Newalta's Growth Continues in Third Quarter
CALGARY, ALBERTA--Newalta Income Fund (TSX: NAL.UN) today announced unaudited financial results for the nine months ended September 30, 2003. Newalta Income Fund is the successor organization to Newalta Corporation. Information for the three and nine months ended September 30, 2003, along with comparative information for the respective periods in 2002, is provided. Some numbers from the prior year have been restated to conform to those reported for the Fund. Financial Highlights ($000s) /T/ Three Months Ended September 30 (unaudited) %Increase 2003 2002 (Decrease) ----------------------------------------------------------------------- Revenue 41,981 30,446 38 Operating income before reorganization costs 12,377 7,108 74 Operating income 12,377 7,108 74 Net earnings 9,928 4,322 130 Net earnings per unit (cents)(1) 43.3 19.8 119 Diluted EPU (cents) 42.5 19.2 121 EBITDA(2) before reorganization costs 16,112 10,474 54 EBITDA 16,112 10,474 54 Trailing 12 month EBITDA before reorganization costs - - - Trailing 12 month EBITDA - - - Cash flow before reorganization costs (3) 15,315 9,502 61 Cash flow 15,315 9,502 61 Cash available for distribution before reorganization costs (Note 9) - $ 9,996 n/a - per unit 0.44 Cash available for distribution (Note 9) - $ 9,996 n/a - per unit 0.44 Cash distributions declared (Note 9) - $ 6,530 n/a - per unit 0.285 Capital expenditures, net 7,069 14,915 (53) Weighted average units outstanding (000s) (1) 22,907 21,817 5 Total units outstanding (000s)(1) 23,032 21,817 6 ----------------------------------------------------------------------- Nine Months Ended September 30 (unaudited) %Increase 2003 2002 (Decrease) ----------------------------------------------------------------------- Revenue 114,934 77,431 48 Operating income before reorganization costs 26,890 15,031 79 Operating income 21,695 15,031 44 Net earnings 18,048 8,965 101 Net earnings per unit (cents)(1) 80.8 43.9 84 Diluted EPU (cents) 79.4 42.2 88 EBITDA(2) before reorganization costs 38,255 24,850 54 EBITDA 33,060 24,850 33 Trailing 12 month EBITDA before reorganization costs 47,694 32,719 46 Trailing 12 month EBITDA 42,499 32,719 30 Cash flow before reorganization costs(3) 35,774 22,300 60 Cash flow 30,579 22,300 37 Cash available for distribution before reorganization costs (Note 9) - $ 28,360 n/a - per unit 1.27 Cash available for distribution (Note 9) - $ 23,184 n/a - per unit 1.04 Cash distributions declared (Note 9) - $ 14,506 n/a - per unit 0.645 Capital expenditures, net 9,145 20,918 (56) Weighted average units outstanding (000s) (1) 22,330 20,446 9 Total units outstanding (000s)(1) 23,032 21,817 6 ----------------------------------------------------------------------- /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 general and administrative expenses. This measure does not have any standardized meaning prescribed by 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 cash flow before changes in non-cash working capital. FINANCIAL SUMMARY AND OPERATIONAL HIGHLIGHTS Revenue for the third quarter increased 38% to $42.0 million. Operating income improved 74% to $12.4 million and EBITDA was up 54% to $16.1 million. Cash available for distribution was $10.0 million, or 44 cents per unit. During the third quarter, the Fund distributed $6.1 million, or 27 cents per unit. Operating costs declined to less than 60% of revenue; a new performance standard for the Fund. Operating income improved to 29.5% of revenue which also sets a new standard. For the nine months ended September 30, revenue increased 48% compared to 2002. Before reorganization costs, EBITDA was up 54% and operating income increased 79%. Cash available for distribution excluding reorganization costs was $28.4 million, or $1.27 per unit (14.1 cents per month); well above the declared distributions. Revenue, EBITDA and operating income in the first nine months were higher than all of last year. On October 21, 2003, we closed a bought deal financing of 3.8 million units @ $12.00 per unit, increasing the total units outstanding to 26.8 million. Net proceeds of approximately $43.0 million were used to eliminate our net debt. "We entered 2003 with clear action plans to increase revenue, improve profitability and generate cash flow in excess of our committed distributions to investors," said Al Cadotte, President and Chief Executive Officer. "We have achieved our objectives for the year and our focus now is on driving improved performance in 2004." Management's Discussion and Analysis as well as financial statements and notes to the financial statements are attached. Management will hold a conference call on Wednesday, November 19, 2003 at 11:00 a.m. (ET) to discuss the third quarter results. 