Newalta Announces Record Second Quarter Performance
CALGARY, ALBERTA--Newalta Income Fund (TSX: NAL.UN) today
announced unaudited financial results for the six months ended
June 30, 2003.
Newalta Income Fund is the successor organization to Newalta
Corporation. Information for the six months ended June 30, 2003
along with comparative information for the respective period in
2002 is provided. Some numbers from the prior year have been
restated to conform to those reported for the Fund.
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Financial Highlights ($000s)
Three Months Ended June 30 Six Months Ended June 30
(unaudited) (unaudited)
%Increase %Increase
2003 2002 (Decrease) 2003 2002 (Decrease)
----------------------------------------------------
Revenue 34,543 23,279 48 72,953 46,985 55
Operating income
before
reorganization
costs 6,568 3,270 101 14,513 7,923 83
Operating income 5,857 3,270 79 9,318 7,923 18
Net earnings 6,032 1,930 213 8,120 4,643 75
Net earnings per
unit (cents)(1) 27.2 8.8 209 36.8 23.5 57
Diluted EPU (cents) 26.7 8.8 203 36.4 23.4 56
EBITDA(2) before
reorganization
costs 10,225 6,436 59 22,001 14,343 53
EBITDA 9,514 6,436 48 16,806 14,343 17
Trailing 12 month
EBITDA before
reorganization
costs - - - 42,510 31,325 36
Trailing 12 month
EBITDA - - - 36,719 31,325 17
Cash flow before
reorganization
costs(3) 9,367 5,608 67 20,440 12,798 60
Cash flow 8,656 5,608 54 15,264 12,798 19
Distributable
cash before
reorganization
costs (Note 8)
- $ 8,770 2,067 324 18,363 6,795 171
- per unit 0.40 0.09 344 0.83 0.34 144
Distributable cash
(Note 8)
- $ 8,059 2,067 290 13,187 6,795 94
- per unit 0.36 0.09 300 0.60 0.34 76
Cash distributions
declared
- $ 5,993 - - 7,976 - -
- per unit 0.27 - - 0.36 - -
Capital
expenditures,
net 597 3,541 (83) 2,077 6,003 (65)
Weighted average
units outstanding
(000s) (1) 22,196 21,816 2 22,042 19,760 12
Total units
outstanding
(000s) (1) 22,406 21,817 3 22,406 21,817 3
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(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 second quarter increased 48% to $34.5 million,
from $23.2 million in 2002. Before reorganization costs,
operating income improved 101% to $6.6 million and EBITDA was up
59% to $10.2 million. Diluted net earnings per unit increased
203% from 8.8 cents in 2002 to 26.7 cents in 2003. Excluding
reorganization costs, distributable cash was $8.8 million, or 40
cents per unit (13.3 cents per month). After reorganization
costs, distributable cash was $8.1 million or 36 cents per unit
(12 cents per month). During the second quarter, the Fund
distributed 27 cents per unit (9 cents per month). The net value
of crude oil per barrel recovered in the quarter remained
unchanged from the second quarter of 2002. Newalta's $2 million
of capital expenditures in the quarter were offset by asset sales
of $1.4 million, for net capital expenditures of $0.6 million.
In the first half of 2003, revenue increased $26.0 million, or
55% compared to the first half of 2002. Before reorganization
costs, EBITDA was up 53% to $22.0 million and operating income
increased 83% to $14.5 million. Net capital expenditures were
$2.1 million. Distributable cash excluding reorganization costs
was $18.4 million, or 83 cents per unit (13.8 cents per month).
After reorganization costs, distributable cash was $13.2 million
or 60 cents per unit (10 cents per month).
