Newalta's Strong Growth Continues
CALGARY, ALBERTA - Aug. 10, 2004 /CNW/ - Newalta Income
Fund (TSX: NAL.UN) today announces strong financial results for
the second quarter of 2004.
"Our performance and our results in the second quarter of 2004
were consistent with expectations. We made excellent progress in
strengthening the organization and developing opportunities to
continue expanding our operations" said Al Cadotte, Newalta
Income Fund's President and Chief Executive Officer.
/T/
Financial Results and Highlights ($000s except per unit data)
Three Months Ended June 30 Six Months Ended June 30
(unaudited) (unaudited)
%Increase %Increase
2004 2003 (Decrease) 2004 2003 (Decrease)
---------------------------------------------------------
Revenue 40,449 34,543 17 83,338 72,953 14
Operating
income
excluding
reorganization
costs(1) 8,094 6,386 27 18,356 14,268 29
Operating
income 8,094 5,675 43 18,356 9,073 102
Net
earnings 7,879 5,852 35 17,753 7,879 125
Earnings per
unit ($) 0.29 0.26 12 0.66 0.36 83
Diluted net
earnings
per
unit ($) 0.28 0.26 8 0.65 0.35 86
EBITDA(2)
excluding
reorganization
costs 11,982 10,049 19 25,829 21,767 19
EBITDA 11,982 9,338 28 25,829 16,572 56
Trailing
12 month
EBITDA
excluding
reorganization
costs 55,214 42,276 31
Trailing
12 month
EBITDA 55,214 36,485 51
Cash flow(3)
excluding
reorganization
costs 11,681 9,367 25 25,484 20,478 24
Cash
flow 11,681 8,656 35 25,484 15,264 67
- per
unit(s) 0.43 0.39 10 0.94 0.69 36
Maintenance
capital
expendi-
tures 3,315 1,289 157 4,340 2,709 60
Principal
repayments 750 - - 1,500 - -
Cash
available
for growth
and
distributions
excluding
reorganization
costs 7,587 9,489 (20) 19,611 19,247 2
- per
unit - $ 0.28 0.43 (35) 0.73 0.87 (16)
Cash
available
for growth
and
distribut-
ions 7,587 8,778 (14) 19,611 14,071 39
- per
unit - $ 0.28 0.40 (30) 0.73 0.64 14
Cash
distributions
declared
(1) 10,193 5,993 70 19,214 7,976 141
- per
unit - $ 0.38 0.27 41 0.71 0.36 97
Growth and
acquisition
capital
expendit-
ures 11,396 723 1,476 25,661 883 2,806
Weighted
average
units
outstanding4
(000s) 27,147 22,196 22 27,011 22,042 23
Total units
outstanding
(000s) 27,240 22,406 22 27,240 22,406 22
--------------------------------------------------------------------
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 $4.5
million was incurred in the first quarter of 2003 and $0.7 million
in the second quarter 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/
FINANCIAL AND OPERATIONAL HIGHLIGHTS
- Second quarter revenue was up 17%, while operating income and
cash flow before reorganization costs increased by 27% and 25%
respectively, from the same period in 2003.
- EBITDA excluding reorganization costs increased by 19% for the
second quarter compared to the same quarter last year.
- Second quarter net earnings improved 35% to $7.9 million or
$0.28 per diluted unit.
- Oilfield revenue was $24.4 million for the quarter, an increase
of 15%, and is up 12% for the first half of 2004. The increases
are attributable to the continued effect of management
initiatives completed in 2003 as well as strong market demand.
- Industrial revenue of $16.1 million increased by 20% in the
second quarter compared to the same period last year. The
increase is almost entirely attributable to the effect of
acquisitions and growth capital expenditures completed late in
2003 and in the first half of 2004.
- A new credit facility of $90.0 million was secured in the
quarter. As at June 30, 2004, $67.6 million of the available
credit facility remained unutilized.
- One complementary acquisition was completed in the quarter at a
total cost of $5.0 million. Total growth and acquisition capital
expenditures in the quarter were $11.4 million compared to $0.7
million for the same period last year. During the quarter,
internal growth capital spending estimates for 2004 were
increased by $8.5 million to $28.5 million. Total capital
expenditures for the year are estimated to be approximately $55.0
million, excluding any additional acquisitions. Maintenance
capital, which is estimated to be approximately $8.0 million for
the year, was $3.3 million in the second quarter compared to $1.3
million in 2003.