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, November 26, 2003. Please dial 416-640-1917 or 1-877-289-8525 and enter the pass code 21022649. 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 35 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. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2002 of Newalta Corporation in the fiscal 2002 annual report, and the MD&A in the fiscal 2002 annual report, including the section on risks and uncertainties. ACHIEVEMENTS We have made excellent progress on all of our objectives in 2003. The conversion to an Income Fund on March 1 has been successful and the unit price has increased steadily. An extensive cost reduction and price improvement program was completed, a strategic alliance was established and we completed the acquisition of our first oilfield satellite facility. We set new performance records every quarter as revenue grew and profitability was enhanced. Based on the new standards of financial performance of the Fund, distributions were increased in September from $0.09 per unit per month to $0.105 per unit per month. We also completed a bought deal financing in October with net proceeds of approximately $43.0 million to eliminate our net debt. We have established clear plans to grow our existing business and acquire complementary businesses. We have the opportunities, experienced management and the financial capacity to capitalize on opportunities to maintain the momentum that we have established. We are confident that the action we are taking will further enhance performance of the Fund and continue to increase returns to our investors in 2004 and beyond. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2003 For the three months ended September 30, 2003, Newalta Income Fund (the "Fund") increased revenue 38% to $42.0 million, from $30.4 million in the third quarter of 2002. Operating income improved 74% to $12.4 million, while cash flow improved by $5.8 million, or 61%, to $15.3 million. The third quarter's performance was driven by management initiatives to maximize price, reduce costs, and enhance efficiencies, as well as was strong market demand in both the Oilfield and Industrial divisions. Net earnings increased $5.6 million, or 130%, to $9.9 million compared with $4.3 million in 2002. General and administrative costs increased $0.3 million to $0.8 million, principally as a result of increases in bonus accruals. Interest expense of $0.6 million was slightly less than 2002 primarily due to reduced interest expense resulting from the conversion of debentures. The increase in depreciation to $3.1 million from $2.7 million in 2002 was attributable to 2002 and 2003 capital investments. Income tax expense recognizes the future liability arising from the difference between taxable and accounting income. The Fund is a unit trust for income tax purposes, and is taxable on taxable income not allocated to the unitholders. During the period substantially all the Fund's income was allocated to shareholders. Newalta is subject to corporate income taxes and follows the liability method of accounting for income taxes. Diluted earnings per unit increased over 120% to 42.5 cents per unit from 19.2 cents in 20021. Distributable cash totaled $10.0 million, of which approximately $6.1 million (27 cents per unit) was distributed to unitholders. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2003 For the nine months ended September 30, 2003 revenue improved 48% and operating income before reorganization costs increased 79%. Including the reorganization costs incurred earlier in the year, operating income improved 44% to $21.7 million and net earnings improved 101% to $18.0 million. Reorganization costs were $5.2 million or $0.23 per unit. Cash flow before reorganization costs increased 60% to $35.8 million for the nine months, and including reorganization costs increased $8.3 million, or 37%, to $30.6 million. Cash available for distribution, excluding reorganization costs, was $28.4 million ($1.27 per unit). Cash available for distribution, after reorganization costs, was $23.2 million ($1.04 per unit). Excluding reorganization costs, trailing 12 month EBITDA(2) improved by 46% to $47.7 million. After reorganization costs, diluted earnings per unit were 79.4 cents compared with 42.2 cents per unit2 in 2002. The record performance for the nine months ended September 30, 2003 can be attributed to strong demand for the Fund's services and products and to operating efficiencies. Further reasons for the improvement in performance are outlined in the results of operations for the three months ended September 30, 2003. General and administrative expenses were $2.4 million compared to $1.5 million in 2002. The increase in expenses relates to a non-cash accrual of $0.3 million for the stock appreciation rights expense (2002-nil), plus additional bonus and insurance costs. Interest expense is approximately $0.2 million higher than last year due to the interest incurred on the debentures issued for asset acquisitions last year. As at September 30, 2003 all the remaining debentures have been converted to units. Depreciation expense of $9.1 million was 8% of revenue compared to $7.7 million or 10% of revenue in 2002. The increase in depreciation expense reflects the 2002 capital program and is mainly attributable to the acquisition of assets from Mohawk Lubricants Ltd. The reorganization costs incurred during the nine month period relate to restructuring the Corporation into an income fund. SEGMENTED PERFORMANCE Oilfield The Oilfield segment ("Oilfield") recovers and resells crude oil from oilfield wastes. Oilfield accounts for approximately 63% of the Fund's total assets and 65% of the Fund's revenues. 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 83% of Oilfield revenues come from wastes generated from oil and gas production. Revenue in Oilfield varies with oilfield activity and commodity prices. During the three months ended September 30, 2003 Oilfield recovered a total of 289,000 barrels of crude oil, of which 76,000 barrels were for the Fund's account and sold at an average price of $36.13 per barrel. Comparable recoveries in third quarter of 2002 were 291,000 barrels including 65,000 barrels for the Fund's account, at an average price of $39.24 per barrel. Revenue for the three months from Oilfield increased 44% to $28.7 million and segment margin improved 68% to $13.7 million. The record Oilfield performance resulted primarily from management initiatives and strong oilfield activity, which more than compensated for the 8% reduction in average price received per barrel of oil recovered and sold. The 62% drilling rig utilization rate for the quarter was above the 5 year average of 48% and last year's average of 41%. For the nine months ended September 30, 2003 business fundamentals remained strong with above average drilling and strong market demand. During the nine months Oilfield recovered a total of 878,000 barrels of crude oil, of which 207,000 barrels were sold for the Fund's account at an average price of $39.01 per barrel. For the first nine months of 2002 oil recoveries totalled 800,000 barrels including 175,000 barrels for the Fund's account, at an average price of $34.88 per barrel. Revenue for the nine months increased 40% to $74.8 million, and margin improved 67% to $32.7 million. (1) Per unit calculations for 2002, prior to the reorganization into the Fund, are calculated as if the weighted average number of shares at the time had been converted to units on a 2:1 basis, and have been retroactively restated. (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 general and administrative expenses. This measure does not have any standardized meaning prescribed by 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 cash flow before changes in non-cash working capital. For the three months ended September 30, 2003 capital spending totaled $6.2 million ($3.1 million in 2002) of which $2.5 million was a non-cash equity issue. Capital expenditures for the nine months were $8.7 million ($6.2 million cash) compared to $5.5 million last year. On July 1, 2003, the Fund purchased a satellite oilfield facility in southwest Saskatchewan for $3.2 million. The outlook for Oilfield remains positive for the balance of the year. Continuing strong oilfield activity combined with strategic initiatives to improve profitability should continue to deliver record performance. Industrial The Industrial segment ("Industrial") collects automotive and industrial wastes and waste lubricating oil in western Canada, which are then processed into resalable products. Industrial accounts for approximately 34% of the Fund's total assets and generates approximately 35% of the Fund's total revenue. Industrial produces various recycled products from waste lubricating oil, including base oil, burner fuel, fuel oil, and drilling oil. This year approximately 57% of Industrial revenue comes from product sales with the balance derived from collection fees (compared to 47% product sales in 2002). This increase in product sales is attributed to the business acquired from Mohawk in 2002. For the three months ended September 30, 2003 Industrial revenue increased 27%, to $13.3 million, and margin improved 28%. During the quarter Industrial collected 13.9 million liters of waste oil, compared to 14.9 million litres collected in 