CALGARY, ALBERTA – March 2, 2010 /CNW/ - Newalta Corporation ("Newalta") (TSX:NAL) today announced financial results for the three months and year ended December 31, 2009.
"In 2009, we managed through the most challenging market cycle in the last 15 years. In the first half of the year, the value of all our products slumped dramatically and the demand for our services declined. Compared to 2008, Adjusted EBITDA fell by $44 million in 2009, with 72% of the decline in the first half of the year," said Al Cadotte, President and CEO of Newalta.
"After absorbing the recessionary shocks early in the year, Adjusted EBITDA improved from $30 million in the first half to $52 million in the second half, as commodity prices strengthened, our markets slowly recovered and cost reductions were realized. In 2009, we generated excess cash after capital expenditures and dividends of $25.7 million which was used to reduce Funded Debt.
"We enter 2010 with improving market conditions, a reduced cost structure, a more agile organization and strengthened balance sheet. We look forward to substantially stronger results in the quarters ahead as commodity prices appear to have stabilized and our markets are slowly improving."
Financial results and highlights for the three months ended December 31,
2009:
- Revenue, net earnings, and Adjusted EBITDA(1) in Q4 2009 were down
from Q4 2008 by 6%, 55%, and 8%, respectively. Restructuring costs
and out of quarter adjustments were approximately $2.2 million in Q4
2009. Excluding the impact of these items, Adjusted EBITDA of
$27.7 million was equal to Q4 2008.
- Revenue and net margin(1) in the Western division were down 22% and
23% year-over-year, respectively, due primarily to lower drilling
activity levels and a decrease in crude oil recovered to our account.
- Eastern's revenue and net margin was up 14% and 22%, respectively,
year-over-year, due to strong performance from VSC, solid results in
the Atlantic region, and the impact of our cost savings initiatives.
- Cost savings in excess of $8 million were realized in Q4 2009, as
compared to Q4 2008.
- SG&A expense before non-cash stock-based compensation was down 4%
compared to Q4 2008.
- Maintenance capital expenditures(1) for the quarter were $3.5 million
compared to $8.5 million in 2008. Growth capital expenditures(1) were
$4.7 million, compared to $38.2 million in 2008.
Financial results and highlights for the year ended December 31, 2009:
- Revenue, net earnings, and Adjusted EBITDA for the year were down
compared to 2008 by 19%, 95%, and 35%, respectively. A steep drop in
commodity prices, compared to 2008, resulted in a decrease in revenue
of $26 million and a decline in EBITDA of $23 million.
- Western's revenue and net margin declined by 30% and 40%,
respectively, year-over-year. With a 51% decline in wells drilled in
2009 and depressed crude oil prices for the first nine months of the
year, revenue from all business units within this segment were down.
Excluding the impact of commodity and base oil prices, revenue and
net margin were down 25% and 23%, respectively.
- Eastern's revenue and net margin were down 2% and 19%, respectively,
year-over-year, primarily due to weak economic activity and lower
average lead prices. Performance improved steadily throughout the
year, impacted by higher lead volumes, improved lead prices and
increased landfill volumes in the second half of the year.
- Cost efficiencies in excess of $24 million were realized over the
last three quarters, as compared to the same period in 2008.
- SG&A expense decreased by 10% compared to 2008.
- Maintenance capital expenditures in the year were $8.6 million,
compared to $20.8 million in 2008.
- Growth capital expenditures in the year were $18.7 million, compared
to $104.4 million in 2008. Growth capital in the year related
primarily to the commissioning of the second kiln at VSC, equipment
for our onsite services and process improvements at facilities
throughout Newalta.
Other highlights:
- Cash from operating activities exceeded capital expenditures and
dividends by $25.7 million, reducing Funded Debt in 2009.
- On October 27th, we completed an equity financing with the issuance
of approximately 6 million common shares for gross proceeds of
approximately $46 million (net proceeds of approximately
$44 million).
- In 2010, capital investments are budgeted at $87 million, comprised
of growth capital expenditures of $60 million, and maintenance
capital of $27 million. These projects will be funded entirely from
funds from operations, with approximately 40% expected to be spent in
the first half of 2010.
- In 2010, we are expanding our technical development team to focus on
identifying, evaluating and commercializing processes that are cost
effective and environmentally superior. One of the first steps to
further this initiative is the recently announced agreement with
BioteQ Environmental Technologies Inc., ("BioteQ") to pursue joint
projects. BioteQ's leading-edge technologies have the potential to
treat a broad range of industrial wastewaters, including SAGD
wastewater, both at our facilities as well as on customers' sites. As
part of this agreement, we acquired a 5% interest in BioteQ for total
consideration of approximately $4 million.
- The Board of Directors declared a dividend of $0.05 per share to
holders of record as at December 31, 2009 which was paid January 15,
2010. We expect to pay a dividend of $0.05 per share to holders of
record as at March 31, 2010.
FINANCIAL RESULTS AND HIGHLIGHTS
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($000s except per % %
share data) Q4 Q4 Increase Increase
(unaudited) 2009 2008 (Decrease) 2009 2008 (Decrease)
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Revenue 137,308 145,341 (6) 483,401 597,035 (19)
Net earnings 4,092 9,085 (55) 3,099 58,882 (95)
- per share ($)
- basic 0.09 0.21 (57) 0.07 1.40 (95)
- per share ($)
- diluted 0.09 0.21 (57) 0.07 1.40 (95)
EBITDA(1) 24,698 27,600 (11) 79,921 125,753 (36)
- per share ($)(1) 0.53 0.65 (18) 1.84 3.00 (39)
Adjusted EBITDA(1) 25,506 27,630 (8) 82,157 125,890 (35)
- per share ($)(1) 0.55 0.65 (15) 1.89 3.00 (37)
Cash from
operations 19,165 54,764 (65) 83,518 128,922 (35)
- per share ($) 0.41 1.30 (68) 1.92 3.07 (37)
Funds from
operations(1) 19,185 18,200 5 60,943 98,306 (38)
- per share ($)(1) 0.41 0.43 (5) 1.40 2.34 (40)
Maintenance capital
expenditures(1) 3,501 8,461 (59) 8,589 20,762 (59)
Dividends/
Distributions
declared(1) 2,423 23,472 (90) 8,141 93,180 (91)
- per share- ($)(1) 0.05 0.56 (91) 0.20 2.22 (91)
Cash distributed(1) 2,122 22,111 (90) 13,233 82,093 (84)
Growth capital
expenditures(1) 4,739 38,193 (88) 18,696 104,440 (82)
Weighted average
shares
outstanding 46,770 42,266 11 43,536 41,935 4
Shares outstanding,
December 31,(2) 48,476 42,400 14 48,476 42,400 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 48,479,002 shares outstanding as at March 2, 2010.
Management's Discussion and Analysis and Newalta's unaudited consolidated financial statements and notes thereto are attached.
Management will hold a conference call on Wednesday, March 3, 2009 at 11 a.m. (EST) to discuss Newalta's performance for the fourth quarter and year ended December 31, 2009. To participate in the teleconference, please call 647-427-7450 or 1-888-231-8191. 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.comand, until midnight on Wednesday, March 10, 2009, by dialling 416-849-0833 or 1-800-642-1687 and using the pass code 55120359 followed by the pound sign.
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. The company 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. Newalta trades on the TSX as NAL. For more information, visit www.newalta.com.
NEWALTA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three and twelve months ended December 31, 2009 and 2008
Following changes in tax rules for specified investment flow-though entities, Newalta Income Fund (the "Fund") undertook steps to convert the Fund's income trust structure into a corporate structure. On December 17, 2008, unitholders of the Fund voted and approved the reorganization by way of a plan of arrangement under the Business Corporations Act (Alberta), into a corporation pursuant to an arrangement agreement dated November 12, 2008 (as amended) between Newalta Inc., Newalta Income Fund, Newalta Corporation, Newalta Industrial Services Inc. and Newalta Services Holdings Inc. (the "Arrangement").
On January 1, 2009, Newalta Corporation, Newalta Industrial Services Inc. and Newalta Services Holdings Inc. were amalgamated to form Newalta Corporation. Prior to the Arrangement, which was effective on December 31, 2008, the consolidated financial statements included the accounts of the Fund and its subsidiaries. After giving effect to the Arrangement, the consolidated financial statements were prepared on a continuity of interests basis, which recognizes Newalta Inc. as the successor entity to the Fund. On December 31, 2009, the sole unitholder of Newalta Income 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.
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 Inc., Newalta Income Fund (the "Fund"), and Newalta Corporation (the "Corporation" and together with Newalta Inc., the Fund, and 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:
- 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.
Such statements reflect our current views with respect to future events
and are subject to certain risks, uncertainties and assumptions, including,
without limitation:
- 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.
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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($000s) Q4 2009 Q4 2008 2009 2008
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Earnings before taxes 3,451 5,616 2,732 50,492
Add back (deduct):
Selling,general, and
administrative(1) 16,603 16,562 56,132 62,129
Finance charges(1) 6,689 6,238 25,364 24,104
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Consolidated net margin 26,743 28,416 84,228 136,725
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Unallocated net margin(1) 2,754 3,403 12,490 10,825
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Combined divisional net margin 29,497 31,819 96,718 147,550
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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).
"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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($000s) Q4 2009 Q4 2008 2009 2008
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Net earnings (loss) 4,092 9,085 3,099 58,882
Add back (deduct):
Current income taxes 317 21 945 949
Future income taxes (958) (3,490) (1,312) (9,339)
Finance charges 6,689 6,238 25,364 24,104
Interest revenue - - - (80)
Amortization and accretion 14,558 15,746 51,825 51,237
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EBITDA 24,698 27,600 79,921 125,753
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Add back (deduct)
Non-cash stock-based
compensation 808 30 2,236 137
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Adjusted EBITDA 25,506 27,630 82,157 125,890
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Weighted average number of shares 46,770 42,266 43,536 41,935
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EBITDA per share 0.53 0.65 1.84 3.00
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Adjusted EBITDA per share 0.55 0.65 1.89 3.00
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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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($000s) Q4 2009 Q4 2008 2009 2008
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Cash from operations 19,165 54,764 83,518 128,922
Add back (deduct):
Changes in non-cash working
capital (298) (36,778) (23,599) (32,647)
Asset retirement costs incurred 318 214 1,024 2,031
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Funds from operations 19,185 18,200 60,943 98,306
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Weighted average number of shares 46,770 42,266 43,536 41,935
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Funds from operations per share 0.41 0.43 1.40 2.34
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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.
The following discussion and analysis should be read in conjunction with (i) the consolidated financial statements of Newalta Inc. and the notes thereto for the year ended December 31, 2009, (ii) the consolidated financial statements of Newalta Inc. and notes thereto and Management's Discussion and Analysis of Newalta Inc. for the year ended December 31, 2008, (iii) the most recently filed Annual Information Form of Newalta Inc. and Newalta Corporation, (iv) the consolidated interim financial statements of Newalta Inc. and the notes thereto and Management's Discussion and Analysis for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009. This information is available at SEDAR (www.sedar.com). Information for the year ended December 31, 2009, along with comparative information for 2008, is provided.
This Management's Discussion and Analysis is dated March 2, 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.
SELECTED FINANCIAL INFORMATION
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($000s except per share data) 2009 2008 2007
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Revenue 483,401 597,035 499,864
Net earnings 3,099 58,882 61,189
- per share ($) - basic 0.07 1.40 1.52
- per share ($) - diluted 0.07 1.40 1.51
EBITDA 79,921 125,753 96,228
- per share ($) 1.84 3.00 2.39
Adjusted EBITDA 82,157 125,890 96,429
- per share ($) 1.89 3.00 2.39
Cash from operations 83,518 128,922 54,058
- per share ($) 1.92 3.07 1.34
Funds from operations 60,943 98,306 81,147
- per share ($) 1.40 2.34 2.01
Total Assets 993,730 1,051,910 1,023,481
Senior long-term debt - net of issue
costs 188,123 263,251 206,940
Convertible debentures - principal amount 115,000 115,000 115,000
Dividends/Distributions declared 8,141 93,180 90,117
- per share ($) 0.20 2.22 2.22
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CORPORATE OVERVIEW
We emerged from 2009 as a financially and operationally stronger company, despite the recessionary environment. Our results reflect our ability to respond quickly to a rapidly changing economy. Compared to 2008, Adjusted EBITDA decreased $43.7 million, with 72% of that decline in the first half of 2009. Performance in the first half of the year reflected significantly lower commodity prices compared to 2008, coupled with an overall dramatic decrease in industrial and drilling activity in both Canada and the U.S. In the second half of the year, stronger results were driven by our cost savings initiatives, recovering commodity prices, modest improvements in demand for our services as well as the expansion at the Ville Ste-Catherine ("VSC") facility in Québec. Adjusted EBITDA for the second half of 2009 improved by over 70% over the first half of the year and was down only $12 million or 19% compared to the prior year comparable period, despite activity levels well below the prior year. Cash from operating activities net of capital expenditures and dividends contributed $25.7 million to Funded Debt reduction in the year, of which $21.8 million was generated in the second half of the year.
The following charts outline the diversification of our business over the past 3 years.
In Q4 2009, Adjusted EBITDA was down 4% from Q3 2009. Restructuring costs and out of quarter adjustments were $2.2 million in Q4 2009. Excluding the impact of these items, Adjusted EBITDA was $27.7 million, reflecting improved market demand and stronger commodity prices. In the East, volumes at the Stoney Creek landfill ("SCL") increased by 90% over Q3 2009, while VSC benefited from higher lead pricing and higher kiln utilization. In the West, seasonal drilling activity improved Drill Site performance while reduced demand for oil recycling products and lower base oil pricing resulted in lower revenue in Q4 compared to Q3. Total combined divisional net margin was relatively flat in Q4 2009 compared to Q3 2009, and down only 7% compared to Q4 2008.
In Q4 2009, Adjusted EBITDA was down 8% over last year. Excluding restructuring costs and out of quarter adjustments in SG&A in Q4 2009, Adjusted EBITDA was equal to last year even though revenues were down $8 million. Strong performance in the Eastern division from VSC due to higher production and improved lead pricing served to offset lower revenue and net margin in the West. Eastern's share of total revenue and combined divisional net margin was 55% and 46%, respectively, compared to 45% and 35% in Q4 2008. Cost savings in excess of $8 million were realized in Q4 2009, as compared to Q4 2008.
For the year, revenue, net earnings and Adjusted EBITDA were down 19%, 95% and 35%, respectively. Performance was strongly impacted by the depressed economic environment and lower commodity prices. In the second quarter of 2009, cost saving initiatives were implemented to reduce our cost base consistent with depressed market conditions. We have been successful in realizing more than $24 million in cost efficiencies over the last three quarters, as compared to the same period in 2008. As a result, quarterly Adjusted EBITDA has grown steadily since Q1 2009, despite weak activity levels compared to last year. The impact of commodity prices on revenue and Adjusted EBITDA lessened as the year progressed and commodity prices strengthened. Overall, 53% of the decline in Adjusted EBITDA in 2009 is attributable to the changes in commodity prices. Excluding the impact of commodity prices, revenue was down 15% and Adjusted EBITDA decreased by only 16%. Net earnings were impacted by the same factors as EBITDA with the exception that 2008 earnings included higher future income tax recoveries.
