CALGARY, ALBERTA--(Marketwire - Aug. 5, 2010) - Newalta Corporation ("Newalta") (TSX:NAL) today announced financial results for the three and six months ended June 30, 2010.
In the second quarter, our markets were considerably stronger than a year ago with improved prices for the products we recover, stronger drilling activity and higher volumes at both VSC and SCL. As a result, revenue was up $25.5 million, or 23%, and Adjusted EBITDA(1) grew by $8.3 million, or 46%.
Year-to-date revenue was up $44.2 million, or 20%, and Adjusted EBITDA was up $25.4 million, or 85%, from last year. Trailing twelve month Adjusted EBITDA was $107.6 million, or $2.22 per share. Adjusted EBITDA as a percent of revenue in the first half was 20.7%, up from 13.4% in 2009.
"The outlook for all of our markets in the second half is much stronger than last year and we remain confident that solid gains in bottom-line performance will be realized in the quarters ahead," said Al Cadotte, President and CEO of Newalta.
The Board of Directors also approved a 30% increase in the quarterly cash dividend to $0.065 per share from $0.05 per share ($0.26 per share versus $0.20 per share per annum), starting with the dividend payable to shareholders of record as of September 30, 2010.
Financial results highlights for the three and six months ended June 30, 2010:
- Revenue, net earnings, and Adjusted EBITDA in Q2 2010 increased by 23%, 1863% and 46%, respectively, compared to the same period last year. On a year-to-date basis compared to last year, revenue, net earnings, and Adjusted EBITDA increased by 20%, 295% and 85%, respectively. The year-to-date increase in Adjusted EBITDA to $55.4 million was largely due to higher activity levels and improved productivity, with 20% of the improvement attributable to higher commodity prices.
- Revenue and net margin(1) in the Facilities Division increased 22% and 40%, respectively, year-over-year in Q2 2010, due to increased market activity, productivity improvements, increased landfill volumes and higher production at VSC. Year-to-date, improvements in revenue and net margin of 20% and 69%, respectively, were impacted by increased activity levels and improved commodity prices.
- Onsite Division's revenue and net margin increased by 25% and 40%, respectively, year-over-year in Q2 2010, as a result of increased drilling activity, particularly in the U.S., which strengthened utilization of our drill site equipment. Year-to-date, revenue and net margin increased 18% and 61%, respectively compared to last year, primarily due to improved results in the Heavy Oil business unit driven by higher crude oil prices, and increased demand for drill site services, particularly in the U.S.
- SG&A before non-cash stock-based compensation was $15.3 million in Q2 2010 and $29.6 million year-to-date, in line with our expectations.
- Maintenance capital expenditures(1) for the quarter were $6.9 million compared to $1.4 million in 2009. Growth capital expenditures(1) were $8.6 million, compared to $4.6 million in 2009. Year-to-date, maintenance and growth capital expenditures were $9.9 million and $14.2 million, respectively, compared to $3.5 million and $10.6 million, respectively, for the same period in 2009.
- Our Board of Directors declared a dividend of $0.05 per share to holders of record as at June 30, 2010 which was paid July 15, 2010. We will pay a dividend of $0.065 per share to holders of record on September 30, 2010.
/T/
FINANCIAL RESULTS AND HIGHLIGHTS
Three months ended Six months ended
($000s except per June 30, June 30,
share data) % Increase % Increase
(unaudited) 2010 2009 (Decrease) 2010 2009 (Decrease)
----------------------------------------------------------------------------
Revenue 136,905 111,386 23 268,145 223,924 20
Net earnings 3,155 (179) 1863 8,877 (4,560) 295
- per share ($) -
basic 0.07 - 1762 0.18 (0.11) 264
- per share ($) -
diluted 0.06 - 1525 0.18 (0.11) 264
EBITDA(1) 26,310 17,940 47 53,680 29,970 79
- per share ($)(1) 0.54 0.42 29 1.11 0.71 56
Adjusted EBITDA(1) 26,573 18,253 46 55,439 30,045 85
- per share ($)(1) 0.55 0.43 28 1.14 0.71 61
Cash from
operations 7,628 11,808 (35) 18,365 41,850 (56)
- per share ($) 0.16 0.28 (43) 0.38 0.99 (62)
Funds from
operations(1) 20,339 13,776 48 43,412 20,586 111
- per share ($)(1) 0.42 0.32 31 0.90 0.48 88
Maintenance capital
expenditures(1) 6,885 1,428 382 9,933 3,474 186
Dividends
declared(1) 2,424 2,121 14 4,848 4,247 14
- per share- ($)(1) 0.05 0.05 - 0.10 0.10 -
Cash distributed(1) 2,424 2,125 14 4,848 9,685 (50)
Growth capital
expenditures(1) 8,591 4,566 88 14,173 10,635 33
Weighted average
shares outstanding 48,487 42,498 14 48,484 42,450 14
Shares outstanding,
June 30, 48,487 42,438 14 48,487 42,438 14
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(1) These financial measures do not have any standardized meaning prescribed
by Canadian generally accepted accounting principles ("GAAP") and are
therefore unlikely to be comparable to similar measures presented by
other issuers. Non-GAAP financial measures are identified and defined
throughout the attached Management's Discussion and Analysis.
(2) Newalta has 48,486,502 shares outstanding as at August 4, 2010.
Management's Discussion and Analysis and Newalta's unaudited consolidated financial statements and notes thereto are attached.
Management will hold a conference call on Friday, August 6, 2010 at 11:00 am (EST) to discuss Newalta's performance for the second quarter. To participate in the teleconference, please call 416-340-8018 or 1-866-223-7781. To access the simultaneous webcast, please visit www.newalta.com. For those unable to listen to the live call, a taped broadcast will be available at www.newalta.com and, until midnight on Thursday, August 12, 2010 by dialing 1-800-408-3053 and using the pass code 4047722.
NEWALTA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three and six months ended June 30, 2010 and 2009
Certain statements contained in this document constitute "forward-looking statements". When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", and similar expressions, as they relate to Newalta Corporation (the "Corporation" and together with other subsidiaries, "Newalta"), or their management, are intended to identify forward-looking statements. In particular, forward-looking statements included or incorporated by reference in this document include statements with respect to:
- future operating and financial results;
- expected demand for our services;
- business prospects and strategy;
- capital expenditure programs and other expenditures;
- the amount of dividends declared or payable in the future;
- realization of anticipated benefits of acquisitions and growth capital investments;
- our projected cost structure; and
- expectations and implications of changes in legislation.
Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation:
- general market conditions of the industries we service;
- strength of the oil and gas industry, including drilling activity;
- fluctuations in commodity prices for oil and lead;
- fluctuations in interest rates and exchange rates;
- supply of waste lead acid batteries as feedstock to support direct lead sales;
- demand for our finished lead products by the battery manufacturing industry;
- our ability to secure future capital to support and develop our business, including the issuance of additional common shares;
- dependence on our senior management team and other operations management personnel with waste industry experience;
- the seasonal nature of our operations;
- success of our growth and acquisition strategies including integration of businesses into our operations and potential liabilities from acquisitions;
- the highly regulated nature of the waste management and environmental services business in which we operate;
- costs associated with operating our landfills and reliance on third party waste volumes;
- the competitive environment of our industry in eastern and western Canada;
- risk of pending and future legal proceedings;
- our ability to attract and retain skilled employees and maintain positive labour union relationships;
- fluctuations in the costs and availability of fuel for our operations;
- open access for new industry entrants and the general unprotected nature of technology used in the waste industry;
- possible volatility of the price of, and the market for, our common shares;
- obtaining insurance for various potential risks and hazards on reasonable financial terms;
- the nature of and market for our debentures; and
- such other risks or factors described from time to time in reports we file with securities regulatory authorities.
