Newalta Income Fund Announces 2004 Third Quarter Results
CALGARY, ALBERTA - Nov. 10, 2004 /CNW/ - Newalta Income Fund
(TSX:NAL.UN) today announced results for the third quarter and nine
months ended September 30, 2004. Revenue in the third quarter increased
by 10% to $46.0 million compared to $42.0 million in 2003. Revenues and
operating results in both divisions were affected by wet weather
conditions which led to a general slowdown in activity and restricted
the transportation of waste to our processing facilities. Oilfield
revenues of $28.7 million were down by 2% compared to the third quarter
in 2003. The decline in revenue was partially offset by increases in
crude oil sales and on-site services. Industrial recorded improved
results in the third quarter as revenues were up 37% to $17.3 million.
Total net margin was $16.6 million compared to $16.4 million in the
third quarter last year. The decrease in Oilfield net margin was offset
by a 29% increase in Industrial net margin.
EBITDA(2) of $15.6 million for the three months was essentially flat
compared to 2003. Cash available for growth and distributions grew by
14% to $13.2 million compared to $11.5 million last year.
Selling, general and administrative costs increased $0.5 million over
the second quarter of this year and were up $1.1 million, or 30% over
the third quarter of 2003. In the third quarter we completed our
initiative to strengthen the organization to provide the resources to
manage the continued growth of the Fund. The increased selling, general
and administrative costs in the third quarter were predominantly
attributable to recruitment costs and salaries as well as costs directly
related to these staff additions.
Maintenance capital was $1.6 million in the third quarter compared to
$3.0 million in 2003 and for the nine months was $6.0 million compared
to $5.7 million in 2003. Total maintenance capital for 2004 is expected
to be approximately $8.0 million. Total growth and acquisition capital
expenditures in the quarter were $7.3 million compared to $4.1 million
for 2003. Total capital expenditures for the year are estimated to be
approximately $55.0 million, excluding any additional acquisitions.
"Cash available for growth and distributions in the quarter was $0.48
per unit and the Fund distributed $0.38 per unit, or 78%. We are well
positioned to capitalize on improved market conditions in the fourth
quarter and in 2005," said Al Cadotte, Newalta Income Fund's President
and Chief Executive Officer.
At September 30, 2004, $50.4 million of the $90.0 million credit
facility was unutilized.
Regulatory approval was received in the quarter for the Fund's
Distribution Reinvestment Plan (the "DRIP"). The DRIP provides eligible
Unitholders of Newalta with the opportunity to reinvest their monthly
cash distributions to acquire additional Units at a net purchase price
equal to 95% of the average market price as defined in the DRIP.
/T/
FINANCIAL AND OPERATIONAL HIGHLIGHTS
Three Months Ended Nine Months Ended
($000s except September 30 September 30
per unit data) (unaudited) (unaudited)
%Increase %Increase
2004 2003 (Decrease) 2004 2003 (Decrease)
-----------------------------------------------------
Revenue 45,990 41,981 10 129,328 114,934 13
Operating income
excluding
reorganization
costs(1) 11,446 12,185 (6) 29,802 26,454 13
Operating income 11,446 12,185 (6) 29,802 21,259 40
Net earnings 10,087 9,739 4 27,840 17,619 58
Earnings per
unit ($) 0.37 0.43 (14) 1.03 0.79 30
Diluted net
earnings per
unit ($) 0.36 0.42 (14) 1.01 0.78 29
EBITDA(2) excluding
reorganization
costs 15,565 15,932 (2) 41,394 37,699 10
EBITDA 15,565 15,932 (2) 41,394 32,504 27
Trailing 12
month EBITDA
excluding
reorganization
costs 54,433 47,739 14
Trailing 12
month EBITDA 54,433 41,948 30
Cash flow(3)
excluding
reorganization
costs 15,056 15,315 (2) 40,542 35,793 13
Cash flow 15,056 15,315 (2) 40,542 30,579 33
- per unit(s) 0.55 0.67 (18) 1.50 1.37 9
Maintenance
capital
expenditures 1,642 2,983 (45) 5,982 5,728 4
Principal
repayments - 750 (100) 1,500 750 100
Cash available
for growth and
distributions
excluding
reorganization
costs 13,166 11,533 14 32,779 30,738 7
- per unit - $ 0.48 0.50 (4) 1.21 1.38 (12)
Cash available
for growth and
distributions 13,166 11,533 14 32,779 25,524 28
- per unit - $ 0.48 0.50 (4) 1.21 1.14 6
Cash distributions
declared (1) 10,217 6,530 56 29,431 14,506 103
- per unit - $ 0.38 0.29 31 1.09 0.65 68
Growth and
acquisition
capital
expenditures 7,344 4,086 80 33,006 4,933 569
Weighted average
units outstanding
(4) (000s) 27,244 22,907 19 27,090 22,330 21
Total units
outstanding
(000s) 27,245 23,032 18 27,245 23,032 18
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(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 incurred 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 GAAP, and may not be
comparable to similar measures presented by other funds or
companies.
