Newalta Poised for Continued Strong Growth
CALGARY, ALBERTA--Newalta Income Fund (TSX: NAL.UN) today
announced consolidated financial results for the three months and
the year ended December 31, 2003.
Newalta Income Fund is the successor organization to Newalta
Corporation. Information for the three months and year ended
December 31, 2003, along with comparative information for the
respective periods in 2002, is provided. Certain of the prior
year's comparative figures have been reclassified to conform to
the current year's presentation.
Financial Results and Highlights ($000s)
/T/
Three Months Ended December 31
(unaudited)
%Increase
2003 2002 (Decrease)
--------------------------------
Revenue 40,098 34,235 17
Operating income before
reorganization costs 9,533 6,412 49
Operating income 9,533 5,816 64
Net earnings 8,763 3,452 154
Net earnings per unit ($)(1) 0.34 0.16 113
Diluted net earnings per unit ($) 0.33 0.15 120
EBITDA(2) excluding
reorganization costs 13,039 10,040 30
EBITDA 13,039 9,444 38
Cash flow excluding
reorganization costs(3) 13,011 9,203 41
Cash flow(3) 13,011 8,607 51
- per unit .50 .39 28
Maintenance capital
expenditures 1,626 3,398 (52)
Principal repayments 750 n/a
Cash available for growth and
distributions excluding
reorganization costs
(Note 13) - $ 10,388 n/a
- per unit 0.40
Cash available for growth and
distributions - $ 10,388 n/a
(Note 13) - per unit 0.40
Cash distributions
declared - $ 8,453 n/a
(Note 13) - per unit 0.315
Growth and acquisition capital
expenditures 10,669 4,234 152
Weighted average units
outstanding (000s)(1) 25,966 21,817 19
Total units outstanding (000s)(1) 26,836 21,817 23
--------------------------------
Year Ended December 31
(audited)
%Increase
2003 2002 (Decrease)
---------------------------------
Revenue 155,032 111,666 39
Operating income before
reorganization costs 36,423 21,443 70
Operating income 31,228 20,847 50
Net earnings 26,811 12,417 116
Net earnings per unit ($)(1) 1.14 0.60 90
Diluted net earnings per unit ($) 1.12 0.59 90
EBITDA(2) excluding
reorganization costs 51,294 34,890 47
EBITDA 46,099 34,294 34
Cash flow excluding
reorganization costs(3) 48,804 31,503 55
Cash flow(3) 43,590 30,907 41
- per unit 1.86 1.49 25
Maintenance capital
expenditures 7,354 9,156 (20)
Principal repayments 1,500 n/a
Cash available for growth and
distributions excluding
reorganization costs
(Note 13) - $ 41,126 n/a
- per unit 1.75
Cash available for growth and
distributions - $ 35,950 n/a
(Note 13) - per unit 1.53
Cash distributions
declared - $ 22,958 n/a
(Note 13) - per unit 0.96
Growth and acquisition capital
expenditures 15,602 19,608 (20)
Weighted average units
outstanding (000s)(1) 23,456 20,788 13
Total units outstanding (000s)(1) 26,836 21,817 23
--------------------------------
/T/
(1) For comparative purposes the previously reported weighted
average and total number of shares outstanding in 2002 have been
converted to units on a 2:1 basis, and per unit calculations have
been restated on this basis.
(2) EBITDA is provided to assist management and investors in
determining the ability of the Fund to generate cash from
operations. It is calculated from the consolidated statements of
income 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.
FINANCIAL AND OPERATIONAL HIGHLIGHTS
- Revenue in 2003 of $155.0 million was 39% higher than 2002.
Fourth quarter revenue of $40.1 million was 17% higher than 2002.
- Oilfield revenue in 2003 was $102.3 million, an increase of 38%
from 2002. Fourth quarter revenue of $27.5 million was 33% higher
than 2002. The increase in revenue resulted from pricing
initiatives, expansion of our service offerings, 2002 growth
capital, high commodity prices and market demand, and above
average drilling activity. Oilfield continues to focus on
internal growth projects, as well as acquisition of satellite
facilities and complementary businesses.
- Industrial revenue in 2003 increased 41% to $52.8 million.
Approximately 80% of the increase resulted from the full year's
impact of the Mohawk acquisition, with the balance coming from
growth in the existing business and the Hazmat acquisition.
Revenue in the fourth quarter was down slightly due to lower than
expected product sales related to the scheduled shut down of the
three processing plants for maintenance. The acquisition of
Hazmat Transportation Services and Waste Logistics in December
2003 generated revenue of approximately $0.5 million. Management
initiatives continue to focus on expanding on-site services and
the collection and processing of hydrocarbon sludges and
wastewater, as well as the acquisition of complementary
businesses.
- Operating costs for 2003 as a percent of revenue decreased to
58.0% as compared to 59.4% in 2002. For the quarter, operating
costs were 56.5% of revenue as compared to 61.8% in 2002. The
reduction in operating costs resulted from several management
initiatives to reduce costs and improve productivity. In prior
years certain indirect operating overheads were included in
operating costs. Effective the fourth quarter and year ended
December 31, 2003, these costs have been reclassified to selling,
general and administrative costs and the comparative figures
reclassified.
- Operating income for the year, excluding for reorganization
costs, improved 70% to $36.4 million (23.5% of revenue) from
$21.4 million (19.2%) in 2002. Operating income for the quarter
improved 64% to $9.5 million.