By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Many other factors could also cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements and readers are cautioned that the foregoing list of factors is not exhaustive. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Furthermore, the forward-looking statements contained in this document are made as of the date of this document and the forward-looking statements in this document are expressly qualified by this cautionary statement. Unless otherwise required by law, we do not intend, or assume any obligation, to update these forward-looking statements.
RECONCILIATION OF NON-GAAP MEASURES
This Management's Discussion and Analysis contains references to certain financial measures, including some that do not have any standardized meaning prescribed by Canadian generally accepted accounting principles ("GAAP") and may not be comparable to similar measures presented by other corporations or entities. These financial measures are identified and defined below:
"Combined divisional net margin" and "net margin" are used by management to analyze divisional operating performance. Combined divisional net margin and net margin as presented are not intended to represent earnings before taxes, nor should it be viewed as an alternative to net earnings or other measures of financial performance calculated in accordance with GAAP. Combined divisional net margin is calculated from the segmented information contained in the notes to the consolidated financial statements and is defined as revenue less operating and amortization and accretion expenses for both of our operating segments. Combined divisional net margin excludes inter-segment eliminations and unallocated revenue and expenses. Net margin for each of our segments is calculated from the segmented information contained in the notes to the consolidated financial statements and is defined as earnings before taxes with financing and selling, general and administrative ("SG&A") expenses added back.
/T/
Three months ended Six months ended
June 30, June 30,
($000s) 2010 2009 2010 2009
----------------------------------------------------------------------------
Earnings before taxes 4,918 (293) 12,931 (6,655)
Add back (deduct):
Selling, general and
administrative(1) 15,543 12,870 31,355 26,477
Finance charges(1) 6,194 6,137 12,446 11,717
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Consolidated net margin 26,655 18,714 56,732 31,539
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Unallocated net margin(1) 4,301 3,345 6,922 6,549
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Combined divisional net margin 30,956 22,059 63,654 38,088
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(1) Management does not allocate interest income; selling, general and
administrative; taxes; finance charges; and corporate amortization and
accretion expense in the segmented analysis (see Note 15 to the
Consolidated Financial Statements).
/T/
"EBITDA", "EBITDA per share", "Adjusted EBITDA", and "Adjusted EBITDA per share" are measures of our operating profitability. EBITDA provides an indication of the results generated by our principal business activities prior to how these activities are financed, assets are amortized or how the results are taxed in various jurisdictions. In addition, Adjusted EBITDA provides an indication of the results generated by our principal business activities prior to recognizing non-cash stock-based compensation. Non-cash stock-based compensation, a component of employee remuneration, can vary significantly with changes in the price of our common shares. As such, Adjusted EBITDA provides improved continuity with respect to the comparison of our operating results over a period of time. EBITDA and Adjusted EBITDA are derived from the consolidated statements of operations, comprehensive income and retained earnings. EBITDA per share and Adjusted EBITDA per share are derived by dividing EBITDA and Adjusted EBITDA by the basic weighted average number of shares.
/T/
They are calculated as follows:
Three months ended Six months ended
June 30, June 30,
($000s) 2010 2009 2010 2009
----------------------------------------------------------------------------
Net earnings (loss) 3,155 (179) 8,877 (4,560)
Add back (deduct):
Current income taxes 107 172 235 367
Future income taxes 1,656 (286) 3,819 (2,462)
Finance charges 6,194 6,137 12,446 11,717
Amortization and accretion 15,198 12,096 28,303 24,908
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EBITDA 26,310 17,940 53,680 29,970
----------------------------------------------------------------------------
Add back (deduct)
Non-cash stock-based compensation 263 313 1,759 75
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Adjusted EBITDA 26,573 18,253 55,439 30,045
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Weighted average number of shares 48,487 42,498 48,484 42,450
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EBITDA per share 0.54 0.42 1.11 0.71
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Adjusted EBITDA per share 0.55 0.43 1.14 0.71
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/T/
"Funds from operations" is used to assist management and investors in analyzing cash flow and leverage. Funds from operations as presented is not intended to represent operating funds from operations 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 GAAP. Funds from operations is derived from the consolidated statements of cash flows and is calculated as follows:
/T/
Three months ended Six months ended
June 30, June 30,
($000s) 2010 2009 2010 2009
----------------------------------------------------------------------------
Cash from operations 7,628 11,808 18,365 41,850
Add back (deduct):
Changes in non-cash working capital 12,353 1,715 24,412 (21,760)
Asset retirement costs incurred 358 253 635 496
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Funds from operations 20,339 13,776 43,412 20,586
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Weighted average number of shares 48,487 42,498 48,484 42,450
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Funds from operations per share 0.42 0.32 0.90 0.48
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/T/
References to Combined divisional net margin, net margin, EBITDA, EBITDA per share, Adjusted EBITDA, Adjusted EBITDA per share and Funds from operations throughout this document have the meanings set out above.
On December 31, 2009, the sole unitholder of Newalta Income Fund (the "Fund") approved the wind-up of the Fund. Subsequent to year end, on January 1, 2010, Newalta Inc. was amalgamated with its wholly-owned operating subsidiary, Newalta Corporation, to form Newalta Corporation.
The following discussion and analysis should be read in conjunction with (i) the consolidated interim financial statements of Newalta, and the notes thereto for the three and six months ended June 30, 2010, (ii) the consolidated financial statements of Newalta and notes thereto and Management's Discussion and Analysis of Newalta for the year ended December 31, 2009, (iii) the most recently filed Annual Information Form of Newalta and (iv) the consolidated interim financial statements of Newalta and the notes thereto and Management's Discussion and Analysis for the three and six months ended June 30, 2009. This information is available at SEDAR (www.sedar.com). Information for the three and six months ended June 30, 2010, along with comparative information for 2009, is provided.
This Management's Discussion and Analysis is dated August 4, 2010 and takes into consideration information available up to that date. Throughout this document, unless otherwise stated, all currency is stated in Canadian dollars, MT is defined as "tonnes" or "metric tons" and references to shares includes trust units prior to the conversion to a corporate structure.