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Impact of
Impact of market
change in and
commodity other
Q4 2008 prices(1) changes Q4 2009
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Revenue 145,341 7,228 (15,261) 137,308
Expenses
Operating 101,179 3,686 (8,858) 96,007
Selling, general and
administrative 16,562 - 41 16,603
Finance charges 6,238 - 451 6,689
Amortization and accretion 15,746 - (1,188) 14,558
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Net earnings (loss) 9,085 3,542 (8,535) 4,092
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EBITDA 27,600 3,542 (6,444) 24,698
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Impact of
Impact of market
change in and
commodity other
2008 prices(1) changes 2009
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Revenue 597,035 (26,041) (87,593) 483,401
Expenses
Operating 409,073 (2,909) (58,816) 347,348
Selling, general and
administrative 62,129 - (5,997) 56,132
Finance charges 24,104 - 1,260 25,364
Amortization and accretion 51,237 - 588 51,825
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Net earnings (loss) 58,882 (23,132) (32,651) 3,099
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EBITDA 125,753 (23,132) (22,700) 79,921
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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.
Total capital expenditures for the year were $27.3 million, consistent with our expectations. In light of the economic downturn in 2009, we managed capital expenditures in line with customer activity. Maintenance expenditures were $8.6 million while growth capital expenditures totalled $18.7 million. Growth capital in the full year related primarily to the commissioning of the second kiln at VSC and equipment upgrades and process improvements within our facilities and onsite services throughout Newalta.
During the fourth quarter, we completed three key initiatives to strengthen our balance sheet and increase financial flexibility. First, our Credit Facility was renewed and extended to October 12, 2011 and, at the election of management, the principal amount was reduced from $375 million to $350 million. Second, we completed an equity financing for net proceeds of $43.8 million through the issuance of 6.0 million shares on October 27, 2009. Lastly, letters of credit totalling $25 million were returned from the Alberta Energy Resources Conservation Board (ERCB).
In early January 2010, we announced an agreement with BioteQ Environmental Technologies Inc. ("BioteQ")(TSX:BQE). Newalta and BioteQ will work together to identify waste treatment projects that recover, recycle, or treat industrial waste and manage related by-products. In conjunction with this agreement, we acquired 3.6 million common shares and warrants, at a price of $1.10 per share for a total purchase price of $4 million, representing 5% of the issued and outstanding common shares of BioteQ.
OUTLOOK
We have identified areas of strategic focus which we believe will provide attractive returns for our shareholders in the years ahead. Effective January 1, 2010, we reorganized our divisions to include Facilities and Onsite in order to more effectively manage our operations and to execute our strategic plan. In our Facilities Division, we will focus on extending services and maximizing profitability within our existing facilities. In Onsite, we will concentrate on managing our resources more effectively on a national scale to better serve our customers' complex environmental needs. Onsite services now represent 32% of consolidated revenue. Our focus for the longer term will be to search globally for innovative ways of applying new technologies to provide solutions for existing customers as well as new markets. The recently announced agreement with BioteQ is a first step in this initiative.
We anticipate higher commodity prices and improvements in drilling and the economy to positively contribute to performance in 2010. Crude oil and lead prices are trending higher in Q1 2010 compared to Q4 2009, and well above Q1 2009. Performance for facilities in both western and eastern Canada is also expected to be stronger than Q1 2009. We anticipate seasonal increases to be higher than last year as we begin to see modest recovery in the oil and gas industry. Equipment-in-use within Drill Site is expected to strengthen reflecting this recovery. Waste receipts for the Stoney Creek landfill are anticipated to be in line with historical levels. In Q1 2010, we expect an increase in routine maintenance down time at VSC over Q4 2009; however, VSC performance will be positively impacted by increased production from the second kiln, when compared to Q1 2009.
We expect that our cost containment program implemented in Q2 2009 will continue to yield savings into the first quarter of 2010. For the balance of 2010, we will manage our cost base consistent with market demand.
Capital expenditures in 2010 are budgeted at $87 million, comprised of growth capital expenditures of $60 million, and maintenance capital of $27 million. Capital expenditures will be funded from funds from operations, with approximately 40% expected to be spent in the first half of 2010.
Initiatives completed in 2009 towards maximizing financial flexibility resulted in a stronger financial position as we enter 2010. Our strengthened balance sheet provides us with the financial capacity to capitalize on growth initiatives as our markets recover and demand for our services strengthens.
RESULTS OF OPERATIONS - WESTERN DIVISION
Overview
Western operates more than 50 facilities with more than 725 people in British Columbia, Alberta, Saskatchewan, Texas and Wyoming. In 2009, Western was organized into the Facilities, Heavy Oil and Drill Site business units.
Western's performance is affected by the following factors:
- fluctuation in the price of crude oil
- state of the oil and gas industry in western Canada
- natural gas drilling activity
- 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
The business units contributed the following to division revenue:
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Q4 2009 Q4 2008 2009 2008
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Facilities 69% 72% 71% 73%
Heavy Oil 23% 15% 23% 18%
Drill Site 8% 13% 6% 9%
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The following table compares Western's results for the periods indicated:
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% %
($000s) Q4 2009 Q4 2008 change 2009 2008 change
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Revenue - external 62,125 79,645 (22) 248,094 356,146 (30)
Revenue - internal 295 250 18 1,203 919 31
Operating costs 40,422 53,535 (24) 163,675 229,423 (29)
Amortization and
accretion 5,931 5,545 7 22,420 21,614 4
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Net margin 16,067 20,815 (23) 63,202 106,028 (40)
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Net margin as % of
revenue 26% 26% - 25% 30% (17)
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Maintenance capital 524 6,163 (91) 2,731 12,342 (78)
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Growth capital(1) 4,042 20,512 (80) 7,660 51,456 (85)
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Assets employed(2) 455,955 470,121 (3)
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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.
For the full year versus the prior year:
- revenue decreased by 30%
- net margin excluding the impact of commodity and base oil prices
decreased by 23%
- net margin as a percent of revenue decreased from 30% to 25%
Compared to Q4 2008, Western's revenue and net margin decreased by 22% and 23%, respectively, primarily due to activity levels well below 2008 and lower crude oil recovered to our account. Wells drilled in Q4 2009 decreased by 47% over Q4 2008. This decline in activity resulted in lower drill site equipment utilization, decreased waste processing and water disposal volumes as well as reduced demand for finished products from oil recycling. Higher crude oil prices and increased revenue from Heavy Oil's onsite services served to partially offset the decline. Net margin as a percentage of revenue remained flat compared to Q4 2008, reflecting the impact of cost savings initiatives carried out throughout the year.
2009 net margin in the Western division mirrored the weak economic activity in the western region. With a 51% decline in wells drilled in 2009 and depressed crude oil prices for the first nine months of the year, revenue from all business units within this segment were down. The total crude oil recovered to our account in 2009 decreased from 407,000 bbls in 2008 to 375,000 bbls. Excluding the impact of commodity and base oil prices, revenue and net margin were down 25% and 23%, respectively.
Facilities
The Facilities business unit is integral to our operations, providing the operational expertise and management capacity to support key business initiatives. Facilities revenue is primarily generated from:
- the processing and disposal 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
- onsite service in western Canada, excluding services provided by
Heavy Oil
- environmental services comprised of environmental projects and
drilling waste management services
Seasonal increases in drilling activity in Q4 2009 resulted in a 30% increase in waste processing volume over Q3 2009, which helped to offset seasonal decreases in oil recycling services and industrial onsite. Overall, Q4 2009 Facilities revenue decreased 7% compared to Q3 2009.
Drilling activity in Q4 2009 remained well below the same period in 2008. Year-over-year, Q4 2009 Facilities revenue decreased by 26% due to lower activity levels. Despite a 31% increase in crude oil prices received compared to Q4 2008, lower drilling activity resulted in weaker waste processing and water disposal volumes by 21% and 27%, respectively. Reduced demand for finished products and a 48% decrease in base oil pricing drove lower oil recycling revenue.
For the year, significantly lower activity levels in western Canada as well as lower crude oil prices resulted in a 33% decrease in revenue. Waste processing volumes were down 34% and the total amount of crude oil recovered to Newalta's account was down by 18% for the year in 2009 compared to 2008. In addition, revenue from our oil recycling business decreased by 29% due to reduced demand for finished products and lower base oil prices.
-------------------------------------------------------------------------
% %
Q4 2009 Q4 2008 change 2009 2008 change
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Waste processing
volumes ('000 m(3)) 96 121 (21) 324 489 (34)
Recovered crude oil
('000 bbl)(1) 42 61 (31) 190 233 (18)
Average crude oil
price received
(CDN$/bbl) 72 55 31 60 91 (34)
Recovered crude oil
sales ($ millions) 3.0 3.4 (12) 11.3 21.3 (47)
Edmonton par price
(CDN$/bbl)(2) 76 66 15 66 103 (36)
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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.
Heavy Oil
Our heavy oil services business began 15 years ago with facilities at Hughenden and Elk Point, Alberta. Using the centrifugation experience gained in processing heavy oil waste streams, in 2005, we launched a new onsite service for customers in the heavy oil market. 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 areas:
- specialized onsite services 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
Compared to Q4 2008, Heavy Oil revenue increased by 23% due to higher revenue from onsite services coupled with a higher average price for recovered crude oil to our account. For the full year 2009 compared to 2008, revenue decreased by $5.1 million, or 8%, largely attributable to a $4.2 million decline in recovered crude oil sales from lower average crude oil prices.
-------------------------------------------------------------------------
% %
Q4 2009 Q4 2008 change 2009 2008 change
-------------------------------------------------------------------------
Waste processing
volumes ('000 m(3)) 122 132 (8) 487 509 (4)
Recovered crude oil
('000 bbl)(1) 35 35 - 185 174 6
Average crude oil
price received
(CDN$/bbl) 62 44 41 52 80 (35)
Recovered crude oil
sales ($ millions) 2.2 1.5 47 9.6 13.8 (30)
Bow River Hardisty
(CDN$/bbl)(2) 71 52 37 61 84 (27)
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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.
Drill Site
Drill Site business unit revenue is generated primarily from the supply and operation of drill site processing equipment, including equipment for solids control and drill cuttings management. In 2009, Drill Site contributed 6% of divisional revenue or 3% of consolidated revenue.
In 2009, Drill Site revenue for both the U.S. and Canada decreased as natural gas drilling was depressed. Although revenue for the year declined by 51% from 2008, Q4 revenue increased by 104% over Q3 2009. In Q4 2009, average equipment-in-use was up 125% compared to Q3 2009, but remained well below 2008 levels.
The table below reflects the changes in average drill site equipment-in-use and utilization:
-------------------------------------------------------------------------
% %
Q4 2009 Q4 2008 change 2009 2008 change
-------------------------------------------------------------------------
Average equipment-
in-use(1)
Canada 25 33 (24) 16 24 (33)
U.S. 20 40 (50) 17 35 (51)
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45 73 (38) 33 59 (44)
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Average equipment
available 176 162 9 175 148 18
-------------------------------------------------------------------------
Utilization 26% 45% (42) 19% 40% (53)
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(1) "Average equipment in use" is calculated by taking the product of the
total amount of average processing equipment and the utilization rate
for the period. Average equipment available is adjusted by 10% for
maintenance and transportation. Maximum utilization of 100%
represents 90% of the total number of processing days.
RESULTS OF OPERATIONS - EASTERN DIVISION
Overview
Eastern provides industrial waste management, recycling and other environmental services to markets located in eastern Canada through our integrated network of 30 facilities with more than 700 employees. This network has two business units, Québec/Atlantic and Ontario, and features Canada's largest lead-acid battery recycling facility with two long body kilns, located in Ville Ste-Catherine, Québec ("VSC") with a potential combined annual kiln capacity of approximately 80,000MT. Current production levels fall below kiln potential capacity and is consistent with market demand. In the event of sustained increases in market demand for lead and the availability of adequate feedstock supplies, further capital investment would be required to attain full potential production. The network also includes an engineered non-hazardous solid waste landfill located in Stoney Creek, Ontario ("SCL") with an annual permitted capacity of 750,000MT of waste per year and, based on current volumes, has an estimated remaining life of 10 years. The business units contributed the following to division revenue:
-------------------------------------------------------------------------
Q4 2009 Q4 2008 2009 2008
-------------------------------------------------------------------------
Québec/Atlantic 75% 66% 74% 68%
Ontario 25% 34% 26% 32%
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Eastern's performance is affected by the following factors:
- fluctuations in the LME trading price of lead
- supply and demand in the North American battery manufacturing
industry
- fluctuation in the U.S./Canadian dollar exchange rate
- 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 following table compares Eastern's results for the periods indicated:
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% %
($000s) Q4 2009 Q4 2008 change 2009 2008 change
-------------------------------------------------------------------------
Revenue - external 75,183 65,696 14 235,307 240,809 (2)
Operating costs 55,880 47,894 17 184,876 180,569 2
Amortization and
accretion 5,873 6,798 (14) 16,915 18,718 (10)
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Net margin 13,430 11,004 22 33,516 41,522 (19)
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Net margin as % of
revenue 18% 17% 6 14% 17% (18)
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Maintenance capital 2,777 2,266 23 5,659 8,312 (32)
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Growth capital(1) 1,408 12,993 (89) 7,919 36,036 (78)
-------------------------------------------------------------------------
Assets employed(2) 349,107 351,617 (1)
-------------------------------------------------------------------------
(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.
For the full year versus the prior year:
- revenue remained relatively flat with a decrease of 2%
- net margin decreased 19%
- net margin as a percent of revenue decreased from 17% to 14%
In Q4 2009, net margin increased by 22% over Q4 2008 due to record performance from VSC and solid results in the Atlantic region. Revenue at SCL was lower due to reduced event-based business in the fourth quarter of 2009 compared to the same period last year.
Eastern's net margin was impacted by weak economic activity and lower average lead prices in 2009. However, performance improved significantly throughout 2009 due to a variety of factors, including the implementation of cost saving measures in Q2 2009. Performance at VSC was positively impacted by the commissioning of the second kiln in June 2009 and improved lead prices in the second half of 2009. SCL volumes improved in the second half of 2009 with Q4 volumes in line with historic norms, but remained lower than 2008. Atlantic's results increased as a result of cost saving initiatives and continued growth in our onsite services.