- Cash flow, excluding reorganization costs, increased 55% to
48.8 million for the year and 41% to $13.0 million for the
quarter. Cash available for growth and distribution, excluding
reorganization costs, was $41.1 million ($1.75 per unit) for the
year and $10.4 million (40 cents per unit) for the quarter.
Distributions of 96 cents were declared in 2003 of which 31.5
cents per unit relates to the fourth quarter. Newalta Corporation
converted to an income fund on March 1, 2003 and declared initial
monthly distributions of 9 cents. Monthly distributions were
increased to 10.5 cents in September 2003 and were increased
again for March 2004 to 12.5 cents. This represents a 39%
increase in distributions since the Fund was created one year
ago.
- Net earnings for the year were 116% higher and net earnings for
the quarter were 154% higher than 2002. Diluted earnings per unit
for the year were $1.12 or 90% improvement over 2002. Diluted
earnings per unit for the quarter improved 120% to $0.33.
- Selling, general and administrative costs of $13.9 million were
9.0% of revenue in 2003 as compared to $10.5 million, or 9.4% of
revenue, in 2002. The increase is primarily attributable to
increased bonuses ($0.8 million), non-cash stock based
compensation expense ($0.8 million) and additional staff ($1.2
million) to handle the growth of the business. Management's goal
is to maintain selling, general and administrative costs, as a
percent of revenue, at 10% or less.
- Depreciation and site remediation for 2003 increased $1.6
million to $12.2 million (7.9% of revenue) from $10.6 million
(9.5% of revenue) in 2002. The increase reflects the 2003 capital
program and the full year's impact of the Mohawk acquisition in
September 2002.
- Interest expense is lower in 2003 because of lower debt levels
mainly as a result of the October 2003 equity issue.
- Reorganization costs, which totaled $5.8 million ($5.0 million
after tax or 21 cents/unit) for 2002 and 2003, reflect the costs
of the conversion of the Corporation into an income fund.
- During 2003, the Fund anticipated capital spending of $11.5
million, excluding acquisitions, which was split $7.5 million for
maintenance capital and $4.0 million for growth. Actual capital
spending for 2003 was $7.4 million on maintenance and $4.1
million on growth. As a result of the equity issue in October
2003, approximately $3.0 million of growth capital was
accelerated and spent in the fourth quarter. Acquisition spending
for the year totaled $8.5 million, the majority of which was
spent in December 2003 and had little impact on 2003 performance.
- The financial performance for 2003 combined with our
disciplined approach to investing capital set new standard for
returns on investment and capital. EBITDA, excluding
reorganization costs, as a percent of average fixed assets,
including goodwill, increased to 22.9% from 16.5% in 2002. Return
on capital, excluding reorganizational costs, more than doubled
to 16.2% from 7.7% in 2002.
- Our 2003 financial performance combined with the October 2003
equity issue, which netted proceeds of $43 million, resulted in
net debt at December 31, 2003 of $1.0 million and net working
capital of $21.6 million. Our balance sheet is very strong, with
substantial unutilized debt capacity.
2003 SUMMARY
Management entered 2003 with clear priorities:
- To increase distributions;
- To improve profitability;
- To expand the existing business;
- To complete accretive acquisitions in the existing business;
- To continue the development of accretive acquisition
opportunities in eastern Canada.
2003 ACHIEVEMENTS
The cash flow available for growth and distributions generated in
2003 exceeded our declared distributions since March 1, 2003. In
2003, we completed a number of initiatives to increase revenue,
reduce costs and improve productivity. We established strategic
alliances with industry partners and suppliers and expanded our
on-site centrifuge program. We completed the acquisition of our
first oilfield satellite facility in July and acquired an
industrial waste transportation and on-site services business in
December. We set new performance standards every quarter as
revenue grew and profitability was enhanced. Based on these new
performance standards, monthly distributions were increased in
September from 9 cents to 10.5 cents per unit. We also completed
a bought deal financing in October for net proceeds of $43
million, which reduced our net debt. In the fall, we accelerated
our 2004 capital program. We also continued to develop
acquisition opportunities in western Canada as well as eastern
Canada.
OUTLOOK FOR 2004
The broad range of productivity, price and costs initiatives that
we completed in 2003 will continue to contribute to our
performance in 2004. We have committed $20 million in growth
capital to expand and improve our operations. These investments
are well underway and will begin to contribute to bottom line
results in the second half of 2004.
We executed acquisitions in December 2003 and January and
February 2004 at responsible prices and where Newalta can add
value. We are pursuing several other very attractive
opportunities and we expect to maintain high activity throughout
2004.
Lastly, our long-term vision remains to establish Newalta as the
clear national industry leader with operations coast to coast.
We delivered on all our commitments in 2003 by remaining very
disciplined and focused. We are making excellent progress on our
2004 objectives.
Financial statements and notes to the financial statements are
attached.
Management will hold a conference call on Thursday, March 18,
2004 at 11:00 a.m. (ET) to discuss the Fund's performance for the
fourth quarter and fiscal year ended December 31, 2003. To
listen, please dial 1-800-814-4853 or 416-640-4127, or log onto
the web cast at www.newalta.com or www.ccnmatthews.com. For those
unable to listen to the live event, a rebroadcast will be
available until midnight, Thursday, March 25, 2004. Please dial
416-640-1917 or 1-877-289-8525 and enter the pass code 21037517.
