Newalta Income Fund Announces 2004 Fourth Quarter and Year End Results
CALGARY, ALBERTA - March 15, 2005 /CNW/ - Newalta Income Fund
("Newalta" or the "Fund") (TSX:NAL.UN) today announced financial results
for the fourth quarter and year ended December 31, 2004.
FOURTH QUARTER
In the quarter, revenue improved $9.2 million or 23%, compared to 2003
and cash flow(3), excluding reorganization costs, increased 2% to $13.3
million. Higher crude oil prices in the quarter contributed a net $0.3
million increase in cash flow compared to 2003.
Oilfield revenue was up $5.3 million or 19%, over 2003 and net margin(6)
increased $1.6 million, or 12%. Crude oil sales in the quarter were up
$0.7 million or 24% over 2003.
Industrial revenue increased $3.9 million or 33% compared to last year
and net margin declined $0.1 million. Higher crude oil prices resulted
in a decline in net margin of $0.4 million compared to 2003.
Selling, general and administrative costs were up $1.9 million in the
fourth quarter compared to last year. In late 2003, Newalta initiated a
comprehensive program to strengthen the organization and to provide the
resources to support the continued strong growth of the business. This
initiative was substantially complete at the end of 2004 and Newalta has
the management in place to support strong growth in 2005 and beyond.
Cash distributed of $9.2 million represented 81% of the $11.4 million
cash available for growth and distributions(4).
Growth and acquisition capital expenditures in the quarter were $14.9
million compared to $10.7 million in 2003.
YEAR ENDED DECEMBER 31, 2004
For the year ended December 31, 2004, revenue increased $23.6 million,
or 15%, to $178.7 million compared to 2003 and cash flow, excluding
reorganization costs, improved $5.0 million, or 10%. Higher crude oil
prices contributed a net $1.9 million increase in cash flow compared to
2003.
Oilfield revenue increased $10.5 million or 10% and net margin increased
$5.0 million or 11% compared to last year. Crude oil sales contributed
$3.8 million of additional net margin in 2004 compared to 2003. Growth
capital investments of $21.4 million completed in 2004 did not
materially contribute to performance.
Industrial revenue increased $13.2 million or 26% and net margin grew
$1.4 million or 21% compared to 2003. Higher crude oil prices, which
resulted in reduced collection revenue and increased transportation fuel
costs, reduced net margin by $1.9 million year over year. Excluding the
decline in performance attributable to increased crude oil prices,
revenue was up $14.8 million and net margin was up $3.3 million
reflecting the division's successful expansion of profitable new
services and integration of acquisitions. Growth capital investments of
$7.2 million completed in 2004 did not materially contribute to
performance.
Selling, general and administrative costs increased $4.8 million or 35%
to $18.7 million compared to 2003. Increased salaries and related costs
accounted for approximately $3.3 million of the year over year increase.
The balance of the increase was attributable primarily to increased
corporate governance and other costs related to growth in the business.
Newalta's balance sheet remains strong with a long-term debt to
EBITDA(2) ratio of 0.67 and $45.6 million of the $90.0 million credit
facility unutilized at December 31, 2004.
Growth and acquisition capital expenditures in 2004 were $47.9 million,
which were about triple the expenditures of $15.6 million in 2003.
"We increased our growth capital investments and strengthened our
organization in 2004 to provide a solid platform for growth in 2005 and
beyond," said Al Cadotte, Newalta's President and Chief Executive
Officer.
Regulatory approval was received in the third quarter for the
Distribution Reinvestment Plan (the "DRIP") of the Fund. A total of $1.0
million of distributions was reinvested by unitholders during the fourth
quarter, resulting in the issuance of 48,378 additional units.
Cash distributed in 2004 was $38.1 million which represented 86% of cash
available for growth and distributions of $44.2 million.
/T/
FINANCIAL AND OPERATIONAL HIGHLIGHTS
Three Months Ended Year Ended
($000's, except December 31 December 31
per unit data) (unaudited) (unaudited)
%Increase %Increase
2004 2003 (Decrease) 2004 2003 (Decrease)
---------------------------------------------------
Revenue 49,339 40,098 23 178,668 155,032 15
Operating income
excluding
reorganization
costs(1) 8,941 9,938 (10) 38,744 36,393 6
Operating income 8,941 9,938 (10) 38,744 31,198 24
Net earnings 8,364 9,171 (9) 36,205 26,791 35
Earnings per unit ($) 0.31 0.35 (11) 1.33 1.14 17
Diluted earnings
per unit ($) 0.30 0.35 (14) 1.31 1.12 17
EBITDA(2) excluding
reorganization
costs 13,531 13,462 1 54,926 51,161 7
EBITDA 13,531 13,462 1 54,926 45,966 19
Cash flow(3)
excluding
reorganization
costs 13,251 13,012 2 53,794 48,804 10
Cash flow 13,251 13,012 2 53,794 43,590 23
- per unit ($) 0.49 0.50 (2) 1.98 1.86 6
Maintenance capita
expenditures 1,773 1,626 9 7,755 7,354 5
Principal repayments - 750 (100) 1,500 1,500 -
Cash available for
growth and
distributions(4)
excluding
reorganization
costs 11,407 10,389 10 44,186 41,127 7
- per unit - $ 0.42 0.40 5 1.63 1.75 (7)
Cash available for
growth and
distributions 11,407 10,389 10 44,186 35,913 23
- per unit - $ 0.42 0.40 5 1.63 1.53 7
Distributions
declared(1) 10,288 8,453 10 39,659 22,958 73
- per unit - $ 0.38 0.32 19 1.46 0.96 52
Cash distributed 9,228 8,053 15 38,071 20,140 89
Growth and
acquisition
capital
expenditures 14,874 10,668 39 47,879 15,602 207
Weighted average
units
outstanding
(5) (000's) 27,265 25,966 5 27,134 23,456 16
Total units
outstanding (000's) 27,294 26,836 2 27,294 26,836 2
------------------------------------------------------------------------
(1) On March 1, 2003, Newalta Corporation converted to an income trust.
The first distribution was declared for the month of March, 2003. The
total cost of the reorganization was $5.8 million of which $0.6 million
was incurred in the fourth quarter of 2002 and $5.2 million was incurre
in the first six months of 2003.
(2) EBITDA is provided to assist management and investors in determining
the ability of Newalta to generate cash from operations. It is
calculated from the consolidated statements of operations and
accumulated earnings as revenue less operating and selling, general and
administrative expenses. This measure does not have any standardized
meaning prescribed by Canadian Generally Accepted Accounting Principles
("GAAP"), and may not be comparable to similar measures presented by
other funds or entities.
(3) Management uses cash flow (before changes in non-cash working
capital) to analyze operating performance and leverage. Cash flow as
presented does not have any standardized meaning prescribed by Canadian
GAAP and therefore it may not be comparable with the calculation of
similar measures for other entities. Cash flow as presented is not
intended to represent operating cash flow 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 Canadian GAAP. All references
to cash flow and cash flow per unit throughout this document are based
on operating cash flow before changes in non-cash working capital and
asset retirement costs.
(4) Management uses cash available for growth and distributions to
supplement cash flow as a measure of operating performance and
leverage. Cash available for growth and distributions as presented does
not have any standardized meaning prescribed by Canadian GAAP and
therefore it may not be comparable with the calculation of similar
measures for other entities. The objective of this non-GAAP measure is
to calculate the amount which is available for distribution to
unitholders. Cash available for growth and distributions is defined as
cash flow less maintenance capital expenditures, principal repayments,
asset retirement costs and deferred costs plus net proceeds on sales of
fixed assets. All references to cash available for growth and
distributions throughout this document have the meaning set out in this
note.
(5) For comparative purposes, the previously reported weighted average
shares outstanding of Newalta Corporation prior to March 1, 2003 have
been converted to units on a 2:1 basis, and per unit calculations have
been adjusted on this basis.
(6) Management uses net margin to analyze divisional operating
performance. Net margin as presented does not have any standardized
meaning prescribed by Canadian GAAP and therefore it may not be
comparable with the calculation of similar measures for other entities.
Net margin as presented is not intended to represent operating income
nor should it be viewed as an alternative to net earnings or other
measures of financial performance calculated in accordance with Canadian
GAAP. Net margin is defined as revenue less operating and depreciation,
amortization and accretion expense.
/T/
The consolidated financial statements and notes thereto and management's
discussion and analysis are attached.
Management will hold a conference call on March 16, 2005 at 1:00p.m.
(ET) to discuss the Fund's performance for the three months and the year
ended December 31, 2004. To listen, please dial 1-800-565-0813 or
416-695-9703, or log onto the web cast at www.newalta.com. For those
unable to listen to the live event, a rebroadcast will be available
until midnight on March 23, 2005, by dialing 416-695-5275 or
1-888-509-0082. No passcode is required.
Newalta Income Fund is an open ended trust that maximizes the inherent
value in certain industrial wastes through recovery of saleable products
and recycling, rather than disposal. Through an integrated network of 41
state-of-the-art facilities, Newalta delivers world-class solutions to a
broad customer base of national and international corporations, in a
range of industries, including the automotive, forestry, pulp and paper,
manufacturing, mining, oil and gas, petrochemical, and transportation
services industries. With a track record of profitable growth and
environmental stewardship, Newalta is focused on leveraging its position
in new service sectors and geographic markets from coast to coast.
NEWALTA INCOME FUND
Management's Discussion and Analysis
FOR THE THREE MONTHS AND YEAR ENDED DECEMBER 31, 2004
This document contains certain forward-looking statements, relating to
the operations or to the environment in which Newalta Income Fund
(the"Fund") and Newalta Corporation (the "Corporation" and together with
the Fund, "Newalta") operate, which are based on Newalta's operations,
estimates, forecasts and projections. These statements are not
guarantees of future performance and involve risks and uncertainties
that are difficult to predict, or are beyond Newalta's control. A number
of important factors could cause actual outcomes and results to differ
materially from those expressed in these forward-looking statements.
These factors include, but are not limited to, general economic,
regulatory, oil and gas industry activity and such other risks or
factors described from time to time in the reports filed with securities
regulatory authorities by Newalta. Consequently, readers should not
place any undue reliance on such forward-looking statements. In
addition, these forward-looking statements relate to the date on which
they are made. Newalta does not undertake any intention or obligation to
update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. All forward-looking
statements contained in this document are expressly qualified by this
cautionary statement.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of the Fund and notes thereto and
the Renewal Annual Information Form of the Fund for the years ended
December 31, 2003 and 2004 and the Management's Discussion and Analysis
for the year ended December 31, 2003 and quarters ended March 31, 2004,
June 30, 2004 and September 30, 2004.
The Fund is the successor organization to the Corporation. Information
for the three months and year ended December 31, 2004, along with
comparative information for 2003, is provided. Certain numbers from the
prior period have been reclassified to conform to those reported for the
Fund in the current period.
This Management's Discussion and Analysis is dated March 15, 2005, and
takes into consideration information available up to that date.
OVERALL PERFORMANCE
Revenues increased 15% to $178.7 million and cash flow, excluding
reorganization costs, improved 10% to $53.8 million. Considerable
progress was achieved towards profitable growth in the Industrial
division through acquisition and expansion into new services.