"We continued to capitalize on strong market conditions in the
second quarter to deliver record performance," said Al Cadotte,
President and Chief Executive Officer. "The results from the
Oilfield division continued to be strong and the Industrial
division delivered substantially improved performance. We made
excellent progress in the first half on our initiatives to
improve the performance of our operations. We are confident we
will maintain the strong momentum from the first half through the
rest of the year, and that we will complete our action plans to
set the foundation for increased cash flow 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 Thursday, August 14,
2003 at 1:00 p.m. (ET) to discuss the second quarter results. To
listen, please dial 1-800-814-3911 or 416-640-4127, or log onto
the web cast at www.newalta.com or www.cdn-news.com. For those
unable to listen to the live event, a rebroadcast will be
available until midnight, August 21, 2003. Please dial
416-640-1917 or 1-877-289-8525 and enter the pass code 21010185.
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 SIX MONTHS ENDED JUNE 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.
CORPORATE OBJECTIVES
Management has two clear objectives in 2003:
- To maximize the distributable cash generated from our existing
operations;
- To exploit growth opportunities for both our divisions;
The distributable cash generated in the first half was in excess
of our declared distributions since March 1, 2003 and we
completed a number of initiatives to improve productivity, reduce
costs and to increase revenues which will contribute to
performance in the second half. We established our first
strategic alliance with Enerchem International and we are
pursuing opportunities to enhance the profitability of both
companies. We also completed the acquisition of our first
oilfield satellite facility in July. We are pursuing additional
alliances and satellite operations as well as the expansion of
our on-site centrifuge program. We also continued to develop
acquisition opportunities in both eastern and western Canada.
Management action plans to maximize performance were completed in
the first half and steps are being taken to drive growth and
improve performance next year.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2003
For the three months ended June 30, 2003, Newalta Income Fund
(the "Fund") increased revenue 48% to $34.5 million, from $23.3
million in the second quarter of 2002. Operating income before
reorganization costs improved 101% to $6.6 million, and including
reorganization costs improved 79% to $5.9 million. This strong
performance was the result of high levels of activity in both the
Oilfield and Industrial divisions, the Fund's 2002 acquisitions
and capital upgrades and several management initiatives to
maximize price, reduce costs, and enhance efficiencies. Crude oil
prices for recovered oil were equal to 2002 and therefore did not
contribute to the improved performance. Net earnings of $6.0
million were three times the $1.9 million earned in the second
quarter of 2002. Reorganization costs for the quarter totaled
$0.7 million or 3.2 cents per unit. Cash flow(3) before
reorganization costs increased $3.8 million to $9.4 million in
the quarter.
General and administrative costs increased $0.3 million to $0.7
million as a result of increases in insurance and bonus
provisions.
Interest expense of $0.8 million was $0.2 million more than last
year primarily due to the interest expense from the $6.0 million
of debentures used to fund the acquisition of assets from Mohawk
Lubricants Ltd.
Depreciation increased to $2.9 million from $2.6 million in 2002
and reflects the 2002 capital program.
Income tax expense recognizes the future liability arising from
the difference between taxable and accounting income. Due to the
reorganization into an income fund, with the exception of capital
taxes, the Fund does not anticipate being cash taxable in the
future.
Diluted earnings per unit increased threefold to 27 cents per
unit from 9 cents in 2002(1). Distributable cash, excluding
reorganization costs, was $8.8 million, of which approximately
$6.0 million (9 cents per unit per month) was distributed to
unitholders. Distributable cash, after reorganization costs, was
$8.1 million or 36 cents per unit (12 cents per month).
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2003
For the six months ended June 30, 2003 revenue improved 55% and
operating income before reorganization costs increased 83%.
Including the reorganization costs, operating income improved 18%
to $9.3 million and earnings improved 75% to $8.1 million.
Reorganization costs on a year to date basis totaled $5.2 million
or $0.24 per unit. Cash flow before reorganization costs
increased 60% to $20.4 million in the six months, and including
reorganization costs increased $2.5 million to $15.3 million.
Distributable cash, excluding reorganization costs, was $18.4
million (83 cents per unit). Distributable cash, after
reorganization costs, was $13.2 million (60 cents per unit).