This document may contain forward-looking statements, relating to
the operations or to the environment in which Newalta operates,
which are based on the Fund'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 the Fund'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 those set forth in this report
and other public filings. 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 disclaims any intention or
obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.
Newalta Income Fund maximizes the inherent value in certain
industrial wastes through recovery of saleable products and
recycling, rather than disposal. Through an integrated network of
37 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
strong track record of profitable growth and environmental
stewardship, Newalta is focused on leveraging its proven
competencies in new service sectors and geographic markets from
coast to coast.
/T/
Newalta Income Fund
Consolidated Balance Sheets
As At December 31 ($000s) 2003 2002
-----------------------------------------------------------------------
Assets
Current assets
Cash 12,529 -
Accounts receivable 30,705 27,924
Inventories (Note 5) 7,897 7,923
Prepaid expenses 979 730
Future income tax (Note 11) 2,000 -
-----------------------------------------------------------------------
54,110 36,577
Capital assets and intangibles (Note 6) 217,517 207,642
Goodwill 10,782 10,782
Deferred costs 854 811
-----------------------------------------------------------------------
283,263 255,812
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Liabilities
Current liabilities
Bank indebtedness - 759
Accounts payable 17,162 17,626
Distribution payable (Note 14) 2,818 -
Current portion of long-term debt (Note 7) 3,002 2,339
Current portion of debentures - 6,000
-----------------------------------------------------------------------
22,982 26,724
Long-term debt (Note 7) 10,500 38,751
Debentures (Note 8) - 3,000
Future income taxes (Note 11) 37,841 32,024
Site restoration 2,936 2,732
-----------------------------------------------------------------------
74,259 103,231
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Unitholders' Equity
Unitholders' capital (Note 9) 149,798 98,269
Contributed surplus (Note 3) 1,041 -
Accumulated earnings 81,123 54,312
Accumulated cash distributions (Note 14) (22,958) -
-----------------------------------------------------------------------
209,004 152,581
-----------------------------------------------------------------------
283,263 255,812
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Newalta Income Fund
Consolidated Statements of Operations and Accumulated Earnings
For the Periods Ended Three Months Ended Year Ended
December 31 ($000s) December 31 December 31
2003 2002 2003 2002
(unaudited)
-----------------------------------------------------------------------
Revenue 40,098 34,235 155,032 111,666
-----------------------------------------------------------------------
Expenses
Operating 22,659 21,162 89,963 66,281
Selling, general and
administrative 4,392 3,038 13,908 10,533
Interest (Note 7) 431 773 2,670 2,830
Depreciation and site
restoration 3,075 2,855 12,201 10,617
Loss (gain) on disposal 8 (5) (133) (38)
Reorganization (Note 2) - 596 5,195 596
-----------------------------------------------------------------------
30,565 28,419 123,804 90,819
-----------------------------------------------------------------------
Operating income 9,533 5,816 31,228 20,847
Provisions for income taxes
(Note 11)
Current 200 197 600 645
Future 570 2,167 3,817 7,785
-----------------------------------------------------------------------
770 2,364 4,417 8,430
-----------------------------------------------------------------------
Net earnings 8,763 3,452 26,811 12,417
Accumulated earnings,
beginning of period 72,360 50,860 54,312 44,282
Goodwill write-down, net of
tax (Note 3b) - - - (2,232)
Stock appreciation rights
(Note 3c) - - - (155)
-----------------------------------------------------------------------
Accumulated earnings, end of
period 81,123 54,312 81,123 54,312
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-----------------------------------------------------------------------
Earnings per unit (Note 12) $ 0.34 $ 0.16 $ 1.14 $ 0.60
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Diluted earnings per unit
(Note 12) $ 0.33 $ 0.15 $ 1.12 $ 0.59
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Newalta Income Fund
Consolidated Statements of Cash Flows
For the Periods Ended Three Months Ended Year Ended
December 31 ($000s) December 31 December 31
(unaudited)
2003 2002 2003 2002
-----------------------------------------------------------------------
Net inflow (outflow) of cash
related to the following
activities:
Operating activities
Net earnings 8,763 3,452 26,811 12,417
Items not requiring cash:
Depreciation and site
restoration 3,075 2,855 12,201 10,617
Future income taxes 570 2,167 3,817 7,785
Stock compensation expense 595 138 913 126
Loss (gain) on disposal of
fixed assets 8 (5) (133) (38)
Reorganization - - (19) -
-----------------------------------------------------------------------
Cash flow from operations 13,011 8,607 43,590 30,907
Decrease (increase) in working
capital 2,286 (2,133) (3,321) (6,886)
-----------------------------------------------------------------------
15,297 6,474 40,269 24,021
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Investing activities
Additions to capital assets (12,295) (7,632) (20,456) (22,764)
Net proceeds on sale of
capital assets 14 38 1,530 252
Deferred costs (14) (145) (43) (673)
Site restoration (247) (89) (311) (37)
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(12,542) (7,828) (19,280) (23,222)
-----------------------------------------------------------------------
Financing activities
Issuance of units 43,089 7 43,028 28,078
Increase (decrease) in debt
and debentures (25,751) 588 (30,589) (19,262)
Distribution to unitholders (8,053) - (20,140) -
-----------------------------------------------------------------------
9,285 595 (7,701) 8,816
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Net cash inflow (outflow) 12,040 (759) 13,288 9,615
Cash (bank indebtedness),
beginning of period 489 - (759) (10,374)
-----------------------------------------------------------------------
Cash (bank indebtedness),
end of period 12,529 (759) 12,529 (759)
-----------------------------------------------------------------------
Supplementary information:
Interest paid 406 517 2,763 2,549
Income taxes paid 162 124 575 664
NEWALTA INCOME FUND
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2003 and 2002
($000s)
/T/
Newalta Income Fund (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 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
Newalta Income Fund was established by Deed of Trust dated
January 16, 2003. Pursuant to the terms of a Plan of Arrangement,
the Fund acquired all of the common shares of Newalta on March 1,
2003. Prior to the Plan of Arrangement the consolidated financial
statements include the accounts of Newalta and its subsidiaries.