- By the end of the second quarter we had substantially completed
all personnel recruitment in order to strengthen the organization
to successfully manage our growth plans.
The consolidated financial statements and notes thereto and
management's discussion and analysis are attached.
Management will hold a conference call on Wednesday, August 11,
2004 at 2:00 p.m. (ET) to discuss the Fund's performance for the
three months ended June 30, 2004. To listen, please dial
1-800-814-4890 or 416-913-8746, 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 August 18, 2004
by dialing 416-640-1917 or 1-877-289-8525 and entering the
passcode 21081165 #.
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 SIX MONTHS ENDED JUNE 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 six months ended June 30, 2004.
The Fund is the successor organization to Newalta Corporation.
Information for the three months and six months ended June 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 August 9, 2004.
OVERALL PERFORMANCE
Newalta continued to deliver strong growth in the second quarter.
Revenue increased by 17% and operating income excluding
reorganization costs was 27% greater, mainly as a result of cost
reduction efforts, productivity improvements and robust market
conditions. Operating costs as a percentage of revenue were
reduced to 60.2% from 62.3% in 2003. Our balance sheet is strong,
and the demand for our products and services remains high. Cash
flow excluding reorganization costs increased 25% quarter over
quarter. During the quarter, a new credit facility was secured
for $90.0 million. As at June 30, 2004, $67.6 million remained
unutilized. We are well positioned for continued strong growth
and performance.
Growth and acquisition capital expenditures in the quarter were
$11.4 million compared to $0.7 million for the same period last
year. One complementary acquisition was completed in the second
quarter for $5.0 million, funded from the extendible term loan
facility. Total growth capital and acquisition expenditures in
the first half of 2004 were $25.7 million compared to $0.9
million in the first half of 2003. The new capital is expected to
contribute to financial performance in the second half of 2004.
Cash flow excluding reorganization costs improved 25% to $11.7
million as compared to $9.4 million in 2003. Cash available for
growth and distributions was $7.6 million for the quarter and
$19.6 million for the first half of 2004. On a 12-month trailing
basis, cash available for growth and distributions was $41.5
million, of which 82.4% or $34.2 million was declared as cash
distributions to unitholders.
Net earnings increased by 35% in the second quarter compared to
last year. Diluted net earnings were $0.28 per unit for the
quarter and $0.26 per unit for the comparable quarter of the
prior year.
Segmented information is discussed in Results of Operations.
RESULTS OF OPERATIONS
Revenue for the three months ended June 30, 2004 increased $5.9
million or 17% and is up 14% for the first half of 2004. The
largest revenue increase was in the Industrial segment where
revenue increased by 20% on the quarter and is up 18% for the
first half of 2004. The Industrial increase for the quarter is
mostly attributable to the effect of acquisitions and growth
capital expenditures completed late in 2003 and in the first half
of 2004. We expect increased contribution to operating income and
earnings in the second half of 2004 from these investments.
Oilfield revenue increased by 15%, and is up 12% for the first
half of 2004. Although commodity prices remained at high levels
throughout the second quarter, both divisions were affected by
wet weather which impacted on-site and drilling related services
and restricted transportation of waste to our facilities.
Oilfield performance in the second quarter remained strong with
revenue and net margin improvements year over year. The volume of
oil sold for Newalta's account increased 46% in the quarter, and
the average price received for the oil increased 16%. Oil sales
in the quarter were $3.8 million as compared to $2.2 million in
2003. Year to date in 2004, the average price decreased 1% and
the volume of oil sold increased 32%.
The Oilfield division ("Oilfield") recovers and resells crude oil
from oilfield wastes. Oilfield accounted for approximately 61% of
Newalta's total assets and generated 60% of Newalta's total
revenue for the quarter and 64% for the first half of 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, with the balance
from drilling related activities. Revenue is also impacted by
activity levels which are driven mainly by commodity prices. A
change of Cdn $1.50 for WTI should result in an annual impact on
Newalta's operating income of approximately $0.5 million. During
the quarter, Oilfield recovered 227,000 barrels of crude oil and
92,000 barrels were sold for Newalta's account at an average
price of Cdn $41.04 per barrel. In the comparable period of 2003,
oil recoveries totaled 257,000 barrels including 63,000 barrels
for Newalta's account, at an average price of Cdn $35.49 per
barrel. Improvements in revenue were driven mainly by strong
market demand for Oilfield's services, as well as management
initiatives to increase pricing, add incremental revenue through
strategic alliances and the development of on-site services.