Contributions from acquisitions and the expansion of on-site and other
service areas resulted in a positive impact to Industrial's net margin
of $3.3 million in 2004. This was partially offset by the impact of high
crude oil prices which resulted in decreased collection revenue and
increased transportation fuel costs, reducing net margin by
approximately $1.9 million. Industrial revenue grew by 26% to $63.5
million on the year and net margin increased $1.4 million, or 21%, to
$8.3 million. In 2004, Oilfield revenue increased 10% to $115.2 million
and net margin increased by $5.0 million or 11% to $51.9 million. The
improved profitability was driven primarily by sustained high crude oil
prices and activity levels. The price received for crude and the volumes
sold both increased 16% year over year, increasing Oilfield net margin
by approximately $3.8 million. Higher crude oil prices contributed a net
$1.9 million increase to Newalta's cash flow in 2004 compared to 2003.
Distributions were increased from 10.5 cents to 12.5 cents per unit in
March, 2004. Cash distributed of $38.1 million was 86% of cash available
for growth and distributions of $44.2 million.
Growth capital expenditures increased 339% in 2004 to $31.5 million
compared to $7.2 million in the prior year. The impact of the 2004
growth capital program on financial performance was modest as the
majority of the projects were not completed until the fourth quarter of
2004 and the first quarter of 2005. Acquisition investments
approximately doubled in 2004 at $16.4 million compared to $8.4 million
in 2003.
A new credit facility was secured in the second quarter of 2004 for
$90.0 million, which requires no principal repayments until July 2006 at
the earliest. Newalta's liquidity and capital resource capacity remains
very strong with solid working capital, a long-term debt to EBITDA ratio
of 0.67 and $45.6 million of the $90.0 million credit facility
unutilized at December 31, 2004. Newalta is well positioned for
continued strong growth.
/T/
SELECTED ANNUAL INFORMATION
------------------------------------------------------------------------
($000's, except per unit data) 2004 2003 2002
------------------------------------------------------------------------
Revenue 178,668 155,032 111,666
------------------------------------------------------------------------
Operating Income 38,744 31,198 20,847
------------------------------------------------------------------------
Net earnings 36,205 26,791 12,417
------------------------------------------------------------------------
Earnings per unit ($) 1.33 1.14 0.60
------------------------------------------------------------------------
Diluted earnings per unit ($) 1.31 1.12 0.59
------------------------------------------------------------------------
Cash flow 53,794 43,590 30,907
------------------------------------------------------------------------
Cash flow per unit ($) 1.98 1.86 1.49
------------------------------------------------------------------------
Total assets 324,945 285,272 255,812
------------------------------------------------------------------------
Total long-term debt & debentures 36,617 13,502 50,090
------------------------------------------------------------------------
Distributions declared 39,659 22,958 -
------------------------------------------------------------------------
Distributions declared per unit ($) 1.46 0.96 -
------------------------------------------------------------------------
------------------------------------------------------------------------
/T/
The factors that impacted revenues and profitability are outlined in
Overall Performance and Results of Operations. Total assets increased by
$39.7 million or 14% in 2004 primarily due to the growth and acquisition
capital spending. Debt levels were lower at December 31, 2003 mainly as
a result of the October 2003 equity issue, but have increased in 2004
due to the growth and acquisition capital expenditures. On March 1,
2003, the Corporation converted to an income trust. The first
distribution was declared for the month of March, 2003. The total cost
of the reorganization was $5.8 million of which $0.6 million was
incurred in the fourth quarter of 2002 and $5.2 million was incurred in
the first six months of 2003.
Segmented information is discussed in further detail in the Results of
Operations.
RESULTS OF OPERATIONS
Total revenue increased by $23.6 million and combined divisional net
margin increased $6.4 million in 2004 compared to 2003. The increase in
revenue and net margin was predominantly attributable to higher
commodity prices and the impact of acquisitions. Rising crude oil prices
had a two-fold effect. First, Oilfield net margin increased $3.8 million
as a result of higher crude oil sales, and second, Industrial net margin
was negatively impacted by $1.9 million due to lower collection revenues
and higher transportation fuel costs.
/T/
RESULTS OF OPERATIONS (percentage of revenue)
------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------------------------------------------------------------
Operating expenses 58.6 58.0 59.4 59.0 61.0
------------------------------------------------------------------------
Selling, general and administrative 10.5 9.0 9.4 8.7 10.8
------------------------------------------------------------------------
Interest 0.8 1.7 2.5 3.8 4.8
------------------------------------------------------------------------
Depreciation, amortization and accretion 8.5 7.9 9.5 9.8 10.5
------------------------------------------------------------------------
Operating income(1) 21.7 23.5 19.2 18.8 12.9
------------------------------------------------------------------------
Cash flow(1) 30.1 31.5 28.2 28.0 22.8
------------------------------------------------------------------------
EBITDA(1) 30.7 33.0 31.2 29.6 28.2
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Excludes reorganization and take-over bid costs
/T/
Oilfield recovers and resells crude oil from oilfield wastes. Oilfield
accounted for approximately 63% of Newalta's total assets and generated
64% of Newalta's total revenue in 2004. Revenue from Oilfield is
generated mainly from the fees charged for the treatment and processing
of various oilfield waste materials and from the sale of recovered crude
oil. Approximately 85% of revenue comes from day to day production.
Revenue is also impacted by oilfield activity levels which are driven
mainly by commodity prices. A change of Cdn $1.50 for WTI is estimated
to impact operating income by approximately $0.5 million.
Oilfield revenue of $115.2 million increased 10% compared to $104.8
million in 2003. Revenue was increased by the impact of high commodity
prices and resultant strong oilfield activity levels throughout most of
the year. Activity levels, which were reduced by wet weather in the
third quarter, rebounded in the fourth quarter. Recovered crude oil
sales in 2004 increased by 35% to $14.7 million compared to $10.9
million in 2003. The balance of Oilfield's revenue growth was derived
primarily from acquisitions, strategic alliances and growth in on-site
services.
In 2004, oil sold for Newalta's account increased 16% to 334,700 barrels
as compared to 289,600 in 2003. The price per barrel sold in 2004 was at
an average price of Cdn $43.85 per barrel compared to an average price
of Cdn $37.72 per barrel in 2003. Total crude oil recovered from waste
processing was 1,067,000 barrels compared to 1,181,000 barrels in 2003,
reflecting the change in Oilfield's business mix.
Oilfield net margin increased by $5.0 million or 11% to $51.9 million
compared to $46.9 million in the prior year, of which $3.8 million was
attributable to increased crude oil sales. Operating costs as a
percentage of revenue were reduced to 47.6% in 2004 compared to 48.3% in
2003. Net margin was impacted by changes in the business mix and the
effect of wet weather in the third quarter.
Acquisitions completed in 2004 consisted of a satellite facility added
in January and a centrifuge rental business acquired in June for total
combined cash consideration of $7.2 million. Growth capital expenditures
were $21.4 million compared to $5.5 million in 2003. Maintenance capital
expenditures were $5.0 million compared to $4.8 million in 2003.
The outlook for Oilfield in 2005 remains positive. Commodity prices and
activity levels are expected to remain strong as producers take
advantage of favourable market conditions. This environment, combined
with the impact of 2004 growth capital, should result in strong
performance.
Industrial collects liquid and semi-solid industrial wastes as well as
automotive wastes, including waste lubricating oil in western Canada.
Recovered materials are processed into resaleable products. Industrial
accounted for 33% of Newalta's total assets and generated 36% of
Newalta's total revenue for the year ended December 31, 2004. Industrial
produces various resaleable products from waste lubricating oil,
including base oil, fuel oil, burner fuel and drilling oil.
Approximately $29.1 million or 46% of 2004 Industrial revenue came from
product sales compared to $28.1 million or 56% in 2003. The balance of
Industrial's revenue for 2004 was derived mainly from collection and
processing fees, which improved 54% to $34.4 million from $22.2 million
in 2003. Industrial's performance is impacted by the general state of
the economy in western Canada, as well as commodity prices and economic
conditions related to the oil and gas, mining and forestry industries.
The automotive market is generally a stable market as the sale of goods
such as lube oil does not significantly fluctuate from year to year.
Industrial revenue for 2004 improved 26% to $63.5 million from $50.3
million in 2003. Year over year revenue growth was achieved through the
contribution provided by acquisitions and management initiatives. The
impact of acquisitions completed in 2004 as well as the full impact of
the Hazmat acquisition in December 2003 provided a significant
contribution to revenue and net margin. High crude oil prices resulted,
however, in increased transportation fuel costs and a reduction in used
oil collection revenue as industrial fuel consumers aggressively sourced
alternate fuel sources and competition for used oil escalated. The total
effect on net margin as a result of high crude oil price was $1.9
million. Growth in revenue and profitability, excluding acquisitions,
was generated as a result of management initiatives to increase sludge
and other processing volumes. Growth capital spending of $0.4 million in
2003 did not have a material impact on 2004 performance and total growth
capital expenditures of $7.2 million in 2004 are not expected to improve
Industrial's performance until 2005.
The impact of acquisitions and management initiatives increased net
margin year over year by approximately $3.3 million, reflecting the
successful integration of acquisitions and profitable expansion of
services areas. This was offset, in part, by the $1.9 million impact of
high commodity prices. Industrial net margin increased by $1.4 million
or 21% in 2004 to $8.3 million compared to $6.8 million in 2003.
Industrial acquisitions completed in 2004 consisted of a satellite
facility in Redwater, Alberta and an industrial services business in
Cranbrook, British Columbia, which were both purchased in the first
quarter for total cash consideration of $9.2 million. Maintenance
capital was $2.2 million compared to $2.7 million in 2003.
In 2005 Industrial will continue to develop product markets and expand
on-site services and centrifugation of industrial sludges.
For the year ended December 31, 2004, selling, general and
administrative costs increased $4.8 million or 35% to $18.7 million
compared to $13.9 million in 2003. Newalta undertook a significant
personnel recruitment initiative which was completed in the third
quarter to strengthen the organization and to provide the resources to
manage continued growth. Key senior personnel were added throughout the
entire organization. Increased salaries and related costs accounted for
approximately $3.3 million of the year over year increase in selling,
general and administrative costs. The remainder of the increase was
attributable primarily to increased corporate governance and other costs
related to growth in the business. For 2004, selling, general, and
administrative costs were 10.5% of revenue compared to 9.0% of revenue
in 2003. There was an increase in selling, general and administrative
costs from 2002 to 2003 which was not consistent with the level of
growth achieved and resulted in minimum staffing levels during 2003. The
recruitment initiative completed this year provides the organizational
capacity for future growth. Management's continued goal is to maintain
selling, general and administrative costs, as a percent of revenue, at
10% or less.
Depreciation, amortization and accretion increased $3.0 million or 25%
in 2004 to $15.1 million compared to $12.1 million in the previous year.
Included in depreciation, amortization and accretion was a $0.4 million
write down of deferred costs. As a percentage of revenue, depreciation,
amortization and accretion, excluding the write down, was 8.3% of
revenue in 2004 compared to 7.8% of revenue in 2003. Increased
depreciation was attributable to growth capital and acquisition
expenditures.
Interest expense in 2004 declined by $1.3 million to $1.4 million
compared to $2.7 million in 2003. The reduction in interest was a result
of lower average debt levels throughout the year compared to the prior
year.