After giving effect to the Plan of Arrangement, the consolidated
financial statements include the accounts of the Fund and its
wholly owned subsidiaries. For reporting purposes the Fund is
considered the continuing entity of Newalta.
These consolidated financial statements have been prepared by
management in accordance with Canadian generally accepted
accounting principles, and include the following significant
accounting policies:
Cash and Cash Equivalents
Cash is defined as cash and short-term deposits with maturities
of three months or less, when purchased.
Financial Instruments
The carrying values of accounts receivable and accounts payable
approximate the fair value of these financial instruments due to
their short term maturity. The Fund's credit risk from Canadian
customers is minimized by its broad customer base and diverse
product lines. In the normal course of operations, the Fund is
exposed to movements in the U.S. dollar exchange rates, relative
to the Canadian dollar. The Fund sells and purchases some product
in U.S. dollars. The Fund does not utilize long-term hedging
instruments but rather chooses to be exposed to current U.S.
exchange rates as increases or decreases in exchange rates are
not significant over the period of the outstanding receivables
and payables.
Inventory
Inventory is comprised of oil, recycled products, spare parts and
supplies, and is recorded at the lower of cost and net realizable
value (see Note 5).
Capital Assets and Intangibles
Capital assets are stated at cost. The carrying values of capital
assets and intangibles are reviewed annually to determine if the
value of any asset is impaired. Any amounts so determined would
be written off in the year of impairment. Depreciation rates are
calculated to amortize the costs, net of salvage value, over the
assets' estimated useful lives. Plant and equipment includes
buildings, site improvements, tanks, and mobile equipment and is
depreciated at rates of 5-10% on the declining balance or from
5-14 years straight line, depending on the expected life of the
asset. Intangible assets consist of certain production processes,
trademarks, and agreements, which are amortized over the period
of the contractual benefit of 5-20 years, straight line.
Goodwill
The Fund annually, on September 30, assesses goodwill, and its
potential impairment, on a reporting unit basis by determining
whether the balance of goodwill can be recovered through the
estimated discounted operating cash flows of each reporting unit
over their remaining life. As at December 31, 2003 the goodwill
relates entirely to the oilfield reporting unit and is not
impaired.
Deferred costs
Costs relating to the Fund's future acquisition plans have been
deferred at year end. As acquisitions are finalized these costs
will be capitalized as part of the acquisition. In the event an
acquisition plan is discontinued, the deferred costs will be
written off in the year of discontinuance.
Site Restoration
The Fund provides for estimated future site restoration costs for
all its facilities based on a 20-year useful life. The provision
for site restoration has been included in depreciation and
amortization. Costs are estimated by management, in consultation
with the Fund's engineers, on the basis of current regulations,
costs, technology and industry standards. Actual site restoration
costs are charged against the provision as incurred.
Revenue Recognition
The major sources of revenue for the Fund relate to the receipt
of waste material for processing and the sale of recycled
products recovered from the waste. Revenue is recognized when
waste material is received and the liability for the waste is
assumed by the Fund. Revenue on recycled products is recognized
when products are delivered to customers or pipelines.
Income Taxes
The Fund is a unit trust for income tax purposes, and is taxable
on taxable income not allocated to the unitholders. During the
year, the Fund allocated all of its taxable income to the
unitholders, and accordingly, no provision for income taxes is
required at the Fund level. Newalta is subject to corporate
income taxes and follows the liability method of accounting for
income taxes.
The Fund follows the liability method of tax allocation. Future
income tax assets and liabilities are measured based upon
temporary differences between the carrying values of assets and
liabilities and their tax basis. Income tax expense (recovery) is
computed based on the change during the year in the future tax
assets and liabilities. Effects of changes in tax laws and tax
rates are recognized when substantively enacted.
Earnings per Unit
Basic earnings per unit are calculated using the weighted average
number of units outstanding during the year. Diluted earnings per
unit is calculated by adding the weighted average number of units
outstanding during the year to the additional units that would
have been outstanding if potentially dilutive units had been
issued, using the "treasury stock" method.
Unit Rights Incentive Plan
The Fund has a unit-based compensation plan (Note 10). Under the
Trust Unit Rights Incentive Plan the Fund may grant to its
management, directors, and employees up to 2,181,832 rights.
Under the former stock option plan, the Company could grant
options for up to 3,158,625 common shares. The exercise price of
each right equals or exceeds the market price of the Fund's
common shares on the date of grant and the maximum term of a
right is 7 years. Rights vest 20% on the date of grant and 20%
annually thereafter. Each right entitles the participant to
receive from the Fund one unit. In 2003 the Fund prospectively
adopted the provisions of the Canadian Institute of Chartered
Accountants amended Handbook Section 3870 Stock-Based
Compensation and Other Stock-Based Payments, and accordingly
recorded a non-cash compensation expense for the options issued
during the year (Note 3a).