Excluding reorganization costs, trailing 12 month EBITDA(2)
improved by 36% to $42.5 million. After reorganization costs,
diluted earnings per unit were 36.8 cents compared with 23.5
cents per unit(2) in 2002. The reasons for the improvement in
performance are outlined in the results of operations for the
three months ended June 30, 2003. In addition, average commodity
prices for recovered crude oil were higher in 2003 than 2002,
contributing $0.9 million of revenue and operating income.
General and administrative expenses were $1.6 million compared to
$1.0 million in 2002. Included in the year to date expenses was a
non-cash accrual of $0.3 million for the stock appreciation
rights expense ($0.1 million 2002).
Interest expense is approximately $0.2 million higher than last
year due to the interest incurred on the Mohawk debentures.
Depreciation expense of $5.9 was 8% of revenue compared to $5.1
million or 11% of revenue in 2002. The depreciation expense
increase reflects the 2002 capital program and is mainly
attributable to the Mohawk acquisition.
The reorganization costs incurred during the periods 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 62% of the Fund's
total assets and generates 63% of the Fund's total revenue.
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 day to
day oil and gas production. Revenues in Oilfield vary with
oilfield activity and commodity prices.
During the three months ended June 30, 2003 Oilfield recovered a
total of 257,000 barrels of crude oil, of which 63,000 barrels
was for the Fund's account and sold at an average price of $35.49
per barrel. Comparable recoveries in second quarter of 2002 were
249,000 barrels including 50,000 barrels for the Fund's account,
at an average price of $35.57 per barrel. Revenue for the three
months from Oilfield increased 33% to $20.5 million and segment
margin improved 68% to $7.3 million. The second quarter is
traditionally the slowest period for Oilfield. This year,
continuing high levels of oilfield activity combined with reduced
operating costs, pricing increases and productivity improvements
have led to record revenues and margins.
For the six months ended June 30, 2003 business fundamentals
remained strong with above average drilling and strong market
demand. During the first half, Oilfield recovered a total of
589,000 barrels of crude oil, of which 131,000 barrels was sold
for the Fund's account at an average price of $40.70 per barrel.
For the first half of 2002 oil recoveries totalled 509,000
barrels including 110,000 barrels for the Fund's account, at an
average price of $32.30 per barrel. Revenue for the six months
from the Oilfield business unit increased 37% to $46.1 million
and margin improved 66% to $19.0 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 ending June 30, 2003 capital spending was
$1.3 million compared to $2.1 million a year ago. During the
quarter Oilfield sold its non-core drill site bin assets for $1.4
million cash. Oilfield capital expenditures for the six months
were $2.5 million, approximately the same amount as spent in the
first half of 2002. Subsequent to June 30, 2003, the Fund
purchased a satellite oilfield facility is southwest Saskatchewan
for $3.0 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 deliver record
performance for the balance of 2003.
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 35% of the Fund's total assets and generates 37% 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 58% of
Industrial revenue comes from product sales with the balance
derived from collection fees (compared to 41% product sales in
2002). This increase in product sales is attributed to the Mohawk
acquisition.
For the three months ended June 30, 2003 Industrial revenue
increased 78%, to $14.0 million from $7.9 million in 2002. The
assets acquired late in 2002 from Mohawk Lubricants Ltd.
contributed $4.1 million in revenue and $0.6 million in margin.
The remaining revenue increase of approximately $2.2 million and
margin increase of approximately $1.0 million was the result of
increased activity levels, particularly in the Alberta market,
improved pricing, and other cost reduction and productivity
initiatives.
For the six months ended June 30, 2003 revenue improved 100% to
$26.8 million and margin increased $1.5 million or 134%. The
former Mohawk assets contributed $8.8 million to the revenue
improvement and $1.1 million in margin.
Industrial capital expenditures for the three months ended June
30, 2003 were $0.2 million compared with $1.1 million in 2002.