Income tax expense for the year ended December 31, 2004 was $2.5 million
as compared to $4.4 million in 2003. The decrease was due to the year
over year reduction in future income taxes as a result of increased
distributions. Current tax expense related to large corporation taxes
and provincial capital taxes. Newalta does not anticipate paying any
cash income taxes in 2005, with the exception of large corporation tax
and provincial capital taxes.
Operating income, excluding reorganization costs, increased by 6% to
$38.7 million compared to $36.4 million in 2003.
Net earnings for the year ended December 31, 2004 increased by $9.4
million or 35% to $36.2 million ($1.33 per unit) compared to $26.8
million ($1.14 per unit) in the prior year. Net earnings per diluted
unit for 2004 were $1.31 compared to $1.12 in 2003.
As at March 15, 2005 the Fund had 27,334,389 units outstanding
(excluding units issuable on March 15, 2005 pursuant to the Dividend
Reinvestment Plan of the Fund) and outstanding rights to acquire up to
1,359,487 units.
/T/
SUMMARY OF QUARTERLY RESULTS
------------------------------------------------------------------------
2004 ($000's, except per unit data) Q1 Q2 Q3 Q4 Total
------------------------------------------------------------------------
Revenue 42,890 40,449 45,990 49,339 178,668
------------------------------------------------------------------------
Operating income 10,261 8,095 11,447 8,941 38,744
------------------------------------------------------------------------
Net earnings 9,873 7,880 10,088 8,364 36,205
------------------------------------------------------------------------
Earnings per unit ($) 0.37 0.29 0.37 0.31 1.33
------------------------------------------------------------------------
Diluted earnings per unit ($) 0.36 0.28 0.36 0.30 1.31
------------------------------------------------------------------------
Weighted average units 26,878 27,147 27,244 27,265 27,134
------------------------------------------------------------------------
Diluted units 27,463 27,608 27,756 27,866 27,636
------------------------------------------------------------------------
------------------------------------------------------------------------
2003 ($000's, except per unit data) Q1 Q2 Q3 Q4 Total
------------------------------------------------------------------------
Revenue 38,410 34,543 41,981 40,098 155,032
------------------------------------------------------------------------
Operating income 3,398 5,676 12,186 9,938 31,198
------------------------------------------------------------------------
Net earnings 2,027 5,853 9,740 9,171 26,791
------------------------------------------------------------------------
Earnings per unit ($) 0.09 0.26 0.43 0.35 1.14
------------------------------------------------------------------------
Diluted earnings per unit ($) 0.09 0.26 0.42 0.35 1.12
------------------------------------------------------------------------
Weighted average units 21,888 22,196 22,907 25,966 23,456
------------------------------------------------------------------------
Diluted units 22,987 22,897 23,404 26,515 24,172
------------------------------------------------------------------------
/T/
Quarterly performance is affected by weather conditions, commodity
prices, market demand and capital investments as well as acquisitions.
Road bans, imposed in the spring, restrict waste transportation which
reduces demand for Newalta's services and, therefore, the second quarter
is generally the weakest quarter of the year. The third quarter is
typically the strongest quarter for both Oilfield and Industrial due to
favourable weather conditions and market cyclicality. Changes in
commodity prices and drilling activity throughout the year will also
impact performance. Similarly, acquisitions and growth capital
investments completed in the first half will tend to strengthen second
half financial performance. First quarter revenue can range from 20% to
26% of year-end revenue and typically averages approximately 24%. Second
quarter revenue averages approximately 22% of year-end revenue and can
range from 20% to 23%. Third quarter revenue can range from 26% to 31%
and averages approximately 27% of year-end totals. Fourth quarter
revenue averages approximately 28% and can range from 24% to 30%. In
2004, quarterly revenues as a percent of total year-end revenue were
24.1% in the first quarter, 22.6% in the second quarter, 25.7% in the
third quarter and 27.6% in the fourth quarter.
Quarterly financial results have been prepared by management in
accordance with Canadian generally accepted accounting principles in
Canadian dollars.
LIQUIDITY
In 2004, Newalta generated cash flow, excluding reorganization costs, of
$53.8 million or $1.98 per unit compared to $48.8 million or $2.08 per
unit in 2003. The $0.10 per unit reduction is mainly due to the increase
in the number of units from the October 2003 equity issue. Total
maintenance capital spending in 2004 was $7.8 million compared to $7.4
million in 2003. Scheduled principal payments of $1.5 million in 2004
were unchanged from 2003. As a result of the renegotiation of the credit
facility completed on May 19, 2004, no further principal repayments are
due until July 2006, at the earliest. Distributions were increased from
10.5 cents to 12.5 cents per unit in March, 2004. Total distributions
declared increased by 73% to $39.7 million or $1.46 per unit compared to
$23.0 million or $0.96 per unit in the prior year, due to the increase
in monthly distributions and because distributions were only declared
for 10 months in 2003.
For the year ended December 31, 2004, $6.1 million of cash available for
growth and distributions was generated in excess of cash distributed,
calculated as follows:
/T/
------------------------------------------------------------------------
($ millions) 2004 2003
------------------------------------------------------------------------
Cash flow before reorganization costs 53.8 48.8
Maintenance capital (7.8) (7.4)
Asset retirement and deferred costs (0.4) (0.3)
Proceeds on sale of capital assets 0.1 1.5
Principal repayments (1.5) (1.5)
------------------------------------------------------------------------
Cash available for growth and distributions
before reorganization costs 44.2 41.1
Growth capital and acquisitions funded by cash flow - (4.1)
Reorganization costs - (5.2)
------------------------------------------------------------------------
Cash available for distribution 44.2 31.8
Cash distributed (38.1) (20.1)
------------------------------------------------------------------------
Excess cash 6.1 11.7
------------------------------------------------------------------------
------------------------------------------------------------------------
/T/
Newalta's current financial performance is well in excess of its debt
covenants under the credit facility. The Fund is restricted from
declaring distributions and distributing cash if it is in breach of the
covenants under its credit facility. At December 31, 2004, Newalta had a
debt to EBITDA ratio of 0.67. Newalta does not have a stability rating.
At December 31, 2004, Newalta had working capital of $21.4 million, down
from $31.1 million at the prior year end. The decrease in working
capital is primarily the result of funding growth capital and
acquisitions from cash on hand at December 31, 2003. At current activity
levels, working capital of $21.4 million is expected to be sufficient to
meet the ongoing commitments and operational demands of the business.
Historically, Newalta has had excellent experience in collecting its
accounts receivable. The credit risks associated with accounts
receivable are viewed as normal for the industry.
Newalta currently has a $25.0 million operating line to fund working
capital and financial security requirements, of which $14.6 million was
unutilized at December 31, 2004. Letters of credit provided for
financial security totaled $7.8 million at December 31, 2004.
The following table outlines the Fund's contractual obligations and
payments due for each of the next five years and thereafter, assuming
the credit facility is not extended:
/T/
------------------------------------------------------------------------
Contractual obligations
($000's) Total 0-1 years 2-3 years 4-5 years 5+ years
------------------------------------------------------------------------
Office leases 13,943 1,752 3,906 3,738 4,547
Operating leases 4,666 1,654 2,310 702 -
Surface leases 9,077 856 2,031 2,108 4,082
Long-term debt 36,617 - 36,617 - -
------------------------------------------------------------------------
Total 64,303 4,262 44,864 6,548 8,629
------------------------------------------------------------------------
------------------------------------------------------------------------
/T/
The total estimated cost for asset retirement at December 31, 2004 was
$13.3 million. At December 31, 2004, $4.9 million of asset retirement
costs have been accrued in the consolidated balance sheet.
Regulatory approval was received in the third quarter for the
Distribution Reinvestment Plan (the "DRIP") of the Fund. The first
eligible reinvestment of distributions was made on October 15, 2004 in
relation to the September distribution payment. A total of $1.0 million
of distributions was reinvested by unitholders in 2004, resulting in the
issuance of 48,378 additional units.
CAPITAL RESOURCES
Total capital expenditures in 2004 increased $32.6 million to $55.6
million compared to $23.0 million in 2003. Maintenance capital
expenditures for the year were $7.8 million compared to $7.4 million in
2003 and were $0.2 million lower than management's estimate of $8.0
million provided in early 2004. Total maintenance capital expenditures
for 2005 are estimated to be approximately $9.0 million. Maintenance
capital is funded from cash flow. Newalta undertook a significant growth
capital and acquisition program in 2004, which included the addition and
expansion of existing satellite facilities, sludge processing
capabilities, additions to the rental centrifuge fleet, transportation
equipment and expansion of on-site services. For the year ended December
31, 2004, $31.4 million was spent on internal growth projects compared
to $7.2 million in 2003. It is estimated that spending on internal
growth projects will be approximately $30.0 million in total for 2005.
Total acquisition expenditures in 2004 were $16.4 million compared to
$8.4 million in 2003. Transactions closed during 2004 included the
acquisition of two satellite facilities, an industrial services business
and a centrifuge rental business. Future expenditures for growth capital
will be funded from working capital and the extendible term credit
facility. Sources of funding for acquisitions will be dependent on the
size of the acquisition.
Total capital expenditures are as follows:
/T/
------------------------------------------------------------------------
($ millions) 2004 2003
------------------------------------------------------------------------
Growth capital 31.4 7.2
Acquisitions 16.4 8.4
------------------------------------------------------------------------
Total growth and acquisition capital 47.8 15.6
Maintenance capital 7.8 7.4
------------------------------------------------------------------------
Total capital expenditures 55.6 23.0
------------------------------------------------------------------------
------------------------------------------------------------------------
/T/
Effective March 1, 2005, Newalta acquired an oilfield facility near Fox
Creek, Alberta. The total investment in the facility, including
additional capital anticipated to be expended in 2005, is estimated to
be $10.0 million.
Newalta secured a new credit facility effective May 19, 2004. This
facility provides for a $25.0 million operating line plus a $65.0
million extendible term facility. At December 31, 2004, Newalta had
$14.6 million of unutilized operating line and $31.0 million of
unutilized extendible term facility.
OFF-BALANCE SHEET ARRANGEMENTS
Newalta currently has no off-balance sheet arrangements.
TRANSACTIONS WITH RELATED PARTIES
Bennett Jones LLP provides legal services to Newalta. Mr. Vance
Milligan, a Trustee and Corporate Secretary of the Fund, is a partner in
the law firm of Bennett Jones LLP and is involved in providing and
managing the legal services provided to Newalta. The total amount of
these legal services in the fourth quarter of 2004 was $0.1 million
compared to $0.1 million in 2003. For the year ending December 31, 2004
these legal services were $0.4 million compared to $0.8 million in 2003.
Newalta provides Oilfield services to Paramount Resources Ltd., an oil
and gas company. Mr. Clayton Riddell, a Trustee and Chairman of the
Board of the Fund, is Chairman and Chief Executive Officer of Paramount
Resources Ltd. The total revenue for services provided by Newalta to
Paramount Resources Ltd. in the fourth quarter of 2004 was $0.3 million
compared to $0.1 million in 2003. For the year ending December 31, 2004,
total revenue was $0.8 million (representing approximately 0.4% of the
revenue of the Fund) compared to $0.3 million (representing
approximately 0.2% of the revenue of the Fund) in 2003.