(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 throughout this
report are based on operating cash flow before changes in non-cash
working capital.
(4) For comparative purposes, the previously reported weighted average
shares outstanding 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.
/T/
The consolidated financial statements and notes thereto and management's
discussion and analysis are attached.
Management will hold a conference call on November 11, 2004 at 3:00 p.m.
(ET) to discuss the Fund's performance for the three months ended
September 30, 2004. To listen, please dial 1-800-814-4861 or
416-640-4127, 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 November 18, 2004, by dialing 416-640-1917 or
1-877-289-8525 and entering the passcode 21099587 #.
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 40
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 NINE MONTHS ENDED SEPTEMBER 30, 2004
This document contains certain forward-looking statements, relating to
the operations or to the environment in which Newalta Income Fund and
Newalta Corporation (collectively "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 Newalta Income Fund (the
"Fund") and notes thereto, the Management's Discussion and Analysis, and
the Renewal Annual Information Form of the Fund for the year ended
December 31, 2003 and the interim consolidated financial statements of
the Fund and notes thereto for the three months and nine months ended
September 30, 2004.
The Fund is the successor organization to Newalta Corporation.
Information for the three months and nine months ended September 30,
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.
Management's discussion and analysis has been prepared taking into
consideration information available to November 9, 2004.
OVERALL PERFORMANCE
Newalta generated record quarterly revenues of $46.0 million for the
three months ended September 30, 2004. Revenues for the nine months
increased 13% to $129.3 million compared to $114.9 million for the same
period last year. Although commodity prices were robust, the demand for
our services was impacted in the third quarter by unfavorable wet
weather which reduced activity levels in both divisions. Despite this,
cash flows for the three months ended September 30, 2004, were at
approximately the same levels as 2003 and cash available for growth and
distributions increased by 14% compared to the same period last year.
Cash available for growth and distribution was $13.2 million in the
third quarter compared to $11.5 million in the same quarter of 2003 due
to reduced maintenance capital spending and the elimination of principal
repayments.
Cash distributions declared in the quarter were $10.2 million,
representing 78% of cash available for growth and distributions. For the
nine months ended September 30, 2004, cash available for growth and
distributions was $32.8 million, of which 90% or $29.4 million was
declared as cash distributions to unitholders.
Segmented information is discussed in Results of Operations.
RESULTS OF OPERATIONS
Revenue for the three months ended September 30, 2004 increased $4.0
million or 10% over the $42.0 million of revenue in 2003. The Industrial
division was the primary source for the increase, providing a $4.7
million or 37% increase over last year. Industrial revenues on a year to
date basis have increased by 24%. Quarterly revenue in the Oilfield
division was slightly lower than the third quarter last year due to
lower waste processing volumes as a result of the wet weather. Oilfield
revenues for the nine months ended September 30, 2004 increased by 7%,
driven by strategic alliances, price increases, higher commodity prices
and the development of on-site services.
The Oilfield division recovers and resells crude oil from oilfield
wastes. Oilfield accounted for approximately 62% of Newalta's total
assets and generated 62% of Newalta's total revenue for the quarter and
63% on a year to date basis. 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.
Declines in processing revenues were partially offset by increases in
crude oil sales, as a result of high commodity prices, and expansion in
on-site services. The volume of oil sold for Newalta's account increased
12% in the quarter, and the average price received for the oil increased
32%. Oilfield recovered 250,000 barrels of crude oil and 85,000 barrels
were sold for Newalta's account at an average price of Cdn $47.86 per
barrel, resulting in oil sales of $4.1 million. In the same quarter of
2003, oil recoveries totaled 289,000 barrels and 76,000 barrels were
sold for Newalta's account, at an average price of Cdn $36.13 per
barrel, resulting in oil sales of $2.7 million. For the nine months, the
volume of oil sold increased 26% and the average price increased 10%,
resulting in oil sales of $11.1 million compared to $8.1 million in 2003.
Oilfield operating costs as a percentage of revenue for the quarter were
unchanged at 46% as compared to 2003. Oilfield net margin for the three
months ended September 30, 2004 was 4% lower than the same period last
year attributable to the lower waste processing volumes caused by the
wet weather. Third quarter net margin as a percentage of revenue was
maintained at 48% of revenue.
The Industrial division collects liquid and semi-solid industrial wastes
as well as automotive wastes, including waste lubricating oil in western
Canada. Recovered materials are processed into resalable products.