Oilfield operating costs as a percentage of revenue were 49% as
compared to 55% in 2003. Management cost reduction initiatives
and productivity improvements contributed to a quarter over
quarter increase of 33% in net margin. Coyote Oilfield Rentals
was acquired in the quarter for approximately $5.0 million. This
acquisition provides new opportunities in the growth and
development of our on-site services. The outlook for Oilfield
remains very positive. Strong market demand and robust commodity
prices are widely expected to continue throughout 2004. These
conditions, combined with an active internal growth program, an
aggressive strategy to acquire complementary businesses in
western Canada and the impact of management initiatives to
improve revenue, reduce costs and improve productivity, should
result in very strong performance in the second half of 2004.
The Industrial division ("Industrial") collects automotive and
industrial wastes and waste lubricating oil in western Canada,
which are processed into resaleable products. Industrial
accounted for 34% of Newalta's total assets and generated 40% of
Newalta's total revenue for the quarter and 36% for the first
half of 2004. Industrial produces various recycled products from
waste lubricating oil, including base oil, burner fuel, fuel oil
and drilling oil. For the second quarter, approximately $7.5
million or 46% of Industrial revenue came from product sales
compared to 52% in 2003. The balance of Industrial's revenue for
the quarter was derived from collection and transportation fees,
which improved 34% to $8.6 million from $6.5 million in 2003. It
is anticipated that collection and transportation revenue and
product sales will share an equal percentage of total Industrial
revenue in future periods. Industrial's performance is impacted
by the general state of the economy in western Canada. The
automotive after-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 in the second quarter of 2004 improved 20% to
$16.1 million. Recent acquisitions and growth capital have
positively impacted revenue and net margin, but are not expected
to provide meaningful contribution to operating income until the
second half of 2004. The volume of collected lube oil was down
slightly for the quarter at 13.1 million liters compared to 13.7
million liters in 2003. During the quarter, management
implemented a new pricing strategy for the oil recycling
business. The new strategy is expected to increase the volumes of
oil collected, optimize utilization of the recycling facilities
and increase the production of recycled oil. In the second
quarter the new pricing strategy had the effect of reducing oil
collection revenue, with little impact on oil volumes collected.
The increase in oil volumes and consequential increase in net
margin as a result of the pricing strategy are expected in the
second half of 2004. Industrial will continue to focus on
developing product markets, increasing collection activities in
the waste water market, centrifugation of sludges and the
acquisition of complementary businesses.
Selling, general and administrative costs of $4.1 million were
10% of revenue in the second quarter of 2004 as compared to $3.0
million or 8.6% of revenue in 2003. The increase is mostly
attributed to increases in staffing levels to prepare for future
growth in the business. As at June 30, 2004, all personnel
recruitment initiatives were substantially complete. Management's
goal is to maintain selling, general and administrative costs, as
a percent of revenue, at 10% or less. For the first half of 2004,
selling, general, and administrative costs were 10% of revenue
compared to 9% of revenue in 2003.
Depreciation and accretion for the second quarter increased to 9%
of revenue from 8% of revenue in 2003. The increase in
depreciation was a result of the 2003 capital spending program.
Interest expense was lower compared to the same period in 2003 as
a result of reduced debt levels. 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 $0.2 million as compared
to a recovery of $0.2 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 June 30, 2004 were $7.9
million compared to $5.9 million in 2003. Diluted net earnings
were $0.28 per unit for the second quarter compared to $0.26 per
unit in 2003. Diluted net earnings for the quarter were impacted
by the October 2003 equity issue which was used to fund the
current capital program, the majority of which will not impact
financial results until the second half of 2004.
During the second quarter of 2004, holders of rights to acquire
trust units exercised certain of their rights and 164,533 units
were issued by the Fund for proceeds of $1.4 million. As at July
31, 2004, the Fund had 27,244,421 units outstanding and 1,352,670
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.