Québec/Atlantic
The Québec/Atlantic Canada business unit revenue is derived from:
- VSC, a lead-acid battery recycling facility in Québec
- waste treatment and transfer facilities that process, consolidate,
and bulk hazardous waste
- onsite services, including a fleet of specialized vehicles and
equipment for waste transport and onsite processing
Revenue in Q4 2009 grew by 30% over Q3 2009 as a result of higher sales at VSC and steady performance from fixed facilities and onsite services. The average lagged LME lead price rose 29% in Q4 2009 over Q3 2009 while lead sold in Q4 2009 increased 36% compared to Q3 2009. The combined operating days for both kilns increased to 164 days in Q4 2009 compared to 126 days in Q3 2009. Down time in Q3 and Q4 related to regularly scheduled maintenance which occurs at the end of December and into the first week of January and in July. Short outages may be required for maintenance from time to time during other periods in the year.
Revenue in Q4 2009 compared to the same period in 2008 was 30% higher due primarily to higher sales at VSC. Performance at VSC was impacted by both higher lead prices and increased sales volumes as a result of additional production from the second kiln.
For the full year 2009, despite lower average lead prices, Québec/Atlantic revenue grew 7% from the added capacity at VSC in the second half and sustained demand for onsite services in both Québec and Atlantic Canada. Performance has improved notably from Q1 2009 as a result of the successful start-up of the second kiln and cost control measures implemented in the second quarter of 2009. Based on the operation of two kilns, our objective is to maintain a 50/50 split between direct sales and tolling. Tolling arrangements generate revenue from a processing fee which is generally fixed, reducing our exposure to fluctuations in lead prices.
The table below highlights the lead sold and average price.
-------------------------------------------------------------------------
% %
Q4 2009 Q4 2008 change 2009 2008 change
-------------------------------------------------------------------------
Lead sold ('000
MT)(1) 19.7 12.6 56 62.6 46.3 35
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Average price -
direct sales
($/MT)(2) 2,551 2,001 27 1,999 2,480 (19)
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-------------------------------------------------------------------------
Average lagged LME
price (U.S.$/MT)(3) 2,251 1,547 46 1,605 2,218 (28)
-------------------------------------------------------------------------
(1) 2009 includes 2,600 MT sold to the LME in Q1 2009 that relates to
production during the commissioning phase of Kiln 2.
(2) Average price received means all direct sales of finished products,
including finished products that are alloyed to customer
specifications.
(3) Average lagged LME price is based on a one-month lag consistent with
our pricing structure.
Excluding VSC, Québec/Atlantic Canada revenue in 2009 remained flat despite a weaker economy. Atlantic Canada revenue contributed positive growth of 7% mainly attributable to onsite services related to the oil & gas industry in the region, reflecting our ability to continue to grow our business in the more challenging environment.
Ontario
The Ontario business unit revenue is derived from:
- SCL, an engineered non-hazardous solid waste landfill
- waste treatment and transfer fixed facilities that process,
consolidate, and bulk hazardous waste
- onsite services, including a fleet of specialized vehicles and
equipment for emergency response, waste transport, and onsite
processing
Ontario performance continued to improve in Q4 2009 compared to Q3 2009 as revenue grew 30%. Waste receipts at SCL in Q4 were well above the three year quarterly average. Growth in our fixed facilities and industrial onsite services also contributed to higher revenue.
Year-over-year, the effects of weak industrial activity persisted in Ontario with revenue down 16% compared to Q4 2008. The result was lower activity at SCL and our fixed facilities which was partially offset by a 76% increase in onsite revenue.
For the full year compared to 2008, performance was impacted by the steep decline in the regional economy. However, performance in Ontario improved steadily throughout 2009 due to cost saving measures implemented in the second quarter of 2009 and higher tonnage at SCL in the second half of the year. Landfill volumes in Q4 2009 were well above the three year quarterly average and were the second highest in the last three years.
-------------------------------------------------------------------------
% %
Q4 2009 Q4 2008 change 2009 2008 change
-------------------------------------------------------------------------
Landfill volume
('000 MT) 190.3 243.2 (22) 477.2 654.7 (27)
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CORPORATE AND OTHER
-------------------------------------------------------------------------
% %
($000s) Q4 2009 Q4 2008 change 2009 2008 change
-------------------------------------------------------------------------
Selling, general and
administrative
expenses ("SG&A") 16,603 16,562 - 56,132 62,129 (10)
Less non-cash
stock-based
compensation 808 30 2,593 2,236 137 1,532
SG&A before non-cash
stock-based
compensation 15,795 16,532 (4) 53,896 61,992 (13)
SG&A before
non-cash
stock-based
compensation as
a % of revenue 11.5% 11.4% 1 11.1% 10.4% 7
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SG&A before non-cash stock-based compensation for Q4 2009 was 4% lower than Q4 2008. SG&A for Q4 2009 included the realization of out of quarter rent expense for space under construction. For the full year, SG&A before non-cash stock-based compensation was down 13% compared to 2008 reflecting the cost saving initiatives implemented in the year. Our objective in 2010 is to ensure SG&A before non-cash stock based compensation remains at or below 10% of revenue on an annual basis. Q1 2010 SG&A before non-cash stock-based compensation is expected to be at or below $15.0 million, 5% lower than Q4 09.
-------------------------------------------------------------------------
% %
($000s) Q4 2009 Q4 2008 change 2009 2008 change
-------------------------------------------------------------------------
Amortization and
accretion 14,558 15,746 (8) 51,825 51,237 1
as a % of
revenue 10.6% 10.8% (2) 10.7% 8.6% 24
-------------------------------------------------------------------------
Amortization and accretion in Q4 2009 compared to Q4 2008, decreased due to lower depreciation for assets amortized on a unit of production basis with lower utilization. On a year-to-date basis, amortization and accretion was flat. Lower amortization for assets on a unit of production basis as a result of lower utilization was offset by increased amortization from the growth in our capital asset base and the net loss on disposal of assets. The net loss on the disposal of assets for the quarter was $0.5 million and year-to-date was $1.6 million. The loss on disposal was added to amortization and accretion.
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% %
($000s) Q4 2009 Q4 2008 change 2009 2008 change
-------------------------------------------------------------------------
Bank fees and
interest 4,353 3,928 11 16,059 14,900 8
Convertible
debentures
interest and
accretion of issue
costs 2,336 2,310 1 9,305 9,204 1
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-------------------------------------------------------------------------
Finance charges 6,689 6,238 7 25,364 24,104 5
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-------------------------------------------------------------------------
Finance charges increased in Q4 2009 and in the full year primarily due to higher credit facility fees. Finance charges associated with the 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.
-------------------------------------------------------------------------
% %
($000s) Q4 2009 Q4 2008 change 2009 2008 change
-------------------------------------------------------------------------
Current tax 317 21 1,410 945 949 -
Future income tax (958) (3,490) (73) (1,312) (9,339) (86)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Provision for
(recovery of) income
taxes (641) (3,469) (82) (367) (8,390) (96)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Future income tax recoveries in the year resulted from the reduction of future income tax rates and a one-time increase in the value of tax assets following the windup of the Fund on December 31, 2009. Future income tax recoveries in 2008 related to the build up of tax losses generated under the income trust structure. To date, we have generated approximately $178 million of tax loss carryforwards. 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" in this MD&A 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 liquidity risk management, please refer to Note 20 to the Consolidated Financial Statements.
Our debt capital structure is as follows:
-------------------------------------------------------------------------
December 31, December 31,
($000s) 2009 2008
-------------------------------------------------------------------------
Use of Credit Facility:
Amount drawn on Credit Facility(1) 195,199 264,687
Letters of credit 22,137 49,249
-------------------------------------------------------------------------
Funded debt A 217,336 313,936
Unused Credit Facility capacity(2) 132,664 111,064
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Debentures B 115,000 115,000
-------------------------------------------------------------------------
Total Debt =A+B 332,336 428,936
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(1) Issue costs were $3.2 million in 2009 and $1.4 million in 2008. See
Note 8 to the Consolidated Financial Statements. The net senior long-
term debt at December 31, 2009 was $188.1 million.
(2) The principal amount of the Credit Facility was reduced, at the
election of management, from $425 million to $375 million on April
22, 2009 and then to $350 million on October 9, 2009.
In 2009, notwithstanding the $43.7 million year-over-year reduction in Adjusted EBITDA, Funded Debt decreased by $96.6 million. Despite the weaker economic environment, cash from operating activities more than exceeded capital expenditures and dividends in the year, contributing $25.7 million to Funded Debt reduction. In addition, $27.1 million in letters of credit were returned in 2009 and in October, we raised $43.8 million in net proceeds through the issuance of approximately 6.0 million shares, thus reducing Funded Debt.
Our working capital at December 31, 2009 was $31 million compared with $40 million at December 31, 2008. This improvement highlights the degree of progress over the last 12 months by addressing the following key areas:
- business process initiatives to improve the timeliness and accuracy
of invoices
- improved collection processes
- strengthened credit risk management
For further information on credit risk management, please refer to Note 18 to the Consolidated Financial Statements.
As a result of these initiatives, notwithstanding a more challenging economic environment, days' sales outstanding in receivables continued to improve over the prior year with accounts over 90 days decreasing from $6.5 million at December 31, 2008 to $0.7 million at December 31, 2009.
At current activity levels, working capital of $31 million is expected to be sufficient to meet our ongoing commitments and operational requirements of the business. We will continue to manage working capital in order to protect and maintain improvements made over the last 12 months.
The Current Ratio is defined as the ratio of total current assets to total current liabilities. As a result of the ongoing process improvements in the management and collection of receivables, as well as the management and payment of payables, this ratio remained flat at 1.34 times at December 31, 2009 as compared to December 31, 2008. This ratio, at December 31, 2009, exceeds our bank covenant minimum requirement of 1.10:1.
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
In April, we elected to reduce the available credit from $425 million to $375 million and amend the Funded Debt to EBITDA and Current Ratio covenant restrictions from 3:00:1 to 3.50:1 for the remainder of 2009 and 1.20:1 to 1.10:1, respectively. In October, we renewed our Credit Facility with our Canadian lending syndicate. The terms of the Credit Facility were amended by extending the maturity to October 12, 2011, and, in anticipation of the return of the letters of credit, we elected to reduce the principal amount to $350 million from $375 million. The extension of the Credit Facility and reduction in the principal amount are in keeping with our focus on tightly managing costs and the routine management of our financial structure. The Credit Facility is available 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.
At December 31, 2009, $22.1 million of letters of credit were issued to various environmental regulatory authorities, and were reduced by $27.1 million from December 31, 2008. Approximately $25 million in letters of credit were returned following amendments to the Alberta Energy Statutes Act. In addition, letters of credit totalling $2.2 million associated with certain facilities in Ontario were replaced with performance bonds in the third quarter.
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 December 31, 2009, surety bonds totalled $20.1 million.
Financial performance relative to the financial ratio covenants(1) under the Credit Facility is reflected in the table below:
-------------------------------------------------------------------------
December 31, 2009 Threshold
-------------------------------------------------------------------------
Current Ratio(2) 1.34:1 1.10:1 minimum
Funded Debt(3) to EBITDA(4)(5) 2.60:1 3.50:1 maximum
Fixed Charge Coverage(6) 2.24:1 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. On April 22,
2009, the Funded Debt to EBITDA covenant restriction under the Credit
Facility was amended from 3.00:1 to 3.50:1 for the remainder of 2009.
The ratio will be 3.00:1 commencing Q1 2010.
(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.
Our Funded Debt was $217.3 million for Q4 2009, resulting in a Funded Debt
to EBITDA ratio of 2.60:1. On a year-to-date basis, we focused on reducing
Funded Debt through the following initiatives:
- restricted capital spending in 2009
- reduced expenses with the implementation of our cost control program,
including: staff reductions, hiring restrictions, postponement of
salary increases and restrictions on travel and discretionary
expenses, and the suspension of our matching contributions to our
Employee Savings Plan, which was reinstated on January 1, 2010
- improved the management of working capital
- sold redundant, idle, or non-core assets
- recovery of outstanding letters of credit
- completed equity financing
Our actions will continue to have a positive impact on our debt position and will continue to strengthen our balance sheet as the economy recovers. We remain confident that we will be able to manage within our covenants throughout 2010.
Equity Issuance
On October 27, 2009, we closed an equity financing with the issuance of 6,037,500 shares at a price of $7.65 per share for gross proceeds of $46.2 million (net proceeds of $43.8 million) which were used to reduce indebtedness.
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.
Upon maturity or redemption of the Debentures, we may pay the outstanding principal of the Debentures in cash or may elect to satisfy our obligations to repay all or a portion of the principal amount of the Debentures, which have matured or been redeemed, by issuing and delivering that number of shares obtained by dividing the aggregate amount of principal of the Debentures which have matured or redeemed by 95% of the current market price. We may also elect, subject to regulatory approval, from time to time, to satisfy our obligation to pay all or any part of the interest on the Debentures, on the date interest is payable under the Debenture Indenture, by delivering a sufficient number of shares to the debenture trustee to satisfy all or any part, as the case may be, of the interest obligation.
The Debentures are redeemable by Newalta at a price of $1,000 per Debenture after November 30, 2010 and on or before November 30, 2011 provided that the current market price of our shares on the date on which the notice of redemption is given is not less than $28.75 (being 25% of the Conversion Price.) After November 30, 2011, debentures are redeemable at a price equal to $1,000 per Debenture. In all cases, consideration will include accrued and unpaid interest, if applicable. Current market price is defined as the volume weighted average trading price of the shares on the Toronto Stock Exchange ("TSX") for the 20 consecutive trading days ending on the fifth trading day prior to the date of determination. The volume weighted average trading price is determined by dividing the aggregate sale price of all shares sold on the TSX during the 20 consecutive trading days by the total number of shares so sold.
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 and years ended December 31,
2009 and December 31, 2008 were:
-------------------------------------------------------------------------
($000s) Q4 2009 Q4 2008 2009 2008
-------------------------------------------------------------------------
Growth capital expenditures(1) 4,739 38,193 18,696 104,440
Maintenance capital expenditures 3,501 8,461 8,589 20,762
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Total capital expenditures(2) 8,240 46,654 27,285 125,202
-------------------------------------------------------------------------
(1) Acquisitions in Q4 and 2008 were $620,000 and Q4 and 2009 were nil.
(2) 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.
Total capital expenditures for the quarter were $8.2 million. Growth capital expenditures of $4.7 million were primarily related to centrifugation equipment for onsite project work in our Heavy Oil business unit and equipment upgrades at our fixed facilities. For the full year, growth capital related primarily to the commissioning of the second kiln at VSC, expansion of the Heavy Oil's onsite business, upgrades to our Sussex facility in Atlantic Canada and process improvements within our facilities and onsite services across Canada. 2009 growth capital expenditures were funded by funds from operations and working capital. Maintenance capital of $8.6 million in 2009 related primarily to control equipment and structural building improvements at VSC, equipment replacement at our facilities in Ontario, Atlantic Canada and in the Western division, as well as process improvements at our Elk Point and Hughenden Heavy Oil facilities.