Industrial accounted for 33% of Newalta's total assets and generated 38%
of Newalta's total revenue for the quarter and 37% for the nine months
ended September 30, 2004. For the third quarter, approximately $7.7
million or 45% of Industrial revenue came from product sales compared to
55% in 2003. The oil recycling strategy, which was implemented in the
second quarter, began to show a modest impact to net margins in the
third quarter, with further improvements expected in the fourth quarter
and into 2005. The balance of Industrial's revenue for the quarter was
derived from collection and transportation fees, which improved 71% to
$9.6 million from $5.6 million in 2003. Revenue and net margin increases
were experienced in British Columbia due to the further development of
on-site services and improvements in the local economy. Performance in
Alberta was also improved in the third quarter compared to the same
period last year, but was lower than expected mostly due to the effect
of the weather on collection volumes and on-site services. Industrial's
performance is impacted by the general state of the economy in western
Canada, as well as economic conditions related to the oil and gas
services industry, mining and lumber related products. The automotive
market segment is generally a stable market as the sale of goods such as
lube oil does not significantly fluctuate from year to year.
Industrial revenue in the third quarter of 2004 improved 37% to $17.3
million from $12.6 million in 2003. Net margin increased by 29% to $3.1
million. Net margin has been impacted, however, by rising fuel costs and
related increases to transportation and collection costs. Industrial
will continue to focus on productivity improvements, developing product
markets, increasing collection activities in the waste water market,
centrifugation of industrial sludges and the acquisition of
complementary businesses.
Selling, general and administrative costs of $4.6 million were 10% of
revenue in the third quarter of 2004 as compared to $3.5 million or 8%
of revenue in 2003. For the nine months ended September 30, 2004,
selling, general and administrative costs increased 29% to $12.8 million
compared to $9.9 million in 2003. In the third quarter we completed our
initiative to strengthen the organization to provide the resources to
manage the continued growth of the Fund. The increased selling, general
and administrative costs in the third quarter and year-to-date were
attributable to recruitment costs, salaries and costs related to these
staff additions. Management's continued goal is to maintain selling,
general and administrative costs, as a percent of revenue, at 10% or
less. For the nine months of 2004, selling, general, and administrative
costs were 10% of revenue compared to 9% of revenue in 2003.
Depreciation and accretion for the third quarter was 8% of revenue
compared to 7% for the same period in 2003, due primarily to the
increase in capital expenditures. On a year to date basis, depreciation
and accretion was 8% of revenue in both 2003 and 2004.
Interest expense in the quarter was $0.5 million compared to $0.6
million in 2003 as a result of reduced average debt levels. At September
30, 2004, $28.0 million in long term debt was outstanding compared to
$39.3 million at September 30, 2003. Debt levels were lowered by the
cash flow made available by the strong financial performance of 2003 and
the October 2003 equity issue.
Income tax expense for the quarter was $1.4 million as compared to $2.4
million in 2003. Current tax expense related to large corporation taxes
and provincial capital taxes. Newalta does not anticipate paying any
cash income taxes in 2004, with the exception of large corporation tax
and provincial capital taxes.
Net earnings for the three months ended September 30, 2004 were $10.1
million compared to $9.7 million in 2003. Diluted net earnings were
$0.36 per unit for the third quarter compared to $0.42 per unit in 2003.
The decrease resulted mainly from the October 2003 equity issue. On a
year to date basis, diluted net earnings per unit were $1.01 compared to
$0.78 year to date in 2003.
During the third quarter of 2004, holders of rights to acquire trust
units exercised certain of their rights and 5,548 units were issued by
the Fund for proceeds of $0.042 million. As at November 9, 2004, the
Fund had 27,245,469 units outstanding and 1,347,122 rights to acquire
trust units outstanding.
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
27% of year-end revenue and typically averages approximately 23%. Second
quarter revenue averages approximately 21% of year-end revenue and can
range from 20% to 23%. Third quarter revenue can range from 26% to 31%
and averages approximately 29% of year-end totals. Fourth quarter
revenue averages approximately 27% and can range from 24% to 30%.
Quarterly financial results have been prepared by management in
accordance with Canadian generally accepted accounting principles in
Canadian dollars.
OUTLOOK
Demand for Newalta's services in western Canada continues to be very
strong. Based on early activity level indications, and the continued
expectation of high commodity prices, performance for the remainder of
the year and into 2005 is anticipated to be strong in both divisions.