Year to date capital spending was $1.0 million ($2.9 million in
2002).
Collection activity and product sales are expected to continue at
a high level for the balance of 2003 as newly acquired assets
become fully utilized. Price increases and cost reduction
initiatives previously initiated are positively impacting
operating results. For the balance of the year Industrial will
focus on developing product markets, increasing the collection
activities in the waste water market and the centrifugation of
sludges.
CAPITAL EXPENDITURES
Capital expenditures for the three months ending June 30, 2003,
net of proceeds of disposition, were $0.6 million, compared with
$3.5 million in 2002. The gross capital expenditures, which
related primarily to sustenance spending, totaled $2.0 million
during the quarter. On June 1, 2003 the Fund sold certain
non-core drill site container assets for $1.4 million in cash.
Year to date net capital spending was $2.1 million ($6.0 million
in 2002). Total sustenance capital expenditures for 2003 are
estimated to be approximately $7.5 million. Total growth capital
expenditures for 2003, excluding acquisitions, are estimated to
be approximately $4.0 million.
Effective July 1, 2003, the Fund purchased a satellite oilfield
facility in southwest Saskatchewan for $3.0 million.
Consideration consisted of 250,000 units at $10.00 per unit and
$500,000 cash.
LIQUIDITY AND FINANCIAL RESOURCES
At June 30, 2003, total long-term debt (including convertible
debentures and the current portion of long-term debt) was $43.0
million or approximately 1.2 times trailing twelve month EBITDA,
compared with $50.1 million, or 1.6 times trailing twelve month
EBITDA a year ago. During the first quarter, 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
commencing July 1, 2003. At June 30, 2003 the $40 million in term
facilities was fully drawn and the $25 million operating line was
unutilized.
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 second quarter the holders of $3.0
million of the debentures converted their debentures to 375,000
units in the Fund. Outstanding units at the end of the quarter
totaled 22.4 million units. On July 1, 2003, 250,000 units ($2.5
million) were issued to acquire a satellite Oilfield facility.
The holder of the debentures converted $1 million principal
amount into 125,000 units of the Fund on each of July 2 and
August 8, 2003, leaving a principal balance outstanding of $1
million.
/T/
QUARTERLY COMPARISON ($000'S)
Three Months Six Months
Ended June 30 Ended June 30
---------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------------------
Revenue 34,543 23,279 72,953 46,985
Net earnings 6,032 1,930 8,120 4,643
Net earnings per unit (cents) 27.2 8.8 36.8 23.5
Diluted net earnings per
unit (cents) 26.7 8.8 36.4 23.4
/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 half of the
year oil sales accounted for 7% of total revenue and in 2002 oil
sales accounted for 8 % of total revenue.