2) Reorganization
On February 24, 2003, the shareholders and option holders of
Newalta approved a Plan of Arrangement under section 193 of the
Business Corporations Act (Alberta). The purpose of the
Arrangement was to convert Newalta from a corporate entity
concentrating on growth through reinvestment of cash flow to a
trust entity which will distribute a substantial portion of cash
flow to unitholders. The Plan of Arrangement was effected on
March 1, 2003.
Under the Plan of Arrangement the Fund issued units in exchange
for all of the shares of Newalta on a 1:2 basis. Prior to the
exchange, Newalta had approximately 43,634,000 shares outstanding
and, subsequent to the exchange, the Fund had approximately
21,810,000 units outstanding.
Associated with the reorganization, the Fund recorded
reorganization costs of $5,195 or $0.14 per unit after tax in
2003. The reorganization costs incurred in 2002 totaled $596, or
$0.02 per unit after tax.
Effective March 1, 2003, the Fund established a Trust Unit Rights
Incentive Plan (the "Rights Incentive Plan") to replace the stock
option plan of Newalta. In accordance with the CICA Handbook
section 3870 regarding stock based compensation, grants under the
Rights Incentive Plan are valued using the intrinsic value method
at the time of issuance. The expense thus calculated is described
in note 10. Rights are valued as options using a Black-Scholes
option pricing model. Prior to March 1, 2003, Newalta had
outstanding both options and stock appreciation rights. The
options were issued prior to January 1, 2002 and, in accordance
with CICA Handbook section 3870, had been neither valued nor
expensed in the financial statements. The stock appreciation
rights were issued after January 1, 2002 and were expected to be
settled in cash. Accordingly an expense was recognized in each
period based on the gain in the underlying value of the common
shares of Newalta. For the first two months of 2003, prior to
reorganization into the Fund, Newalta expensed $318 in stock
appreciation rights expense. In the fourth quarter of 2002,
Newalta recognized $138 as the stock appreciation rights expense,
and for the year ending December 31, 2002, Newalta recognized an
expense of $126.
3) Change in accounting policies
a) During the fourth quarter of 2003, the Fund adopted certain
amended provisions of the Canadian Institute of Chartered
Accountants 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 has
chosen to early adopt these provisions on a prospective basis,
which has resulted in a full-year increase in contributed surplus
for this change, and a corresponding non-cash charge of $0.6
million ($0.03 per unit). No stock options remain outstanding
from years prior to 2003.
b) Effective January 1, 2002, the Fund adopted the
recommendations of the CICA Handbook section 3062 regarding
goodwill. Under the revised standard, goodwill is not amortized
on a regular basis, but is examined annually for impairment. The
Fund annually assesses impairment on a reporting unit basis by
determining whether the balance of goodwill can be recovered
through the estimated discounted operating cash flows of each
reporting unit over their remaining life. At the beginning of
2002 it was determined that the value of the goodwill in the
Industrial reporting unit was impaired, and in accordance with
the CICA Handbook, both goodwill and retained earnings were
reduced by $3.1 million ($2.2 million after tax). The remaining
goodwill relates to the Oilfield reporting unit and is not
impaired.
c) Effective January 1, 2002, the Fund adopted the
recommendations of the CICA Handbook section 3870 concerning
stock based compensation. Stock appreciation rights settled in
equity are valued on the gain incurred during the period based on
the market price of the underlying stock. At the beginning of
2002 the value of stock appreciation rights held by employees,
calculated as the gain incurred on the market price of the
underlying stock, was $155, and in accordance with section 3870
of the CICA Handbook this amount was accrued and accumulated
earnings were reduced.
4) Acquisitions
a) Effective December 1, 2003, the Fund acquired the assets of
Hazmat Transportation Services and Waste Logistics for $5,220
cash. Also, effective July 1, 2003, the Fund acquired a satellite
oilfield facility located in southwest Saskatchewan. The purchase
price of $3,212 was funded by $712 of cash plus the issuance of
250,000 units valued at $10.00 per unit. The value of the
consideration given and the assets received were:
/T/
July 1 December 1
Acquisition Acquisition Total
-----------------------------------------
Units issued 2,500 - 2,500
Cash 712 5,220 5,932
-----------------------------------------
-----------------------------------------
Total consideration 3,212 5,220 8,432
Plant and equipment 2,912 4,432 7,344
Intangibles 300 750 1,050
Inventory and prepaids - 38 38
-----------------------------------------
-----------------------------------------
Total 3,212 5,220 8,432
-----------------------------------------
-----------------------------------------
/T/
Intangibles include customer lists, non-compete agreements,
licenses, and permits. The above values include some accruals and
are management's best estimate and may be subject to change as
the fair value of the assets acquired are finalized.
b) On September 1, 2002 the Fund acquired a waste lube oil
re-refinery, related collection network and working capital from
Mohawk Lubricants Ltd. The total purchase price of $14,370 was
funded by cash and $6,000 in 9.5% debentures convertible at $8.00
per unit maturing half on September 1, 2003 and half on September
1, 2004. The value of the consideration given, and the assets
received were:
/T/
Debentures issued 6,000
Cash 8,370
-------------
-------------
Total Consideration 14,370
-------------
-------------
Intangibles 1,000
Equipment 9,703
Working capital 3,667
-------------
-------------
Total 14,370
-------------
-------------
Intangibles include the patent to certain production processes and
the trademarks of the associated products.