LIQUIDITY
Newalta generated cash flow of $15.1 million ($0.55 per unit) in the
third quarter compared to $15.3 million ($0.67 per unit) for the third
quarter of 2003. For the nine months ended September 30, 2004, cash flow
excluding reorganization costs was $40.5 million ($1.50 per unit)
compared to $35.8 million ($1.60 per unit) for the nine months ended
September 30, 2003. The $0.10 reduction in cash flow per unit reflects
the increase in the number of units from the October 2003 equity issue,
the proceeds of which were used to reduce debt.
No principal payments were made in the third quarter and under the terms
of the credit facility, no further principal repayments are due until
July 2006, at the earliest. During the quarter, Newalta generated $3.0
million of cash available for growth and distributions in excess of
declared distributions. Total declared distributions in the quarter were
78% of cash available for growth and distributions.
For the nine months ended September 30, 2004, $3.4 million of cash
available for growth and distributions was generated in excess of
declared distributions calculated as follows:
/T/
------------------------------------------------------------------------
($ millions) 3 months 9 months
------------------------------------------------------------------------
Cash flow from operations 15.0 40.5
Maintenance Capital (1.6) (6.0)
Asset retirement and deferred costs (0.2) (0.2)
Debt repayment - (1.5)
Cash available for growth and distribution 13.2 32.8
Growth capital and acquisitions funded by cash flow - -
Cash available for distribution 13.2 32.8
Distributions declared 10.2 29.4
Excess cash 3.0 3.4
------------------------------------------------------------------------
------------------------------------------------------------------------
/T/
Newalta currently has a $25.0 million operating line to fund working
capital and financial security requirements, of which $13.4 million was
unutilized at September 30, 2004. Letters of credit provided for
financial security totaled $7.8 million at September 30, 2004. Newalta's
current financial performance is well in excess of its debt covenants.
The Fund does not have a stability rating.
Regulatory approval was received in the third quarter for the Fund's
Distribution Reinvestment Plan (the "DRIP"). The first eligible
reinvestment of distributions was made on October 15, 2004 in relation
to the September distribution payment. A total of $0.2 million was
reinvested at a price of $20.51 per unit, resulting in the issuance of
8,527 additional units.
CAPITAL RESOURCES
Third quarter maintenance capital expenditures were $1.6 million in 2004
compared to $3.0 million in 2003. Total maintenance capital spending on
a year to date basis was $6.0 million this year compared to $5.7 million
in 2003. Total estimated maintenance capital expenditures for the year
2004 are expected to be $8.0 million. It is estimated that spending on
internal growth projects will be approximately $28.5 million in total
for 2004. For the nine months ended September 30, 2004, $17.0 million
was spent on internal growth projects ($1.7 million in 2003), which will
not begin to contribute to financial performance until the fourth
quarter. Total acquisition expenditures in the third quarter were $0.2
million compared to $3.2 million in 2003. For the nine months ended
September 30, 2004, acquisition expenditures were $16.0 million compared
to $3.2 million in 2003. Future expenditures for growth capital and
acquisitions will be funded from working capital and the extendible term
credit facility. Total capital expenditures for 2004 are estimated to be
approximately $55.0 million, of which $47.0 million relates to internal
growth and acquisitions and $8.0 million relates to maintenance capital.
Capital expenditures are summarized as follows:
/T/
------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
($ millions) 3 months 9 months 3 months 9 months
------------------------------------------------------------------------
Maintenance capital 1.6 6.0 3.0 5.7
Acquisitions 0.2 16.0 3.2 3.2
Internal growth projects 7.2 17.0 0.9 1.7
Total capital expenditures 9.0 39.0 7.1 10.6
------------------------------------------------------------------------
/T/
At September 30, 2004, Newalta had working capital of $25.5 million,
down from $31.1 million at December 31, 2003. The decrease in working
capital is primarily the result of funding growth capital and
acquisitions.
Effective May 19, 2004, the Fund secured a new credit facility. This
facility provides for a $25.0 million operating line plus a $65.0
million extendible term facility. At September 30, 2004, Newalta had
$13.4 million of unutilized operating line and $37.0 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 at market rates.
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 paid for these legal services in the third quarter was $0.1
million in 2004 and nil in 2003. For the nine months ending September
30, 2004 these legal services were $0.3 million compared to $0.8 million
in 2003.
Newalta provides Oilfield services to Paramount Resources Ltd. at market
rates. 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 Newalta to Paramount Resources Ltd.,
in the third quarter, was $0.3 million in 2004 and nil in 2003 ($0.5
million year to date compared to $0.2 million in 2003).
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
During 2003, the Fund adopted the 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 for
fiscal years beginning on or after January 1, 2004, and allowed for the
early adoption of the guidelines for the year 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 September 30, 2004 was $0.2 million ($0.2 million in 2003), and
for the nine months ended September 30, 2004 was $0.4 million ($0.4
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. This change in accounting standards affects the way the
Fund records its obligation for the eventual restoration of plants and
facilities. The comparative financial statements for 2003 have been
adjusted to show the impact of the change in accounting treatment. The
increase in non-cash expenses is not material.