/T/
FINANCIAL RESULTS AND HIGHLIGHTS
Three months ended Six months ended
($000s except June 30, June 30,
per share data) % Increase % Increase
(unaudited) 2010 2009 (Decrease) 2010 2009 (Decrease)
----------------------------------------------------------------------------
Revenue 136,905 111,386 23 268,145 223,924 20
Net earnings 3,155 (179) 1863 8,877 (4,560) 295
- per share ($)
- basic 0.07 - 1762 0.18 (0.11) 264
- per share ($)
- diluted 0.06 - 1525 0.18 (0.11) 264
EBITDA(1) 26,310 17,940 47 53,680 29,970 79
- per share ($)(1) 0.54 0.42 29 1.11 0.71 56
Adjusted
EBITDA(1) 26,573 18,253 46 55,439 30,045 85
- per share ($)(1) 0.55 0.43 28 1.14 0.71 61
Cash from
operations 7,628 11,808 (35) 18,365 41,850 (56)
- per share ($) 0.16 0.28 (43) 0.38 0.99 (62)
Funds from
operations(1) 20,339 13,776 48 43,412 20,586 111
- per share ($)(1) 0.42 0.32 31 0.90 0.48 88
Maintenance
capital
expenditures(1) 6,885 1,428 382 9,933 3,474 186
Dividends
declared(1) 2,424 2,121 14 4,848 4,247 14
- per share- ($)(1) 0.05 0.05 - 0.10 0.10 -
Cash
distributed(1) 2,424 2,125 14 4,848 9,685 (50)
Growth capital
expenditures(1) 8,591 4,566 88 14,173 10,635 33
Weighted average
shares
outstanding 48,487 42,498 14 48,484 42,450 14
Shares outstanding,
June 30, 48,487 42,438 14 48,487 42,438 14
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(1) These financial measures do not have any standardized meaning prescribed
by Canadian generally accepted accounting principles ("GAAP") and are
therefore unlikely to be comparable to similar measures presented by
other issuers. Non-GAAP financial measures are identified and defined
throughout the attached Management's Discussion and Analysis.
/T/
NEWALTA
Newalta provides cost-effective solutions to industrial customers to improve their environmental performance with a focus on the recycling and recovery of products from industrial residues. These services are provided both through our network of 80 facilities across Canada and at our customers' facilities where we mobilize our equipment and people to process material directly onsite. Our customers operate in a broad range of industries including the oil and gas, petrochemical, refining, lead, manufacturing and mining industries. Newalta has delivered strong, profitable growth for over 15 years and has established a leadership position in the industry with talented people, efficient and safe operations, innovative approaches and high ethical standards.
Our strategic objective is to provide our customers with environmentally superior solutions to their complex environmental needs. We will leverage our existing talent and asset base to provide cost-effective solutions which reduce environmental footprints through recycling, recovery, reuse and where possible, eliminating transportation. Our longer term focus is to search globally for innovative ways of applying new technologies to provide solutions for existing customers as well as new markets.
SECOND QUARTER RESULTS
Q2 2010 results improved dramatically over last year as our markets continued to recover and demand for our products and services improved. Net earnings increased to $3.2 million from a net loss of $0.2 million in Q2 2009, while Adjusted EBITDA increased to $26.6 million, or $0.55 per share, from $18.3 million, or $0.43 per share. Strong incremental margins across both divisions were driven by revenue growth and our ongoing focus on productivity and cost efficiencies throughout our organization. In Q2 2010, the net impact of commodity prices and foreign exchange on Adjusted EBITDA was minimal with substantially all of the year-over-year growth attributable to improved activity levels and productivity improvements.
Q2 2010 Combined divisional net margin increased by 40% over 2009, with the Facilities Division ("Facilities") accounting for 71% of the improvement. Net margin in Facilities increased 40% year-over-year, primarily due to improved activity levels across all business units. The Onsite Division's ("Onsite") net margin also increased by 40% as a result of higher equipment utilization due to increased drilling activity and improved demand for western onsite services.
Year-to-date, the 85% increase in Adjusted EBITDA to $55.4 million was mainly due to higher activity levels and improved productivity, with only 20% of the improvement attributable to higher commodity prices.
Adjusted EBITDA on a trailing twelve-month basis improved to $107.6 million at the end of Q2 2010. The productivity improvements and cost reductions implemented in 2009 have contributed to sustained performance improvements as our markets steadily recover.
Table 1: Trailing Twelve Month Adjusted EBITDA, Revenue and Adjusted EBITDA
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During the first half of 2010, we launched our Technical Development team. We established an organizational structure, secured the appropriate staff, began a review of prospective technologies and initiated testing on certain technologies. In Q2, we were engaged to pilot and test centrifugation technology for application in oil sands tailings ponds. We are assessing opportunities to apply some of BioteQ's technologies at our facilities and customer sites where we are currently operating.
OUTLOOK
Performance in Q3 2010 is expected to be much improved over last year. Crude oil and lead prices for Q3 2010 are trending modestly above 2009 and activity levels are expected to improve. Oil & gas drilling activity is expected to continue to strengthen with the current average rig count forecast for Q3 2010 nearly double Q3 2009 levels. Volumes at both our lead acid battery recycling facility at Ville Ste-Catherine, Quebec and at our landfill at Stoney Creek, Ontario are also anticipated to be higher than 2009. We also expect continued gains from the increased demand for drill site equipment in the U.S., and from our focused expansion on onsite projects serving the refining and petrochemical industries across Canada.
We anticipate commodity prices and improved demand across all of our markets to positively contribute to performance throughout the remainder of 2010.
The Board of Directors also approved a 30% increase in the quarterly cash dividend to $0.065 per share from $0.05 per share ($0.26 per share versus $0.20 per share per annum), starting with the dividend payable to shareholders of record as of September 30, 2010.
RESULTS OF OPERATIONS - FACILITIES DIVISION
Overview
Facilities includes an integrated network of more than 55 facilities located to service key market areas across Canada employing over 900 people. This division features Canada's largest lead-acid battery recycling facility, located in Ville Ste-Catherine, Quebec ("VSC"), an engineered non-hazardous solid waste landfill located in Stoney Creek, Ontario ("SCL"), and over 25 oilfield facilities throughout western Canada. Facilities is organized into the Western Facilities, Eastern Facilities and VSC business units.
Facilities performance is affected by the following factors:
- fluctuation in the price of crude oil, lead and base oil
- state of the oil and gas industry in western Canada including drilling activity
- supply and demand in the North American battery manufacturing industry
- the amount of waste generated by producers
- fluctuation in the U.S./Canadian dollar exchange rate
- the strength of other industries in western Canada, including: construction, forestry, mining, petrochemical, pulp and paper, refining, and transportation service industries
- market conditions in eastern Canada and bordering U.S. states, including: automotive, construction, forestry, manufacturing, mining, oil and gas, petrochemical, pulp and paper, refining, steel, and transportation service industries
The business units contributed the following to division revenue:
Three months ended Six months ended
June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Western Facilities 45% 46% 46% 50%
Eastern Facilities 24% 26% 23% 23%
VSC 31% 28% 31% 27%
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Table 2: Facilities Revenue and Net Margin
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The following table compares Facilities' results for the periods indicated:
Three months ended Six months ended
June 30, June 30,
($000s) 2010 2009 % change 2010 2009 % change
----------------------------------------------------------------------------
Revenue(1) 92,521 75,995 22 184,270 153,096 20
Operating costs 62,953 53,698 17 121,839 111,648 9
Amortization and
accretion 7,545 6,602 14 14,663 13,209 11
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Net margin 22,023 15,695 40 47,768 28,239 69
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Net margin as % of
revenue 24% 21% 14 26% 18% 44
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Maintenance capital 4,852 1,028 372 6,554 2,568 155
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Growth capital(2) 977 2,257 (57) 1,428 5,690 (75)
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Assets employed(3) 555,515 569,478 (2)
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(1) Includes $189,000 and $346,000 in internal revenue in Q2 2010 and Q2
2010 year-to-date, respectively, and $341,000 and $497,000 in Q2 2009
and Q2 2009 year-to-date, respectively.
(3) "Assets employed" is provided to assist management and investors in
determining the effectiveness of the use of the assets at a divisional
level. Assets employed is the sum of capital assets, intangible assets
and goodwill allocated to each division.