LIQUIDITY
During the three months ended June 30, 2004, Newalta generated
cash flow of $11.7 million. Cash flow per unit was $0.43 compared
to $0.39 for the same quarter in 2003. The modest increase in
cash flow per unit is reflective of the increase in the number of
units from the October 2003 equity issue.
Scheduled principal payments in the period were $0.8 million. As
a result of the renegotiation of the credit facility, no further
principal repayments are due until July 2006, at the earliest.
During the first six months of 2004, Newalta generated $0.4
million of cash flow in excess of its declared distributions.
This was in line with our plans and was expected as the second
quarter of 2004 is typically Newalta's weakest quarter. On a
12-month trailing basis, we generated $4.1 million of cash flow
in excess of declared distributions calculated as follows:
/T/
----------------------------------------------------------------
($ millions) 12-month
trailing
----------------------------------------------------------------
Cash flow from operations 53.8
----------------------------------------------------------------
Maintenance Capital (9.0)
----------------------------------------------------------------
Asset retirement and deferred costs (.3)
----------------------------------------------------------------
Debt repayment (3.0)
----------------------------------------------------------------
Cash available for growth and distribution 41.5
----------------------------------------------------------------
Growth capital and acquisitions funded by cash flow (3.2)
----------------------------------------------------------------
Cash available for distribution 38.3
----------------------------------------------------------------
Distributions declared 34.2
----------------------------------------------------------------
Excess cash 4.1
----------------------------------------------------------------
----------------------------------------------------------------
/T/
Newalta currently has a $25.0 million operating line to fund
working capital requirements, of which $19.6 million is
unutilized. Newalta's current financial performance is well in
excess of its debt covenants. The Fund does not have a stability
rating.
CAPITAL RESOURCES
It is estimated that spending on internal growth projects will be
approximately $28.5 million in total for 2004. For the first half
of 2004, $9.8 million was spent on internal growth projects ($0.9
million in 2003), which are expected to contribute to Newalta's
financial performance in the second half. 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.
Second quarter maintenance capital expenditures were $3.3 million
compared to $1.3 million in 2003. Higher maintenance capital
spending was incurred in the second quarter in order to gear up
for expected higher activity levels in the second half of 2004.
Maintenance capital expenditures were funded from cash flow.
At June 30, 2004, Newalta had working capital of $18.8 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 (totaling $25.7 million for the first half of
2004).
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 June 30, 2004, Newalta
had $19.6 million of unutilized operating line and $48.0 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
second quarter was $0.2 million in 2004 and $0.2 million in 2003.
For the six months ending June 30, 2004 these legal services were
$0.2 million compared to $0.7 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 second quarter, was $0.1 million
in 2004 and $0.1 million in 2003 ($0.2 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 for 2003. The non-cash expense for the three months ended
June 30, 2004 was $0.1 million ($0.2 million in 2003), and for
the six months ended June 30, 2004 was $0.3 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. 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) June 30, 2004 December 31, 2003
(note 2)
--------------------------------------------------------------------
Assets
Current assets
Cash - 12,529
Accounts receivable 32,602 30,705
Inventories 7,390 7,897
Prepaid expenses 3,609 979
Future income tax 3,600 2,000
--------------------------------------------------------------------
47,201 54,110
Capital assets and intangibles 240,252 219,526
Goodwill 13,212 10,782
Deferred costs 881 854
--------------------------------------------------------------------
301,546 285,272
--------------------------------------------------------------------
--------------------------------------------------------------------
Liabilities
Current liabilities
Bank indebtedness 5,365 -
Accounts payable 19,631 17,162
Distribution payable (Note 10) 3,405 2,818
Current portion of long-term debt - 3,002
--------------------------------------------------------------------
28,401 22,982
Long-term debt ( Note 4) 17,000 10,500
Future income taxes 39,814 37,911
Asset retirement obligation (Note 2a) 5,033 4,736
--------------------------------------------------------------------
90,248 76,129
--------------------------------------------------------------------
Unitholders' Equity
Unitholders' capital (Note 5) 153,134 149,798
Contributed surplus 1,322 1,041
Accumulated earnings 99,015 81,262
Accumulated cash distributions
(Note 10) (42,173) (22,958)
--------------------------------------------------------------------