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.
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
-----------------------------------------------------------------------
-----------------------------------------------------------------------
($000s) (unaudited) September 30, 2004 December 31, 2003
(note 2)
-----------------------------------------------------------------------
Assets
Current assets
Cash - 12,529
Accounts receivable 38,650 30,705
Inventories 7,400 7,897
Prepaid expenses 2,715 979
Future income tax 3,600 2,000
-----------------------------------------------------------------------
52,365 54,110
Capital assets 241,555 217,470
Intangibles 4,176 2,056
Goodwill 13,212 10,782
Deferred costs 906 854
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312,214 285,272
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Liabilities
Current liabilities
Bank indebtedness 3,755 -
Accounts payable 19,754 17,162
Distribution payable (Note 10) 3,406 2,818
Current portion of long-term debt - 3,002
-----------------------------------------------------------------------
26,915 22,982
Long-term debt ( Note 4) 28,000 10,500
Future income taxes 41,023 37,911
Asset retirement obligation (Note 2a, 11) 4,904 4,736
-----------------------------------------------------------------------
100,842 76,129
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Unitholders' Equity
Unitholders' capital (Note 5) 153,176 149,798
Contributed surplus 1,484 1,041
Accumulated earnings 109,102 81,262
Accumulated cash distributions (Note 10) (52,390) (22,958)
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211,372 209,143
-----------------------------------------------------------------------
312,214 285,272
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Newalta Income Fund
Consolidated Statements of Operations and Accumulated Earnings
-----------------------------------------------------------------------
-----------------------------------------------------------------------
($000s) (unaudited) For the Three Months For the Nine Months
Ended September 30 Ended September 30
2004 2003 2004 2003
(Note 2) (Note 2)
-----------------------------------------------------------------------
Revenue 45,990 41,981 129,328 114,934
Expenses
Operating 25,829 22,521 75,085 67,305
Selling, general and
administrative 4,596 3,528 12,849 9,930
Interest 518 648 844 2,239
Depreciation and
accretion 3,601 3,099 10,748 9,006
Reorganization - - - 5,195
-----------------------------------------------------------------------
34,544 29,796 99,526 93,675
-----------------------------------------------------------------------
Operating income 11,446 12,185 29,802 21,259
Provisions for income taxes
Current 150 150 450 400
Future (Note 7) 1,209 2,296 1,512 3,240
-----------------------------------------------------------------------
1,359 2,446 1,962 3,640
-----------------------------------------------------------------------
Net earnings 10,087 9,739 27,840 17,619
Accumulated earnings,
beginning of period, as
reported 99,015 62,351 81,123 54,312
Cumulative effect of
change in accounting
policy (Note 2) - - 139 159
-----------------------------------------------------------------------
Accumulated earnings, end
of period 109,102 72,090 109,102 72,090
-----------------------------------------------------------------------
Earnings per unit (Note
8) $ 0.37 $0.43 $1.03 $0.79
-----------------------------------------------------------------------
Diluted earnings per unit
(Note 8) $ 0.36 $0.42 $1.01 $0.78
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Newalta Income Fund
Consolidated Statements of Cash Flows
-----------------------------------------------------------------------
-----------------------------------------------------------------------
($000s) (unaudited) For the Three Months For the Nine Months
Ended September 30 Ended September 30
2004 2003 2004 2003
-----------------------------------------------------------------------
Net inflow (outflow) of
cash related to the
following activities:
Operating activities
Net earnings 10,087 9,739 27,840 17,619
Items not requiring cash:
Depreciation and
accretion 3,601 3,099 10,748 9,006
Future income taxes 1,209 2,296 1,512 3,240
Stock compensation
expense 159 181 442 733
Reorganization - - - (19)
-----------------------------------------------------------------------
Cash flow from operations 15,056 15,315 40,542 30,579
Decrease (increase) in
working capital (5,038) (3,450) (6,590) (5,606)
Asset retirement costs
incurred (222) (34) (250) (64)
-----------------------------------------------------------------------
9,796 11,831 33,702 24,909
-----------------------------------------------------------------------
Investing activities
Additions to capital
assets (8,798) (3,857) (22,949) (7,449)
Net proceeds on sale of
capital assets - 1 22 1,516
Acquisitions (Note 3) (188) (712) (16,039) (712)
Deferred costs (26) (22) (53) (29)