2002. Collection revenue increased 25% to $5.9 million for the quarter. For the nine months ended September 30, 2003 revenue improved 68% to $40.1 million, and margin increased 57%. For the nine months Industrial collected 39.9 million liters of waste oil compared to 34.4 million liters in 2002. Capital expenditures for the three months ended September 30, 2003 were $0.4 million compared with $11.3 million in 2002. Year to date capital spending was $1.4 million ($14.2 million in 2002). Capital spending in 2002 included $10.3 million spent to acquire the Mohawk assets. Collection activity and product sales are expected to continue at a high level for the remainder of 2003. Price increases and cost reduction initiatives previously initiated are positively impacting operating results. For the remainder of the year Industrial will focus on developing product markets, increasing collection activities in the waste water market and the centrifugation of sludges. CAPITAL EXPENDITURES Capital expenditures on a cash basis for the three months ending September 30, 2003, net of proceeds of disposition, were $4.6 million, compared with $8.9 million in 2002. Total capital additions, for the quarter, were $7.1 million compared to $14.9 million in 2002. Included in the 2003 spending is $3.2 million for a satellite oilfield facility. Year to date net capital spending was $9.1 million inclusive of the $1.5 million of proceeds from the sale of assets as compared to net capital spending of $20.9 million in 2002. For the nine months growth capital spending totaled approximately $2.0 million, the acquisition cost $3.2 million, and the balance of capital spending, $5.4 million related to sustenance capital. Total sustenance capital expenditures for 2003 are estimated to be approximately $7.0 million. Total growth capital expenditures for 2003, excluding acquisitions, are estimated to be approximately $5.0 million. LIQUIDITY AND FINANCIAL RESOURCES At September 30, 2003, long-term debt (including the current portion) was $39.3 million or approximately 0.9 times trailing 12 month EBITDA, compared with $50.1 million, or 1.5 times trailing 12 month EBITDA a year ago. During the first quarter of 2003, management negotiated a new credit facility with two Canadian chartered banks. The new facility provides for a total of $65.0 million in loan capacity, with equal quarterly payments of $0.75 million. As at September 30, 2003, the $25 million operating line was unutilized, the $25.0 million extendable term facility was fully drawn, and the five year term facility had $14.3 million outstanding. On September 30, 2003 the Fund announced that it had entered into a bought deal to raise $45.6 million of equity through the issuance of 3.8 million units, at $12.00 per unit. On October 21, 2003 the financing closed with net proceeds to the Fund of approximately $43.0 million. The proceeds of the offering will be used to repay the $25.0 million extendable term facility, general corporate purposes and to fund Newalta's growth through investments in existing operations as well as acquisitions. UNITHOLDERS' CAPITAL During the first quarter, under a Plan of Arrangement, the Fund issued 21.8 million units and 0.3 million Exchange Rights in exchange for all of the common shares and options of Newalta Corporation. In March 2003, holders of 0.2 million Exchange Rights exercised resulting in an additional issuance of 0.2 million units. During the year the holders of the $6.0 million of debentures converted their debentures to 750,000 units in the Fund. On July 1, 2003, 250,000 units ($2.5 million) were issued to acquire a satellite Oilfield facility. Outstanding units at the end of the quarter totaled 23.0 million units. /T/ QUARTERLY COMPARISON ($000'S) Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------------- 2003 2002 2003 2002 ----------------------------------------------------------------------- Revenue 41,981 30,446 114,934 77,431 Net earnings 9,928 4,322 18,048 8,965 Net earnings per unit (cents) 43.3 19.8 80.8 43.9 Diluted net earnings per unit (cents) 42.5 19.2 79.4 42.2 /T/ RISKS AND UNCERTAINTIES This report contains forward-looking statements that involve a number of risks and uncertainties, including statements regarding the outlook for the Fund's business and results of operations. There are a number of factors that could cause actual results to differ materially from those indicated. Operational risks include: - The business of the Fund is affected by fluctuations in the level of activity in the oil and natural gas industry, which, in turn, is directly affected by changes in world energy prices. - Fluctuations in commodity prices also affect the value of the crude oil the Fund