211,298 209,143
--------------------------------------------------------------------
301,546 285,272
--------------------------------------------------------------------
--------------------------------------------------------------------
Newalta Income Fund
Consolidated Statements of Operations and Accumulated Earnings
--------------------------------------------------------------------
--------------------------------------------------------------------
($000s) (unaudited) For the Three Months For the Six Months
Ended June 30 Ended June 30
2004 2003 2004 2003
(Note 2) (Note 2)
--------------------------------------------------------------------
Revenue 40,449 34,543 83,338 72,953
Expenses
Operating 24,345 21,514 49,256 44,784
Selling, general
and administrative 4,122 2,980 8,253 6,402
Interest 250 783 326 1,591
Depreciation and
accretion 3,638 2,880 7,147 5,908
Reorganization - 711 - 5,195
--------------------------------------------------------------------
32,355 28,868 64,982 63,880
--------------------------------------------------------------------
Operating income 8,094 5,675 18,356 9,073
Provisions for
income taxes
Current 175 75 300 250
Future (Note 7) 40 (252) 303 944
--------------------------------------------------------------------
215 (177) 603 1,194
--------------------------------------------------------------------
Net earnings 7,879 5,852 17,753 7,879
Accumulated
earnings,
beginning of
period, as
reported 91,136 56,498 81,123 54,312
Cumulative effect
of change in
accounting policy
(Note 2) - - 139 159
--------------------------------------------------------------------
Accumulated
earnings, end of
period 99,015 62,350 99,015 62,350
--------------------------------------------------------------------
--------------------------------------------------------------------
Earnings per unit
(Note 8) $0.29 $0.26 $0.66 $0.36
--------------------------------------------------------------------
--------------------------------------------------------------------
Diluted earnings
per unit (Note 8) $0.28 $0.26 $0.65 $0.35
--------------------------------------------------------------------
--------------------------------------------------------------------
Newalta Income Fund
Consolidated Statements of Cash Flows
--------------------------------------------------------------------
--------------------------------------------------------------------
($000's) (unaudited) For the Three Months For the Six Months
Ended June 30 Ended June 30
2004 2003 2004 2003
--------------------------------------------------------------------
Net inflow (outflow)
of cash related to
the following
activities:
Operating
activities
Net earnings 7,879 5,852 17,753 7,879
Items not
requiring cash:
Depreciation and
accretion 3,638 2,880 7,147 5,908
Future income
taxes 40 (252) 303 944
Stock compensation
expense 124 176 281 552
Reorganization - - - (19)
--------------------------------------------------------------------
Cash flow from
operations 11,681 8,656 25,484 15,264
Decrease
(increase) in
working capital 3,339 1,333 (1,551) (2,155)
Asset retirement
costs incurred (5) (1) (28) (30)
--------------------------------------------------------------------
15,015 9,988 23,905 13,079
--------------------------------------------------------------------
Investing
activities
Additions to
capital assets (9,575) (2,012) (14,150) (3,592)
Net proceeds on
sale of capital
assets - 1,415 22 1,515
Acquisitions (Note 3) (5,136) - (15,851) -
Deferred costs (24) (3) (27) (7)
--------------------------------------------------------------------
(14,735) (600) (30,006) (2,084)
--------------------------------------------------------------------
Financing
activities
Issuance
(repurchase) of
units 1,434 - 3,336 (61)
Increase
(decrease) in debt
and debentures 4,249 (1) 3,498 (4,086)
Distributions to
unitholders (10,172) (5,960) (18,627) (5,960)
--------------------------------------------------------------------
(4,489) (5,961) (11,793) (10,107)
--------------------------------------------------------------------
Net cash inflow
(outflow) (4,209) 3,427 (17,894) 888
Cash (bank
indebtedness),
beginning of
period (1,156) (3,298) 12,529 (759)
--------------------------------------------------------------------
Bank indebtedness,
end of period (5,365) 129 (5,365) 129
--------------------------------------------------------------------
--------------------------------------------------------------------
Supplementary information:
--------------------------------------------------------------------
Interest paid 477 467 651 1,648
--------------------------------------------------------------------
Income taxes paid 190 110 324 234
--------------------------------------------------------------------
NEWALTA INCOME FUND
Notes to the Consolidated Financial Statements
For the Three Months and Six Months Ended June 30, 2004 and 2003
($000s) (Unaudited)
/T/
Newalta Income Fund was established 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 June 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 June 30, 2004 was $95 ($86 in 2003). For the six months
ended June 30, 2004 accretion expense totaled $192 ($172 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 $176
($0.008 per unit) for the three months ended June 30, 2003 and of
$234 ($0.011 per unit) for the six months ended June 30, 2003.