/T/
Compared to Q2 2009, Facilities revenue and net margin grew by 22% and 40%, respectively. Net margin as a percentage of revenue improved from 21% in Q2 2009 to 24% in Q2 2010. Performance across all business units improved year-over-year, reflecting improved market activity as well as productivity improvements. Increased drilling activity in western Canada significantly improved volume receipts in Western Facilities. Volumes at SCL increased by 67% and performance at VSC was positively impacted by increased production.
In addition to the factors outlined above, year-to-date results were also impacted by improved commodity prices, which accounted for 18% of the increase in net margin when compared to 2009.
Western Facilities
Western Facilities are located in British Columbia, Alberta and Saskatchewan and generate revenue from:
- the processing of industrial and oilfield-generated wastes, including collection, treatment, water disposal, clean oil terminalling, custom treating, and landfilling
- sale of recovered crude oil for our account
- oil recycling, including the collection and processing of waste lube oils and the sale of finished products
Q2 2010 Western Facilities revenue increased by 20% compared to Q2 2009 largely due to increased drilling activity and improved crude oil prices. Wells drilled increased by 53% compared to Q2 2009. As a result, waste processing and recovered crude oil volumes increased by 79% and 12%.
Year-to-date revenue increased by 12% due to increased drilling activity and higher crude oil prices.
Three months ended Six months ended
June 30, June 30,
2010 2009 % change 2010 2009 % change
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Waste processing
volumes ('000 m(3)) 95 53 79 205 148 39
Recovered crude oil
('000 bbl)(1) 56 50 12 115 105 10
Average crude oil
price received
(CDN$/bbl) 70.86 59.88 18 73.37 51.95 41
Recovered crude oil
sales ($ millions) 4.0 3.0 33 8.4 5.5 53
Edmonton par price
(CDN$/bbl)(2) 75 65 15 77 57 35
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(1) Represents the total crude oil recovered and sold for our account.
(2) Edmonton par is an industry benchmark for conventional crude oil.
/T/
Table 3: Waste Processing Volumes - Western Facilities and Recovered Crude Oil - Western Facilities
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Eastern Facilities
Eastern Facilities is comprised of facilities in Ontario, Quebec and Atlantic Canada and includes an engineered non-hazardous solid waste landfill located in Stoney Creek, Ontario. Eastern revenue is primarily derived from:
- the processing of industrial wastes, including collection, treatment, and disposal
- SCL, an engineered non-hazardous solid waste landfill with an annual permitted capacity of 750,000MT of waste per year
In Q2 2010, revenue grew by 12% when compared to Q2 2009, due primarily to improved performance at SCL. The total volume collected at SCL increased by 67% driven by event-based projects.
Year-to-date revenue improved by 19% year-over-year due to higher event-based projects at SCL. For the remainder of the year, we expect landfill volumes at or about our three year quarterly average of 150,000 MT.
Three months ended Six months ended
June 30, June 30,
2010 2009 % change 2010 2009 % change
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SCL Volume Collected
('000 MT) 183.1 109.9 67 367.8 186.9 97
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/T/
Table 4: Volume Collected - Stoney Creek Landfill
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Ville Ste-Catherine ("VSC")
VSC is our lead-acid battery recycling facility. This facility generates revenue from a combination of direct lead sales and tolling fees received for processing batteries. Historically, based on the operation of two kilns, our objective is to maintain a 50/50 split between direct sales and tolling. In 2010, based on customer demand, we expect tolling to account for approximately 60% of total production. Tolling fees are generally fixed, reducing our exposure to fluctuations in lead prices.
VSC revenue in Q2 2010 increased by over 30% compared to Q2 2009 due to both higher lead prices and increased production. The average lagged LME price rose 56% in Q2 2010 to $2,107 U.S./MT from $1,354 U.S./MT in Q2 2009. This increase was partially offset by a weaker U.S. dollar. Lead tonnage sold increased by 18% to 17,100 MT in Q2 2010, consistent with our expectation.
Year-to-date revenue was also impacted by improved lead prices and increased production.
We anticipate consistent quarterly production for the remainder of 2010, ranging between 17,000 MT and 20,000 MT per quarter.
RESULTS OF OPERATIONS - ONSITE DIVISION
Overview
Onsite includes a network of 25 facilities with over 400 employees across Canada and the U.S. Onsite services involve the mobilization of equipment and our people to manage industrial by-products at our customer sites. Onsite includes: the processing of oilfield-generated wastes and the sale of recovered crude oil for our account; industrial cleaning; site remediation; dredging and dewatering; and drill site processing including solids control and drill cuttings management. Onsite includes the Western Onsite, Eastern Onsite and Heavy Oil business units.
The business units contributed the following to division revenue:
/T/
Three months ended Six months ended
June 30, June 30,
2010 2009 2010 2009
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Western Onsite 35% 18% 36% 27%
Eastern Onsite 30% 40% 28% 35%
Heavy Oil 35% 42% 36% 38%
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/T/
Onsite's performance is affected by the following factors:
- fluctuation in the price of crude oil and heavy oil price differentials
- state of the oil and gas industry in Canada and the U.S. including drilling activity
- fluctuation in the U.S./Canadian dollar exchange rate - the amount of waste generated by producers
- changes in regulations
- market conditions in Canada and bordering U.S. states, including: automotive, construction, forestry, manufacturing, mining, oil and gas, petrochemical, pulp and paper, refining, steel, and transportation service industries
Table 5: Onsite Revenue and Net Margin
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The following table compares Onsite's results for the periods indicated:
Three months ended Six months ended
June 30, June 30,
($000s) 2010 2009 % change 2010 2009 % change
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Revenue - external 44,573 35,732 25 84,221 71,325 18
Operating costs 32,288 27,219 19 61,617 56,326 9
Amortization and
accretion 3,352 2,149 56 6,718 5,150 30
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Net margin 8,933 6,364 40 15,886 9,849 61
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Net margin as % of
revenue 20% 18% 11 19% 14% 36
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Maintenance capital 1,688 400 322 2,727 907 201
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Growth capital 6,364 1,196 432 8,900 2,485 258
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Assets employed(1) 242,131 241,144 -
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(1) "Assets employed" is provided to assist management and investors in
determining the effectiveness of the use of the assets at a divisional
level. Assets employed is the sum of capital assets, intangible assets
and goodwill allocated to each division.
/T/
Revenue and net margin increased by approximately 25% and 40%, respectively, in Q2 2010 compared to Q2 2009. Net margin as a percentage of revenue increased by 11% largely due to growth in Western Onsite. Increased demand for our western onsite projects combined with higher drill site utilization as a result of recovery in drilling activity, drove growth in the quarter.
Year-to-date revenue and net margin improved significantly due to improved results from Heavy Oil driven by higher crude oil prices, and increased demand for drill site services in Western Onsite. Higher crude oil prices accounted for 12% of the increase in revenue and 25% of the increase in net margin.
Western Onsite
Revenue is primarily generated from:
- the supply and operation of drill site processing equipment, including equipment for solids control and drill cuttings management throughout western Canada and the U.S.