5) Inventories
2003 2002
------------------
------------------
Burner fuel 1,403 1,028
Recycled and processed products 4,382 4,535
Recovered oil 1,324 830
Parts and supplies 788 1,530
------------------------------------------------------
Total inventory 7,897 7,923
------------------------------------------------------
------------------------------------------------------
6) Capital Assets and Intangibles
2003 2002
-----------------------------------------------------------------------
Accumulated Net Book Accumulated Net Book
Cost Depreciation Value Cost Depreciation Value
-----------------------------------------------------------------------
Plant and
equipment 278,288 68,449 209,839 258,147 57,178 200,969
Intangibles 2,056 63 1,993 1,000 12 988
Land 5,685 - 5,685 5,685 - 5,685
-----------------------------------------------------------------------
286,029 68,512 217,517 264,832 57,190 207,642
-----------------------------------------------------------------------
-----------------------------------------------------------------------
7) Long Term Debt
2003 2002
---------------------------------------------------------------------
Reducing term facility 13,500 41,000
Other 2 90
---------------------------------------------------------------------
13,502 41,090
Less current portion 3,002 2,339
---------------------------------------------------------------------
10,500 38,751
---------------------------------------------------------------------
---------------------------------------------------------------------
/T/
On February 20, 2003, the Fund entered into an agreement for a
new credit facility with a syndicate arranged by two Canadian
chartered banks. The credit facility provides for a total of
$65,000 comprised of a $25,000 extendable term facility, a
$15,000 reducing 5-year term facility, and a $25,000 operating
facility. The credit facility is secured principally by a general
security agreement over the Fund's assets. Subject to certain
conditions the term facilities charge interest at prime plus 0.5%
or at Bankers Acceptance base plus 2.0%, at the Fund's option.
The operating facility charges interest at prime or at Bankers
Acceptance base plus 1.5%, also at the Fund's option. Interest
paid during the year amounted to $2,763 (2002 - $2,549) of which
$2,731 (2002 - $2,488) related to long term debt and debentures.
At December 31, 2003 the Fund had utilized $13,500 of the
reducing term facility, and the extendable term and the operating
facilities were unutilized. Principal repayments on the term
facility are $750 per quarter.
8) Debentures
At December 31, 2002 the Fund had $9.0 million of convertible
debentures outstanding. During 2003, $3.0 million of the
debentures were exchanged for cash and $6.0 million were
exchanged for 750,000 units. There are no debentures outstanding
as at December 31, 2003.
9) 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.
During the year 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, 2001 35,408 69,481
Issued for stock options exercised 7 22
Issued for cash 8,219 30,000
Share issue costs - (1,944)
Future tax effect on share issue costs - 710
---------------------------
Shares issued as at December 31, 2002 43,634 98,269
Non-board lot repurchased (13) (62)
Shares cancelled under the plan of
arrangement (Note 2) (43,621) (98,207)
---------------------------
- -
Units issued under the plan of
arrangement (Note 2) 21,811 98,207
Rights exercised 225 2
Units issued for cash 3,800 43,089
Units exchanged for debentures (Note 8) 750 6,000
Units issued on asset purchase (Note 4a) 250 2,500
-----------------------------------------------------------------------
Units outstanding as at December 31, 2003 26,836 149,798
-----------------------------------------------------------------------
/T/
The Fund declared a monthly distribution of $0.09 per unit for
each of the months of March through August, inclusive. In
September, the monthly distribution was increased to $0.105 per
unit. For the year a total of $0.96 per unit, or approximately
$22,958 has been distributed to unitholders as of January 15,
2004.
10) Trust Unit Rights Incentive Plan
On February 24, 2003, the Shareholders of Newalta approved the
Rights Incentive Plan. On March 1, 2003, the Fund granted
1,045,000 Rights under the plan to certain executives, trustees,
and employees. The Rights vest 20% annually from March 1, 2004
until March 1, 2008 and are exercisable at market value at the
time of the grant, $9.30 per unit. In addition, pursuant to the
Plan of Arrangement, the outstanding stock options as of March 1,
2003 were exchanged for Exchange Rights that are exercisable for
units at $0.01 per unit. 225,000 Exchange Rights were exercised
during the year. The remaining 81,000 vest at various dates over
the next three years. On May 22, 2003 the Fund granted 275,000
Rights to certain trustees, executives, and employees. On
December 15, 2003 the Fund granted 12,500 Rights to certain
trustees.
During the fourth quarter of 2003, the Fund adopted the
provisions of the Canadian Institute of Chartered Accountants
amended Handbook Section 3870 Stock-Based Compensation and Other
Stock-Based Payments (Note 3a). The Fund has chosen to early
adopt the provisions on a prospective basis, which has resulted
in a full-year increase in contributed surplus, and a
corresponding non-cash charge of $0.6 million ($0.03 per unit).
Rights were valued as follows:
The Exchange Rights were valued at the date of conversion, March
1, 2003, and the value of the Exchange Rights was attributed to
the Contributed Surplus of the Fund. The market value of the
Exchange Rights was recorded at $446 using the Black-Scholes
option pricing model with the following assumptions: risk-free
interest rate of 6%; yield of 12%; expected life of three years;
and expected volatility of 48%.
The fair market value of the March 1, 2003 Rights was estimated
on the grant date using the Black-Scholes option pricing model
with the following assumptions: risk-free interest rate of 4.25%;
yield of 12%; expected life of seven years; and expected
volatility of 48%.