-----------------------------------------------------------------------
(9,012) (4,590) (39,019) (6,674)
-----------------------------------------------------------------------
Financing activities
Issuance (repurchase) of
units 42 - 3,378 (61)
Increase (decrease) in
debt and debentures 11,000 (752) 14,498 (4,838)
Distributions to
unitholders (10,216) (6,129) (28,843) (12,088)
-----------------------------------------------------------------------
826 (6,881) (10,967) (16,987)
-----------------------------------------------------------------------
Net cash inflow (outflow) 1,610 360 (16,284) 1,248
Cash (bank indebtedness),
beginning of period (5,365) 129 12,529 (759)
-----------------------------------------------------------------------
Cash (bank indebtedness),
end of period (3,755) 489 (3,755) 489
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Supplementary information:
-----------------------------------------------------------------------
Interest paid 353 709 1,004 2,358
-----------------------------------------------------------------------
Income taxes paid 138 178 462 413
-----------------------------------------------------------------------
NEWALTA INCOME FUND
Notes to the Consolidated Financial Statements
For the Three Months and Nine Months Ended September 30, 2004 and 2003
($000s) (Unaudited)
------------------------------------------------------------------------
/T/
Newalta Income Fund was establis hed by Deed of Trust dated January 16,
2003. The Fund is a Canadian income trust engaged, through its
wholly-owned subsidiary Newalta Corporation ("Newalta"), in maximizing
the inherent value of certain industrial wastes through recovery of
saleable products and recycling, rather than disposal. Through a network
of integrated facilities in western Canada, Newalta delivers 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
The interim consolidated financial statements include the accounts of
the Fund and its wholly owned subsidiary companies and have been
prepared by management in accordance with Canadian generally accepted
accounting principles. Certain information and disclosures normally
required to be included in the notes to the annual financial statements
have been omitted or condensed. The accounting principles applied are
consistent with those as set out in the Fund's annual financial
statements for the year ended December 31, 2003, except for the changes
in accounting policies as described in Note 2. These interim financials
statements and the notes thereto should be read in conjunction with
Newalta's consolidated financial statements for the year ended December
31, 2003 as contained in the Annual Report for fiscal 2003.
Financial results can vary from quarter to quarter depending on weather
conditions, commodity prices, market demand and capital investments.
First quarter revenue can range from 20% to 27% of year-end revenue and
averages approximately 23%. Second quarter revenue averages
approximately 21% of year-end revenue and can range from 20% to 23%.
Third quarter revenue can range from 26% to 31% and averages
approximately 29% of year-end totals. Fourth quarter revenue averages
approximately 27% and can range from 24% to 30%.
Accounting measurements at interim dates inherently involve reliance on
estimates and the results of operations for the interim periods shown in
these statements are not necessarily indicative of results to be
expected for the fiscal year. In the opinion of management, the
accompanying unaudited interim consolidated financial statements include
all adjustments (of a normal recurring nature) necessary to present
fairly the consolidated results of the Fund's operations and cash flows
for the periods ended September 30, 2004 and 2003.
2) Changes in Accounting Policies
a) Asset retirement obligations: In December 2002 the Canadian Institute
of Chartered Accountants ("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 $13.3 million. The fair value of this liability at December
31, 2003 was $4,736 using a discount rate of 8% and an inflation rate of
2%. Accretion expense for the three months ended September 30, 2004 was
$92 ($89 in 2003). For the nine months ended September 30, 2004
accretion expense totaled $284 ($261 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 these provisions on a prospective basis. On a comparative
basis, this would have resulted in an increase in contributed surplus
for this change, and a corresponding non-cash charge of $181 ($0.008 per
unit) for the three months ended September 30, 2003 and of $415 ($0.019
per unit) for the nine months ended September 30, 2003. The Interim
Financial Statements for September 30, 2003 have been adjusted to
include these revised amounts. The corresponding non-cash expense for
the three month period in 2004 was $159 ($0.006 per unit), and for the
nine month period in 2004 was $442 ($0.016 per unit).