- 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 June 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)
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June 30, 2003 December 31, 2002
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Unaudited Audited
Assets
Current assets
Cash 129 -
Accounts receivable 27,648 27,924
Inventory 6,960 7,923
Prepaid expenses 2,316 730
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37,053 36,577
Capital assets and intangibles 204,078 207,642
Goodwill 10,782 10,782
Deferred costs 817 811
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252,730 255,812
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Liabilities
Current liabilities
Bank indebtedness - 759
Accounts payable 15,669 17,626
Distribution payable 2,016
Current portion of long-term debt (Note 3) 3,005 2,339
Current portion of debentures - 6,000
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20,690 26,724
Long-term debt (Note 3) 37,000 38,751
Debentures 3,000 3,000
Future income taxes 32,972 32,024
Site restoration 2,957 2,732
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96,619 103,231
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Unitholders' Equity
Unitholders' capital (Note 4) 101,209 98,269
Contributed surplus 446 -
Accumulated earnings (Note 2) 62,432 54,312
Accumulated cash distributions (Note 8) (7,976) -
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156,111 152,581
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252,730 255,812
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Newalta Income Fund
Consolidated Statements of Income and Accumulated Earnings
For the periods ended June 30
($000s) (Unaudited)
----------------------------------------------------------------------
----------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
----------------------------------------------------------------------
Revenue 34,543 23,279 72,953 46,985
Expenses
Operating 23,569 16,474 49,358 31,632
General and administrative 749 369 1,594 1,010
Interest (Note 3) 783 585 1,591 1,366
Depreciation and site
remediation 2,874 2,581 5,897 5,054
Reorganization (Note 2) 711 - 5,195 -
----------------------------------------------------------------------
Operating income 5,857 3,270 9,318 7,923
Provisions for income taxes
Current 75 150 250 300
Future (Note 7) (250) 1,190 948 2,980
----------------------------------------------------------------------
(175) 1,340 1,198 3,280
----------------------------------------------------------------------
Net earnings 6,032 1,930 8,120 4,643
Accumulated earnings,
beginning of period 56,400 44,608 54,312 44,282
Goodwill write-down, net of tax - - - (2,232)
Stock appreciation rights - - - (155)
----------------------------------------------------------------------
Accumulated earnings, end of
period 62,432 46,538 62,432 46,538
----------------------------------------------------------------------
Net earnings per unit (cents)
(Note 2, 6) 27.2 8.8 36.8 23.5
Diluted net earnings per unit
(cents) (Note 2, 6) 26.7 8.8 36.4 23.4
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----------------------------------------------------------------------
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Newalta Income Fund
Consolidated Statements of Cash Flows
For the periods ended June 30
($000s) (Unaudited)
----------------------------------------------------------------------
----------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
----------------------------------------------------------------------
Net inflow (outflow) of cash
related to the following
activities:
Operating activities
Net earnings 6,032 1,930 8,120 4,643
Items not requiring cash
Depreciation and site
remediation 2,874 2,581 5,897 5,054
Future income taxes (250) 1,190 948 2,980
Stock compensation expense - (93) 318 121
Reorganization - - (19) -
----------------------------------------------------------------------
Cash flow from operations 8,656 5,608 15,264 12,798
Decrease (increase) in working
capital 1,365 25,705 (141) (2,318)
----------------------------------------------------------------------
10,021 31,313 15,123 10,480
----------------------------------------------------------------------
Investing activities
Additions to capital assets (2,012) (3,717) (3,592) (6,217)
Net proceeds on sale of
capital assets 1,415 176 1,515 214
Deferred costs (2) (325) (6) (307)
Site restoration (1) (3) (30) 52
----------------------------------------------------------------------
(600) (3,869) (2,113) (6,258)
----------------------------------------------------------------------
Financing activities
Equity proceeds receivable - (28,000) - -
Issuance of units - 28,071 (61) 28,071
Decrease in long-term debt (1) (18,065) (4,085) (21,919)
Distribution to unitholders (5,960) - (5,960) -
(Increase) in accrued
distributions (33) - (2,016) -
----------------------------------------------------------------------
(5,994) (17,994) (12,122) 6,152
----------------------------------------------------------------------
Net cash inflow (outflow) 3,427 9,450 888 10,374
Cash (bank indebtedness),
beginning of period (3,298) (9,450) (759) (10,374)
----------------------------------------------------------------------
Cash (bank indebtedness), end
of period 129 - 129 -
Supplementary information:
----------------------------------------------------------------------
Interest paid 467 650 1,648 1,393
----------------------------------------------------------------------
Income taxes paid 110 229 234 318
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NEWALTA INCOME FUND
Notes to the Consolidated Financial Statements
For the Six Months ended June 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. 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
second 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 June 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 and expensed using the intrinsic
value method at the time of issuance. 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 not
been 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 second quarter
of 2002, Newalta recognized $93 as a recovery of the stock
appreciation rights expense, and for the period ending June 30,
2002, Newalta expensed $121.