recovers and resells. In the first nine months of the year oil sales accounted for 12% of total revenue in both 2003 and 2002. - The waste management industry is highly regulated, and the Fund's business is affected by government legislation. - The Fund's business is also affected by seasonality and by competition, which varies by location and by type of service. The Fund currently has no swaps, hedges, nor derivatives in place. Financial risk is limited to the Fund's exposure to fluctuations in interest rates, and to the normal business risk incurred with trade accounts receivable. In the three months ending September 30, 2003, a 1% change in interest rates would have increased/decreased operating income by $0.1 million. Some sales are to customers based in the United States and as a result the Fund is exposed to the risk of currency exchange rate changes. Both exchange rate and trade receivables risk are minimized through the Fund's credit granting and receivables collection processes. /T/ Newalta Income Fund Consolidated Balance Sheets ($000s) --------------------------------------------------------------------- --------------------------------------------------------------------- September 30, 2003 December 31, 2002 --------------------------------------------------------------------- Unaudited Audited Assets Current assets Cash (Note 12) 489 - Accounts receivable 33,251 27,924 Inventory 7,504 7,923 Prepaid expenses 1,918 730 --------------------------------------------------------------------- 43,162 36,577 Capital assets and intangibles 208,188 207,642 Goodwill 10,782 10,782 Deferred costs 839 811 --------------------------------------------------------------------- 262,971 255,812 --------------------------------------------------------------------- --------------------------------------------------------------------- Liabilities Current liabilities Bank indebtedness - 759 Accounts payable 17,968 17,626 Distribution payable 2,418 Current portion of long-term debt (Note 3) 3,003 2,339 Current portion of debentures - 6,000 --------------------------------------------------------------------- 23,389 26,724 Long-term debt (Notes 3 and 12) 36,250 38,751 Debentures - 3,000 Future income taxes 35,271 32,024 Site restoration 3,052 2,732 --------------------------------------------------------------------- 97,962 103,231 --------------------------------------------------------------------- Unitholders' Equity Unitholders' capital (Notes 4 and 12) 106,709 98,269 Contributed surplus 446 - Accumulated earnings (Note 2) 72,360 54,312 Accumulated cash distributions (Notes 9 and 10) (14,506) - --------------------------------------------------------------------- 165,009 152,581 --------------------------------------------------------------------- 262,971 255,812 --------------------------------------------------------------------- --------------------------------------------------------------------- Newalta Income Fund Consolidated Statements of Income and Accumulated Earnings For the periods ended September 30 ($000s) (Unaudited) --------------------------------------------------------------------- --------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 2003 2002 2003 2002 --------------------------------------------------------------------- Revenue 41,981 30,446 114,934 77,431 Expenses Operating 25,081 19,468 74,439 51,101 General and administrative 787 504 2,381 1,513 Interest (Note 3) 648 691 2,239 2,057 Depreciation and site remediation 3,087 2,675 9,126 7,762 (Gain) on disposal of fixed assets 1 (141) (33) Reorganization (Note 2) 5,195 --------------------------------------------------------------------- Operating income 12,377 7,108 21,695 15,031 Provisions for income taxes Current 150 148 400 448 Future (Note 7) 2,299 2,638 3,247 5,618 --------------------------------------------------------------------- Net earnings 9,928 4,322 18,048 8,965 Accumulated earnings, beginning of period 62,432 46,538 54,312 44,282 Goodwill write-down, net of tax (2,232) Stock appreciation rights (155) --------------------------------------------------------------------- Accumulated earnings, end of period 72,360 50,860 72,360 50,860 --------------------------------------------------------------------- Net earnings per unit (cents) (Notes 2 and 6) 43.3 19.8 80.8 43.9 Diluted net earnings per unit (cents) (Notes 2 and 6) 42.5 19.2 79.4 42.2 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Newalta Income Fund Consolidated Statements of Cash Flows For the periods ended September 30 ($000s) (Unaudited) ----------------------------------------------------------------------- ----------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 2003 2002 2003 2002 ----------------------------------------------------------------------- Net inflow (outflow) of cash related to the following activities: Operating activities Net earnings 9,928 4,322 18,048 8,965 Items not requiring cash Depreciation and site remediation 3,087 2,675 9,126 7,762 Future income taxes 2,299 2,638 3,247 5,618 Stock compensation expense - (133) 318 (12) (Gain) on disposal of fixed assets 1 (141) (33) Reorganization - (19) ----------------------------------------------------------------------- Cash flow from operations 15,315 9,502 30,579 22,300 Decrease (increase) in working capital (3,050) (2,435) (3,189) (4,753) ----------------------------------------------------------------------- 12,265 7,067 27,390 17,547 ----------------------------------------------------------------------- Investing activities Additions to capital assets (4,569) (8,915) (8,161) (15,132) Net proceeds on sale of capital assets - - 1,516 214 Deferred costs (22) (221) (29) (528) Site restoration (34) (64) 52 ----------------------------------------------------------------------- (4,625) (9,136) (6,738) (15,394) ----------------------------------------------------------------------- Financing activities Issuance of units - (61) 28,071 Decrease in long-term debt and debentures (751) 2,069 (4,837) (19,850) Distribution to unitholders (6,128) (12,088) (Increase) in accrued distributions (401) (2,418) ----------------------------------------------------------------------- (7,280) 2,069 (19,404) 8,221 ----------------------------------------------------------------------- Net cash inflow 360 - 1,248 10,374 Cash (bank indebtedness), beginning of period 129 (759) (10,374) ----------------------------------------------------------------------- Cash, end of period 489 - 489 - Supplementary information: Interest paid 709 639 2,358 2,032 Income taxes paid 178 222 413 540 ----------------------------------------------------------------------- NEWALTA INCOME FUND Notes to the Consolidated Financial Statements For the Nine Months ended September 30, 2003 and 2002 ($000s) (Unaudited) /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 35 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 subsidiaries. For reporting purposes the Fund is considered the continuing entity of Newalta. 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. The interim consolidated financial statements contain disclosures, which are supplemental to the Fund's annual consolidated financial statements. Certain disclosures, which are normally required to be included in the notes to the annual consolidated financial statements, have been condensed or omitted. 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, 2002 as contained in the Annual Report for fiscal 2002. The Fund is a unit trust for income tax purposes, and is taxable on taxable income not allocated to the unitholders. During the third quarter of 2003, 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. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end 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 result of its operations and cash flows for the periods ended September 30, 2003 and 2002. 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 (excluding $596 recorded in 2002). 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 5. 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 third quarter of 2002, Newalta recognized $133 as a recovery of the stock appreciation rights expense, and for the period ending September 30, 2002, Newalta recognized a recovery of $12. 3. Debt (a) Credit facility 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. At September 30, 2003, the Fund had utilized $39,250 of the term facilities and the operating facility was unutilized. Principal repayments are $750 per quarter, commencing July 1, 2003. (b) Debentures On February 28, 2003, $3,000 of 8% debentures were redeemed by Newalta in exchange for cash. During the nine months $6,000 of 9.5% debentures were converted into 750,000 units of which $3,000 was converted during the third quarter. There are no debentures outstanding as at September 30, 2003. 4. Unitholders' capital 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 granted pursuant to the Plan of Arrangement. During the third quarter of 2003, $3,000 of debentures were converted into 375,000 units. Also during the third quarter the Fund purchased certain assets for 250,000 units plus $700. An additional 1,000 units were exercised during the quarter under the Rights Incentive Plan. /T/ Units/Shares Amount --------------------------- Shares issued as at December 31, 2002 (000s) 43,634 $ 98,269 Shares cancelled under the plan of arrangement (43,634) (98,269) Units issued under the plan of arrangement 21,817 98,269 Non-board lot repurchased (7) (62) Rights exercised 222 2 Units issued in exchange for debentures 750 6,000 Units issues on asset purchase 250 2,500 ---------------------------------------------------------------------- Units outstanding as at September 30, 2003 23,032 $ 106,709 ---------------------------------------------------------------------- /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. A total of $0.645 per unit, or approximately $14,500 has been distributed to unitholders as of October 15, 2003. 