- onsite service in western Canada, excluding services provided by Heavy Oil, including industrial cleaning; site remediation; centrifugation; and dredging and dewatering
- environmental services serving primarily oil & gas customers
Q2 2010 Western Onsite revenue improved by 137% due to increased drilling activity in both western Canada and the U.S. Utilization of our U.S. fleet increased to 67% from 15% in Q2 2009 due primarily to activity in the Marcellus and Fayetteville shale gas plays. In western Canada, increased drilling activity improved our Canadian fleet utilization to 21% from 2% in Q2 2009. In addition, revenue was positively impacted by increased demand for onsite project work.
Year-to-date revenue improved by 56% compared to the prior year, due to the same factors impacting the Q2 results.
We anticipate continued growth in this business unit consistent with increased drilling activity in both Canada and the U.S. We will continue to balance our fleet in Canada and the U.S. to meet customer demand.
Eastern Onsite
Eastern Onsite revenue is derived from:
- onsite service in eastern Canada, including industrial cleaning; centrifugation; and dredging and dewatering
- a fleet of specialized vehicles and equipment for emergency response, and onsite processing
Compared to Q2 2009, Eastern Onsite performance was flat, despite a slower rate of economic recovery in this region. Improved performance from refocusing our business to the refining and petrochemical industry was offset by the timing of projects in Atlantic Canada. Year-to-date performance reflects similar factors.
As we establish our market position, we are engaged primarily in short term projects providing centrifugation, dredging services and industrial cleaning at our customers' sites. We expect the momentum from gains made in the refining and petrochemical industry in Q2 to drive growth in Q3 in line with the evolution of the Onsite business.
Heavy Oil
Our heavy oil services business began 15 years ago with facilities at Hughenden and Elk Point, Alberta. This business has expanded from processing heavy oil in our facility network to operating equipment on customers' sites. Leveraging our facilities as staging areas, we deliver a broad range of specialized services at numerous customer sites under short and long-term arrangements.
Heavy Oil business unit revenue is generated from three main activities:
- specialized onsite services for heavy oil producers under short and long-term arrangements
- processing and disposal of oilfield-generated wastes, including water disposal, and landfilling
- sale of recovered crude oil for our account
Compared to Q2 2009, Heavy Oil revenue increased by 5%. SAGD onsite projects continued to perform as expected with service expansion at existing short and long-term project locations. In Q2, we were successful in extending the terms of two medium-term contracts, reflecting our success in delivering cost effective and safe solutions for reducing and processing waste, and recovering oil onsite. Revenue from onsite services is generally based on processing volumes and is not directly susceptible to fluctuations in crude oil pricing.
At our Heavy Oil facilities, waste processing and recovered crude oil volumes to our account increased by 8% and 13%, respectively, due to increased waste volumes from the area served by our Heavy Oil facilities as well as higher slop oil volumes from SAGD operations.
Year-to-date revenue compared to the prior year period increased by 11% due primarily to a 33% increase in the average crude oil price received and growth in our onsite services.
Three months ended Six months ended
June 30, June 30,
2010 2009 % change 2010 2009 % change
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Waste processing
volumes ('000 m(3)) 136 126 8 260 257 1
Recovered crude oil
('000 bbl)(1) 63 56 13 105 108 (3)
Average crude oil
price received
(CDN$/bbl) 58.04 54.28 7 61.30 46.01 33
Recovered crude oil
sales ($ millions) 3.7 3.0 23 6.4 4.9 31
Bow River Hardisty
(CDN$/bbl)(2) 69.65 61.96 12 72.43 53.56 35
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(1) Represents the total crude oil recovered and sold for our account.
(2) Bow River Hardisty is an industry benchmark for heavy crude oil.
/T/
Table 6: Waste Processing Volumes - Heavy Oil Facilities and Recovered Crude Oil - Heavy Oil Facilities
http://media3.marketwire.com/docs/805nal_6.jpg /T/
CORPORATE AND OTHER
Three months ended Six months ended
June 30, June 30,
($000s) 2010 2009 % change 2010 2009 % change
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Selling, general
and administrative
expenses 15,543 12,870 21 31,355 26,477 18
("SG&A")
Less non-cash
stock-based
compensation 263 313 (16) 1,759 75 2245
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SG&A before
non-cash
stock-based
compensation 15,280 12,557 22 29,596 26,402 12
SG&A before
non-cash
stock-based
compensation
as a % of revenue 11.2% 11.3% (1) 11.0% 11.8% (7)
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/T/
SG&A before non-cash stock-based compensation increased by 22% in Q2 2010 and 12% year-to-date, compared to prior year. This increase was in line with expectation, reflecting our continued focus on managing our cost framework in concert with increasing customer demand and growth initiatives. /T/
Three months ended Six months ended
June 30, June 30,
($000s) 2010 2009 % change 2010 2009 % change
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Amortization and
accretion 15,198 12,096 26 28,303 24,908 14
as a % of revenue 11.1% 10.9% 2 10.6% 11.1% (5)
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/T/
Amortization and accretion in Q2 2010 included $1.2 million for a net loss on disposal of assets for the quarter and $1.4 million year-to-date compared to a $0.3 million net loss in Q2 2009 and $1.0 million year-to-date. Compared to Q2 2009, amortization and accretion increased due to higher depreciation for assets amortized on a unit of production basis with higher utilization. /T/
Three months ended Six months ended June
June 30, 30,
($000s) 2010 2009 % change 2010 2009 % change
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Bank fees and
interest 3,844 3,814 1 7,753 7,078 10
Convertible debentures
interest and
accretion of issue
costs 2,350 2,323 1 4,693 4,639 1
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Finance charges 6,194 6,137 1 12,446 11,717 6
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/T/
Finance charges increased year-over-year primarily due to higher credit facility and standby fees. Finance charges associated with the Convertible Debentures ("Debentures") include an annual coupon rate of 7%, the accretion of issue costs and discount on the debt portion of the Debentures. See "Liquidity and Capital Resources" in this MD&A for discussion of our long-term borrowings. /T/
Three months ended Six months ended
June 30, June 30,
($000s) 2010 2009 % change 2010 2009 % change
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Current tax 107 172 (65) 235 367 (36)
Future income tax 1,656 (286) (679) 3,819 (2,462) (255)
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Provision for
(recovery of) income
taxes 1,763 (114) (1646) 4,054 (2,095) (294)
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/T/
The increase in future income tax expense in the quarter is due to higher taxable income compared to Q2 2009. To date, loss carry forwards are approximately $178 million. Other than provincial capital taxes and U.S. state and federal income taxes, we do not anticipate paying significant income tax for at least three years. See "Critical Accounting Estimates - Income Taxes" on page 34 of the MD&A for the year ended December 31, 2009 for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
The term liquidity refers to the speed with which a company's assets can be converted into cash, as well as cash on hand. Our liquidity risk may arise from general day-to-day cash requirements, and in the management of our assets, liabilities and capital resources. Liquidity risk is managed against our financial leverage to meet obligations and commitments in a balanced manner. For further information on our risk management, refer to Note 18 to the consolidated financial statements for the year ended December 31, 2009. /T/
Our debt capital structure is as follows:
($000s) June 30, 2010 December 31, 2009
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Use of Credit Facility:
Amount drawn on Credit Facility(1) 202,051 195,199
Letters of credit 25,127 22,137
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Funded debt A 227,178 217,336
Unused Credit Facility capacity 122,822 132,664
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Debentures B 115,000 115,000
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Total Debt =A+B 342,178 332,336
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(1) See Note 5 to the consolidated financial statements for the three and
six months ended June 30, 2010. The net senior long-term debt at June
30, 2010 was $202 million.