The Interim Financial Statements for June 30, 2003 have been
adjusted to include these revised amounts. The corresponding
non-cash expense for the three month period in 2004 was $124
($0.005 per unit), and for the six month period in 2004 was $281
($0.010 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 carrying amount of the asset exceeds its fair value. As at
January 1, 2004 and June 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
Retire-
ment
Obli-
At gation Adjusted
Consolidated December 31, Adjust- December 31,
Balance Sheets 2003 ments 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
Asset
Retire- Stock- Adjusted
Consolidated For the ment based three
Statements three months Obli- Compen- months
of Operations ended gation sation ended
and Accumulated June 30, Adjust- Adjust- June 30,
Earnings 2003 ments ments 2003
----------------------------------------------
Site restoration expense 128 (128) - -
Depreciation and accretion
expense 2,746 134 - 2,880
Future income tax recovery (250) (2) - (252)
Stock-based compensation
expense - - 176 176
Net earnings 6,032 (4) (176) 5,852
Earnings per unit $0.27 - (0.01) $0.26
Diluted earnings per unit $0.27 - (0.01) $0.26
Asset
Retire- Stock- Adjusted
For the ment based six
six months Obli- Compen- months
ended gation sation ended
June 30, Adjust- Adjust- June 30,
2003 ments ments 2003
--------------------------------------------
Site restoration expense 255 (255) - -
Depreciation and accretion
expense 5,642 266 - 5,908
Future income tax provision 948 (4) - 944
Stock-based compensation
expense 318 - 234 552
Net earnings 8,120 (7) (234) 7,879
Earnings per unit $0.37 - (0.01) $0.36
Diluted earnings per unit $0.36 - (0.01) $0.35
/T/
3) Acquisitions
On May 31, 2004 the Fund acquired the assets of an oilfield
rental business located in Nisku, Alberta.
The Fund also made three acquisitions during the three months
ended March 31, 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; and on March 31, 2004 acquired the business and
assets of an Industrial Services company in Cranbrook, B.C. The
amount of the consideration given and the assets received were:
/T/
----------------------------
First Second
Quarter Quarter Total
----------------------------
Total cash consideration 10,715 5,136 15,851
----------------------------
Land 300 - 300
Plant & equipment 6,496 4,639 11,135
Intangibles 1,120 500 1,620
Petroleum & natural gas rights 500 - 500
Goodwill 2,430 - 2,430
Asset retirement obligation (131) (3) (134)
----------------------------
Total 10,715 5,136 15,851
----------------------------
----------------------------
/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.
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. 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 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
(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 404 3,336
--------------------------------------------------------------------
Units outstanding as at June 30, 2004 27,240 153,134
--------------------------------------------------------------------
/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 June, 2004. For the six month
period, a total of $0.69 per unit, or $18,627 has been
distributed to unitholders. From inception on March 1, 2003 to
July 15, 2004, a total of $42,173 has been distributed to
unitholders.
6) Trust Unit Rights Incentive Plan
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 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 June 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 Ended Six Months Ended
June 30 June 30
2004 2003 2004 2003
-----------------------------------------
Weighted average number
of units 27,147 22,196 27,011 22,042
Net additional units if
rights exercised 461 584 448 102
Additional units if
debentures converted - 117 - 753
--------------------------------------------------------------------
Diluted weighted average
number of units 27,608 22,897 27,459 22,897
--------------------------------------------------------------------
9) Reconciliation of Unitholder Distributions Declared and Paid
Three Months Ended Six Months Ended
June 30 June 30
2004 2003 2004 2003
-----------------------------------------
Cash flow from operations
before reorganization costs 11,681 9,367 25,484 20,478
Maintenance capital
expenditures (3,315) (1,289) (4,340) (2,709)
Asset retirement and
deferred costs (29) (4) (55) (37)
Net proceeds on sales of
fixed assets - 1,415 22 1,515
Scheduled principal repayment (750) - (1,500) -
--------------------------------------------------------------------
Cash available for growth
and distribution before
reorganization costs 7,587 9,489 19,611 19,247
Reorganization costs - (711) - (5,176)
-----------------------------------------
Cash available for growth
and distribution 7,587 8,778 19,611 14,071
-----------------------------------------
-----------------------------------------
Unitholder distributions
declared 10,193 5,993 19,214 7,976
- per unit - $ 0.375 0.27 0.71 0.36
Unitholder distributions paid 10,172 5,960 18,627 5,960
- per unit - $ 0.375 0.27 0.69 0.27
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 (15,810)
Unitholder distributions declared (3,405)
-------------
Balance, June 30, 2004 (42,173)
-------------
-------------
/T/
11) 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 resaleable
products.