These transactions were incurred in the normal course of operations on
similar terms and conditions to those entered into with unrelated
parties. These transactions are measured at the exchange amount, which
is the amount of consideration established and agreed to by the related
parties.
FOURTH QUARTER
Revenue for the fourth quarter increased by 23% to $49.3 million
compared to $40.1 million in 2003. Of the total $9.2 million increase in
revenue, $5.3 million was generated from Oilfield and $3.9 from
Industrial. Higher crude oil prices in the quarter contributed a net
$0.3 million of increase in cash flow compared to 2003.
Oilfield revenue of $33.4 million and net margin of $14.7 million
increased by 19% and 12% respectively in the fourth quarter of 2004
compared to 2003. Growth in Oilfield revenue and net margin was driven
by strong activity levels, continued high crude oil prices and
contributions from growth and acquisition capital expenditures. Activity
levels significantly rebounded from the third quarter, as favourable
weather conditions prevailed throughout the fourth quarter. Oil sales
increased $0.7 million to $3.6 million compared to $2.9 million in 2003.
A total of 74,600 barrels were sold for Newalta's account in the quarter
at an average price of Cdn $47.60 per barrel, resulting in oil sales of
$3.6 million. In the fourth quarter of 2003, 82,600 barrels were sold
for Newalta's account, at an average price of Cdn $34.50 per barrel,
resulting in oil sales of $2.9 million.
Industrial revenue increased $3.9 million or 33% compared to last year
and net margin declined $0.1 million. Net margin was adversely impacted
by approximately $0.4 million as a result of reduced used oil collection
revenue and increased transportation fuel costs due to the effect of
high crude oil prices. Net margin was also impacted by lower activity
levels in British Columbia due to wet weather and seasonality. Net of
the effect from high crude prices, the increase in net margin resulted
from contributions of acquisitions and growth in on-site services.
Selling, general and administrative costs increased $1.9 million to $5.9
million compared to $4.0 million in the same quarter of 2003 and were up
$1.3 million from the third quarter this year. In late 2003, Newalta
initiated a comprehensive program to strengthen the organization and
provide the resources to support the continued strong growth of the
business. This initiative was substantially complete at the end of 2004
and Newalta has the management in place to deliver strong performance in
2005 and beyond. The increase in fourth quarter administrative costs was
due primarily to increased salaries and related costs, increased
corporate governance and other costs associated with growth in the
business. The normal range for selling, general and administrative costs
at current activity levels is estimated to be approximately $5.0 million
per quarter. However, certain additional costs of approximately $0.8
million were incurred in the quarter related to recruitment, relocation,
employee severance and other costs, which contributed to the increased
selling, general and administrative costs in the fourth quarter.
Fourth quarter cash available for growth and distributions increased 10%
to $11.4 million ($0.42 per unit) compared to $10.4 million ($0.40 per
unit) in 2003. Cash distributed of $9.2 million represented 81% of the
$11.4 million cash available for growth and distributions.
Growth and acquisition capital expenditures in the quarter were $14.9
million compared to $10.7 million in 2003.
/T/
SEGMENTED INFORMATION For the three months ended December 31 ($000's)
Inter- Consolidated
2004 Oilfield Industrial segment Unallocated(2) Total
------------------------------------------------------------------------
External
revenue 33,353 15,986 49,339
Inter segment
revenue(1) 137 54 (191) -
Operating
expense 16,393 13,352 (191) 29,554
Depreciation,
amortization
and accretion 2,355 1,385 628 4,368
------------------------------------------------------------------------
Net margin 14,742 1,303 (628) 15,417
Selling, general
and
administrative 5,890 5,890
Interest
expense 586 586
------------------------------------------------------------------------
Operating
income 14,742 1,303 (7,104) 8,941
------------------------------------------------------------------------
Capital
expenditures 10,819 4,999 829 16,647
Goodwill 10,782 2,430 13,212
Total assets 205,316 106,529 13,100 324,945
----------------------------------------------------------
----------------------------------------------------------
Inter- Consolidated
2003 Oilfield Industrial segment Unallocated(2) Total
------------------------------------------------------------------------
External
revenue 28,057 12,041 40,098
Inter segment
revenue(1) 7 32 (39) -
Operating
expense 13,030 9,668 (39) 22,659
Depreciation,
amortization
and
accretion 1,877 1,017 199 3,093
------------------------------------------------------------------------
Net margin 13,157 1,388 (199) 14,346
Selling,
general and
administrative 3,977 3,977
Interest expense 431 431
------------------------------------------------------------------------
Operating
income 13,157 1,388 (4,607) 9,938
------------------------------------------------------------------------
Capital
expenditures 4,916 6,830 548 12,294
Goodwill 10,782 - 10,782
Total assets 172,212 90,712 22,348 285,272
----------------------------------------------------------
----------------------------------------------------------
(1) Inter-segment revenue is recorded at market, less the costs of
serving external customers.
(2) Management does not allocate selling, general & administrative,
taxes, and interest costs in the segment analysis.
/T/
CRITICAL ACCOUNTING ESTIMATES
The preparation of the financial statements in accordance with Canadian
GAAP requires management to make estimates with regard to the reported
amounts of revenues 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 judgement and uncertainty, the amounts currently reported in
the financial statements could, in the future, prove to be inaccurate.
ASSET RETIREMENT OBLIGATIONS
Asset retirement obligations are estimated by management based on the
anticipated costs to abandon and reclaim all Newalta facilities and
wells and the projected timing of the costs to be incurred in future
periods. Management, in consultation with the Corporation'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.
GOODWILL
Management performs a test for goodwill impairment annually and whenever
events or circumstances make it more likely than not that an impairment
may have occurred. Determining whether an impairment has occurred
requires valuation of the respective reporting unit, which is estimated
using a discounted cash flow method. In applying this methodology,
management relies on a number of factors, including actual operating
results, future business plans, economic projections and market data.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of the Fund's 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 the Fund's
plant and equipment.
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
During 2003, the Fund adopted certain provisions of the Canadian
Institute of Chartered Accountants ("CICA") amended Handbook Section
3870 Stock-Based Compensation and Other Stock-Based Payments. This
amendment requires expensing of the fair value of equity-based
compensation effective for fiscal years beginning on or after January 1,
2004, and allowed for the early adoption of the guidelines for the year
ended 2003. Pursuant to the transitional rules, the Fund chose to early
adopt the pronouncement on a prospective basis in 2003. The non-cash
expense for the three months ended December 31, 2004 was $0.2 million
($0.2 million in 2003), and for the year ended December 31, 2004 was
$0.6 million ($0.6 million in 2003).
ASSET RETIREMENT OBLIGATIONS
In December 2002, the CICA issued a new standard on the accounting for
asset retirement obligations. This standard requires recognition of a
liability for the future retirement obligations associated with
property, plant and equipment. 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 its useful life. The liability accretes
until the date of expected settlement of the retirement obligations. The
new standard is effective for all fiscal years beginning on or after
January 1, 2004. The Fund estimates the undiscounted cash flows related
to asset retirement obligations, adjusted for inflation, to be incurred
over the estimated period of 20 years to be $13.5 million. The fair
value of this liability at December 31, 2004 was $4.9 million ($4.7
million in 2003) using a discount rate of 8% and an inflation rate of
2%. Accretion expense for the three months ended December 31, 2004 was
$0.1 million ($0.1 million in 2003). For the year ended December 31,
2004, accretion expense totaled $0.4 million ($0.4 million in 2003).
VARIABLE INTEREST ENTITIES
In June 2003, the CICA issued Accounting guideline 15 ("ACG-15"),
Consolidation of Variable Interest Entities, which defines Variable
Interest Entities as entities that have insufficient equity or their
equity investors lack one or more specified essential characteristics of
a controlling financial interest. The standard provides guidance for
determining when an entity is a Variable Interest Entity and who, if
anyone, should consolidate the Variable Interest Entity. ACG-15 will
apply to all annual and interim periods beginning on or after November
1, 2004. The Fund is currently evaluating the impact of this new
accounting guideline but its adoption is not expected to have an impact
on the consolidated financial statements.
FINANCIAL INSTRUMENTS - RECOGNITION AND MEASUREMENT, HEDGES, AND
COMPREHENSIVE INCOME
The Accounting Standards Board ("AcSB") has issued three exposure drafts
on financial instruments which will apply to interim and annual
financial statements relating to fiscal years beginning on or after
October 1, 2006. It will require the following:
- All trading financial instruments will be recognized on the balance
sheet and will be fair valued through the income statement;
- All remaining financial assets will be recorded at cost and amortized
through the financial statements;
- A new statement for comprehensive income that will include certain
gains and losses on translation of assets and liabilities; and
- An update to AcG-13 to incorporate the fair value changes not recorded
in the income statement to be recorded through the comprehensive income
statement.
The Fund has not yet assessed the future impact of these standards on
the consolidated financial statements.
EXCHANGEABLE SECURITIES ISSUED BY SUBSIDIARIES OF INCOME TRUSTS
On January 19, 2005, the CICA Emerging Issues Committee ("EIC") issued
EIC Abstract 151, Exchangeable Securities Issued by Subsidiaries of
Income Trusts which provides guidance on how to present exchangeable
securities representing a retained interest in a subsidiary of an income
trust on the consolidated balance sheet of the income trust. This
Abstract must be applied retroactively, with restatement of prior
periods, to all financial statements issued after January 19, 2005.
Newalta currently does not have exchangeable shares and, accordingly,
the adoption of this new guideline will not have an impact on the
consolidated financial statements.
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. Newalta's credit risk from Canadian customers is
minimized by its broad customer base and diverse product lines. In the
normal course of operations, Newalta is exposed to movements in the U.S.
dollar exchange rates, relative to the Canadian dollar. Newalta sells
and purchases some product in U.S. dollars. Newalta does not utilize
hedging instruments but rather chooses to be exposed to current U.S.
exchange rates as increases or decreases in exchange rates are not
considered to be significant over the period of the outstanding
receivables and payables. The floating interest rate profile of
Newalta's long-term debt exposes Newalta to interest rate risk. Newalta
does 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.
DISCLOSURE CLARIFICATION RELATED TO 2003
As a matter of clarification, the 2003 annual Consolidated Statement of
Cash Flows included $5.9 million of acquisition expenditures in the
amount of $20.4 million disclosed as capital asset additions. The Fund
had disclosed acquisitions separately from capital asset additions in
its Consolidated Statement of Cash Flows for all disclosures prior to
the 2003 annual consolidated financial statements and has done so for
all subsequent disclosures in 2004.
ADDITIONAL INFORMATION
Additional information relating to the Fund, including the Renewal
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 Renewal Annual
Information Form of the Fund may be obtained from Newalta Corporation at
#1200, 333 - 11th Avenue S.W., Calgary, Alberta T2R 1L9 or by facsimile
at (403) 262-7348.