c) Impairment of Long-Lived Assets: Effective January 1, 2004, the Fund
adopted the new recommendation that the CICA issued in December 2002 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 September 30, 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
Retirement Adjusted
Consolidated Balance At December 31, Obligation December 31,
Sheets 2003 Adjustments 2003
-------------------------- ------------
Capital assets and
intangibles 217,517 2,009 219,526
Future income tax 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
Adjusted
Stock- three
Asset based months
Consolidated For the three Retirement Compen- ended
Statements of months ended Obligation sation Sept-
Operations and September 30, Adjust- Adjust- ember
Accumulated Earnings 2003 ments ments 30, 2003
---------------------------------------------
Site restoration expense 130 (130) - -
Depreciation and
accretion expense 2,958 141 - 3,099
Future income tax
provision 2,299 (3) - 2,296
Stock-based
compensation expense - - 181 181
Net earnings 9,928 (8) (181) 9,739
Earnings per unit $0.43 - (0.01) $0.43
Diluted earnings per unit $0.43 - (0.01) $0.42
Adjusted
Stock- nine
based months
For the nine Asset Compen- ended
months ended Retirement sation Sept-
September 30, Obligation Adjust- ember
2003 Adjustments ments 30, 2003
---------------------------------------------
Site restoration expense 385 (385) - -
Depreciation and
accretion expense 8,600 406 - 9,006
Future income tax
provision 3,247 (7) - 3,240
Stock-based
compensation expense 318 - 415 733
Net earnings 18,048 (14) (415) 17,619
Earnings per unit $0.81 - (0.02) $0.79
Diluted earnings per unit $0.79 - (0.02) $0.78
/T/
3) Acquisitions
During the nine months ended September 30, 2004, the Fund 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, B.C.; and on May 31, 2004
acquired the assets of a centrifuge rental business located in Nisku,
Alberta. The amount of the considerations given and the assets received
were:
/T/
Total cash consideration 16,039
-------
Land 300
Plant & equipment 11,323
Intangibles 1,620
Petroleum & natural gas rights 500
Goodwill 2,430
Asset retirement obligation (134)
-------
Total 16,039
-------
-------
/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. Termination costs for acquired employees incurred within
the twelve months following the acquisition are not provided for until
the actual costs are realized.
4) Long term Debt
Effective May 19, 2004 the Fund secured a new credit facility. The
credit facility provides for a $25,000 operating line plus a $65,000
extendible term facility. As at September 30, 2004, $13.4 million of the
operating line and $37.0 million of the extendible term facility
remained unutilized. The credit facility is secured principally by a
general security agreement over the Fund's assets. Interest on the
facilities is subject to certain conditions, and may be charged at a
prime based or a BA (Bankers' Acceptance) based rate, at the Fund's
option. The operating facility charges interest at the Banks' prime
rate, or at the BA rate plus 1.25%. The term facility charges interest
at the Banks' prime rate plus 0.25%, or at the BA rate plus 1.75%. The
term loan is subject to an annual review, and extension at the option of
the lender. If an extension is not granted, principal repayments would
commence in 15 months at the quarterly rate of one-twelfth of the
outstanding indebtedness for 3 quarters and a balloon payment for the
balance at the end of the fourth quarter.
5) Unitholders' Capital
On March 1, 2003 and pursuant to the Plan of Arrangement 21,810,318
units were issued by the Fund in exchange for 43,620,665 common shares
of Newalta previously outstanding. Additional units were subsequently
issued upon the exercise of Exchange Rights, conversion of debentures,
purchase of assets, and issuance of new equity.
/T/
Units/Shares Amount
(000's)
----------------------------
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 409 3,378
------------------------------------------------------------------------
Units outstanding as at September 30, 2004 27,245 153,176
------------------------------------------------------------------------
/T/
The Fund declared distributions of $0.105 per unit for each of the
months of January and February, 2004, increasing to $0.125 for the
months of March through September, 2004. For the nine month period, a
total of $1.065 per unit, or $28,843 has been distributed to
unitholders. From inception on March 1, 2003 to October 15, 2004, a
total of $52,390 has been distributed to unitholders.
6) Trust Unit Rights Incentive Plan
During the nine month period, officers, trustees and employees exercised
rights to acquire units of the Fund. A total of 409,877 rights were
exercised for $3,378.
On June 1, 2004 a total of 347,500 Rights were granted to certain
trustees, officers, and employees of the Fund 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%.
7) Future Income Tax
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
period ended March 31, 2004 by $650 or $0.02 per unit.
8) Earnings per Unit
Basic per unit calculations for the periods ending September 30 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 and the convertible debentures.