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 1%
or at Bankers Acceptance base plus 2.5% at the Fund's option. The
operating facility charges interest at prime plus .25% or at
Bankers Acceptance base plus 1.85%, also at the Fund's option. At
June 30, 2003, the Fund had utilized $40,000 of the term
facilities and none of the operating facility. Principal
repayments of $750 per quarter commence on July 1, 2003.
(b) Debentures
On February 28, 2003, $3,000 of 8% debentures were redeemed by
Newalta in exchange for cash. During the second quarter $3,000 of
9.5% debentures were converted into 375,000 units at the holders'
option. Subsequent to the period, an additional $2,000 of 9.5%
debentures were converted into 250,000 units. The remaining
$1,000 of 9.5% debentures mature on September 1, 2004 and are
convertible into units of the Fund at a conversion price of $8.00
per unit.
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 second quarter $3,000 of
debentures were converted into 375,000 units.
/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 221 2
Units issued in exchange
for debentures 375 3,000
-----------------------------------------------------------------
Units outstanding as at
June 30, 2003 22,406 $101,209
-----------------------------------------------------------------
/T/
The Fund declared a monthly distribution of $0.09 per unit for
each of the four months since inception. A total of $0.36 per
unit, or approximately $7,976 has been distributed to unitholders
as of July 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, and a further 89,000 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 six months ended June 30, 2003 would have been reduced by
$968 and net earnings per unit would have been 32.5 cents per
unit. 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 reorganized in the Fund's
expenses, the net earnings for the period ended June 30, 2003
would have been reduced by $5.
6. Net Earnings per unit
Basic per unit calculations for the period ending June 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 Six Months Ended
June 30 June 30
------------------------------------
2003 2002 2003 2002
------------------------------------
Weighted average number of units 22,196 21,816 22,044 19,760
Net additional units if rights
exercised 584 160 102 144
Additional units if debentures
converted 117 261 753 261
----------------------------------------------------------------------
Diluted weighted average number
of units 22,897 22,237 22,897 20,165
/T/
7. Future Income Taxes
During the period the Alberta government reduced the corporate
tax rate and the Fund has accordingly accounted for the recovery
of future income tax due to the change in tax rates.
8. Reconciliation of Unitholder Distributions Declared and Paid
/T/
Three Months Ended Six Months Ended
June 30 June 30
2003 2003
-------------- --------------
Cash flow from operations before
reorganization costs 9,367 20,440
Capital expenditures (2,012) (3,592)
Proceeds from fixed asset sales 1,415 1,515
Debt repayment - -
-------------- --------------
Cash available for distribution
before reorganization costs 8,770 18,363
Reorganization costs (711) (5,176)
-------------- --------------
Cash available for distribution 8,059 13,187
-------------- --------------
-------------- --------------
Unitholder distributions
declared - $ 5,993 7,976
- per unit 0.27 0.36
Unitholder distributions paid - $ 5,960 5,960
- per unit 0.27 0.27
9. Reconciliation of Accumulated Unitholder Distributions
Balance, December 31, 2002 -
Unitholder distributions declared and paid (5,960)
Unitholder distributions declared (2,016)
--------------
Balance, June 30, 2003 (7,976)
--------------
/T/
10. Subsequent events
Effective July 1, 2003 the Fund acquired a satellite oilfield
facility located in southwest Saskatchewan. The purchase price of
$3,000 was funded by $500 of cash plus the issuance of 250,000
units valued at $10.00 per unit.
The holder of the 9.5% debentures converted $1,000 principal
amount into 125,000 units of the Fund on each of July 2 and
August 8, 2003, leaving a principal balance outstanding of
$1,000.
11. Segmented Information
The Fund has two reportable segments. The Oilfield segment
recovers and resells crude oil from oilfield waste. The
Industrial segment collects waste lubricating oil, automotive,
and industrial wastes which are processed into resalable
products.