/T/
We continue to focus on managing our working capital accounts while supporting our growth. Working capital at June 30, 2010 increased to $60.4 million from $31.0 million at December 31, 2009, due to increased activity levels, timing of receipts and payments, and our investment in BioteQ. Cash from operations was similarly impacted. Days' sales outstanding in receivables have increased slightly over year end, while accounts receivable over 90 days of $0.9 million remains consistent with Q4 2009.
At current activity levels, working capital is expected to be sufficient to meet our ongoing commitments and operational requirements of the business. We will continue to manage working capital to balance prudent management with increasing activity levels.
SOURCES OF CASH
Our liquidity needs can be sourced in several ways including: Funds from operations, borrowings against our Credit Facility, new debt instruments, the issuance of securities from treasury, return of letters of credit or replacement of letters of credit with other types of financial security, proceeds from the sale of assets and payments of dividends to shareholders.
Credit Facility
At June 30, 2010, $123 million was available and undrawn under the Credit Facility to fund growth capital expenditures and for general corporate purposes, as well as to provide letters of credit to third parties for financial security up to a maximum amount of $60 million. The aggregate dollar amount of outstanding letters of credit is not categorized in the financial statements as long-term debt; however, the issued letters of credit reduce the amount available under the Credit Facility and are included in the definition of Funded Debt for covenant purposes. Under the Credit Facility agreement, surety bonds (including performance and bid bonds) to a maximum of $125 million are excluded from the definition of Funded Debt. As at June 30, 2010, surety bonds issued and outstanding totalled $21.1 million.
Financial performance relative to the financial ratio covenants(1) under the Credit Facility is reflected in the table below: /T/
June 30, 2010 Threshold
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Current Ratio(2) 1.68:1 1.10:1 minimum
Funded Debt(3) to EBITDA(4)(5) 2.09:1 3.00:1 maximum
Fixed Charge Coverage(6) 3.25:1 1.00:1 minimum
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(1) We are restricted from declaring dividends if we are in breach of the
covenants under our Credit Facility.
(2) Current Ratio means, the ratio of consolidated current assets to
consolidated net current liabilities (excluding the current portion of
long-term debt and capital leases outstanding, if any).
(3) Funded Debt is a non-GAAP measure, the closest measure of which is
long-term senior debt. Funded Debt is generally defined as long-term
debt and capital leases including any current portion thereof but
excluding future income taxes and future site restoration costs. Funded
Debt is calculated by adding the senior long-term debt to the amount of
letters of credit outstanding at the reporting date. In calculating
Funded Debt, letters of credit returned after the end of a fiscal
quarter but prior to the date that is 45 days following the end of the
first, second or third interim period (90 days following the end of the
annual period) are excluded.
(4) EBITDA is a non-GAAP measure, the closest measure of which is net
earnings. For the purpose of calculating the covenant, EBITDA is defined
as the trailing twelve-months consolidated net income for Newalta before
the deduction of interest, taxes, depreciation and amortization, and
non-cash items (such as non-cash stock-based compensation and gains or
losses on asset dispositions). Additionally, EBITDA is normalized for
any acquisitions completed during that time frame and excludes any
dispositions incurred as if they had occurred at the beginning of the
trailing twelve-months.
(5) Funded Debt to EBITDA means the ratio of consolidated Funded Debt to the
aggregate EBITDA for the trailing twelve-months.
(6) Fixed Charge Coverage Ratio means, based on the trailing twelve-month
period, EBITDA less unfinanced capital expenditures and cash taxes to
the sum of the aggregate of principal payments (including amounts under
capital leases, if any), interest (excluding accretion for the
convertible debentures), dividends paid for such period, other than cash
payments in respect of a dividend reinvestment plan, if any. Unlike the
Funded Debt to EBITDA ratio, the Fixed Charge Coverage ratio trailing
twelve-month EBITDA is not normalized for acquisitions or dispositions.
/T/
Our Funded Debt was $227 million as at June 30, 2010 reflected an $83 million improvement over Q2 2009 and resulted in a Funded Debt to EBITDA ratio of 2.09:1. Our other covenant ratios well exceeded restrictive levels. We will manage within our covenants throughout 2010.
Debentures
The Debentures have a maturity date of November 30, 2012 and bear interest at a rate of 7.0% payable semi-annually in arrears on May 31 and November 30 each year. Each $1,000 debenture is convertible into 43.4783 shares, at a conversion price of $23.00 per share, at any time at the option of the holders of the Debentures. The Debentures are not included in calculating financial covenants in the Credit Facility.
There were no redemptions of the Debentures in 2010.
USES OF CASH
Our primary uses of funds include maintenance and growth capital expenditures as well as acquisitions, payment of dividends, operating and SG&A expenses, and the repayment of debt.
Capital Expenditures
"Growth capital expenditures" or "growth and acquisition capital expenditures" are capital expenditures that are intended to improve our efficiency and productivity, allow us to access new markets, and diversify our business. Growth capital or growth and acquisition capital are reported separately from maintenance capital because these types of expenditures are discretionary. "Maintenance capital expenditures" are capital expenditures to replace and maintain depreciable assets at current service levels. Maintenance capital expenditures are reported separately from growth activity because these types of expenditures are not discretionary and are required to maintain current operating levels.
Capital expenditures for the three and six months ended June 30, 2010 were:
Three months ended Six months ended
June 30, June 30,
($000s) 2010 2009 2010 2009
----------------------------------------------------------------------------
Growth capital expenditures 8,591 4,566 14,173 10,635
Maintenance capital expenditures 6,885 1,428 9,933 3,474
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Total capital expenditures(1) 15,476 5,994 24,106 14,109
----------------------------------------------------------------------------
(1) The numbers in this table differ from the consolidated statements of
cash flows because the numbers above do not reflect the net change in
working capital related to capital asset accruals.
/T/
Total capital expenditures for the quarter were $15.5 million. Growth capital expenditures of $8.6 million primarily related to drill site equipment in Western Onsite and centrifugation equipment for project work in our Heavy Oil business unit. Maintenance capital expenditures related primarily to the construction of landfill cells and routine process equipment refurbishment in Facilities. Capital expenditures were funded by Funds from operations.
In the first half of the year, we focused on maximizing performance as markets improved. As a result, work on growth capital projects was delayed. Projects are now moving ahead and investments are expected to be consistent with the budget of $87 million.
We may revise the budget, from time to time, in response to changes in market conditions that materially impact our financial performance and/or investment opportunities.
Dividends and Share Capital
In determining the dividend to be paid to our shareholders, the Board of Directors considers a number of factors including the forecasts for operating and financial results, maintenance and growth capital requirements as well as market activity and conditions. After a review of all factors, the Board declared $2.4 million in dividends or $0.05 per share, paid July 15, 2010 to shareholders of record as at June 30, 2010.
We will pay a dividend of $0.065 per share to holders of record on September 30, 2010. The Board will continue to review future dividends, taking into account all factors noted above.
As at August 4, 2010, Newalta had 48,486,502 shares outstanding, outstanding options to purchase up to 2,789,575 shares and a number of shares that may be issuable pursuant to the $115.0 million in Debentures (see Sources of Cash - Debentures on page 27 of the MD&A for the year December 31, 2009.)