/T/
Newalta Income Fund
Consolidated Balance Sheets
------------------------------------------------------------------------
------------------------------------------------------------------------
($000's) (unaudited) December 31, 2004 December 31, 2003
(note 3)
------------------------------------------------------------------------
Assets
Current assets
Cash - 12,529
Accounts receivable 40,885 30,705
Inventories (Note 6) 7,214 7,897
Prepaid expenses 1,075 979
Future income tax (Note 12) 3,600 2,000
------------------------------------------------------------------------
52,774 54,110
Capital assets (Note 7) 255,197 217,533
Intangibles (Note 7) 3,212 1,993
Goodwill 13,212 10,782
Deferred costs (Note 8) 550 854
------------------------------------------------------------------------
324,945 285,272
------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable 27,996 17,162
Distribution payable (Note 14) 3,412 2,818
Current portion of long-term debt - 3,002
------------------------------------------------------------------------
31,408 22,982
Long-term debt ( Note 9) 36,617 10,500
Future income taxes (Note 12) 41,347 37,911
Asset retirement obligation
(Note 3a, 15) 4,875 4,736
------------------------------------------------------------------------
114,247 76,129
------------------------------------------------------------------------
Unitholders' Equity
Unitholders' capital (Note 10) 154,170 149,798
Contributed surplus 1,678 1,041
Accumulated earnings 117,467 81,262
Accumulated cash distributions
(Note 14) (62,617) (22,958)
------------------------------------------------------------------------
210,698 209,143
------------------------------------------------------------------------
324,945 285,272
------------------------------------------------------------------------
------------------------------------------------------------------------
Newalta Income Fund
Consolidated Statements of Operations and Accumulated Earnings
------------------------------------------------------------------------
------------------------------------------------------------------------
For the Three Months For the Year Ended
($000's) (unaudited) Ended December 31 December 31
2004 2003 2004 2003
(Note 3) (Note 3)
------------------------------------------------------------------------
Revenue 49,339 40,098 178,668 155,032
Expenses
Operating 29,554 22,659 104,639 89,964
Selling, general
and administrative 5,890 3,977 18,739 13,907
Interest 586 431 1,430 2,670
Depreciation, amortization,
and accretion 4,368 3,093 15,116 12,098
Reorganization (Note 2) - - - 5,195
------------------------------------------------------------------------
40,398 30,160 139,924 123,834
------------------------------------------------------------------------
Operating income 8,941 9,938 38,744 31,198
Provision for income taxes
(Note 12)
Current 253 200 703 600
Future 324 567 1,836 3,807
------------------------------------------------------------------------
577 767 2,539 4,407
------------------------------------------------------------------------
Net earnings 8,364 9,171 36,205 26,791
Accumulated earnings,
beginning of period,
as reported 109,103 72,091 81,262 54,312
Cumulative effect of
change in accounting
policy (Note 3) - - - 159
------------------------------------------------------------------------
Accumulated earnings,
end of period 117,467 81,262 117,467 81,262
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings per unit (Note 13) $ 0.31 $ 0.35 $ 1.33 $ 1.14
------------------------------------------------------------------------
------------------------------------------------------------------------
Diluted earnings per unit
(Note 13) $ 0.30 $ 0.35 $ 1.31 $ 1.12
------------------------------------------------------------------------
------------------------------------------------------------------------
Newalta Income Fund
Consolidated Statements of Cash Flows
------------------------------------------------------------------------
For the Three Months For the Year Ended
($000's) (unaudited) Ended December 31 December 31
2004 2003 2004 2003
(Note 3) (Note 3)
------------------------------------------------------------------------
Net inflow (outflow) of
cash related to the
following activities:
Operating activities
Net earnings 8,364 9,171 36,205 26,791
Items not requiring cash:
Depreciation, amortization,
and accretion 4,368 3,093 15,116 12,098
Future income taxes 324 567 1,836 3,807
Stock compensation expense 195 181 637 913
Reorganization - - - (19)
------------------------------------------------------------------------
13,251 13,012 53,794 43,590
Decrease (increase) in
non-cash working capital 7,832 2,286 1,242 (3,321)
Asset retirement costs
incurred (121) (247) (372) (311)
------------------------------------------------------------------------
20,962 15,051 54,664 39,958
------------------------------------------------------------------------
Investing activities
Additions to capital assets (16,304) (7,074) (39,252) (14,524)
Net proceeds on sale
of capital assets 58 14 80 1,530
Acquisitions (Note 5) (343) (5,220) (16,382) (5,932)
Deferred costs (8) (14) (61) (43)
------------------------------------------------------------------------
(16,597) (12,294) (55,615) (18,969)
------------------------------------------------------------------------
Financing activities
Issuance of units - 43,089 3,378 43,028
Increase (decrease) in
long-term debt
and debentures 8,617 (25,751) 23,115 (30,589)
Distributions to unitholders (9,227) (8,055) (38,071) (20,140)
------------------------------------------------------------------------
(610) 9,283 (11,578) (7,701)
------------------------------------------------------------------------
Net cash inflow (outflow) 3,755 12,040 (12,529) 13,288
Cash - beginning of period (3,755) 489 12,529 (759)
------------------------------------------------------------------------
Cash - end of period - 12,529 - 12,529
------------------------------------------------------------------------
------------------------------------------------------------------------
Supplementary information:
------------------------------------------------------------------------
Interest paid 654 709 1,616 2,358
------------------------------------------------------------------------
Income taxes paid 148 178 609 413
------------------------------------------------------------------------
NEWALTA INCOME FUND
Notes to the Consolidated Financial Statements
For the Three Months and Years Ended December 31, 2004 and 2003
($000's)
/T/
Newalta Income Fund (the "Fund") was established by Deed of Trust dated
January 16, 2003. The Fund is a Canadian income trust engaged, through
its wholly-owned operating subsidiary Newalta Corporation (the
"Corporation"), in maximizing the inherent value in certain industrial
wastes through recovery of saleable products and recycling, rather than
disposal. Through an integrated network of facilities, the Corporation
delivers waste management solutions to a broad customer base of national
and international corporations, in a range of industries, including the
automotive, forestry, pulp and paper, manufacturing, mining, oil and
gas, petrochemical, and transportation services industries.
1) Summary of Significant Accounting Policies
Pursuant to the terms of a Plan of Arrangement, the Fund acquired all of
the common shares of the Corporation on March 1, 2003. Prior to the Plan
of Arrangement the consolidated financial statements include the
accounts of the Corporation and its wholly-owned subsidiaries. After
giving effect to the Plan of Arrangement, the consolidated financial
statements include the accounts of the Fund and its wholly owned
subsidiaries. For reporting purposes, the Fund is considered the
continuing entity of the Corporation.
These consolidated financial statements have been prepared by management
in accordance with Canadian generally accepted accounting principles,
and include the following significant accounting policies:
Cash and cash equivalents
Cash is defined as cash and short-term deposits with maturities of three
months or less, when purchased.
Distributions
The Fund makes monthly distributions to its holders of trust units.
Determination of the amount of cash distributions for any period is at
the sole discretion of the Trustees and is based on certain criteria
including financial performance as well as the projected liquidity and
capital resource position of the Fund. Distributions are 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 is not a
business day, the next following business day).
Financial instruments
The carrying values of accounts receivable and accounts payable
approximate the fair value of these financial instruments due to their
short term maturity. The Fund's credit risk from Canadian customers is
minimized by its broad customer base and diverse product lines. In the
normal course of operations of the Corporation, the Fund is exposed to
movements in the U.S. dollar exchange rates, relative to the Canadian
dollar. The Corporation sells and purchases some product in U.S.
dollars. The Fund does not utilize long-term hedging instruments but
rather chooses to be exposed to current U.S. exchange rates as increases
or decreases in exchange rates are not significant over the period of
the outstanding receivables and payables.
Inventory
Inventory is comprised of oil, recycled products, spare parts and
supplies, and is recorded at the lower of cost and net realizable value
(see Note 6).
Capital assets and intangibles
Capital assets are stated at cost, less accumulated amortization. The
carrying values of capital assets and intangibles are reviewed annually
to determine if the value of any asset is impaired. Any amounts so
determined would be written off in the year of impairment. Depreciation
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
depreciated at rates of 5-10% on the declining balance or from 5-14
years straight line, depending on the expected life of the asset.
Intangible assets consist of certain production processes, trademarks,
and agreements, which are amortized over the period of the contractual
benefit of 5-20 years, straight line.
Goodwill
Goodwill represents the excess of the purchase price over the fair value
of the net identifiable assets of the acquired businesses. The Fund
annually, in the third quarter, 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 life.
Management's determination at December 31, 2004 was that the goodwill
was not impaired.
Deferred costs
Costs relating to future acquisition plans have been deferred at year
end. As acquisitions are finalized these costs will be capitalized as
part of the acquisition. In the event an acquisition plan is
discontinued, the deferred costs are written off in the year of
discontinuance.
Asset retirement obligations
The Fund provides for estimated future asset retirement costs for all of
the facilities of the Corporation based on a 20-year useful life. Over
this period the Fund recognizes the liability for the future retirement
obligations associated with property, plant and equipment. 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 depreciation, amortization, and accretion
expense. Asset retirement costs are estimated by management, in
consultation with the Corporation's engineers, on the basis of current
regulations, costs, technology, and industry standards. Actual asset
retirement costs are charged against the provision as incurred.
Revenue recognition
The major sources of revenue relate to the receipt of waste material for
processing 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.
Income taxes
The Fund is a unit trust for income tax purposes, and is taxable on
taxable income not allocated to the unitholders. During the year, the
Fund allocated all of its taxable income to the unitholders, and
accordingly, no provision for income taxes is required at the Fund level.
The Corporation is taxable on taxable income less a deduction for
interest paid on notes held by the Fund.
Both the Fund and the Corporation follow the liability method of tax
allocation. Future income tax assets and liabilities are measured based
upon temporary differences between the carrying values of assets and
liabilities and their tax basis. 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.
Earnings per unit
Basic earnings per unit are calculated using the weighted average number
of units outstanding during the year. Diluted earnings per unit is
calculated by adding the weighted average number of units outstanding
during the year to the additional units that would have been outstanding
if potentially dilutive units had been issued, using the "treasury
stock" method.
Trust Unit rights incentive plan
The Fund has a unit-based and Exchange Rights compensation plan (Note
11). Under the Trust Unit Rights Incentive Plan (the "Rights Incentive
Plan") the Fund may grant to the trustees, directors, officers,
employees and consultants of the Fund, the Corporation or any affiliate
of the Fund rights to acquire up to 2,181,032 trust units. Subject to
adjustments set out in the Rights Incentive Plan, the exercise price of
each right equals or exceeds the closing market price of the trust units
on the date immediately preceding the date on which a right is granted
and has a maximum term of 10 years. Rights vest 20% twelve months from
the date of grant and 20% annually thereafter. Each right entitles the
participant to receive from the Fund one trust unit. In 2003 the Fund
prospectively adopted the provisions of the Canadian Institute of
Chartered Accountants ("CICA") amended Handbook Section 3870 Stock-Based
Compensation and Other Stock-Based Payments, and accordingly recorded a
non-cash compensation expense for the rights issued pursuant to the
Rights Incentive Plan and exchange rights issued pursuant to the Plan of
Arrangement during the year (Note 3b).
Measurement uncertainty
The preparation of the Fund's financial statements in a timely manner
and in conformity with Canadian generally accepted accounting principles
requires the use of estimates, assumptions, and judgment regarding
assets, liabilities, revenues 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
depreciation, accretion, amortization, future asset retirement costs 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.
2) Reorganization
On February 24, 2003, the shareholders and optionholders of the
Corporation approved a Plan of Arrangement under section 193 of the
Business Corporations Act (Alberta) (the "Arrangement"). The purpose of
the Arrangement was to convert Newalta from a corporate entity
concentrating on growth through reinvestment of cash flow to a trust
entity which distributes a substantial portion of cash flow to
unitholders. The Arrangement became effective on March 1, 2003.