Capital expenditures in 2010 are budgeted at $87 million, comprised of growth capital expenditures of $60 million, and maintenance capital of $27 million. We plan to spend $35 million in growth capital expenditures in the Onsite division, primarily related to expansion of the Heavy Oil business unit as well as additional equipment for the East and West Onsite business units. We plan to spend $20 million in the Facilities division primarily related to process improvements and additions, as well as the completion of a new oilfield facility. Maintenance capital expenditures will relate to the construction of additional landfill cells, process improvements and equipment replacement.
These investments will be funded from funds from operations. We may revise the forecast, 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 a dividend of $0.05 per share, paid January 15 2010 to shareholders of record as at December 31, 2009.
We expect to pay a dividend of $0.05 per share to holders of record on March 31, 2010. The Board will continue to review future dividends, taking into account all factors noted above.
As at March 2, 2010, Newalta had 48,479,002 shares outstanding, outstanding options to purchase up to 2,807,075 shares and a number of shares that may be issuable pursuant to the $115.0 million in Debentures (see Sources of Cash - Debentures).
Contractual Obligations
Our contractual obligations, as at December 31, 2009, were:
-------------------------------------------------------------------------
Less
than 1-3 4-5 There-
($000s) Total one year years years after
-------------------------------------------------------------------------
Office leases 71,863 7,973 14,695 14,255 34,940
Operating leases(1) 24,912 10,692 12,782 1,438 -
Surface leases 4,137 1,092 2,245 800 -
Convertible debentures 138,479 8,050 130,429 - -
Senior long-term
debt(2) 191,280 - 191,280 - -
-------------------------------------------------------------------------
Total commitments 430,671 27,807 351,431 16,493 34,940
-------------------------------------------------------------------------
(1) Operating leases relate to our vehicle fleet with terms ranging
between 3 and 5 years.
(2) Senior long-term debt is gross of transaction costs. Interest
payments are not included.
SUMMARY OF QUARTERLY RESULTS
($000s except per share data) 2009
-------------------------------------------------------------------------
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue 137,308 122,169 111,386 112,538
Earnings (loss) before taxes 3,451 5,936 (293) (6,362)
Net earnings (loss) 4,092 3,567 (179) (4,381)
Earnings (loss) per share ($) 0.09 0.08 0.00 (0.10)
Diluted earnings (loss)
per share ($) 0.09 0.08 0.00 (0.10)
Weighted average share - basic 46,770 42,438 42,450 42,402
Weighted average share - diluted 47,049 42,610 42,450 42,402
EBITDA 24,698 25,253 17,940 12,030
Adjusted EBITDA 25,506 26,606 18,253 11,792
-------------------------------------------------------------------------
($000s except per share data) 2008
-------------------------------------------------------------------------
Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue 145,341 158,579 142,939 150,176
Earnings (loss) before taxes 5,616 19,041 9,293 16,542
Net earnings (loss) 9,085 18,717 11,776 19,304
Earnings (loss) per share ($) 0.21 0.44 0.28 0.47
Diluted earnings (loss)
per share ($) 0.21 0.44 0.28 0.46
Weighted average share - basic 42,266 42,102 41,822 41,543
Weighted average share - diluted 42,266 42,111 41,950 41,635
EBITDA 27,600 37,441 26,573 34,139
Adjusted EBITDA 27,630 36,887 27,190 34,184
-------------------------------------------------------------------------
Quarterly performance is affected by seasonal variation as described below.
For the first three quarters in 2008, revenue, earnings before taxes, and net earnings reflect relatively high commodity prices and strong drilling activity. In Q4 2008, crude oil prices declined significantly, negatively impacting revenue and earnings in the Western division. Earnings in Q4 2008 were negatively impacted by non-reoccuring 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 DRIP which was discontinued after we converted from an income trust to a corporation.
In 2009, the decrease in revenue, earnings before taxes, and net earnings as compared to the prior period was mainly due to weak 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 improved commodity prices, higher waste receipts at SCL and higher daily average production at VSC. Weighted average shares increased reflecting the equity offering of 6 million shares completed on October 27, 2009. Compared to 2008, Adjusted EBITDA was down $22.4 million in Q1, $8.9 million in Q2, $10.3 million in Q3 and only $2.1 million in Q4. The year-over-year decline was higher in Q1 than for the last three quarters combined.
Seasonality of Operations
Quarterly performance is affected by, among other things, weather conditions, commodity prices, 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.
In 2009, the volatility of commodity prices and foreign exchange combined with the impact of management's cost cutting initiatives has affected the ability to see these seasonality trends in our combined divisional net margin and EBITDA.
Seasonality impacts the Western and Eastern divisions differently, reflecting the types of services that each provides. The following seasonality factors describe the typical quarterly fluctuations in operating results in the absence of growth and acquisition capital and significant volatility in commodity prices and foreign exchange rates.
For Western, the frozen ground during the winter months in western Canada provides an optimal environment for drilling activities and consequently, the first quarter is typically strong. As warm weather returns in the spring, the winter's frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until the roads have thoroughly dried out. Road bans, which are generally imposed in the spring, restrict waste transportation which reduces demand for the Western Division's services and therefore, the second quarter is generally the weakest quarter of the year for Western. The third quarter is typically the strongest quarter for Western due to favourable weather conditions and market cyclicality. The areas in the U.S. in which we operate are not affected by frozen ground requirements for winter drilling nor are they impacted by the spring thaw. Typical seasonality for quarterly revenue as a percentage of annual Western revenue is approximately: 26% for the first quarter, 23% for the second quarter, 27% for the third quarter, and 24% in the fourth quarter.
Eastern's services are generally curtailed by colder weather in the first quarter, which is typically its weakest quarter as aqueous wastes and onsite work are restricted by colder temperatures. Typical seasonality for quarterly revenue as a percentage of annual revenue for Eastern is approximately: 23% in the first quarter, 25% in the second quarter, 25% in the third quarter, and 27% in the fourth quarter.
RECENT DEVELOPMENTS
Effective January 1, 2010, we reorganized our reporting structure into two divisions - Onsite and Facilities - in order to better align the business for continued growth. The Onsite division includes the Western Onsite, Eastern Onsite and Heavy Oil business units, while the Facilities division includes the Western Facilities, Eastern Facilities and the VSC business units. The new reporting structure was implemented to facilitate growth in Onsite operations by enabling us to manage and leverage resources, equipment and technical expertise nationally in order to provide our customers with the most cost-effective solutions to their complex environmental challenges. The Onsite business is primarily contractual in nature and involves sales, finance and management capabilities distinctly different from our Facilities business. Shared resources and technical expertise will be directed primarily at large customers with complex environmental challenges, where we can help reduce their costs and improve their environmental performance.
Onsite has grown dramatically over the past few years, representing 32% of total revenue and 29% of combined net margin in 2009. When we manage waste directly onsite we bring our people, processing expertise, and specialized equipment to a customer's site to manage the customer's needs at the source. This approach creates value for our customers and minimizes off-site disposal but also requires a flexible business model capable of finding unique solutions for our customers. Onsite includes: the processing of heavy oilfield-generated wastes and the sale of recovered crude oil for our account; industrial cleaning; site remediation; dredging and dewatering; technical services; and drill site processing for solids control and drill cuttings management.
The Facilities division provides the operational expertise and management capacity to support key business initiatives. Revenue from Facilities represents 68% of total revenue and 71% of combined net margin in 2009. Facilities operations include: the processing and disposal 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 tables below restate the historical segmented information from the Western and Eastern divisions to the Onsite and Facilities divisions.
Onsite - Information by Quarter
($000s) 2009
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
-------------------------------------------------------------------------
Revenue 35,593 35,732 43,124 42,671
Operating costs 29,107 27,219 30,117 31,263
Amortization and accretion 3,001 2,149 2,623 3,643
-------------------------------------------------------------------------
Net Margin 3,485 6,364 10,384 7,765
-------------------------------------------------------------------------
Net Margin as % of revenue 10% 18% 24% 18%
-------------------------------------------------------------------------
Capital Expenditures 1,796 1,596 1,881 4,596
-------------------------------------------------------------------------
($000s) 2008
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
-------------------------------------------------------------------------
Revenue 48,237 43,886 51,273 46,554
Operating costs 35,627 32,183 36,896 36,564
Amortization and accretion 3,378 3,018 3,550 4,513
-------------------------------------------------------------------------
Net Margin 9,232 8,685 10,827 5,477
-------------------------------------------------------------------------
Net Margin as % of revenue 19% 20% 21% 12%
-------------------------------------------------------------------------
Capital Expenditures 3,029 6,261 15,552 18,865
-------------------------------------------------------------------------
($000s) 2007
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
-------------------------------------------------------------------------
Revenue 34,046 37,608 50,921 52,847
Operating costs 27,427 30,734 37,754 40,641
Amortization and accretion 2,459 2,854 2,843 2,889
-------------------------------------------------------------------------
Net Margin 4,160 4,020 10,324 9,317
-------------------------------------------------------------------------
Net Margin as % of revenue 12% 11% 20% 18%
-------------------------------------------------------------------------
Capital Expenditures 1,644 7,753 15,129 15,461
-------------------------------------------------------------------------
Onsite - Year to Date Information
($000s) 2009
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
YTD YTD YTD
-------------------------------------------------------------------------
Revenue 35,593 71,325 114,449 157,120
Operating costs 29,107 56,326 86,443 117,706
Amortization and accretion 3,001 5,150 7,773 11,416
-------------------------------------------------------------------------
Net Margin 3,485 9,849 20,233 27,998
-------------------------------------------------------------------------
Net Margin as % of revenue 10% 14% 18% 18%
-------------------------------------------------------------------------
Capital Expenditures 1,796 3,392 5,273 9,869
-------------------------------------------------------------------------
($000s) 2008
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
YTD YTD YTD
-------------------------------------------------------------------------
Revenue 48,237 92,123 143,396 189,950
Operating costs 35,627 67,810 104,706 141,270
Amortization and accretion 3,378 6,396 9,946 14,459
-------------------------------------------------------------------------
Net Margin 9,232 17,917 28,744 34,221
-------------------------------------------------------------------------
Net Margin as % of revenue 19% 19% 20% 18%
-------------------------------------------------------------------------
Capital Expenditures 3,029 9,290 24,842 43,707
-------------------------------------------------------------------------
($000s) 2007
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
YTD YTD YTD
-------------------------------------------------------------------------
Revenue 34,046 71,654 122,575 175,422
Operating costs 27,427 58,161 95,915 136,556
Amortization and accretion 2,459 5,313 8,156 11,045
-------------------------------------------------------------------------
Net Margin 4,160 8,180 18,504 27,821
-------------------------------------------------------------------------
Net Margin as % of revenue 12% 11% 15% 16%
-------------------------------------------------------------------------
Capital Expenditures 1,644 9,397 24,526 39,987
-------------------------------------------------------------------------
Facilities - Information by Quarter
($000s) 2009
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
-------------------------------------------------------------------------
External Revenue 76,945 75,654 79,045 94,637
Inter-segment Revenue 156 341 411 295
Operating costs 57,950 53,698 54,158 65,039
Amortization and accretion 6,607 6,602 6,549 8,161
-------------------------------------------------------------------------
Net Margin 12,544 15,695 18,749 21,732
-------------------------------------------------------------------------
Net Margin as % of revenue 16% 21% 24% 23%
-------------------------------------------------------------------------
Capital Expenditures 4,973 3,285 1,687 4,155
-------------------------------------------------------------------------
($000s) 2008
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
-------------------------------------------------------------------------
External Revenue 101,898 99,014 107,306 98,787
Inter-segment Revenue 301 240 128 250
Operating costs 65,835 68,405 69,617 64,865
Amortization and accretion 6,093 6,439 5,511 7,830
-------------------------------------------------------------------------
Net Margin 30,271 24,410 32,306 26,342
-------------------------------------------------------------------------
Net Margin as % of revenue 30% 25% 30% 27%
-------------------------------------------------------------------------
Capital Expenditures 10,660 13,641 17,068 23,690
-------------------------------------------------------------------------
($000s) 2007
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
-------------------------------------------------------------------------
External Revenue 83,267 73,897 82,395 84,186
Inter-segment Revenue - 433 105 114
Operating costs 52,087 52,687 53,142 54,841
Amortization and accretion 6,121 5,454 5,945 6,447
-------------------------------------------------------------------------
Net Margin 25,059 16,189 23,413 23,012
-------------------------------------------------------------------------
Net Margin as % of revenue 30% 22% 28% 27%
-------------------------------------------------------------------------
Capital Expenditures 9,908 36,654 16,169 72,800
-------------------------------------------------------------------------
Facilities - Year to Date Information
($000s) 2009
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
YTD YTD YTD
-------------------------------------------------------------------------
Revenue 76,945 152,599 231,644 326,281
Inter-segment Revenue 156 497 908 1,203
Operating costs 57,950 111,648 165,806 230,845
Amortization and accretion 6,607 13,209 19,758 27,919
-------------------------------------------------------------------------
Net Margin 12,544 28,239 46,988 68,720
-------------------------------------------------------------------------
Net Margin as % of revenue 16% 18% 20% 21%
-------------------------------------------------------------------------
Capital Expenditures 4,973 8,258 9,945 14,100
-------------------------------------------------------------------------
($000s) 2008
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
YTD YTD YTD
-------------------------------------------------------------------------
Revenue 101,898 200,912 308,218 407,005
Inter-segment Revenue 301 541 669 919
Operating costs 65,835 134,240 203,857 268,722
Amortization and accretion 6,093 12,532 18,043 25,873
-------------------------------------------------------------------------
Net Margin 30,217 54,681 86,987 113,329
-------------------------------------------------------------------------
Net Margin as % of revenue 30% 27% 28% 28%
-------------------------------------------------------------------------
Capital Expenditures 10,660 24,301 41,369 65,059
-------------------------------------------------------------------------
($000s) 2007
-------------------------------------------------------------------------
Q1 Q2 Q3 Q4
YTD YTD YTD
-------------------------------------------------------------------------
Revenue 83,267 157,164 239,559 323,745
Inter-segment Revenue - 433 538 652
Operating costs 52,087 104,774 157,915 212,756
Amortization and accretion 6,121 11,575 17,520 23,967
-------------------------------------------------------------------------
Net Margin 25,059 41,248 64,662 87,674
-------------------------------------------------------------------------
Net Margin as % of revenue 30% 26% 27% 27%
-------------------------------------------------------------------------
Capital Expenditures 9,908 46,562 62,731 135,531
-------------------------------------------------------------------------
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
SENSITIVITIES
Our revenue is sensitive to changes in commodity prices for crude oil, base oils, and lead. These factors have both a direct and indirect impact on our business. The direct impact of these commodity prices is reflected in the revenue received from the sale of products such as crude oil, base oils, and lead. The indirect impact is the effect that the variations of these factors, including natural gas, has on activity levels of our customers and, therefore, demand for our services. The indirect impacts of these fluctuations previously discussed are not quantifiable.