/T/
-----------------------------------------------------------------------
For the three months ended June 30
Corporate
Inter- and Consolidated
2003 Oilfield Industrial segment Unallocated Total
-----------------------------------------------------------------------
External revenue 20,502 14,041 34,543
Inter segment
revenue(4) (6) (19) 25 -
Operating
expense 9,964 9,933 25 19,922
Indirect
operating
expense(5) 1,466 634 1,547(6) 3,647
Depreciation and
amortization 1,737 944 193 2,874
-----------------------------------------------------------------------
Net margin 7,329 2,511 (1,740) 8,100
General and
administrative 749 749
Interest
expense 783 783
Reorganization
costs 711 711
-----------------------------------------------------------------------
Operating
income 7,329 2,511 (3,983) 5,857
-----------------------------------------------------------------------
Capital
expenditures 1,261 246 505 2,012
Goodwill 10,782 10,782
Total assets 156,259 88,700 7,771 252,730
-------------------------------------------------------
----------------------------
(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 three months ended June 30
Corporate
Inter- and Consolidated
2002 Oilfield Industrial segment Unallocated Total
-----------------------------------------------------------------------
External
revenue 15,378 7,901 23,279
Inter segment
revenue(4) 85 26 (111) -
Operating
expense 8,395 5,693 (111) 13,977
Indirect
operating
expense(5) 982 578 937(6) 2,497
Depreciation and
amortization 1,713 712 156 2,581
-----------------------------------------------------------------------
Net margin 4,373 944 (1,093) 4,224
General and
administrative 369 369
Interest
expense 585 585
-----------------------------------------------------------------------
Operating
income 4,373 944 (2,047) 3,270
-----------------------------------------------------------------------
Capital
expenditures 2,112 1,066 539 3,717
Goodwill 10,782 10,782
Total assets 146,322 77,575 8,413 232,310
-------------------------------------------------------
For the six months ended June 30
Corporate
Inter- and Consolidated
2003 Oilfield Industrial segment Unallocated Total
-----------------------------------------------------------------------
External
revenue 46,123 26,830 72,953
Inter segment
revenue(4) 44 66 (110) -
Operating
expense 21,348 20,830 (110) 42,068
Indirect
operating
expense(5) 2,397 1,334 3,559(6) 7,290
Depreciation and
amortization 3,455 2,056 386 5,897
-----------------------------------------------------------------------
Net margin 18,967 2,676 (3,945) 17,698
General and
administrative 1,594 1,594
Interest
expense 1,591 1,591
Reorganization
costs 5,195 5,195
-----------------------------------------------------------------------
Operating
income 18,967 2,676 (12,325) 9,318
-----------------------------------------------------------------------
Capital
expenditures 2,497 957 138 3,592
Goodwill 10,782 10,782
Total assets 156,259 88,700 7,771 252,730
-------------------------------------------------------
For the six months ended June 30
Corporate
Inter- and Consolidated
2002 Oilfield Industrial segment Unallocated Total
-----------------------------------------------------------------------
External
revenue 33,550 13,435 46,985
Inter segment
revenue(4) 121 128 (249) -
Operating
expense 16,874 9,852 (249) 26,477
Indirect
operating
expense(5) 2,014 1,173 1,968(6) 5,155
Depreciation
and
amortization 3,371 1,392 291 5,054
-----------------------------------------------------------------------
Net margin 11,412 1,146 (2,259) 10,299
General and
administrative 1,010 1,010
Interest
expense 1,366 1,366
-----------------------------------------------------------------------
Operating
income 11,412 1,146 (4,635) 7,923
-----------------------------------------------------------------------
Capital
expenditures 2,487 2,856 874 6,217
Goodwill 10,782 10,782
Total assets 146,322 77,575 8,413 232,310
-------------------------------------------------------
For further information: Newalta Income Fund - Ronald L. Sifton, Senior Vice President, Finance and Chief Financial Officer, (403) 206-2684; Website: www.newalta.com