5. 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 1,042,500 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. 218,000 Exchange Rights were exercised during March 2003, another 2,800 were exercised in June 2003, and a further 1,000 were exercised during September 2003. The remaining 85,200 vest at various dates over the next three years. On May 22, 2003 the Fund granted 275,000 Rights to certain directors, officers, and managers of Newalta Corporation. 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 Fund accounts for Rights granted pursuant to the Rights plan using intrinsic values. On this basis compensation costs are not required to be recognized in the financial statements for Rights granted at market value. Had compensation costs for the Fund's Rights Plan been determined based on the fair value methodology at the date of the grant, the Fund's pro-forma net earnings for the nine months ended September 30, 2003 would have been reduced by $968 and net earnings per unit would have been 78 cents. There was no impact in the third quarter. 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 6%; 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%. Had these compensation costs been recognized in the Fund's expenses, the operating income for the nine months ended September 30, 2003 would have been reduced by $13. There was no impact in the third quarter. 6. Net Earnings per unit Basic per unit calculations for the period ending September 30, 2003 were based on the weighted average number of units outstanding for the quarter. 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 Nine Months Ended September 30 September 30 ----------------------------------------------------------------------- 2003 2002 2003 2002 ----------------------------------------------------------------------- Weighted average number of units 22,907 21,817 22,330 20,446 Net additional units if rights exercised 372 67 242 128 Additional units if debentures converted 125 1,011 486 1,011 ----------------------------------------------------------------------- Diluted weighted average number of units 23,404 22,895 23,040 21,585 /T/ 7. Future Income Taxes During the second quarter the Alberta government reduced the corporate tax rate and in the second quarter the Fund accordingly accounted for the recovery of future income tax due to the change in tax rates. 8. Comparative Figures Certain of the prior year's and prior quarter's comparative figures have been reclassified to conform to the current period's presentation. 9. Reconciliation of Unitholder Distributions Declared and Paid /T/ Three Months Nine Months Ended Ended September 30 September 30 2003 2003 -------------------------- Cash flow from operations before reorganization costs $ 15,315 $ 35,755 Capital expenditures (4,569) (8,161) Proceeds from fixed asset sales 1,516 Debt repayment (750) (750) -------------------------- Cash available for distribution before reorganization costs 9,996 28,360 Reorganization costs - (5,176) -------------------------- Cash available for distribution $ 9,996 $ 23,184 -------------------------- -------------------------- Unitholder distributions declared - $ 6,530 14,506 - per unit 0.285 0.645 Unitholder distributions paid - $ 6,128 12,088 - per unit 0.27 0.54 10. Reconciliation of Accumulated Unitholder Distributions Balance, December 31, 2002 $ - Unitholder distributions declared and paid (12,088) Unitholder distributions declared (2,418) --------- Balance, September 30, 2003 $ (14,506) --------- /T/ 11. Acquisition Effective July 1, 2003, the Fund acquired a satellite oilfield facility located in southwest Saskatchewan. The purchase price of $3,200 was funded by $700 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 are: /T/ Units issued $ 2,500 Cash 712 --------- Total consideration 3,212 --------- --------- Plant & equipment 2,912 Intangibles 300 --------- Total $ 3,212 --------- --------- /T/ 12. Subsequent event On September 30, 2003, the Fund announced that it had entered into an agreement with an underwriting syndicate to raise $45.6 million through the issuance of units of the Fund. On October 21, 2003, the Fund issued 3.8 million units at $12.00 each for gross proceeds of $45.6 million and net proceeds of approximately $43.0 million. 