The following table provides management's estimates of fluctuations in key inputs and prices and the direct impact on revenue from product sales and SG&A:
-------------------------------------------------------------------------
Impact on
Change in Annual
benchmark Revenue ($)
-------------------------------------------------------------------------
LME lead price (U.S.$/MT)(1) $220 6.9 million
Edmonton Par crude oil price ($/bbl)(1) $1.00 0.3 million
Gulf Coast Base oil ($/litre)(1) $0.05 0.8 million
-------------------------------------------------------------------------
(1) Based on 2009 performance and volumes.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the financial statements in accordance with GAAP requires management to make estimates with regard to the reported amounts of revenue and expenses and the carrying values of assets and liabilities. These estimates are based on historical experience and other factors determined by management. Because this involves varying degrees of judgment and uncertainty, the amounts currently reported in the financial statements could, in the future, prove to be inaccurate.
Amortization and Accretion
Amortization of capital assets and intangible assets incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change impacting the operation of plant and equipment. Accretion expense is the increase in the asset retirement obligation over time. The asset retirement obligation is based on estimates that may change as more experience is obtained or as general market conditions change impacting the future cost of abandoning our facilities. Amortization of capital assets and intangible assets incorporates estimates of useful lives and residual values. The estimates may change as more experience is obtained or as general market conditions change impacting the operating of plant and equipment.
Asset Retirement Obligations
Asset retirement obligations are estimated by management based on the anticipated costs to abandon and reclaim all our facilities and landfills as well as the projected timing of the costs to be incurred in future periods. Management, in consultation with Newalta's engineers, estimates these costs based on current regulations, costs, technology, and industry standards. The fair value estimate is capitalized as part of the cost of the related asset and amortized to expense over the asset's useful life. The useful lives of the assets and the long-term commitments of certain sites range from 20 to 300 years. The total estimated future cost for asset retirement obligations at December 31, 2009 was $9.8 billion. The net present value of this amount, $21.9 million (using a discount rate of 8%), has been accrued on the consolidated balance sheet at December 31, 2009. The majority of the undiscounted future asset retirement obligations relates to SCL in Ontario, which are expected to be incurred over the next 300 years. Excluding SCL, the total undiscounted future costs are $36.2 million. There were no significant changes in the estimates used to prepare the asset retirement obligation in 2009 compared to 2008.
Goodwill
We perform a test for goodwill impairment annually and whenever events or circumstances make it possible that impairment may have occurred. Determining whether impairment has occurred requires a valuation of the respective segment, based on its future discounted cash flows. In applying this methodology, we rely on a number of factors, including actual operating results, future business plans, economic projections and market data. We test the valuation of goodwill as at September 30 of each year to determine whether or not any impairment in the goodwill balance recorded exists. In addition, on a quarterly basis, we assess the reasonableness of assumptions used for the valuation to determine if further impairment testing is required.
Our determination as at September 30, 2009 and December 31, 2009 was that goodwill was not impaired.
Income Taxes
Current income tax expense predominantly represents capital taxes paid in eastern Canada, federal and provincial income taxes, and U.S. taxation imposed on the U.S. subsidiary. Prior to the elimination of the trust structure on December 31, 2008, Newalta Income Fund itself was sheltered from any current tax liability as all of its taxable income was distributed to unitholders.
Future income taxes are estimated based on temporary differences between the book value and tax value of assets and liabilities using the applicable future income tax rates under current law. The change in these temporary differences results in a future income tax expense or recovery. The applicable future income tax rate for each entity is calculated based on provincial allocation calculations and the expected timing of reversal of temporary differences. Changes in the assumptions used to derive the future income tax rate could have a material impact on the future income tax expense or recovery incurred in the period.
Permits and other intangibles
Permits and other intangibles represent the book value of expiring permits and rights, indefinite permits, and non-competition contracts. The intrinsic value of the permits relates to the breadth of the terms and conditions and the types of waste we are able to process. In today's regulatory environment, management believes an operator would be unable to obtain similar permits with the same scope of operations. Therefore, management estimates that the value of our permits could be greater than its book value.
Stock-Based Compensation
We have three share-based compensation plans, the 2003 Option Plan (the "2003 Plan"), the 2006 Option Plan (the "2006 Plan") and the 2008 Option Plan (the "2008 Plan"). Under the option plans, we may grant to directors, officers, employees and consultants of Newalta or any of its affiliates, options to acquire up to 10% of the issued and outstanding shares. Newalta uses the fair value method to account for the options granted pursuant to the 2003 Plan and recognizes the share based compensation expense over the vesting period of the options, with a corresponding increase to contributed surplus. When options are exercised, the proceeds, together with the amount recorded in contributed surplus, are transferred to shareholders' capital. Forfeitures are accounted for as incurred. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of the options, the expected volatility of the underlying security and the expected dividends.
The 2006 Plan and the 2008 Plan, are accounted for as stock appreciation rights since they allow for individuals to settle their rights in cash. Accordingly, we use the intrinsic value method to account for these rights. The intrinsic value reflects the net cash liability calculated as the difference between the market value of the shares and the exercise price of the right. This is re-measured at each reporting date and stock based compensation expense is increased or decreased accordingly. Decreases or reversals of stock based compensation expense are limited to previously recognized stock based compensation expense.
Adoption of New Accounting Standards in 2009
Effective January 1, 2009, we adopted the Canadian Institute of Chartered Accountants ("CICA") new accounting standard, section 3064, Goodwill and Intangible Assets, replacing section 3062, Goodwill and Other Intangible Assets. The new Section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The standards concerning goodwill are unchanged from the standards included in the previous section 3062. The adoption of this new section did not have a material impact on Newalta's financial statements.
FUTURE ACCOUNTING POLICY CHANGES
Information regarding our changes in accounting policies is included in Note 3 to the Consolidated Financial Statements.
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 Canadian GAAP, but there are differences in recognition, measurement and disclosures. At this time, the impact of IFRS convergence on our future consolidated balance sheets and consolidated statements of operations, comprehensive income and retained earnings (deficit) and cash flows is not reasonably determinable or estimable.
We have commenced our IFRS project and have established a formal project governance structure with a target implementation date of January 1, 2011. We continue to actively monitor the activities of the AcSB and the International Accounting Standards Board which may issue new accounting standards during the period leading up to the conversion. We will modify the plan to incorporate new accounting requirements as they are issued. The following table summarizes our key activities, related milestones, and accomplishments to date.
-------------------------------------------------------------------------
Key Activity Milestones Status (as at Status (as at
September 30,2009) December 31,2009)
-------------------------------------------------------------------------
Accounting Complete new Assessment We have completed
policies: financial processes are our final review
policies and ongoing. of processes and
Identification procedures We have completed are in the
of differences manual our final review process of
between addressing IFRS of processes in confirming our
Canadian requirements. most areas and assessment with
GAAP/IFRS Key milestones are confirming our consultants
include: our assessment and auditors.
- Accounting - Opening with our
policy balances consultants and Parallel SAP is
choices estimates - auditors. operational.
under IFRS Q3 2009
- Financial - Testing phase For the We are on track
statement - Q3/Q4 2009 outstanding for finalizing
impact - SAP parallel areas, we have opening balances
- Opening run - Q4 2009 made significant during the first
balances - Finalize progress in our half of 2010.
- Final opening assessment
implemen- balances - Q4 processes.
tation 2009/Q1 2010
decisions
- Financial
policies and
procedures
-------------------------------------------------------------------------
Detailed policy Develop working We are We are
assessment: groups and finalizing our finalizing our
training to recommendations recommendations
Identification implement for systemic for systemic
of areas that changes for process process
may have a significant changes required changes
significant impact items. by IFRS. required
impact. Key milestones by IFRS.
include:
- Develop and Significant
implement impact areas
training have been
programs for identified.
working The financial
groups - statement
Q1 2009 impact
- Identify and assessment
recommend is ongoing.
systemic
process Issue specific
changes - training
Q2/Q3 2009 sessions will
begin Q1 2010.
-------------------------------------------------------------------------
IT Ensure readiness We have Required system
Infrastructure: for parallel identified and upgrades and
Identify key processing of addressed key IT changes have
changes in the 2010 financial infrastructure been made.
following areas: results and issues.
- IT system IFRS-compliant We are proceeding Parallel SAP
changes and reporting in in accordance system is
upgrades 2011 - Q4 2009 with our IT plan. operational.
- Systemic
process We are proceeding
changes for in accordance
data with our IT
collection for plan.
G/L,
disclosures,
and
consolidation
- One-time
processes due
to IFRS 1
-------------------------------------------------------------------------
Control Complete final Assessment is Assessment is
environment: signoff and ongoing. ongoing.
Internal control review of
over financial accounting
reporting policy changes
by Q4 2010
- Accounting Update
policy certification
changes and process by
approval Q4 2010
- Changes to
certification
process
-------------------------------------------------------------------------
Control Publish material Assessment is Assessment is
environment: changes in ongoing. ongoing.
Disclosure policies and Key stakeholder Key stakeholder
controls and known impacts communications communications
procedures of IFRS will continue will continue
- MD&A throughout into the balance in 2010.
communications 2009 & 2010 of 2009 and 2010.
package MD&A's - starting Material changes
- IFRS Q3 - 2009 Material changes in policies and
adjustments Publish impact in policies and known impacts
to Canadian of conversion known impacts are expected to
GAAP (with are expected to be communicated
statements reconciliation be communicated throughout 2010.
(2010) to GAAP) on key throughout 2010.
- 2011 financial measures by
statement Q1 2011.
presentation Publish
disclosure of
2010 comparative
information
(with
reconciliation
to GAAP) in the
interim and
annual financial
statements -
Q1 2011
-------------------------------------------------------------------------
Other Issues: Develop investor Assessment is Assessment is
Address impacts relations ongoing. ongoing.
to operations communication
due to IFRS: plan by Q3 2009
- Investor Review of:
relations - Financial
- Financial covenants -
covenants by Q3 - 2010
- Compensation - Compensation
packages packages - by
Q3 - 2010
-------------------------------------------------------------------------
The detailed project plan and the expected timing of key activities identified above may change prior to the IFRS conversion date due to the issuance of new accounting standards or amendments to existing accounting standards, changes in regulations or economic conditions or other factors.
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 in the fourth paragraph 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.
The Annual Information Form is available through the internet on the Canadian System for Electronic Document Analysis and Retrieval ("SEDAR") which can be accessed at www.sedar.com. Copies of the Annual Information Form may be obtained, on request without charge, from Newalta Corporation at 211 - 11th Avenue S.W., Calgary, Alberta T2R 0C6 or by facsimile at (403) 806-7032.
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 December 31, 2009. 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.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
The Chief Executive Officer and the Chief Financial Officer (collectively the "Certifying Officers") have evaluated the design and effectiveness of our disclosure controls and procedures as of December 31, 2009 and have concluded that such disclosure controls and procedures were effective. In addition, the Certifying Officers have evaluated the design and effectiveness of our internal control over financial reporting as of December 31, 2009 and have concluded that such internal controls over financial reporting were effective. There have not been any changes in the internal control over financial reporting in Q4 of 2009 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
December 31, December 31,
($000s) (unaudited) 2009 2008
-------------------------------------------------------------------------
Assets
Current assets
Accounts receivable 84,317 120,884
Inventories (Note 4) 33,148 29,781
Prepaid expenses and other 6,183 6,546
-------------------------------------------------------------------------
123,648 157,211
Note receivable (Note 5) 978 1,160
Capital assets (Note 6) 701,884 724,788
Permits and other intangible assets (Note 7) 61,935 64,003
Goodwill 103,597 103,597
Future income taxes (Note 10) 1,688 1,151
-------------------------------------------------------------------------
993,730 1,051,910
-------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 90,191 109,698
Dividends/distributions payable (Note 16) 2,423 7,560
-------------------------------------------------------------------------
92,614 117,258
Senior long-term debt (Note 8) 188,123 263,251
Convertible debentures - debt portion (Note 9) 110,708 109,419
Other long-term liabilities (Note 14) 1,218 -
Future income taxes (Note 10) 39,164 40,039
Asset retirement obligations (Note 11) 21,903 21,094
-------------------------------------------------------------------------
453,730 551,061
-------------------------------------------------------------------------
Shareholders' Equity (Notes 9 and 12)
Shareholders' capital 552,871 509,369
Convertible debentures - equity portion 1,850 1,850
Contributed surplus 1,679 988
Retained earnings (deficit) (16,400) (11,358)
-------------------------------------------------------------------------
540,000 500,849
-------------------------------------------------------------------------
993,730 1,051,910
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Operations, Comprehensive Income (Loss) and
Retained Earnings (Deficit)
For the
three months For the year
ended December 31 ended December 31,
-------------------------------------------------------------------------
($000s except earnings per
share data) (unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue 137,308 145,341 483,401 597,035
Expenses
Operating (Note 4) 96,007 101,179 347,348 409,073
Selling, general and
administrative 16,603 16,562 56,132 62,129
Finance charges 6,689 6,238 25,364 24,104
Amortization and accretion
(Note 6) 14,558 15,746 51,825 51,237
-------------------------------------------------------------------------
133,857 139,725 480,669 546,543
-------------------------------------------------------------------------
Earnings before taxes 3,451 5,616 2,732 50,492
Provision for (recovery of)
income taxes (Note 10)
Current 317 21 945 949
Future (958) (3,490) (1,312) (9,339)
-------------------------------------------------------------------------
(641) (3,469) (367) (8,390)
-------------------------------------------------------------------------
Net earnings and comprehensive
income 4,092 9,085 3,099 58,882
Retained earnings (deficit),
beginning of period (18,069) 3,029 (11,358) 22,940
Dividends/distributions (Note 16) (2,423) (23,472) (8,141) (93,180)
-------------------------------------------------------------------------
Retained earnings (deficit),
end of period (16,400) (11,358) (16,400) (11,358)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per share (Note 15) 0.09 0.21 0.07 1.40
-------------------------------------------------------------------------
Diluted earnings per share
(Note 15) 0.09 0.21 0.07 1.40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows
For the
three months For the year
ended December 31 ended December 31,
($000s) (unaudited) 2009 2008 2009 2008
-------------------------------------------------------------------------
Net inflow (outflow) of cash
related to the following
activities:
Operating Activities
Net earnings 4,092 9,085 3,099 58,882
Items not requiring cash:
Amortization and accretion 14,558 15,746 51,825 51,237
Future income tax recovery (958) (3,490) (1,312) (9,339)
Stock based compensation expense 808 30 2,236 137
Other (Note 19) 685 (3,171) 5,095 (2,611)
-------------------------------------------------------------------------
Funds from Operations 19,185 18,200 60,943 98,306
Increase in non-cash working
capital (Note 19) 298 36,778 23,599 32,647
Asset retirement expenditures
incurred (318) (214) (1,024) (2,031)
-------------------------------------------------------------------------
19,165 54,764 83,518 128,922
-------------------------------------------------------------------------
Investing Activities
Additions to capital assets
(Note 19) (8,109) (36,580) (39,652) (117,472)
Net proceeds on sale of
capital assets (Note 6) 621 1,581 1,921 15,200
Acquisitions - (715) - (2,662)
-------------------------------------------------------------------------
(7,488) (35,714) (37,731) (104,934)
-------------------------------------------------------------------------
Financing Activities
Issuance of shares 43,975 - 44,227 1,913
Increase (decrease) in debt (53,548) 2,975 (76,963) 55,847
Decrease in note receivable 18 86 182 345
Dividends/distributions to
shareholders (Note 16) (2,122) (22,111) (13,233) (82,093)
-------------------------------------------------------------------------
(11,677) (19,050) (45,787) (23,988)
-------------------------------------------------------------------------
Net cash flow - - - -
Cash - beginning of period - - - -
-------------------------------------------------------------------------
Cash - end of period - - - -
-------------------------------------------------------------------------
Supplementary information:
Interest paid 12,183 11,042 22,311 22,468
Income taxes paid 164 760 588 1,500
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
For the three and twelve months ended December 31, 2009 and 2008
(all tabular data in $000s except per share and ratio data)
NOTE 1. CORPORATE STRUCTURE
Newalta Inc. was incorporated on October 29, 2008 pursuant to the laws of
the Province of Alberta. Newalta Inc. is engaged, through its wholly
owned operating subsidiary, Newalta Corporation (the "Corporation", and
together with Newalta Inc., collectively "Newalta"), in adapting
technologies to maximize the value inherent in industrial waste through
the recovery of saleable products and recycling. Newalta also provides
environmentally sound disposal of solid, non-hazardous industrial waste.