/T/
For the three months ended June 30 ($000's)
Oil- Indus- Inter- Unallo- Consolidated
2004 field trial segment cated(2) Total
--------------------------------------------------------------------
External revenue 24,353 16,096 40,449
Inter segment
revenue(1) 78 26 (104) -
Operating expense 11,911 12,538 (104) 24,345
Depreciation
and accretion 2,166 1,253 219 3,638
--------------------------------------------------------------------
Net margin 10,354 2,331 (219) 12,466
Selling, general
and administrative 4,122 4,122
Interest expense 250 250
--------------------------------------------------------------------
Operating income 10,354 2,331 (4,591) 8,094
--------------------------------------------------------------------
Capital
expenditures 11,892 1,877 942 14,711
Goodwill 10,782 2,430 13,212
Total assets 185,052 101,853 14,641 301,546
--------------------------------------------------
--------------------------------------------------
Oil- Indus- Inter- Unallo- Consolidated
2003(Note 2) field trial segment cated(2) Total
--------------------------------------------------------------------
External revenue 21,177 13,366 34,543
Inter segment
revenue(1) (5) (20) 25 -
Operating expense 11,573 9,916 25 21,514
Depreciation and
accretion 1,794 893 193 2,880
--------------------------------------------------------------------
Net margin 7,805 2,537 (193) 10,149
Selling, general
and administrative 2,980 2,980
Interest expense 783 783
Reorganization costs 711 711
--------------------------------------------------------------------
Operating income 7,805 2,537 (4,667) 5,675
--------------------------------------------------------------------
Capital
expenditures 1,289 218 505 2,012
Goodwill 10,782 10,782
Total assets 162,077 84,896 7,771 254,744
---------------------------------------------------
---------------------------------------------------
1 Inter-segment Revenue are 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 six months ended June 30 ($000's)
Oil- Indus- Inter- Unallo- Consolidated
2004 field trial segment cated(2) Total
--------------------------------------------------------------------
External revenue 53,142 30,196 83,338
Inter segment
revenue(1) 87 37 (124) -
Operating expense 25,351 24,029 (124) 49,256
Depreciation and
accretion 4,330 2,378 439 7,147
--------------------------------------------------------------------
Net margin 23,548 3,826 (439) 26,935
Selling, general and
administrative 8,253 8,253
Interest expense 326 326
--------------------------------------------------------------------
Operating income 23,548 3,826 (9,018) 18,356
--------------------------------------------------------------------
Capital
expenditures 16,321 11,555 2,125 30,001
Goodwill 10,782 2,430 13,212
Total assets 185,052 101,853 14,641 301,546
---------------------------------------------------
---------------------------------------------------
Oil- Indus- Inter- Unallo- Consolidated
2003 (Note 2) field trial segment cated(2) Total
--------------------------------------------------------------------
External revenue 47,283 25,670 72,953
Inter segment
revenue(1) 46 64 (110) -
Operating expense 24,131 20,763 (110) 44,784
Depreciation and
accretion 3,568 1,954 386 5,908
--------------------------------------------------------------------
Net margin 19,630 3,017 (386) 22,261
Selling, general
and administrative 6,402 6,402
Interest expense 1,591 1,591
Reorganization costs 5,195 5,195
--------------------------------------------------------------------
Operating income 19,630 3,017 (13,574) 9,073
--------------------------------------------------------------------
Capital
expenditures 2,525 929 138 3,592
Goodwill 10,782 10,782
Total assets 162,077 84,896 7,771 254,744
---------------------------------------------------
---------------------------------------------------
1 Inter-segment Revenue are 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.