13. 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. For the three months ended September 30 ($000's) /T/ Consol- 2003 Indus- Inter- Corporate, idated Oilfield trial segment Unallocated Total ----------------------------------------------------------------------- External revenue 28,682 13,299 41,981 Inter segment revenue(4) 4 29 (33) - Operating expense 11,643 9,458 (33) 21,068 Indirect operating expense(5) 1,482 478 2,054(6) 4,014 Depreciation & site remediation 1,819 1,070 198 3,087 ----------------------------------------------------------------------- Net margin 13,742 2,322 (2,252) 13,812 General and administrative 787 787 Interest expense 648 648 Reorganization costs - - ----------------------------------------------------------------------- Operating income 13,742 2,322 (3,687) 12,377 ----------------------------------------------------------------------- Capital expenditures 6,118 488 463 7,069 Goodwill 10,782 10,782 Total assets 165,405 89,357 8,209 262,971 --------------------------------------------------- --------------------------------------------------- Corporate Consol- 2002 Oilfield Indus- Inter- and idated trial segment Unallocated Total ----------------------------------------------------------------------- External revenue 19,974 10,472 30,446 Inter segment revenue(4) 118 19 (137) - Operating expense 9,088 7,255 (137) 16,206 Indirect operating expense(5) 1,057 682 1,523(6) 3,262 Depreciation & site remediation 1,765 738 172 2,675 ----------------------------------------------------------------------- Net margin 8,182 1,816 (1,695) 8,303 General and administrative 504 504 Interest expense 691 691 ----------------------------------------------------------------------- Operating income 8,182 1,816 (2,890) 7,108 ----------------------------------------------------------------------- Capital expenditures 3,029 11,341 545 14,915 Goodwill 10,782 10,782 Total assets 150,834 93,093 10,023 253,950 ----------------------------------------------------------------------- ----------------------------------------------------------------------- /T/ (4) Inter-segment revenues are recorded at market, less the costs of serving external customers. (5) Indirect operating expenses are defined as the allocated general management costs for the reporting unit. (6) Management does not allocate certain indirect operating, general & administrative, taxes, and interest costs in the segment analysis. For the nine months ended September 30 ($000's) /T/ Corporate Consol- 2003 Indus- Inter- and idated Oilfield trial segment Unallocated Total ----------------------------------------------------------------------- External revenue 74,805 40,129 114,934 Inter segment revenue(4) 48 95 (143) - Operating expense 32,991 30,288 (143) 63,136 Indirect operating expense(5) 3,879 1,812 5,612(6) 11,303 Depreciation & site remediation 5,274 3,126 585 8,985 ----------------------------------------------------------------------- Net margin 32,709 4,998 (6,197) 31,510 General and administrative 2,381 2,381 Interest expense 2,239 2,239 Reorganization costs 5,195 5,195 ----------------------------------------------------------------------- Operating income 32,709 4,998 (16,012) 21,695 ----------------------------------------------------------------------- Capital expenditures 8,615 1,445 601 10,661 Goodwill 10,782 10,782 Total assets 165,405 89,357 8,209 262,971 ------------------------------------------------- ------------------------------------------------- Corporate Consol- 2002 Oilfield Indus- Inter- and idated trial segment Unallocated Total ----------------------------------------------------------------------- External revenue 53,524 23,907 77,431 Inter segment revenue(4) 239 147 (386) - Operating expense 25,963 17,107 (386) 42,684 Indirect operating expense(5) 3,071 1,630 3,716(6) 8,417 Depreciation & site remediation 5,136 2,130 463 7,729 ----------------------------------------------------------------------- Net margin 19,593 3,187 (4,179) 18,601 General and administrative 1,513 1,513 Interest expense 2,057 2,057 ----------------------------------------------------------------------- Operating income 19,593 3,187 (7,749) 15,031 ----------------------------------------------------------------------- Capital expenditures 5,516 14,197 1,419 21,132 Goodwill 10,782 10,782 Total assets 150,834 93,093 10,023 253,950 ------------------------------------------------- -------------------------------------------------
For further information: Newalta Income Fund - Ronald L. Sifton, Senior Vice President, Finance and Chief Financial Officer, (403) 206-2684; Website: www.newalta.com