With an integrated network of facilities, Newalta provides waste
management solutions to a broad customer base of national and
international corporations in a range of industries, including
automotive, construction, forestry, lead, manufacturing, mining, oil and
gas, petrochemical, pulp and paper, refining, steel and transportation
services.
Following changes in tax rules for specified investment flow-though
entities, Newalta Income Fund (the "Fund") undertook steps to convert the
Fund's income trust structure into a corporate structure. On December 17,
2008, unitholders of the Fund voted and approved the reorganization by
way of a plan of arrangement under the Business Corporations Act
(Alberta), into a corporation pursuant to an arrangement agreement dated
November 12, 2008 (as amended) between Newalta Inc., Newalta Income Fund,
Newalta Corporation, Newalta Industrial Services Inc. and Newalta
Services Holdings Inc. (the "Arrangement").
On January 1, 2009, Newalta Corporation, Newalta Industrial Services Inc.
and Newalta Services Holdings Inc. were amalgamated to form Newalta
Corporation.
Prior to the Arrangement, which was effective on December 31, 2008, the
consolidated financial statements included the accounts of the Fund and
its subsidiaries. After giving effect to the Arrangement, the
consolidated financial statements were prepared on a continuity of
interests basis, which recognizes Newalta Inc. as the successor entity to
the Fund.
On December 31, 2009, the sole unitholder of Newalta Income 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.
NOTE 2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Newalta
Inc. and its wholly-owned subsidiaries. The consolidated financial
statements have been prepared by management in accordance with Canadian
generally accepted accounting principles and include the following
significant accounting policies:
a) Cash and cash equivalents
Cash is defined as cash and short-term deposits with maturities of three
months or less, when purchased.
b) Inventory
Inventory is comprised of oil, lead and other recycled products, spare
parts and supplies, and is recorded at the lower of cost and net
realizable value. Cost of finished goods includes the laid down cost of
materials plus the cost of direct labour applied to the product and the
applicable share of overhead expense. Cost of other items of inventory
comprises the laid down cost.
c) Capital and intangible assets
Capital and intangible assets are stated at cost, less accumulated
amortization. Amortization rates are calculated to amortize the costs,
net of salvage value, over the assets' estimated useful lives. Plant and
equipment includes buildings, site improvements, tanks and mobile
equipment and is principally depreciated at rates of 5-10% of the
declining balance or from 5-14 years straight line, depending on the
expected life of the asset. Some equipment is depreciated based on
utilization rates. The utilization rate is determined by dividing the
cost of the asset (net of estimated salvage value) by the estimated
future hours of service.
Landfill assets represent the costs of landfill available space,
including original acquisition cost, incurred landfill construction and
development costs, including gas collection systems installed during the
operating life of the site, and capitalized landfill closure and post-
closure costs. The cost of landfill assets, together with projected
landfill construction and development costs for permitted capacity, is
amortized on a per unit basis as landfill space is consumed. Management
annually updates landfill capacity estimates, based on survey information
provided by independent engineers, and projected landfill construction
and development costs. The impact on annual amortization expense of
changes in estimated capacity and construction costs is accounted for
prospectively.
The carrying values of capital assets are reviewed at least annually to
determine if the value of any asset is impaired. Any amount so determined
is written off in the year of impairment. As at December 31, 2009, there
was no impairment in the value of capital assets.
Intangible assets consist of certain production processes, trademarks,
permits and agreements, which are amortized over the period of the
contractual benefit of 3-20 years, straight line. Certain permits are
deemed to have indefinite lives and therefore are not amortized. There
are nominal fees to renew these permits provided that Newalta remains in
good standing with regulatory authorities.
The carrying values of intangibles are reviewed at least annually whereby
management reviews any changes in the regulatory environment that could
cause impairment in the value ascribed to these permits. Any amount so
determined is written off in the year of impairment. As at December 31,
2009, there was no impairment in the value of these permits.
d) Goodwill
Goodwill represents the excess of the purchase price over the fair value
of the net identifiable assets of acquired businesses. Newalta, at least
annually, on September 30, assesses goodwill, and its potential
impairment, on a reporting unit basis by determining whether the balance
of goodwill can be recovered through the estimated discounted operating
cash flows of each reporting unit over their remaining lives.
Management's determination as at September 30, 2009 and December 31, 2009
was that goodwill was not impaired.
e) Asset retirement obligations
Newalta provides for estimated future asset retirement costs for all its
facilities based on the useful lives of the assets and the long-term
commitments of certain sites (20 to 300 years). Over this period, Newalta
recognizes the liability for the future retirement obligations associated
with capital assets. These obligations are initially measured at fair
value, which is the discounted future value of the liability. This fair
value is capitalized as part of the cost of the related asset and
amortized to expense over the asset's useful life. The balance of the
liability accretes until the date of expected settlement of the
retirement obligations. The accretion expense has been included in
amortization and accretion expense. Asset retirement costs are estimated
by management, in consultation with Newalta's engineers, on the basis of
current regulations, costs, technology and industry standards. Actual
asset retirement costs are charged against the provision as incurred.
f) Revenue recognition
The major sources of revenue relate to the processing of waste material
and the sale of recycled products recovered from the waste. Revenue is
recognized when waste material is received and a liability is assumed for
the waste. Revenue on recycled products is recognized when products are
delivered to customers or pipelines. For construction projects and well
abandonment work, revenue is recognized on a percentage of completion
basis.
g) Income taxes
Newalta Inc. and its wholly owned subsidiaries follow the liability
method of accounting for income taxes. Future income tax assets and
liabilities are measured based upon temporary differences between the
carrying values of assets and liabilities and their tax basis. Future
income tax expense is computed based on the change during the year in the
future income tax assets and liabilities. Effects of changes in tax laws
and tax rates are recognized when substantively enacted.
Income tax assets are also recognized for the benefits from tax losses
and deductions with no accounting basis, provided those benefits are more
likely than not to be realized. Future income tax assets and liabilities
are determined based on the tax laws and rates that are anticipated to
apply in the period of estimated realization.
h) Earnings per share
Basic earnings per share is calculated using the weighted average number
of shares outstanding during the year. Diluted earnings per share is
calculated by adding the weighted average number of shares outstanding
during the year to the additional shares that would have been outstanding
if potentially dilutive shares had been issued, using the "treasury
stock" method and the "if converted" method for the Debentures.
i) Incentive plans
Newalta Inc. has three share-based compensation plans, the 2003 Option
Plan (the "2003 Plan"), the 2006 Option Plan (the "2006 Plan") and the
2008 Option Plan (the "2008 Plan"). Under the option plans, Newalta Inc.
may grant to directors, officers, employees and consultants of Newalta
Inc. or any of its affiliates, rights to acquire up to 10% of the issued
and outstanding shares. Newalta Inc. uses the fair value method to
account for the options granted pursuant to the 2003 Plan and recognizes
the share based compensation expense over the vesting period of the
options, with a corresponding increase to contributed surplus. When
options are exercised, the proceeds, together with the amount recorded in
contributed surplus, are transferred to shareholders' capital.
Forfeitures are accounted for as incurred.
The 2006 Plan and the 2008 Plan allow for individuals to settle their
options in cash. Accordingly, Newalta Inc. uses the intrinsic value
method to account for these options. The intrinsic value reflects the net
cash liability calculated as the difference between the market value of
the shares and the exercise price of the option. This is re-measured at
each reporting date and stock based compensation expense is increased or
decreased accordingly. Decreases or reversals of stock based compensation
expense are limited to previously recognized stock based compensation
expense.
j) Financial instruments
Classification
All financial instruments are classified into one of five categories and
are initially recognized at fair value and subsequently measured as noted
in the table below.
-------------------------------------------------------------------------
Category Subsequent Measurement
-------------------------------------------------------------------------
Held-for-trading Fair value and changes in fair value are
recognized in net earnings
Held-to-maturity investments Amortized cost, using the effective
interest method
Loans and receivables Amortized cost, using the effective
interest method
Available-for-sale Fair value and changes in fair value are
financial assets recorded in other comprehensive income
until the instrument is derecognized or
impaired
Other financial liabilities Amortized cost, using the effective
interest method
-------------------------------------------------------------------------
Accounts receivable and note receivable are classified as loans and
receivables. Senior long-term debt, Convertible Debentures
("Debentures"), accounts payable and accrued liabilities and
dividends/distributions payable are classified as other financial
liabilities. Newalta does not have any derivatives or embedded
derivatives.
Convertible Debentures
Newalta presents outstanding Debentures in their debt and equity
component parts on the consolidated balance sheets. The debt component
represents the total discounted present value of the semi-annual interest
obligations to be satisfied by cash and the principal payment due at
maturity, using the rate of interest that would have been applicable to a
non-convertible debt instrument of comparable term and risk at the date
of issue. Typically, this results in an accounting value assigned to the
debt component of the convertible which is less than the principal amount
due at maturity. The debt component presented on the consolidated balance
sheets increases over the term of the relevant to the full face value of
the outstanding at maturity. The difference is reflected as increased
interest expense with the result that adjusted interest expense reflects
the effective yield of the debt component of the Debentures. The equity
component of the Debentures is presented under Shareholders' Equity on
the consolidated balance sheets. The equity component represents the
value ascribed to the conversion right granted to the holder, which
remains a fixed amount over the term of the related. Upon conversion of
the Debentures into shares by the holders, a proportionate amount of both
the debt and equity components are transferred to Shareholders' Capital.
Accretion and interest expense for the Debentures are reflected as
finance charges on the consolidated statements of operations,
comprehensive income and retained earnings (deficit).
Transaction Costs
Transaction costs associated with other financial liabilities are netted
against the related liability.
k) Measurement uncertainty
The preparation of Newalta's financial statements in a timely manner and
in accordance with Canadian generally accepted accounting principles
requires the use of estimates, assumptions, and judgment regarding
assets, liabilities, revenue and expenses. Such estimates relate to
unsettled transactions and events as of the date of the financial
statements. Accordingly, actual results may differ from estimated amounts
as transactions are settled in the future. Amounts recorded for
amortization, accretion, future asset retirement obligations, future
income taxes, the equity component of Debentures and impairment
calculations are based on estimates. By their nature, these estimates are
subject to measurement uncertainty, and the impact of the difference
between the actual and the estimated costs on the financial statements of
future periods could be material.
Note 3. Accounting Changes
a) Adopted changes
Effective January 1, 2009, Newalta adopted the Canadian Institute of
Chartered Accountants ("CICA") new accounting standard, section 3064,
Goodwill and Intangible Assets, replacing section 3062, Goodwill and
Other Intangible Assets. The new Section establishes standards for the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. The standards concerning goodwill are unchanged from
the standards included in the previous section 3062. The adoption of this
new section did not have a material impact on Newalta's financial
statements.
In June 2009, the CICA amended Section 3862 Financial Instruments -
Disclosures, to include additional disclosure requirements about fair
value measurements of financial instruments and enhanced liquidity risk
disclosures. These amendments require a three-level hierarchy that
reflects the significance of the inputs used in making fair value
measurements. Fair value of assets and liabilities included in Level 1
are determined by reference to quoted prices in active markets for
identical assets and liabilities. Asset and liabilities in Level 2
include valuations using inputs other than the quoted prices for which
all significant inputs are based on observable market data, either
directly or indirectly. Level 3 valuations are based on inputs that are
not based on observable market data. The amendments to the Section apply
to annual financial statements for the Company's fiscal year ended
December 31, 2009. At December 31, 2009, Newalta did not have any
financial instruments carried at fair value and the adoption of this new
standard did not have a material impact on the Company's consolidated
financial statements.
b) Future accounting changes
In February 2008, the Canadian Accounting Standards Board ("AcSB")
confirmed that Canadian publicly accountable enterprises would be
required to adopt International Financial Reporting Standards ("IFRS")
for fiscal years beginning on or after January 1, 2011. IFRS uses a
conceptual framework similar to Canadian Generally Accepted Accounting
Principles ("GAAP"), but there are differences in recognition,
measurement and disclosures. At this time, the impact on Newalta's future
consolidated balance sheets and consolidated statements of operations,
comprehensive income and retained earnings (deficit) and cash flows is
not reasonably determinable or estimable.
Section 1582, Business Combinations. This new section will be applicable
to business combinations for which the acquisition date is on or after
interim and fiscal periods beginning January 1, 2011, with prospective
application. Early adoption is permitted. This section improves the
relevance, reliability and comparability of the information that a
reporting entity provides in its financial statements about a business
combination and its effects. Newalta has not yet determined the impact of
the adoption of this new section on the consolidated financial
statements.
Section 1601, Consolidated Financial Statements. This new Section will be
applicable to financial statements relating to interim and fiscal periods
beginning on or after January 1, 2011, with prospective application.
Early adoption is permitted. This section establishes standards for the
preparation of consolidated financial statements. Newalta has not yet
determined the impact of the adoption of this new section on the
consolidated financial statements.