Contractual Obligations
For the three and six months ended June 30, 2010, there were no significant changes in our contractual obligations. For a summary of our contractual obligations, see page 29 of the MD&A for the year ended December 31, 2009.
SUMMARY OF QUARTERLY RESULTS
($000s except per share data) 2010 2009
Q2 Q1 Q4 Q3 Q2 Q1
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Revenue 136,905 131,240 137,308 122,169 111,386 112,538
Earnings (loss) before
taxes 4,918 8,013 3,451 5,936 (293) (6,362)
Net earnings (loss) 3,155 5,722 4,092 3,567 (179) (4,381)
Earnings (loss) per share($) 0.07 0.12 0.09 0.08 - (0.10)
Diluted earnings (loss)
per share ($) 0.06 0.12 0.09 0.08 - (0.10)
Weighted average shares -
basic 48,487 48,480 46,770 42,438 42,450 42,402
Weighted average shares -
diluted 48,844 48,826 47,049 42,610 42,450 42,402
EBITDA 26,310 27,370 24,698 25,253 17,940 12,030
Adjusted EBITDA 26,573 28,866 25,506 26,606 18,253 11,792
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2008
Q4 Q3
----------------------------------------------------------------------------
Revenue 145,341 158,579
Earnings (loss) before taxes 5,616 19,041
Net earnings (loss) 9,085 18,717
Earnings (loss) per share ($) 0.21 0.44
Diluted earnings (loss) per
share ($) 0.21 0.44
Weighted average shares -
basic 42,266 42,102
Weighted average shares -
diluted 42,266 42,111
EBITDA 27,600 37,441
Adjusted EBITDA 27,630 36,887
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/T/
Quarterly performance is affected by, among other things, weather conditions, timing of onsite projects, commodity prices, foreign exchange rates, market demand, and the timing of our growth capital investments as well as acquisitions and the contributions from those investments. Growth capital investments completed in the first half of the year will tend to strengthen the second half financial performance. Revenue from certain business units is impacted by seasonality. However, due to the diversity of our business, the impact is limited on a consolidated basis. For example, waste volumes received at our oilfield facilities decline in the second quarter due to road bans which restrict drilling activity. This decline is offset by increased activity in our Eastern Onsite business unit due to the aqueous nature of work performed, as well as potentially by fluctuations in commodity prices, or event based waste receipts at SCL. As experienced over the last eight quarters, fluctuations in commodity prices can dramatically impact our results.
Revenue, earnings before taxes, and net earnings in Q3 2008 reflected relatively high commodity prices and strong drilling activity. However, in Q4 2008, crude oil prices declined significantly, negatively impacting revenue and earnings in the Western Facilities and Heavy Oil business units. In addition, earnings in Q4 2008 were negatively impacted by non-recurring charges related to conversion costs, reorganization charges and changes in estimated revenue associated with certain environmental projects.
In 2009, revenue and net earnings grew as the year progressed, with lower revenue, earnings before taxes, and net earnings in the first half of the year as compared to the prior period mainly due to weaker economic conditions. Lead and crude oil prices fell from historic highs achieved in 2008, continuing the negative impact on revenue and margin from Q4 2008. The improvement in Q2 2009 was driven by a combination of stronger commodity prices and management's cost containment program. In Q3 2009, we observed improved commodity prices and typical seasonal activity increases; however, our waste volumes remained below historic levels. Revenue in Q4 2009 improved due to higher commodity prices, better waste receipts at SCL and increased lead production at VSC. Weighted average shares increased reflecting the equity offering of 6 million shares completed on October 27, 2009.
Q1 2010 revenue, earnings before taxes and net earnings reflect continued improvements in commodity prices and productivity and cost efficiencies combined with strengthened demand across all business units. Q2 2010 revenue, earnings before taxes and net earnings reflect continued recovery in activity levels, consistent with expectations.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
SENSITIVITIES
Our non-cash stock based compensation expense is sensitive to changes in our share price. A $1 change in our share price, up to $15 per share, has a $2.2 million direct impact on annual non-cash stock based compensation reflected in SG&A, before the effects of vesting.
There have been no significant variations from the sensitivities provided in the MD&A for the year ended December 31, 2009. For further information on sensitivities, see page 33 of the MD&A for the year ended December 31, 2009.
FUTURE ACCOUNTING POLICY CHANGES
For information regarding our changes in accounting policies see page 45 of the Consolidated Financial Statements for the year ended December 31, 2009.
CRITICAL ACCOUNTING ESTIMATES
For the three and six months ended June 30, 2010, there have been no significant changes in our critical accounting estimates. For further information on our critical accounting estimates, see page 34 of the MD&A for the year ended December 31, 2009.
INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
In February 2008, the Canadian Accounting Standards Board ("AcSB") confirmed that Canadian publicly accountable enterprises would be required to adopt IFRS for fiscal years beginning on or after January 1, 2011. IFRS uses a conceptual framework similar to GAAP, but there are differences in recognition, measurement and disclosures.
Management established a project team to plan for and achieve a smooth transition to IFRS. An external resource was also engaged in an advisory capacity. The Audit Committee of the Board of Directors regularly receives progress reports on the status of the IFRS implementation project.
The following table summarizes our key activities, related milestones, and
accomplishments to date.
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Key Activity Milestones Status
----------------------------------------------------------------------------
Accounting policies and
procedures:
-Identification of -Finalize accounting We have completed our
differences between IFRS policy choices under internal review of
and the company's IFRS differences between IFRS
existing policies and and current policies and
procedures -Finalize opening procedures and have made
balances initial assessments of
-Accounting policy accounting policy choices.
choices under IFRS -Complete new financial We are in the process of
policies and procedures confirming these
-Financial statement manual addressing IFRS assessments with our
impact requirements. consultants and auditors.
-Opening balances Financial statement
impacts are in varying
-Financial policies and stages of assessment
procedures and/or confirmation with
consultants and auditors.
-Identification of areas
that may have a We are on track for
significant impact. finalizing opening
balances in the third
quarter of 2010, which
will be communicated
subject to audit
completion.
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Financial Statement
Preparation:
-Prepare financial -Senior management -A preliminary pro forma
statements and note approval and Audit financial statement and
disclosures in Committee review of pro note disclosure structure
compliance with IFRS forma financial was presented to senior
statements and management and the Audit
-Quantify the effects disclosures (by Q3 2010) Committee in early in
of converting to IFRS 2009.
-Prepare first-time -An updated pro forma
adoption reconciliations financial statement and
required under IFRS 1 note disclosure structure
was presented to senior
management and the Audit
Committee in Q3 2010.
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IT Infrastructure:
Identify key changes in -Ensure readiness for Required system upgrades
the following areas: parallel processing of and changes have been
2010 financial results made.
-IT system changes and and IFRS-compliant
upgrades reporting in 2011 (Q4 Parallel SAP system is
2009) operational.
-Systemic process
changes for data -Identify and recommend We are proceeding in
collection for G/L, systemic process changes accordance with our IT
disclosures, and (Q2/Q3 2009) plan.
consolidation
-Testing phase (Q3/Q4
-One-time processes due 2009)
to IFRS 1
-SAP parallel run (Q4
2009)
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Control Environment:
Internal control over
financial reporting
-Accounting policy -Complete final signoff Assessment will be ongoing
changes and approval and review of accounting throughout 2010.
policy changes by Q4
-Changes to 2010
certification process
-Update certification
process by Q4 2010
Disclosure controls and Assessment will be ongoing
procedures throughout 2010.