The May 22, 2003 Rights were issued at the market price of $9.08
per unit, and valued on the date of issuance using a
Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 3.6%; yield of 11.9%;
expected life of seven years; and expected volatility of 16.8%.
The fair market value of the December 15, 2003 Rights was
estimated on the grant date using the Black-Scholes option
pricing model with the following assumptions: risk-free interest
rate of 3.9%; yield of 8%; expected life of seven years; and
expected volatility of 18.4%.
Under the Trust Unit Rights Incentive Plan the Fund may grant to
its management, directors, and employees up to 2,181,832 rights.
Under the former stock option plan, the Company could grant up to
3,158,625 options for common shares. The exercise price of each
right equals or exceeds the market price of the Fund's units on
the date of grant and the current maximum term of a right is 7
years. Rights vest 20% annually, twelve months from the date of
grant and 20% annually thereafter. Each right entitles the
participant to receive from the Fund one unit.
/T/
Rights/Shares reserved under the plans (000s) 2003 2002
-----------------------------------------------------------------------
Total shares available for grant 630 3,159
Shares under option - 2,529
Cancelled under the plan of arrangement 630 -
--------------------
Shares available for future grants - 630
Total units available for grant 2,182 -
Rights granted 1,333 -
--------------------
Units available for grant 849 -
--------------------
Newalta Options Options Weighted Average
(000's) Exercise Price ($)
-----------------------------------------------------------------------
As at December 31, 2001 2,426 4.32
Granted 550 3.85
Exercised (7) 3.19
Forfeited (440) 7.02
-----------------------------------------------------------------------
As at December 31, 2002 2,529 3.76
Converted to exchange rights (2,126) 3.30
Cancelled and forfeited (403) 6.35
-----------------------------------------------------------------------
As at December 31, 2003 - -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Exercisable at December 31, 2003 - -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Newalta Income Fund Rights Rights Weighted Average
(000's) Exercise Price ($)
-----------------------------------------------------------------------
As at December 31, 2002 - -
Converted from options 307 0.01
Granted 1,333 9.31
Exercised (225) 0.01
Forfeited (1) 0.01
-----------------------------------------------------------------------
As at December 31, 2003 1,414 8.78
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Exercisable at December 31, 2003 - -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Rights Weighted Options
Outstanding Average Weighted Exercisable Weighted
Range of December Remaining Average December Average
Exercise 31, 2003 Life Exercise 31, 2003 Exercise
Prices ($) (000's) (Years) Price ($) (000's) Price ($)
-----------------------------------------------------------------------
0.01 81 4.4 0.01 - -
9.08 to 9.35 1,320 6.2 9.25 - -
15.60 13 7.0 15.60 - -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
1,414 6.1 8.78 - -
-----------------------------------------------------------------------
-----------------------------------------------------------------------
/T/
11) Income Taxes
Future income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Fund's
future tax liabilities and assets are as follows:
/T/
2003 2002
-----------------------------------------------------------------------
Future income tax liabilities:
Capital assets 40,205 32,762
Goodwill 1,351 1,253
Deferred costs 298 286
-----------------------------------------------------------------------
41,854 34,301
-----------------------------------------------------------------------
Future income tax assets:
Non-capital loss carry forwards 4,459 257
Less current portion (2,000) -
Site restoration 1,026 963
Trust unit issuance costs 528 1,057
-----------------------------------------------------------------------
4,013 2,277
-----------------------------------------------------------------------
Net future income tax liability 37,841 32,024
-----------------------------------------------------------------------
-----------------------------------------------------------------------
/T/
Realization of future income tax assets is dependent on
generating sufficient taxable income during the period in which
the temporary differences are deductible. Although realization is
not assured, management believes it is more likely than not that
all future income tax assets will be realized based on reversals
of future income tax liabilities, projections of operating
results and tax planning strategies available to the Fund and its
subsidiaries.
The income tax expense differs from the amount computed by
applying Canadian statutory rates to operating income for the
following reasons:
/T/
2003 2002
-----------------------------------------------------------------------
Earnings of the Fund before taxes
and distributions to unitholders 31,228 20,847
Current statutory income tax rate 37% 40%
-----------------------------------------------------------------------
Computed tax expense at statutory rate 11,540 8,235
Increase (decrease) in taxes resulting from:
Intercompany interest expense related to
shareholder notes and eliminated upon
consolidation (7,776) -
Capital taxes 600 645
Other 327 108
Effect of substantively enacted tax
rate change (274) (558)
-----------------------------------------------------------------------
Reported income tax expense 4,417 8,430
-----------------------------------------------------------------------
-----------------------------------------------------------------------
/T/
During 2003 the Alberta government reduced the corporate tax rate
and the Fund accordingly accounted for the recovery of future
income tax due to the change in tax rates.
12) Net Earnings per Unit
Basic per unit calculations for the period ending December 31,
2003 were based on the weighted average number of units
outstanding for the quarter and for the year. Diluted net
earnings included the potential dilution of the outstanding
rights and the convertible debentures. The prior year's per share
calculations and number of shares have been retroactively
restated to reflect the 2 for 1 conversion of shares into units
effective March 1, 2003.