Section 1602, Non-Controlling Interests. This new section will be
applicable to financial statements relating to interim and fiscal periods
beginning on or after January 1, 2011, with prospective application.
Early adoption is permitted. This section establishes standards for
accounting for a non-controlling interest in a subsidiary in consolidated
financial statements subsequent to a business combination. Newalta has
not yet determined the impact of the adoption of this new section on the
consolidated financial statements.
NOTE 4. INVENTORIES
Inventories consist of the following:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Lead 15,259 15,989
Recycled and processed products 8,046 4,969
Recovered oil 3,667 2,508
Parts and supplies 5,906 4,797
Burner fuel 270 1,518
-------------------------------------------------------------------------
Total inventory 33,148 29,781
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cost of inventory expensed in operating expenses for the year ended
December 31, 2009 was $62.7 million ($62.4 million for the same period in
2008). Inventories are pledged as general security under our Credit
Facility.
NOTE 5. NOTE RECEIVABLE
Included in an acquisition in 2005 were certain capital costs relating to
landfill construction that are recoverable from a third party based on
usage of the landfill. This unsecured and non-interest bearing amount is
shown as a note receivable.
NOTE 6. Capital assets
a) Capital assets consist of the following:
-------------------------------------------------------------------------
2009
-------------------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------
Land 14,813 - 14,813
Plant and equipment 835,621 (213,991) 621,630
Landfill 103,264 (37,823) 65,441
-------------------------------------------------------------------------
Total 953,698 (251,814) 701,884
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008
-------------------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------
Land 14,455 - 14,455
Plant and equipment 814,976 (176,200) 638,776
Landfill 102,395 (30,838) 71,557
-------------------------------------------------------------------------
Total 931,826 (207,038) 724,788
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Disposal of capital assets
During the year ended December 31, 2009, Newalta disposed of certain
transport vehicles, equipment, land and buildings with a net book value
of $3.5 million for proceeds of $1.9 million. The resulting net loss of
$1.6 million is included in amortization and accretion in the
consolidated statements of operations, comprehensive income and retained
earnings (deficit).
During the year ended December 31, 2008, Newalta disposed of certain
transport vehicles, land and buildings with a net book value of
$15.0 million for proceeds of $15.2 million. The resulting net gain of
$0.2 million is included in amortization and accretion in the
consolidated statements of operations, comprehensive income and retained
earnings (deficit).
NOTE 7. PERMITS AND OTHER INTANGIBLE ASSETS
-------------------------------------------------------------------------
2009
-------------------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------
Indefinite permits 53,012 - 53,012
Expiring permits/rights 11,602 (3,337) 8,265
Non-competition contracts 9,070 (8,412) 658
-------------------------------------------------------------------------
Total 73,684 (11,749) 61,935
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008
-------------------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------
Indefinite permits 53,037 - 53,037
Expiring permits/rights 11,602 (2,697) 8,905
Non-competition contracts 9,070 (7,009) 2,061
-------------------------------------------------------------------------
Total 73,709 (9,706) 64,003
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 8. SENIOR LONG-TERM DEBT
On October 9, 2009, Newalta extended the maturity of its Credit Facility
to October 12, 2011, and elected to reduce the principal amount of the
Credit Facility from $375 million to $350 million. The Credit Facility is
available 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. Interest on
the facilities is subject to certain conditions and may be charged at
prime, U.S. base rate, Bankers' Acceptance ("BA") or LIBOR, at the option
of the Corporation. The Credit Facility bears interest at a base rate
plus an increment (depending on certain criteria) as follows:
-------------------------------------------------------------------------
Base Rate Type Range of Increment
-------------------------------------------------------------------------
Prime Rate 1.75% to 4.00%
U.S. Base Rate 1.75% to 4.00%
BA Rate 2.75% to 5.00%
LIBOR 2.75% to 5.00%
-------------------------------------------------------------------------
The incremental BA interest rate as at December 31, 2009 was 4.5%
(2008 - 2.25%).
The Credit Facility is secured by a fixed and floating charge debenture
to the lenders on the assets of the Corporation and material
subsidiaries, an unlimited subsidiary guarantee from each material
subsidiary of the Corporation, a limited recourse guarantee from Newalta
Inc. and an assignment of insurance naming the lenders as first loss
payee in relation to business interruption, property and inventory
insurance.
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 December 31, 2009, Newalta was in compliance with all
covenants.
December 31, December 31,
2009 2008
-------------------------------------------------------------------------
Amount drawn on credit facility 191,280 264,687
Issue costs (3,157) (1,436)
-------------------------------------------------------------------------
Senior long-term debt 188,123 263,251
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 9. Convertible debentures
In November 2007, the Fund issued $115.0 million of convertible unsecured
subordinated 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 beginning May 31,
2008. Each $1,000 debenture is convertible into 43.4783 shares (or a
conversion price of $23.00 per share) at any time at the option of the
holders of the Debentures. As subordinated debt, the issuance of the
Debentures does not affect the borrowing capacity on the Credit Facility.
On the consolidated balance sheets, the Debentures are presented net of
the costs to issue. The equity portion of the Debentures will be
reclassified into Shareholders' Capital as the Debentures are converted
into shares.
The Debentures are redeemable by Newalta Inc. after November 30, 2010 and
on or before November 30, 2011 if the current market price of the shares
on the notice date is greater than $28.75 and may be redeemed after
November 30, 2011 for a redemption price of $1,000 per debenture with 30-
60 days notice. The obligation may be settled in cash or shares at the
discretion of Newalta Inc.
The following table compares the face and fair values of the Debentures
to the carrying value. The fair value of the Debentures was determined by
reference to the trading price on December 31, 2009. The effective
interest rate is 8.4%.
-------------------------------------------------------------------------
Carrying
Value
Face Fair Equity Debt
Value Value Portion Portion
-------------------------------------------------------------------------
7% Debentures due 2012 115,000 116,438 1,850 110,708
-------------------------------------------------------------------------
NOTE 10. Income tax
Future income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of Newalta Inc.'s future income tax liabilities
and assets are as follows:
Canadian Tax Jurisdiction:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Future income tax liabilities:
Capital assets 91,858 83,006
Intangible assets 11,946 12,552
Deferred costs 1,902 40
-------------------------------------------------------------------------
105,706 95,598
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Future income tax assets:
Non-capital loss carry forwards 46,502 41,778
Goodwill 6,557 7,839
Asset retirement obligation 5,594 5,548
Equity issuance costs 3,023 394
Deferred revenue 4,292 -
Other - Donations, allowance for
doubtful accounts 574 -
-------------------------------------------------------------------------
66,542 55,559
-------------------------------------------------------------------------
Net future income tax liability 39,164 40,039
-------------------------------------------------------------------------
-------------------------------------------------------------------------
U.S. Tax Jurisdiction:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Future income tax assets:
Non-capital loss carry forwards 1,688 1,151
-------------------------------------------------------------------------
Net future income tax asset from U.S. operations 1,688 1,151
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-capital loss carry forwards relating to Canadian operations total
$173.4 million and relating to our U.S. Operations total $4.8 million.
These losses will begin expiring in 2026.
Immediately prior to giving effect to the Arrangement, on December 31,
2008, the Fund itself was not subject to income tax provided it
distributed all of its taxable income to unitholders. For taxation
purposes the Fund was considered a specified investment flow-through
("SIFT") entity and was to become subject to tax commencing January 1,
2011. For accounting purposes, the Fund computed future income tax based
on temporary differences that were expected to reverse after 2010, at the
tax rate expected to apply for those periods. Realization of future
income tax assets is dependent on generating sufficient taxable income
during the period in which the temporary differences are deductible.
Although realization is not assured, management believes it is more
likely than not that all future income tax assets will be realized based
on reversals of temporary timing differences, projections of operating
results and tax planning strategies available to Newalta and its
subsidiaries. Effective December 31, 2008, after giving effect to the
Arrangement, Newalta Inc. became subject to tax on taxable income earned
from that date forward.
The income tax expense differs from the amount computed by applying
Canadian statutory rates to operating income for the following reasons:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Consolidated earnings of Newalta Inc. before
taxes and distributions to shareholders 2,732 50,492
Current statutory income tax rate 30.45% 31.20%
-------------------------------------------------------------------------
Computed tax expense at statutory rate 832 15,754
Increase (decrease) in taxes resulting from:
Reduction resulting from distributions
to unitholders - (28,948)
Capital taxes 945 951
Non-deductible costs 592 455
Foreign tax losses and tax credits paid - 1,613
Acceleration of tax loss utilization 57 1,500
Other (1,046) 563
Effect of future income tax rate change (1,747) (278)
-------------------------------------------------------------------------
Reported income tax expense (367) (8,390)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 11. 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
net present value of this amount, $21.9 million ($21.1 million at
December 31, 2008) has been accrued on the consolidated balance sheets at
December 31, 2009. The total estimated future cost for asset retirement
obligations at December 31, 2009 was $9.8 billion. The majority of the
undiscounted future asset retirement obligations relate to the Stoney
Creek landfill in Ontario, which are expected to be incurred over the
next 300 years. Excluding the landfill, the total undiscounted future
cost is $36.2 million. Newalta uses a discount rate of 8% and an
inflation rate of 2% to calculate the present value of the asset
retirement obligations.
-------------------------------------------------------------------------
Three months ended Year ended
December 31, December 31,
2009 2008 2009 2008
-------------------------------------------------------------------------
Asset retirement obligations,
beginning of period 21,765 20,843 21,094 20,985
Additional retirement obligations
added through development
activities - - - 289
Expenditures incurred to
fulfill obligations (318) (214) (1,024) (2,031)
Accretion 456 465 1,833 1,851
-------------------------------------------------------------------------
Asset retirement obligations,
end of year 21,903 21,094 21,903 21,094
-------------------------------------------------------------------------
NOTE 12. SHAREHOLDERS' CAPITAL
a) Shareholders' capital
Authorized capital of Newalta Inc. consists of an unlimited number of
common shares and an unlimited number of preferred shares issuable in
series.
On June 29, 2009, an aggregate of 60,483 common shares were cancelled and
returned to Newalta Inc. Under the terms of the March 1, 2003 Plan of
Arrangement, Newalta Corporation (a predecessor entity) converted from a
corporate structure to Newalta Income Fund (the "Fund"), a trust
structure. The Plan of Arrangement provided that certificates formerly
representing common shares of Newalta Corporation that were not deposited
with the required documentation on or before March 1, 2009 ceased to
represent a right or claim of any kind or nature and the right of the
holder of such common shares to receive certificates representing trust
units of the Fund or cash payments pursuant to the Plan of Arrangement,
as the case may be, were deemed to be surrendered together with all
dividends or distributions thereon held for such holder. These shares
were valued at $11.99 each using the average carrying amount of shares
outstanding prior to their return. As a result $0.7 million was
transferred from Share Capital to Contributed Surplus.
On October 27, 2009, Newalta issued 6.0 million shares pursuant to a
bought deal equity financing at a price of $7.65 per share. Proceeds, net
of issuance costs, were $43.8 million.
The following table is a summary of the changes in Shareholders' capital
during the period:
(000s) Shares (No.) Amount ($)
-------------------------------------------------------------------------
Shares outstanding as at October 29, 2008 - -
Shares issued pursuant to the Arrangement 42,400 509,369
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
b) Unitholders' capital
-------------------------------------------------------------------------
Units outstanding as at December 31, 2007 41,417 496,027
-------------------------------------------------------------------------
Contributed surplus on rights exercised - 241
-------------------------------------------------------------------------
Rights exercised 209 1,913
-------------------------------------------------------------------------
Units issued under the DRIP(1) 774 11,188
-------------------------------------------------------------------------
Units cancelled under the Arrangement (42,400) (509,369)
-------------------------------------------------------------------------
Units outstanding as at December 31, 2008 - -
-------------------------------------------------------------------------
1) Distribution Reinvestment Plan of the Fund
c) Retained earnings (deficit) and contributed surplus
The following table provides a breakdown of the components of retained
earnings (deficit):
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Accumulated earnings 363,180 360,081
Accumulated cash distributions (379,580) (371,439)
-------------------------------------------------------------------------
Retained Earnings (Deficit) (16,400) (11,358)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following tables provide a summary of the changes to contributed
surplus during the period:
-------------------------------------------------------------------------
Amount ($)
-------------------------------------------------------------------------
Contributed surplus as at December 31, 2007 1,092
Stock based compensation expense 137
Amounts transferred to equity on exercise of rights (241)
-------------------------------------------------------------------------
Contributed surplus as at December 31, 2008 988
Stock based compensation adjustments (79)
Return of prior period distributions 45
Cancellation of returned shares 725
-------------------------------------------------------------------------
Contributed surplus as at December 31, 2009 1,679
-------------------------------------------------------------------------
-------------------------------------------------------------------------
d) Convertible debentures - equity portion
The equity portion of the Debentures was recorded on the initial
recognition of the Debentures issued in November 2007. The equity
portion will be reclassified to Shareholder's capital on a pro-rata basis
as the Debentures are exercised.
NOTE 13. CAPITAL DISCLOSURES
Newalta's capital structure currently consists of:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Amount drawn on credit facility 191,280 264,687
Letters of Credit or bonds issued as financial
security to third parties ("Surety Bonds") 42,283 64,457
Convertible debentures, debt portion 110,708 109,419
Shareholders' equity 540,000 500,849
-------------------------------------------------------------------------
-------------------------------------------------------------------------
884,271 939,412
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
Management and the Board of Directors review and assess Newalta's capital
structure and dividend/distribution 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:
- 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.
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:
-------------------------------------------------------------------------
December 31, December 31,
Ratio 2009 2008 Threshold
-------------------------------------------------------------------------
Current(1) 1.34:1 1.34:1 1.10:1 minimum
Funded Debt(2) to EBITDA(3)(4) 2.60:1 2.46:1 3.50:1 maximum
Fixed Charge Coverage(5) 2.24:1 1.19:1 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. On April 22,
2009, the Funded Debt to EBITDA covenant restriction under the Credit
Facility was amended from 3.00:1 to 3.50:1 for the remainder of 2009.
The ratio will be 3.00:1 commencing Q1 2010.
(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.
NOTE 14. LONG-TERM INCENTIVE PLANS
a) The 2008 Option Plan
On January 2, 2009 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 $5.31 per share. A further 12,500 options
were granted to a director of the Corporation on May 21, 2009 at an
exercise price of $3.81 per share, with an additional 12,500 options
being granted to a director of the Corporation on July 1, 2009 at an
exercise price of $5.40 per share. On October 6, 2009, 20,000 options
were granted to an employee at an exercise price of $7.65 per share. Each
tranche of the options vest over a four year period (with a five year
life), and the holder of the option can exercise the option for either a
share of Newalta Inc. 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. The total compensation expense for these
options was $1.2 million for the year ended December 31, 2009 (nil in
2008).
b) The 2006 Option Plans
The options granted under the 2006 Plan have been accounted for as stock
appreciation options and the total compensation expense for these options
was nil for the year ended December 31, 2009 (nil for 2008). During 2009,
an aggregate of 1,810,050 options to acquire common shares were
cancelled.