Pursuant to the Arrangement, the Fund issued units in exchange for all
of the shares of the Corporation on a 1:2 basis. Prior to the exchange,
the Corporation had approximately 43,634,000 shares outstanding and,
subsequent to the exchange, the Fund had approximately 21,811,000 units
outstanding.
Associated with the reorganization, the Fund recorded reorganization
costs of $5,195 or $0.14 per unit after tax in 2003.
Effective March 1, 2003, the Fund established the Rights Incentive Plan
to replace the stock option plan of the Corporation. In accordance with
the CICA Handbook section 3870 regarding stock based compensation,
grants under the Rights Incentive Plan were valued using the fair value
method at the time of issuance. The expense thus calculated is described
in note 11. The rights granted under the Rights Incentive Plan are
valued using a Black-Scholes option pricing model.
Prior to March 1, 2003, the Corporation had outstanding both options and
stock appreciation rights. The options were issued prior to January 1,
2002 and, in accordance with CICA Handbook section 3870, had been
neither valued nor expensed in the financial statements. The stock
appreciation rights were issued after January 1, 2002 and were expected
to be settled in cash. Accordingly, an expense was recognized in each
period based on the gain in the underlying value of the common shares of
the Corporation. For the first two months of 2003, prior to the
Arrangement, the Corporation expensed $318 in stock appreciation rights.
3) Changes in Accounting Policies
a) Asset retirement obligations: In December 2002, the CICA issued a new
standard on the accounting for asset retirement obligations. This
standard requires recognition of a liability for the future retirement
obligations associated with property, plant and equipment. 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
its useful life. The liability accretes until the date of expected
settlement of the retirement obligations. The new standard is effective
for all fiscal years beginning on or after January 1, 2004. The Fund
estimates the undiscounted cash flows related to asset retirement
obligations, adjusted for inflation, to be incurred over the estimated
period of 20 years to be $13.5 million. The fair value of this liability
at December 31, 2004 was $4,875 ($4,736 in 2003) using a discount rate
of 8% and an inflation rate of 2%. Accretion expense for the three
months ended December 31, 2004 was $94 ($90 in 2003). For the year ended
December 31, 2004, accretion expense totaled $378 ($351 in 2003).
b) Stock-based compensation: During the fourth quarter of 2003, the Fund
adopted certain provisions of the CICA's amended Handbook Section 3870.
This amendment requires expensing of the fair value of equity-based
compensation effective for fiscal years beginning on or after January 1,
2004, and allows for the early adoption of the recommendations for the
year ended 2003. Pursuant to the transitional rules, the Fund chose to
early adopt the pronouncement on a prospective basis. On a comparative
basis, this resulted in a decrease in contributed surplus and a
corresponding non-cash recovery of expense of $414 ($0.01 per unit) for
the three months ended December 31, 2003 and of $0 ($0.00 per unit) for
the year ended December 31, 2003. The Consolidated Financial Statements
for the year December 31, 2003 have been adjusted to include these
revised amounts. The corresponding non-cash expense for the three month
period ended December 31, 2004 was $195 ($0.007 per unit), and for 2004
was $637 ($0.023 per unit).
c) Impairment of Long-Lived Assets: Effective January 1, 2004, the Fund
adopted the new recommendation of the CICA on the impairment of
long-lived assets. This recommendation provides guidance on the
recognition, measurement and disclosure of impairment of long-lived
assets. There is a requirement to recognize an impairment loss for a
long-lived asset when its carrying amount exceeds the sum of the
undiscounted cash flows expected from its use and eventual disposition.
The impairment loss is measured as the amount by which the carrying
amount of the asset exceeds its fair value. As at January 1, 2004 and
December 31, 2004, there were no indications of impairment of long-lived
assets.
To account for the changes in accounting policies as outlined in (a) and
(b) above, the historical amounts in the financial statements have been
adjusted as follows:
/T/
Asset
Consolidated Retirement Adjusted
Balance At December Obligation December
Sheets 31, 2003 Adjustments 31, 2003
--------------------------- -------------
Capital assets 215,524 2,009 217,533
Future income
tax liability 37,841 70 37,911
Site restoration 2,936 (2,936) -
Asset retirement
obligation - 4,736 4,736
Accumulated
earnings 81,123 139 81,262
Consolidated
Statements For the Adjusted
of Operations three months Asset three months
and ended Retirement Stock-based ended
Accumulated December 31, Obligation Compensation December 31,
Earnings 2003 Adjustments Adjustments 2003
--------------------------------------------------------
Site restoration
expense 131 (131) - -
Depreciation and
accretion
expense 2,953 140 - 3,093
Future income
tax provision 570 (3) - 567
Stock-based
compensation
expense 595 (414) 181
Net earnings 8,763 (6) 414 9,171
Earnings
per unit $0.34 - 0.016 $0.35
Diluted earnings
per unit $0.33 - 0.016 $0.35
For the
year Asset Adjusted
ended Retirement Stock-based year ended
December 31, Obligation Compensation December 31,
2003 Adjustments Adjustments 2003
--------------------------------------------------------
Site restoration
expense 517 (517) - -
Depreciation and
accretion expense 11,551 547 - 12,098
Future income
tax provision 3,817 (10) - 3,807
Net earnings 26,811 (20) - 26,791
Earnings per unit $1.14 - - $1.14
Diluted earnings
per unit $1.12 - - $1.12
/T/
4) Seasonality of Operations
The Corporation's operations are carried out in western Canada. The
ability to transport waste is dependent on weather conditions. 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 they have thoroughly dried out. Road bans,
imposed in the spring, restrict waste transportation which reduces
demand for the Corporation's services and, therefore, the second quarter
is generally the weakest quarter of the year. The third quarter is
typically the strongest quarter for both Oilfield and Industrial due to
favourable weather conditions and market cyclicality. Financial results
can vary from quarter to quarter depending on weather conditions,
commodity prices, market demand and capital investments. First quarter
revenue ranges from 20% to 26% of year-end revenue and has averaged
approximately 24%. Second quarter revenue has averaged approximately 22%
of year-end revenue and ranges from 20% to 23%. Third quarter revenue
ranges from 26% to 31% and has averaged approximately 27% of year-end
revenue. Fourth quarter revenue has averaged approximately 28% and
ranges from 24% to 30%.
5) Acquisitions
During the year ended December 31, 2004, the Corporation acquired a
satellite oilfield facility located near Drumheller, Alberta on January
1, 2004; purchased a second satellite facility near Redwater, Alberta on
March 1, 2004; on March 31, 2004 acquired the business and assets of an
industrial services company in Cranbrook, British Columbia; and on June
1, 2004 acquired the assets of a centrifuge rental business located in
Nisku, Alberta. The purchased assets consisted of stand-alone businesses
that expanded the service offerings, geographic coverage, and customer
base of the Corporation. The consolidated financial statements of the
Fund include earnings from the date of acquisition, for each
acquisition. The amount of the consideration given and the assets
received were:
/T/
January 1, March 1, March 31, June 1,
2004 2004 2004 2004 Total
Acquisition Acquisition Acquisition Acquisition 2004
-------------------------------------------------------
Total cash
consideration 2,029 4,288 4,938 5,127 16,382
-------------------------------------------------------
Land - - 300 - 300
Plant and
equipment 1,570 2,363 3,103 4,630 11,666
Intangibles 500 100 520 500 1,620
Petroleum and
natural gas
rights - 500 - - 500
Goodwill - 1,400 1,030 - 2,430
Asset retirement
obligation (41) (75) (15) (3) (134)
-------------------------------------------------------
Total 2,029 4,288 4,938 5,127 16,382
-------------------------------------------------------
/T/
Certain of the above amounts are management's current estimate of the
known and expected fair values, and may change as final information
becomes known.
Effective July 1, 2003, the Corporation acquired a satellite oilfield
facility located in southwest Saskatchewan. The purchase price of $3,212
was funded by $712 of cash plus the issuance of 250,000 units valued at
$10.00 per unit. Also, effective December 1, 2003, the Corporation
acquired the assets of Hazmat Transportation Services and Waste
Logistics for $5,220 cash.
The value of the consideration given and the assets received were:
/T/
July 1, December 1,
2003 2003 Total
Acquisition Acquisition 2003
---------------------------------------
Units issued 2,500 - 2,500
Cash 712 5,220 5,932
---------------------------------------
Total consideration 3,212 5,220 8,432
Plant and equipment 2,912 4,432 7,344
Intangibles 300 750 1,050
Inventory and prepaids - 38 38
---------------------------------------
Total 3,212 5,220 8,432
---------------------------------------
---------------------------------------
/T/
Intangibles include customer lists, non-compete agreements, licenses,
and permits.
6) Inventories
Inventories consist of the following:
/T/
2004 2003
-------------------
Recycled and processed products 4,567 4,382
Recovered oil 1,463 1,324
Parts and supplies 1,120 788
Burner fuel 64 1,403
------------------------------------------------------------------------
Total inventory 7,214 7,897
------------------------------------------------------------------------
------------------------------------------------------------------------
7) Capital Assets and Intangibles
2004
------------------------------------
Accumulated Net Book
Cost Depreciation Value
--------------------------------------------------------------
Capital assets:
Plant and equipment 331,743 83,073 248,670
Land 6,527 - 6,527
------------------------------------
Total capital assets 338,270 83,073 255,197
------------------------------------
------------------------------------
Intangibles: 3,670 458 3,212
------------------------------------
------------------------------------
2003
------------------------------------
Accumulated Net Book
Cost Depreciation Value
--------------------------------------------------------------
Capital assets:
Plant and equipment 280,297 68,449 211,848
Land 5,685 - 5,685
------------------------------------
Total capital assets 285,982 68,449 217,533
------------------------------------
------------------------------------
Intangibles: 2,056 63 1,993
------------------------------------
------------------------------------
/T/
8) Deferred costs
Incremental costs related to expansion and acquisition plans have been
deferred at year end. During 2004 the Fund determined that certain costs
were no longer recoverable and accordingly those costs were written off.
/T/
2004 2003
------------------
Deferred costs, beginning of year 854 811
Additional costs during the year 60 43
Deferred costs written off (364) -
------------------
Deferred costs, end of year 550 854
------------------
9) Long-term Debt
2004 2003
------------------------------------------------------------------------
Operating term facility 2,617 -
Extendable term facility 34,000 -
Reducing term facility - 13,500
Other - 2
------------------------------------------------------------------------
36,617 13,502
Less current portion - 3,002
------------------------------------------------------------------------
36,617 10,500
------------------------------------------------------------------------
------------------------------------------------------------------------
/T/
Effective May 19, 2004, the Corporation secured a new credit facility
which provides for a $25,000 operating term facility plus a $65,000
extendible term facility. The credit facility is secured principally by
a general security agreement over the assets of the Corporation.
Interest on the facilities is subject to certain conditions, and may be
charged at a prime based or a Banker's Acceptance ("BA") based rate, at
the option of the Corporation. The operating facility charges interest
at the lenders' prime rate, or at the BA rate plus 1.25%. The term
facility charges interest at the lenders' prime rate plus 0.25%, or at
the BA rate plus 1.75%. The operating and the term facilities are
subject to an annual review, and extension at the option of the lender.