/T/
Three Months Nine Months
Ended Ended
September 30 September 30
2004 2003 2004 2003
-------------------------------
Weighted average number of units 27,244 22,907 27,090 22,330
Net additional units if rights exercised 512 372 461 224
Additional units if debentures converted - 125 - 486
------------------------------------------------------------------------
Diluted weighted average number of units 27,756 23,404 27,551 23,040
------------------------------------------------------------------------
9) Reconciliation of Unitholder Distributions Declared and Paid
Three Months Nine Months
Ended Ended
September 30 September 30
2004 2003 2004 2003
-------------------------------
Cash flow from operations before
reorganization costs 15,056 15,315 40,542 35,793
Maintenance capital expenditures (1,642) (2,983) (5,982) (5,728)
Asset retirement and deferred costs (248) (50) (303) (93)
Net proceeds on sales of fixed assets - 1 22 1,516
Scheduled principal repayment - (750) (1,500) (750)
------------------------------------------------------------------------
Cash available for growth and
distribution before reorganization
costs 13,166 11,533 32,779 30,738
Reorganization costs - - - (5,214)
-------------------------------
Cash available for growth and
distribution 13,166 11,533 32,779 25,524
-------------------------------
-------------------------------
Unitholder distributions declared 10,217 6,530 29,431 14,506
- per unit - $ 0.375 0.285 1.085 0.645
Unitholder distributions paid 10,216 6,128 28,844 12,088
- per unit - $ 0.375 0.27 1.065 0.54
10) 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 (26,026)
Unitholder distributions declared (3,406)
--------
Balance, September 30, 2004 (52,390)
--------
--------
11) Reconciliation of Asset Retirement Obligation
Asset Retirement Obligation at beginning of period 4,736
Additional retirement obligations added through acquisitions 134
Costs incurred to fulfill obligations (250)
Accretion 284
--------
Asset Retirement Obligation at end of period 4,904
--------
--------
/T/
12) Segmented Information
The Fund has two reportable segments. 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 resalable products.
/T/
For the three months ended September 30 ($000's)
Inter- Consolidated
2004 Oilfield Industrial segment Unallocated(2) Total
------------------------------------------------------------------------
External revenue 28,721 17,269 45,990
Inter segment
revenue(1) 192 (7) (185) -
Operating expense 13,141 12,873 (185) 25,829
Depreciation and
accretion 2,125 1,256 220 3,601
------------------------------------------------------------------------
Net margin 13,647 3,133 (220) 16,560
Selling, general
and administrative 4,596 4,596
Interest expense 518 518
------------------------------------------------------------------------
Operating income 13,647 3,113 (5,334) 11,446
------------------------------------------------------------------------
Capital
expenditures 6,464 2,015 507 8,986
Goodwill 10,782 2,430 13,212
Total assets 194,404 103,025 14,785 312,214
--------------------------------------------------------
--------------------------------------------------------
Inter- Consolidated
2003 (Note 2) Oilfield Industrial segment Unallocated(2) Total
------------------------------------------------------------------------
External revenue 29,410 12,571 41,981
Inter segment
revenue(1) 6 27 (33) -
Operating expense 13,394 9,160 (33) 22,521
Depreciation and
accretion 1,880 1,018 201 3,099
------------------------------------------------------------------------
Net margin 14,142 2,420 (201) 16,361
Selling, general
and administrative 3,528 3,528
Interest expense 648 648
------------------------------------------------------------------------
Operating income 14,142 2,420 (4,377) 12,185
------------------------------------------------------------------------
Capital
expenditures 6,118 488 463 7,069
Goodwill 10,782 10,782
Total assets 171,136 85,684 8,209 265,029
--------------------------------------------------------
--------------------------------------------------------
(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 nine months ended September 30 ($000's)
Inter- Consolidated
2004 Oilfield Industrial segment Unallocated(2) Total
------------------------------------------------------------------------
External revenue 81,863 47,465 129,328
Inter segment
revenue(1) 279 30 (309) -
Operating expense 38,492 36,902 (309) 75,085
Depreciation and
accretion 6,455 3,634 659 10,748
------------------------------------------------------------------------
Net margin 37,195 6,959 (659) 43,495
Selling, general
and administrative 12,849 12,849
Interest expense 844 844
------------------------------------------------------------------------
Operating income 37,195 6,959 (14,352) 29,802
------------------------------------------------------------------------
Capital
expenditures 22,745 13,611 2,632 38,988
Goodwill 10,782 2,430 13,212
Total assets 194,404 103,025 14,785 312,214
--------------------------------------------------------
--------------------------------------------------------
Inter- Consolidated
2003 (Note 2) Oilfield Industrial segment Unallocated(2) Total
------------------------------------------------------------------------
External revenue 76,693 38,241 114,934
Inter segment
revenue(1) 52 91 (143) -
Operating expense 37,525 29,923 (143) 67,305
Depreciation and
accretion 5,449 2,972 585 9,006
------------------------------------------------------------------------
Net margin 33,771 5,437 (585) 38,623
Selling, general
and administrative 9,930 9,930
Interest expense 2,239 2,239
Reorganization costs 5,195 5,195
------------------------------------------------------------------------
Operating income 33,771 5,437 (17,949) 21,259
------------------------------------------------------------------------
Capital
expenditures 8,643 1,417 601 10,661
Goodwill 10,782 10,782
Total assets 171,136 85,684 8,209 265,029
--------------------------------------------------------
--------------------------------------------------------
(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