-------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
2008 Exercise 2006 Exercise 2003 Exercise
Options Price Options Price Options Price
(000s) ($/share) (000s) ($/share) (000s) ($/share)
-------------------------------------------------------------------------
At December
31, 2007 - - 1,440 27.47 823 19.29
-------------------------------------------------------------------------
Granted - - 960 17.86 - -
Exercised - - - - (209) 9.31
Forfeited - - (117) 27.84 (4) 25.95
-------------------------------------------------------------------------
At December
31, 2008 - - 2,283 23.41 610 22.65
-------------------------------------------------------------------------
Granted 887 5.34 - - - -
Exercised - - - - - -
Forfeited - - - - - -
Cancelled - - (1,565) 26.38 (245) 25.12
-------------------------------------------------------------------------
At December
31, 2009 887 5.34 718 16.95 365 21.00
-------------------------------------------------------------------------
Exercisable at
Dec. 31, 2009 25 5.31 215 17.80 319 20.67
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options Weighted Weighted Options Weighted
Range of Outstanding Average Average Exercisable Average
Exercise December Remaining Exercise December Exercise
Prices 31, 2009 Life Price 31, 2009 Price
($/share) (000s) (years) ($/share) (000s) ($/share)
-------------------------------------------------------------------------
3.81 - 9.30 897 4.1 5.39 35 6.43
14.00 - 19.46 814 3.1 16.72 317 17.10
22.75 - 32.38 259 2.5 23.66 207 23.71
-------------------------------------------------------------------------
1,970 3.4 12.47 559 18.88
-------------------------------------------------------------------------
-------------------------------------------------------------------------
c) Share Appreciation Rights
On January 2, 2009, 791,500 share appreciation rights were granted to
certain employees and an officer of the Corporation at the market price
of $5.31. On November 16, 2009, a total of 20,000 share appreciation
rights were granted to certain employees at the market price of $7.74.
Each tranche of these rights vests over a four year period (with a five
year life). 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 $1.1 million for the year ended December 31,
2009 (nil in 2008). During 2009, an aggregate of 503,500 share
appreciation rights were cancelled.
d) Other Long-term liabilities
Other long-term liabilities consist of non-current obligations under the
Corporation's long-term incentive plans as at December 31, 2009 ($nil as
at December 31, 2008).
NOTE 15. EARNINGS PER SHARE
Basic earnings per share calculations for the year ended December 31,
2009 and 2008 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 diluted 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 number of excluded options for 2009 was 1,957,700
(2,772,500 in 2008).
The diluted 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
number of shares issuable on conversion of the Debentures excluded for
2009 was 5,000,000 (5,000,000 in 2008).
-------------------------------------------------------------------------
Three months ended Year ended
(000s) December 31, December 31,
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Weighted average number of shares 46,770 42,266 43,536 41,935
Net additional shares if
options exercised 279 - - -
Net additional shares if
debentures converted - - - -
-------------------------------------------------------------------------
Diluted weighted average
number of shares 47,049 42,266 43,536 41,935
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 16. SHAREHOLDER DIVIDENDS/DISTRIBUTIONS DECLARED AND PAID
a) Dividends
During the year ended December 31, 2009, Newalta declared quarterly
dividends of $0.05 per share.
b) Distributions
Prior to conversion to a corporation on December 31, 2008, the Fund made
monthly distributions to its holders of trust units. Determination of the
amount of cash distributions for any period was at the sole discretion of
the Board of Trustees of the Fund and was based on certain criteria
including financial performance as well as the projected liquidity and
capital resource position of the Fund. Distributions were declared to
holders of trust units of record on the last business day of each month,
and paid on the 15th day of the month following (or if such day was not a
business day, the next following business day).
-------------------------------------------------------------------------
Three months ended Year ended
December 31, 2008 December 31, 2008
-------------------------------------------------------------------------
Unitholder distributions declared 23,472 93,180
per unit - $ 0.555 2.220
Unitholder distributions - paid in cash 22,111 82,093
Unitholder distributions -
value paid in units 1,330 10,914
paid in cash - per unit $ 0.523 1.958
issued units - per unit $ 0.031 0.260
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 17. COMMITMENTS
a) Debt and Lease Commitments
Newalta has annual commitments for senior long-term debt, Debentures,
leased property and equipment and short term amounts payable as follows:
-------------------------------------------------------------------------
There-
2010 2011 2012 2013 2014 after Total
-------------------------------------------------------------------------
Amount
drawn on
credit
facility(1)
(note 8) - 191,280 - - - - 191,280
Convertible
debentures
(note 9) 8,050 8,050 122,379 - - - 138,479
-------------------------------------------------------------------------
Total debt
commitments 8,050 199,330 122,379 - - - 329,759
-------------------------------------------------------------------------
Office
leases 7,973 7,445 7,250 7,278 6,977 34,940 71,863
Operating
leases 10,692 8,296 4,486 1,181 257 - 24,912
Surface
leases 1,092 1,112 1,133 533 267 4,137
Accounts
payable and
accrued
liabil-
ities 90,191 - - - - - 90,191
Dividends
payable 2,423 - - - - - 2,423
-------------------------------------------------------------------------
Total debt
and other
commit-
ments 120,421 216,183 135,248 8,992 7,501 34,940 523,285
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Gross of transaction costs. Interest payments are not reflected.
b) Letters of Credit and Surety bonds
As at December 31, 2009, Newalta had issued letters of credit and surety
bonds in respect of compliance with environmental licenses in the amount
of $22.1 million and $20.2 million respectively.
NOTE 18. FINANCIAL INSTRUMENTS
a) Fair Value of Financial Assets and Liabilities
Newalta's financial instruments include accounts receivable, note
receivable, accounts payable and accrued liabilities,
dividends/distributions 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 December 31, 2009 are as
follows:
-------------------------------------------------------------------------
Total
Held for Loans and Available Other Carrying
trading Receivables for sale Liabilities Value
-------------------------------------------------------------------------
Accounts receivable - 84,317 - - 84,317
Note receivable - 978 - - 978
Accounts payable
and accrued
liabilities - - - 90,191 90,191
Dividends payable - - - 2,423 2,423
Amount drawn on
credit facility - - - 191,280 191,280
-------------------------------------------------------------------------
The fair value of the Debentures is based on the closing trading price on
the Toronto Stock Exchange as follows:
-------------------------------------------------------------------------
December 31, 2009
Carrying Quoted Fair
Value(1) Value
-------------------------------------------------------------------------
7% Convertible debentures due November 30, 2012 112,558 116,438
-------------------------------------------------------------------------
(1) Includes both the debt and equity portions.
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 11% 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.
Revenue from Newalta's largest customer was $63.8 million for the year
ended December 31, 2009 ($37.5 million in 2008) representing 13% of
revenue (2008 - 6%). This revenue is recognized within our Eastern
segment.
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
$0.8 million which are considered to be outstanding beyond normal
repayment terms at December 31, 2009. A provision of $0.8 million has
been established as an allowance for doubtful accounts. No additional
provision has been made as there has not been a significant change in
credit quality and the amounts are still considered collectible. Newalta
does not hold any collateral over these balances.
-------------------------------------------------------------------------
Aging Trade Receivables
aged by Allowance for
Invoice Date Doubtful Accounts Net Receivables
December December December December December December
31, 2009 31, 2008 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Current 53,981 58,049 13 9 53,968 58,040
31-60 days 15,454 28,953 21 7 15,433 28,946
61-90 days 3,159 6,608 65 52 3,094 6,556
91 days + 791 6,503 725 1,465 66 5,038
-------------------------------------------------------------------------
Total 73,385 100,113 824 1,533 72,561 98,580
-------------------------------------------------------------------------
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 2009 are
as follows:
-------------------------------------------------------------------------
Allowance for doubtful accounts 2009 2008
-------------------------------------------------------------------------
Balance, beginning of year 1,533 2,263
Additional amounts provided for 922 1,502
Amounts written off as uncollectible (1,631) (2,232)
-------------------------------------------------------------------------
Balance, end of year 824 1,533
-------------------------------------------------------------------------
Liquidity risk
Ultimate responsibility for liquidity risk management rests with the
Board of Directors of Newalta Inc., 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. See
note 17 for maturity analysis.
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 and twelve months ended December 31, 2009:
-------------------------------------------------------------------------
Three months ended Year ended
December 31, December 31,
2009 2009
-------------------------------------------------------------------------
If interest rates increased by 1% with
all other variables held constant (389) (1,891)
-------------------------------------------------------------------------
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 December 31,
2009, Newalta had $24.6 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 December 31, 2009.
The table below provides a foreign currency sensitivity analysis on long-
term debt and working capital outstanding as at December 31, 2009:
-------------------------------------------------------------------------
Net Earnings
-------------------------------------------------------------------------
If the value of the U.S. dollar increased by
$0.01 with all other variables held constant 71
-------------------------------------------------------------------------
NOTE 19. CASH FLOW STATEMENT INFORMATION
The following tables provide supplemental information.
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Changes in current assets 33,563 32,789
Changes in accounts payable and
accrued liabilities (24,644) 1,787
Dividends/distributions payable 5,137 102
Stock based compensation, foreign exchange
and other (3,168) 2,463
Changes in capital asset accruals 12,711 (4,494)
-------------------------------------------------------------------------
Total increase in non-cash working capital 23,599 32,647
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign exchange 2,354 (3,509)
Accretion of convertible debentures 1,289 1,083
Amortization of deferred financing charges 1,834 463
Other (382) (648)
-------------------------------------------------------------------------
Total other items not requiring cash 5,095 (2,611)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash additions to capital assets during the year (26,941) (121,966)
Changes in capital asset accruals (12,711) 4,494
-------------------------------------------------------------------------
Total cash additions to capital assets (39,652) (117,472)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTE 20. COMPARATIVE FIGURES
Cash Flow Statements
2008 comparative information reflects the presentation of the change in
deferred revenue as a decrease (increase) in non-cash working capital on
the Cash Flow statements. In previous periods such items were classified
as other.
NOTE 21. SEGMENTED INFORMATION
Newalta has 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 Western segment recovers and
resells crude oil from oilfield waste, rents drill cuttings management
and solids control equipment, provides environmental services comprised
of environmental projects and drilling waste management, collects liquid
and semi-solid industrial wastes as well as automotive wastes, including
waste lubricating oil, and provides mobile site services in western
Canada. The Eastern segment provides industrial waste collection, pre-
treating, transfer, processing and disposal services and operates a fleet
of specialized vehicles and equipment for waste transport and onsite
processing, a lead recycling facility and an emergency response service
in central and eastern Canada. Recovered materials both segments are
processed into resalable products. The accounting policies of the
segments are the same as those of Newalta.
For the three months ended December 31, 2009
Consol-
Inter- idated
Western Eastern segment Unallocated Total
-------------------------------------------------------------------------
External revenue 62,125 75,183 - - 137,308
Inter segment
revenue(1) 295 - (295) - -
Operating
expense 40,422 55,880 (295) - 96,007
Amortization
and accretion
expense 5,931 5,873 - 2,754 14,558
-------------------------------------------------------------------------
Net margin 16,067 13,430 - (2,754) 26,743
Selling,
general and
administrative - - - 16,603 16,603
Finance charges - - - 6,689 6,689
-------------------------------------------------------------------------
Earnings
before taxes 16,067 13,430 - (26,046) 3,451
-------------------------------------------------------------------------
Capital
expenditures and
acquisitions(2) 4,566 4,185 - (511) 8,240
-------------------------------------------------------------------------
Goodwill 62,280 41,317 - - 103,597
-------------------------------------------------------------------------
Total assets 510,518 410,030 - 73,182 993,730
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended December 31, 2008
Consol-
Inter- idated
Western Eastern segment Unallocated Total
-------------------------------------------------------------------------
External revenue 79,645 65,696 - - 145,341
Inter segment
revenue(1) 250 - (250) - -
Operating
expense 53,535 47,894 (250) - 101,179
Amortization
and accretion
expense 5,545 6,798 - 3,403 15,746
-------------------------------------------------------------------------
Net margin 20,815 11,004 - (3,403) 28,416
Selling,
general and
administrative - - - 16,562 16,562
Finance charges - - - 6,238 6,238
-------------------------------------------------------------------------
Earnings
before taxes 20,815 11,004 - (26,203) 5,616
-------------------------------------------------------------------------
Capital
expenditures and
acquisitions(2) 26,677 15,878 - 4,099 46,654
-------------------------------------------------------------------------
Goodwill 62,280 41,317 - - 103,597
-------------------------------------------------------------------------
Total assets 552,132 425,233 - 74,545 1,051,910
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the year ended December 31, 2009
Consol-
Inter- idated
Western Eastern segment Unallocated Total
-------------------------------------------------------------------------
External
revenue 248,094 235,307 - - 483,401
Inter segment
revenue(1) 1,203 - (1,203) - -
Operating
expense 163,675 184,876 (1,203) - 347,348
Amortization
and accretion
expense 22,420 16,915 - 12,490 51,825
-------------------------------------------------------------------------
Net margin 63,202 33,516 - (12,490) 84,228
Selling,
general and
administrative - - - 56,132 56,132
Finance charges - - - 25,364 25,364
-------------------------------------------------------------------------
Earnings
before taxes 63,202 33,516 - (93,986) 2,732
-------------------------------------------------------------------------
Capital
expenditures and
acquisitions(2) 10,391 13,578 - 3,316 27,285
-------------------------------------------------------------------------
Goodwill 62,280 41,317 - - 103,597
-------------------------------------------------------------------------
Total assets 510,518 410,030 - 73,182 993,730
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the year ended December 31, 2008
Consol-
Inter- idated
Western Eastern segment Unallocated Total
-------------------------------------------------------------------------
External
revenue 356,146 240,809 - 80 597,035
Inter segment
revenue(1) 919 - (919) - -
Operating
expense 229,423 180,569 (919) - 409,073
Amortization
and accretion
expense 21,614 18,718 - 10,905 51,237
-------------------------------------------------------------------------
Net margin 106,028 41,522 - (10,825) 136,725
Selling,
general and
administrative - - - 62,129 62,129
Finance charges - - - 24,104 24,104
-------------------------------------------------------------------------
Earnings
before taxes 106,028 41,522 - (97,058) 50,492
-------------------------------------------------------------------------
Capital
expenditures and
acquisitions(2) 63,799 44,967 - 16,436 125,202
-------------------------------------------------------------------------
Goodwill 62,280 41,317 - 103,597
-------------------------------------------------------------------------
Total assets 552,132 425,233 - 74,545 1,051,910
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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.