If an extension is not granted, principal repayments for the term loan
would commence in 15 months at the quarterly rate of one-twelfth of the
outstanding indebtedness for three quarters and a balloon payment for
the balance at the end of the fourth quarter. The operating loan,
subject to certain conditions would be due in full in 12 months. If
renewal and extension were not granted, the annual principal repayments
would be:
/T/
2005 2006 2007 Total
----------------------------------
Operating term facility - 2,617 - 2,617
Extendible term facility - 5,670 28,330 34,000
------------------------------------------------------------------------
Total repayment - 8,287 28,330 36,617
------------------------------------------------------------------------
/T/
10) Unitholders' Capital
On March 1, 2003 and pursuant to the Arrangement, 21,810,318 units were
issued by the Fund in exchange for 43,620,665 common shares of the
Corporation previously outstanding. Additional units were subsequently
issued upon the exercise of rights to acquire units, conversion of
debentures, purchase of assets, issuance of new equity and issuances
pursuant to the Dividend Reinvestment Program.
/T/
Units/Shares
(000's) Amount
--------------------------
Shares issued as at December 31, 2002 43,634 98,269
Non-board lot repurchased (13) (62)
Shares cancelled under the plan of arrangement (43,621) (98,207)
--------------------------
- -
--------------------------
Units issued under the plan of arrangement 21,811 98,207
Rights exercised 225 2
Units issued for cash 3,800 43,089
Units exchanged for debentures 750 6,000
Units issued on asset purchase 250 2,500
--------------------------
Units outstanding as at December 31, 2003 26,836 149,798
Rights exercised 410 3,378
Units issued under the DRIP program 48 994
--------------------------
Units outstanding as at December 30, 2004 27,294 154,170
--------------------------
/T/
On October 15, 2004, the Fund implemented a Dividend Reinvestment Plan
("DRIP") which allows participating unitholders to increase their
investment in the Fund through the automatic reinvesting of their
monthly distribution in units. Under the terms of the DRIP, reinvestment
units are purchased by unitholders from the treasury of the Fund at a
cost of 95% of the volume weighted average TSX trading price for the 10
trading days immediately preceding the distribution payment date.
The Fund declared distributions of $0.105 per unit for each of the
months of January and February, 2004, increasing to $0.125 for each of
the months of March through December, 2004, for a total of $1.46 per
unit for 2004. During 2004, $38,071 of cash was distributed to
unitholders.
11) Rights to Acquire Trust Units
(a) Trust Unit Rights Incentive Plan
On February 24, 2003, the shareholders of the Corporation approved the
Rights Incentive Plan. Under the Rights Incentive Plan, the Fund may
grant to the trustees, directors, officers, employees and consultants of
the Fund, the Corporation or any affiliate of the Fund rights to acquire
up to 2,181,032 units. Subject to adjustments set out in the Rights
Incentive Plan, the exercise price of each right equals or exceeds the
closing market price of the units of the Fund on the date immediately
preceding the date on which a right is granted and the maximum term of
each right is 10 years. All rights granted to date pursuant to the
Rights Incentive Plan expire seven years after the date of grant. Rights
vest 20%, twelve months from the date of grant and 20% annually
thereafter. Each right entitles the participant to receive from the Fund
one unit.
On March 1, 2003, rights to acquire up to 1,045,000 units were granted
to certain directors, officers, and employees of the Corporation at the
market price of $9.30 per unit. On May 22, 2003, rights to acquire up to
275,000 units were granted to certain directors, officers, and employees
of the Corporation at the market price of $9.08 per unit. On December
10, 2003, rights to acquire up to 12,500 units were granted to a
director of the Corporation at the market price of $15.60 per unit.
On June 1, 2004, rights to acquire up to 347,500 units were granted to
certain directors, officers, and employees of the Corporation at the
market price of $17.95 per unit, and valued on the date of issuance at
$1.17 per unit using a Black-Scholes option pricing model with the
following assumptions: risk-free interest rate of 3.5%; yield of 8.35%;
a vesting period of 5 years; and an expected volatility of 20.48%.
During 2004, directors, officers and employees of the Corporation
exercised rights to acquire 364,000 units pursuant to the Rights
Incentive Plan for $3,378.
The following table summarizes the activity for the years ended December
31, 2003 and 2004 of the units reserved for issuance under the Rights
Incentive Plan:
/T/
(000's) 2004 2003
------------------------------------------------------------------------
Rights available for grant, beginning of year 848 2,181
------------------------------------------------------------------------
Granted (347) (1,333)
------------------------------------------------------------------------
Forfeited 32 -
------------------------------------------------------------------------
Rights available for grant, end of year 533 848
------------------------------------------------------------------------
/T/
(b) Exchange Rights
Pursuant to the terms of the Arrangement, on March 1, 2003, each option
to acquire a common share in the capital of the Corporation outstanding
and not exercised prior to March 1, 2003, having an exercise price per
share below $4.65 ($9.30 after adjusting for the two-for-one stock
consolidation pursuant to the Arrangement), was cancelled in exchange
for a right to purchase units (the "Exchange Right"), at a price of
$0.01 per unit, equal to (i) the difference between $4.65 and the
exercise price of such option, multiplied by the number of common shares
to which such option relates divided by (ii) $9.30. Each Exchange Right
entitles the holder to receive one unit from the Fund. With respect to
options that had vested on or prior to March 1, 2003, the Exchange Right
was exercisable at any time up until April 1, 2003. With respect to
options that had not vested on or prior to March 1, 2003, the Exchange
Right is exercisable at any time during the period from the date on
which the option to which the unit relates would have vested had it not
been cancelled pursuant to the Arrangement and ending on the date the
option would have expired had it not been cancelled pursuant to the
Arrangement.
An aggregate of 307,499 Exchange Rights were issued on March 1, 2003.
During 2003, an aggregate of 225,274 Exchange Rights were exercised and
during 2004 an aggregate of 45,877 Exchange Rights were exercised.
The following table summarizes the activity for the years ended December
31, 2003 and 2004 of the Exchange Rights:
/T/
Units reserved under the plans (000's) 2004 2003
------------------------------------------------------------------------
Outstanding, beginning of the year 82 -
------------------------------------------------------------------------
Issued upon cancellation of options - 307
------------------------------------------------------------------------
Exercised (46) (225)
------------------------------------------------------------------------
Forfeited (1) -
------------------------------------------------------------------------
Outstanding, end of year 35 82
------------------------------------------------------------------------
/T/
During the fourth quarter of 2003, the Fund adopted the provisions of
the Canadian Institute of Chartered Accountants amended Handbook Section
3870 Stock-Based Compensation and Other Stock-Based Payments (Note 3b).
The Fund chose to early adopt the provisions on a prospective basis,
which resulted in a full-year increase in contributed surplus, and a
corresponding non-cash charge of $0.6 million ($0.03 per unit). Rights
granted pursuant to the Rights Incentive Plan and the Exchange Rights
were valued as follows:
The fair value of the rights to acquire units that were granted on March
1, 2003 was estimated on the grant date using the Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of
4.25%; yield of 12%; expected life of seven years; and expected
volatility of 48%.
The fair value of the rights to acquire units that were issued on May
22, 2003 was estimated on the grant date using the Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of
3.6%; yield of 11.9%; expected life of seven years; and expected
volatility of 16.8%.
The fair value of the rights to acquire units that were issued on
December 15, 2003 was estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions:
risk-free interest rate of 3.9%; yield of 8%; expected life of seven
years; and expected volatility of 18.4%.
The Exchange Rights were valued at the date of conversion, March 1,
2003, and the value of the Exchange Rights was attributed to the
Contributed Surplus of the Fund. The fair value of the Exchange Rights
was recorded at $446 using the Black-Scholes option pricing model with
the following assumptions: risk-free interest rate of 6%; yield of 12%;
expected life of three years; and expected volatility of 48%.
The following tables summarize the activity for the years ended December
31, 2003 and 2004 for the Exchange Rights and the Rights and the range
of exercise prices:
/T/
Rights
Weighted pursuant to Weighted
Average Rights Average
Exchange Unit Incentive Exercise
Right Price Plan Price
(000's) ($) (000's) ($)
---------------------------------------------
As at December 31, 2002 - - - -
Converted from options 307 0.01 - -
Granted - - 1,333 9.31
Exercised (225) 0.01 - -
Forfeited - - - -
------------------------------------------------------------------------
As at December 31, 2003 82 0.01 1,333 9.31
------------------------------------------------------------------------
------------------------------------------------------------------------
Exercisable at
December 31, 2003 - - - -
Granted - - 347 17.95
Exercised (46) 0.01 (364) 9.28
Forfeited 1 0.01 (32) 17.41
------------------------------------------------------------------------
As at December 31, 2004 35 0.01 1,284 11.48
------------------------------------------------------------------------
------------------------------------------------------------------------
Exercisable at
December 31, 2004 - - 25 9.75
------------------------------------------------------------------------
------------------------------------------------------------------------
Rights and Rights and
Exchange Exchange
Rights Weighted Weighted Rights Weighted
Range of Outstanding Average Average Exercisable Average
Exercise December 31, Remaining Exercise December 31, Exercise
Prices 2004 Life Price 2004 Price
($) (000's) (Years) ($) (000's) ($)
------------------------------------------------------------------------
0.01 35 3.4 0.01 - -
9.08 to 9.30 954 5.2 9.27 22 9.08
15.60 to 17.95 330 6.6 17.86 3 15.60
------------------------------------------------------------------------
1,319 6.1 11.17 25 9.75
------------------------------------------------------------------------
------------------------------------------------------------------------
/T/
(c) Options
The following table summarizes the activity in the option plan of the
Corporation for the year ended December 31, 2003:
/T/
Weighted
Average
Exercise
Options Price
(000's) ($)
------------------------------------------------------------------------
As at December 31, 2002 2,529 3.76
Cancelled pursuant to Plan of Arrangement
resulting in issuance of Exchange rights (2,126) 3.30
Cancelled and forfeited (403) 6.35
------------------------------------------------------------------------
As at December 31, 2003 - -
------------------------------------------------------------------------
------------------------------------------------------------------------
Exercisable at December 31, 2003 - -
------------------------------------------------------------------------
------------------------------------------------------------------------
Shares reserved under the plan (000's) 2003
------------------------------------------------------------
Shares available for grant, beginning of year 630
------------------------------------------------------------
Shares cancelled pursuant to Plan of Arrangement 630
------------------------------------------------------------
Shares available for grants, end of year -
------------------------------------------------------------
/T/
12) Income Taxes
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 the Fund's income future tax liabilities and
assets are as follows:
/T/
2004 2003
------------------------------------------------------------------------
Future income tax liabilities:
Capital assets and intangibles 43,108 40,275
Goodwill 803 1,351
Deferred costs 190 298
------------------------------------------------------------------------
44,101 41,924
------------------------------------------------------------------------
Future income tax assets:
Non-capital loss carry forwards 4,195 4,459
Less current portion (3,600) (2,000)
Asset retirement obligation 1,682 1,026
Trust unit issuance costs 477 528
------------------------------------------------------------------------
2,754 4,013
------------------------------------------------------------------------
Net future income tax liability 41,347 37,911
------------------------------------------------------------------------
------------------------------------------------------------------------
/T/
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 future income tax
liabilities, projections of operating results and tax planning
strategies available to the Fund and its subsidiaries.