/T/
Three Months Ended Year Ended
December 31 December 31
-----------------------------------------------------------------------
2003 2002 2003 2002
-----------------------------------------------------------------------
Weighted average number
of units 25,966 21,817 23,456 20,789
Net additional units if
rights exercised 549 118 351 124
Additional units if
debentures converted - 1,011 365 511
-----------------------------------------------------------------------
Diluted weighted average
number of units 26,515 22,946 24,172 21,424
-----------------------------------------------------------------------
13) Reconciliation of Unitholder Distributions Declared and Paid
Three Months Year
Ended Ended
December 31 December 31
2003 2003
------------ -----------
Cash flow from operations before
reorganization costs 13,011 48,804
Maintenance capital expenditures (1,626) (7,354)
Site restoration and deferred costs (261) (354)
Proceeds from fixed asset sales 14 1,530
Debt repayment (750) (1,500)
---------------------------------------------------------------------
Cash available for growth and distribution
before reorganization costs 10,388 41,126
Reorganization costs - (5,176)
------------ -----------
Cash available for growth and distribution 10,388 35,950
------------ -----------
------------ -----------
Unitholder distributions declared - $ 8,453 22,958
- per unit 0.315 0.960
Unitholder distributions paid - $ 8,053 20,140
- per unit 0.315 0.855
14) 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)
------------
------------
/T/
15) Commitments
(a) Lease Commitments
The Fund has annual commitments for leased office and plants of
$1,750. The office leases expire in 2010, the plant lease is
renewable. The Fund also has annual surface lease costs of $250.
(b) Letters of Guarantee and Surety Bonds
As of December 31, 2003, the Fund had issued Letters of Guarantee
and Surety Bonds in respect of compliance with environmental
licenses in the amount of $2,435 and $5,374 respectively.
16) Comparative Figures
Certain of the prior year's comparative figures have been
reclassified to conform to the current year's presentation.
17) 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 December 31 ($000's)
Inter- Corporate, Consolidated
2003 Oilfield Industrial segment Unallocated(5) Total
-----------------------------------------------------------------------
External revenue 27,459 12,639 40,098
Inter segment
revenue(4) 4 35 (39) -
Operating expense 12,526 10,172 (39) 22,659
Depreciation &
site restoration 1,819 1,065 199 3,083
-----------------------------------------------------------------------
Net margin 13,118 1,437 (199) 14,356
Selling, general
and
administrative 4,392 4,392
Interest expense 431 431
-----------------------------------------------------------------------
Operating income 13,118 1,437 (5,022) 9,533
-----------------------------------------------------------------------
Capital
expenditures 4,882 6,865 548 12,295
Goodwill 10,782 10,782
Total assets 166,659 94,256 22,348 283,263
------------------------------------------------------
------------------------------------------------------
Corporate
Inter- and Consolidated
2002 Oilfield Industrial segment Unallocated(5) Total
-----------------------------------------------------------------------
External revenue 20,719 13,516 34,235
Inter segment
revenue(4) 150 36 (186) -
Operating expense 10,712 10,636 (186) 21,162
Depreciation &
site restoration 1,688 1,003 159 2,850
-----------------------------------------------------------------------
Net margin 8,469 1,913 (159) 10,223
Selling, general
and
administrative 3,038 3,038
Interest expense 773 773
Reorganization
costs 596 596
-----------------------------------------------------------------------
Operating income 8,469 1,913 (4,566) 5,816
-----------------------------------------------------------------------
Capital
expenditures 5,631 1,439 562 7,632
Goodwill 10,782 10,782
Total assets 156,507 94,589 4,716 255,812
------------------------------------------------------
------------------------------------------------------
(4) Inter-segment revenues are recorded at market, less the costs of
serving external customers.
(5) Management does not allocate operating, selling, general
& administrative, taxes, and interest costs in the segment analysis.
For the year ended December 31 ($000's)
Corporate
Inter- and Consolidated
2003 Oilfield Industrial segment Unallocated(5) Total
-----------------------------------------------------------------------
External revenue 102,264 52,768 155,032
Inter segment
revenue(4) 52 130 (182) -
Operating expense 48,605 41,540 (182) 89,963
Depreciation &
site restoration 7,093 4,191 784 12,068
-----------------------------------------------------------------------
Net margin 46,618 7,167 (784) 53,001
Selling, general
and
administrative 13,908 13,908
Interest expense 2,670 2,670
Reorganization
costs 5,195 5,195
-----------------------------------------------------------------------
Operating income 46,618 7,167 (22,557) 31,228
-----------------------------------------------------------------------
Capital
expenditures 13,497 8,310 1,149 22,956
Goodwill 10,782 10,782
Total assets 166,659 94,256 22,348 283,263
------------------------------------------------------
------------------------------------------------------
Corporate
Inter- and Consolidated
2002 Oilfield Industrial segment Unallocated(5) Total
-----------------------------------------------------------------------
External revenue 74,243 37,423 111,666
Inter segment
revenue(4) 389 183 (572) -
Operating expense 38,291 28,562 (572) 66,281
Depreciation &
site restoration 6,824 3,133 622 10,579
-----------------------------------------------------------------------
Net margin 29,517 5,911 (622) 34,806
Selling, general
and
administrative 10,533 10,533
Interest expense 2,830 2,830
Reorganization
costs 596 596
-----------------------------------------------------------------------
Operating income 29,517 5,911 (14,581) 20,847
-----------------------------------------------------------------------
Capital
expenditures 11,147 15,636 1,981 28,764
Goodwill 10,782 10,782
Total assets 156,507 94,589 4,716 255,812
------------------------------------------------------
------------------------------------------------------
For further information: Newalta Income Fund - Ronald L. Sifton, Senior Vice President, Finance and Chief Financial Officer, (403) 206-2684; Website: www.newalta.com