The income tax expense differs from the amount computed by applying
Canadian statutory rates to operating income for the following reasons:
/T/
2004 2003
------------------------------------------------------------------------
Consolidated earnings of the Fund before
taxes and distributions to unitholders 38,744 31,198
Current statutory income tax rate 34.5% 37%
------------------------------------------------------------------------
Computed tax expense at statutory rate 13,367 11,540
Increase (decrease) in taxes resulting from:
Reduction in taxable income resulting from
distributions to unitholders (11,296) (7,776)
Capital taxes 703 600
Other 415 317
Effect of substantively enacted tax rate change (650) (274)
------------------------------------------------------------------------
Reported income tax expense 2,539 4,407
------------------------------------------------------------------------
------------------------------------------------------------------------
/T/
On March 31, 2004, the Province of Alberta announced a reduction in the
corporate tax rate from 12.5% to 11.5%. The Fund recognized the change
in future tax rate by reducing the future income tax liability for the
year ended December 31, 2004 by $650 or $0.02 per unit.
13) Earnings per Unit
Basic per unit calculations for the periods ending December 31, 2004
were based on the weighted average number of units outstanding for the
periods. Diluted earnings per unit include the potential dilution of the
outstanding rights.
/T/
Three Months Ended Year Ended
December 31 December 31
2004 2003 2004 2003
-------------------------------------
Weighted average number of units 27,265 25,966 27,134 23,456
Net additional units if
rights exercised 601 549 502 351
Additional units if
debentures converted - - - 365
------------------------------------------------------------------------
Diluted weighted average
number of units 27,866 26,515 27,636 24,172
------------------------------------------------------------------------
/T/
14) Reconciliation of Unitholder Distributions Declared and Paid
/T/
Three Months Ended Year Ended
December 31 December 31
2004 2003 2004 2003
-------------------------------------
Cash flow from operations before
reorganization costs, non-cash
working capital and asset
retirement costs 13,251 13,012 53,794 48,805
Maintenance capital expenditures (1,773) (1,626) (7,755) (7,354)
Asset retirement and deferred costs (129) (261) (433) (354)
Net proceeds on sales of
fixed assets 58 14 80 1,530
Principal repayments - (750) (1,500) (1,500)
------------------------------------------------------------------------
Cash available for growth and
distribution before
reorganization costs 11,407 10,389 44,186 41,127
Reorganization costs - - - (5,214)
-------------------------------------
Cash available for growth
and distribution 11,407 10,389 44,186 5,913
-------------------------------------
-------------------------------------
Unitholder distributions declared 10,288 8,453 39,659 22,958
- per unit - $ 0.38 0.32 1.46 0.96
Unitholder distributions
- paid in cash 9,228 8,053 38,071 20,140
Unitholder distributions
- issued in units issued 994 - 994 -
- paid in cash - per unit $ 0.34 0.32 1.40 0.86
- issued units - per unit $ 0.04 - 0.04 -
Reconciliation of Accumulated Unitholder Distributions:
Balance, December 31, 2002 -
Unitholder distributions declared and paid (20,140)
Unitholder distributions declared (2,818)
---------
Balance, December 31, 2003 (22,958)
---------
---------
Unitholder distributions declared and paid in cash and units (36,247)
Unitholder distributions declared (3,412)
---------
(39,659)
---------
Balance, December 31, 2004 (62,617)
---------
---------
/T/
15) Reconciliation of Asset Retirement Obligation
The total future asset retirement obligation was estimated by management
based on the anticipated costs to abandon and reclaim the Corporation's
facilities and wells, and the projected timing of these expenditures.
The net present value is estimated to be $4.9 million ($4.7 million in
2003) based on a total estimated future liability of $13.5 million. Cash
expenditures to fulfill these obligations will be incurred over the next
20 years, with the majority of the expenses occurring in the 15-20 year
range. The Fund used a discount rate of 8% and an inflation rate of 2%
to calculate the present value of the asset retirement obligation.
/T/
2004 2003
-------------------
Asset Retirement Obligation, beginning of year 4,736 4,602
Additional retirement obligations added
through acquisitions 134 94
Costs incurred to fulfill obligations (372) (311)
Accretion 377 351
-------------------
Asset Retirement Obligation, end of year 4,875 4,736
-------------------
-------------------
/T/
16) Commitments
i) Lease Commitments
The Fund has annual commitments for leased property and equipment as
follows:
/T/
2005 2006 2007 2008 2009 Thereafter Total
-------------------------------------------------------
Office leases 1,752 1,953 1,953 1,905 1,833 4,547 13,943
Operating leases 1,654 1,370 940 419 283 - 4,666
Surface leases 856 1,006 1,025 1,044 1,064 4,082 9,077
-------------------------------------------------------
4,262 4,329 3,919 3,368 3,179 8,629 27,686
-------------------------------------------------------
/T/
ii) Letters of Guarantee and Surety Bonds
As of December 31, 2004, the Fund had issued Letters of Guarantee and
Surety Bonds in respect of compliance with environmental licenses in the
amount of $7,771 and $7,093 respectively.
17) Financial instruments
i) Interest rate risk
Long-term debt bears interest at rates that vary in relation to prime.
The Fund is therefore exposed to fluctuations in interest rates. During
2004 a change of 1% in the prime interest rate would have
increased/decreased interest expense by approximately $250 ($500 in
2003).
ii) Fair value
The determination of the fair value of long-term debt is based on the
net present value of the future principal and interest payments,
discounted at current market rates of interest for debt of similar
conditions and maturities. The carrying amount of the long tem debt
approximates, in all material respects, its fair value.
iii) Credit risk
Accounts receivable includes balances from a large and diverse customer
base. The Fund views the credit risks on these amounts as normal for the
industry. Credit risk is mitigated by the Fund's ongoing assessement of
the credit worthiness of its customers as well as monitoring the amount
and age of balances outstanding.
18) Transactions with Related Parties
Bennett Jones LLP provides legal services to the Fund. Mr. Vance
Milligan, a Trustee and Corporate Secretary of the Fund is a partner in
the law firm of Bennett Jones LLP and is involved in providing and
managing the legal services provided to the Fund. The total cost of
these legal services during 2004 was $423 ($750 in 2003).
The Corporation provides Oilfield services to Paramount Resources Ltd.,
an oil and gas company. Mr. Clayton Riddell, a Trustee and Chairman of
the Board of the Fund, is Chairman and Chief Executive Officer of
Paramount Resources Ltd. The total amount invoiced by the Fund to
Paramount Resources Ltd. was $776 compared $304 in 2003.
These transactions were incurred during the normal course of operations
on similar terms and conditions to those entered into with unrelated
parties. These transactions are measured at the exchange amount, which
is the amount of consideration established and agreed to by the related
parties.
19) Comparative Figures
Certain of the prior year's comparative figures have been reclassified
to conform to the current year's presentation.
20) Segmented Information
The Fund has two reportable segments. The reportable segments are
distinct strategic business units whose operating results are regularly
reviewed by the Fund's senior 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 Oilfield segment
recovers and resells crude oil from oilfield waste. The Industrial
segment collects waste lubricating oil, automotive, and industrial
wastes which are processed into resaleable products. The accounting
policies of the segments are the same as those of the Fund.
/T/
For the three months ended December 31 ($000's)
Inter- Unallo- Consolidated
2004 Oilfield Industrial segment cated(2) Total
------------------------------------------------------------------------
External revenue 33,353 15,986 49,339
Inter segment
revenue(1) 137 54 (191) -
Operating expense 16,393 13,352 (191) 29,554
Depreciation,
amortization and
accretion 2,355 1,385 628 4,368
------------------------------------------------------------------------
Net margin 14,742 1,303 (628) 15,417
Selling, general
and administrative 5,890 5,890
Interest expense 586 586
------------------------------------------------------------------------
Operating income 14,742 1,303 (7,104) 8,941
------------------------------------------------------------------------
Capital
expenditures 10,819 4,999 829 16,647
Goodwill 10,782 2,430 13,212
Total assets 205,316 106,529 13,100 324,945
-----------------------------------------------------
-----------------------------------------------------
Inter- Unallo- Consolidated
2003 (Note 2) Oilfield Industrial segment cated(2) Total
------------------------------------------------------------------------
External revenue 28,057 12,041 40,098
Inter segment
revenue(1) 7 32 (39) -
Operating expense 13,030 9,668 (39) 22,659
Depreciation,
amortization and
accretion 1,877 1,017 199 3,093
------------------------------------------------------------------------
Net margin 13,157 1,388 (199) 14,346
Selling, general
and administrative 3,977 3,977
Interest expense 431 431
------------------------------------------------------------------------
Operating income 13,157 1,388 (4,607) 9,938
------------------------------------------------------------------------
Capital
expenditures 4,916 6,830 548 12,294
Goodwill 10,782 - 10,782
Total assets 172,212 90,712 22,348 285,272
-----------------------------------------------------
-----------------------------------------------------
(1)Inter-segment revenue is recorded at market, less the costs of
serving external customers.
(2)Management does not allocate selling, general & administrative,
taxes, and interest costs in the segment analysis.
For the year ended December 31 ($000's)
Inter- Unallo- Consolidated
2004 Oilfield Industrial segment cated(2) Total
------------------------------------------------------------------------
External revenue 115,217 63,451 178,668
Inter segment
revenue(1) 416 84 (500) -
Operating expense 54,885 50,254 (500) 104,639
Depreciation,
amortization and
accretion 8,810 5,019 1,287 15,116
------------------------------------------------------------------------
Net margin 51,938 8,262 (1,287) 58,913
Selling, general
and administrative 18,739 18,739
Interest expense 1,430 1,430
------------------------------------------------------------------------
Operating income 51,938 8,262 (21,456) 38,744
------------------------------------------------------------------------
Capital
expenditures 33,563 18,610 3,461 55,634
Goodwill 10,782 2,430 13,212
Total assets 205,316 106,529 13,100 324,945
-----------------------------------------------------
-----------------------------------------------------
Inter- Unallo- Consolidated
2003 (Note 2) Oilfield Industrial segment cated(2) Total
------------------------------------------------------------------------
External revenue 104,750 50,282 155,032
Inter segment
revenue(1) 59 123 (182) -
Operating expense 50,555 39,591 (182) 89,964
Depreciation,
amortization and
accretion 7,325 3,989 784 12,098
------------------------------------------------------------------------
Net margin 46,929 6,825 (784) 52,970
Selling, general
and administrative 13,907 13,907
Interest expense 2,670 2,670
Reorganization costs 5,195 5,195
------------------------------------------------------------------------
Operating income 46,929 6,825 (22,556) 31,198
------------------------------------------------------------------------
Capital
expenditures 13,560 8,247 1,149 22,956
Goodwill 10,782 10,782
Total assets 172,212 90,712 22,348 285,272
-----------------------------------------------------
-----------------------------------------------------
(1)Inter-segment revenue is recorded at market, less the costs of
serving external customers.
(2)Management does not allocate selling, general & administrative,
taxes, and interest costs in the segment analysis.
For further information: Newalta Income Fund - Ronald L. Sifton, Senior Vice President, Finance and Chief Financial Officer, (403) 206-2684; Website: www.newalta.com