-Publish material
-MD&A communications changes in policies and
package known impacts of IFRS in Material changes in
the MD&A throughout 2009 policies and known impacts
-IFRS adjustments to & 2010 (starting Q3 - will be communicated
GAAP statements (2010) 2009) throughout 2010 as they
are finalized and
-2011 financial -Publish impact of confirmed with our
statement presentation conversion (with auditors.
reconciliation to GAAP)
on key measures (Q1
2011)
-Publish disclosure of
2010 comparative
information (with
reconciliation to GAAP)
in the interim and
annual financial
statements (Q1 2011)
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Training, Communication
and Other:
-Provide training to key -Develop working groups Issue specific training
stakeholders and training to sessions began in Q1 2010,
implement changes for and will continue
-Address impacts to significant impact throughout the remainder
operations due to IFRS items. of the year.
-Investor relations -Develop investor Key communication
relations communication continues to be provided
-Financial covenants plan (Q3 2009) through the MD&A.
Assessment of requirements
-Compensation packages -Review of: for further communication
is ongoing.
--Financial covenants
(by Q3 2010) Assessment of impact on
financial covenants and
--Compensation packages compensation packages is
(by Q3 2010) in progress.
Key stakeholder
communications will
continue throughout 2010.
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/T/
Management is continuing to make progress on the transition to IFRS and has shifted its focus to working with our auditors to achieve agreement on conclusions. A summary of the key areas where changes in accounting policies are expected to impact our consolidated financial statements are listed below. This summary should not be regarded as a complete list of the changes that will result from the transition to IFRS. Rather, it is intended to highlight those areas management currently believes to be the most significant. The analysis of changes is still in progress and not all decisions have been finalized where choices of accounting policies are available.
Most adjustments required on transition to IFRS will be made retrospectively against opening retained earnings as of January 1, 2010 ("transition date"). Transitional adjustments relating to those standards where comparative figures are not required to be restated will only be made as of the first day of the year of adoption.
First-Time Adoption of IFRS
The First-Time Adoption of International Financial Reporting Standard ("IFRS 1") provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions, to the general requirement for full retrospective application of IFRS. The most significant IFRS 1 exemptions expected to apply to Newalta are summarized below. /T/
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Area of IFRS Summary of Exemption Available
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Business An entity may elect, on transition to IFRS, not to
Combinations retrospectively apply IFRS 3, "Business Combinations" to
past business combinations. This election is allowed subject
to specific requirements (an entity must maintain the
classification of the acquirer and acquiree,
recognize/derecognize certain assets or liabilities as
required under IFRS and remeasure certain assets and
liabilities at fair value).
Newalta intends to elect, on transition to IFRS, to apply
this exemption and not restate business combinations prior
to the transition date.
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Property, Plant An elective exemption exists whereby an entity may elect to
and Equipment revalue, as the new cost basis for property, plant and
(Capital equipment, its fair value at the date of transition. The
Assets) exemption can be applied on an asset by asset basis.
Newalta is not planning on taking this election to revalue
any of its assets at transition date, and will continue to
measure its property, plant and equipment at historical
cost.
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Share-Based An entity may elect not to apply IFRS 2, "Share-based
Payments Payments" to equity instruments granted on or before
November 7, 2002, or which vested prior to transition to
IFRS, and may also elect not to apply IFRS 2 to liabilities
arising from share-based payment transactions which settled
before the date of transition to IFRS.
Newalta is planning on electing, on transition to IFRS, to
take this exemption and not apply IFRS 2 to equity
instruments and liabilities as described above.
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Decommissioning In accounting for changes in obligations to dismantle,
Liabilities remove and restore items of property, plant and equipment,
(Asset IFRS guidance requires changes in such obligations to be
Retirement added to or deducted from the cost of the asset to which it
Obligations) relates. The adjusted depreciable amount of the asset is
then depreciated prospectively over its remaining useful
life. Rather than recalculating the effect of all such
changes throughout the life of the obligation, an entity may
elect to measure the liability and the related depreciation
effects at the date of transition to IFRS.
Newalta intends to elect to measure any decommissioning
liabilities and the related depreciation effects at the date
of transition to IFRS.
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/T/
Expected Areas of Significance in Accounting Policies
The following table summarizes the key areas where accounting policies are expected to differ under IFRS and for which accounting policy decisions are necessary. This summary is limited to those areas (with the exception of transition policy choices made under IFRS 1 which are described above) that, based on management's assessment, may have an impact on Newalta's consolidated financial statements. /T/
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Accounting
Policy Area Summary of Differences and Decision Requirements
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Property, Plant Under IFRS, an entity is required to prospectively choose
and Equipment between the cost model and the revaluation model to account
(Capital for its capital and intangible assets. The cost model refers
Assets) to the use of an asset's carrying value as its cost less any
accumulated depreciation and impairment loss, and is
generally consistent with GAAP. Under the revaluation model
the asset is carried at its fair value as at the date of
revaluation, less any accumulated depreciation and
impairment loss. Value increases affect equity whereas
decreases (in excess of previously recognized surpluses, if
any) affect net income.
Newalta expects to continue to value property, plant and
equipment using the historical cost method. As such, the
impact of this difference under IFRS will be minimal.
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Borrowing Costs IFRS requires the capitalization of borrowing costs that are
directly attributable to the acquisition, construction or
production of a qualifying asset as part of the cost of that
asset. A qualifying asset is an asset that necessarily takes
a substantial period of time to prepare for its intended use
or sale. Borrowing costs are considered to be directly
attributable to a qualifying asset when they would have been
avoided if the expenditure on the qualifying asset had not
been made.
This change will be applied prospectively, and will result
in ongoing reduced finance charges and increased capital
asset values, which will be driven by the levels of activity
within qualifying projects in any given period.
----------------------------------------------------------------------------
Impairment Under GAAP, goodwill is tested for impairment by comparing
the fair value of the goodwill, on a reporting unit basis,
with the carrying value of the goodwill. For remaining
assets, GAAP generally uses a two-step approach to
impairment testing: first comparing asset carrying values
with undiscounted future cash flows to determine whether
impairment exists; and then measuring any impairment by
comparing asset carrying values with fair values.
With IFRS, goodwill is not tested independent of other
assets. Instead, a one step approach is used for testing for
and measuring impairment of all assets at the cash
generating unit (CGU) level. A cash-generating unit (CGU) is
the smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash
inflows from other assets or groups of assets. Any
impairment is applied first to goodwill and then prorated to
the other assets in the CGU. Impairment of assets other than
goodwill can be reversed in later periods if there is a
change in the estimate that resulted in the original
impairment.
Newalta has not yet completed its assessment of the
transition impact of this accounting policy change.
Prospective impacts will be dependent on future
circumstances.
----------------------------------------------------------------------------
Provisions IFRS requires a provision to be recognized when: there is a
including present obligation as a result of a past transaction or
Decommissioning event; it is probable that an outflow of resources will be
Liabilities required to settle the obligation; and a reliable estimate
(Asset can be made of the obligation. "Probable" in this context
Retirement means more likely than not. Under GAAP, the criterion for
Obligations) recognition in the financial statement is "likely", which is
and a higher threshold than "probable". Therefore it is possible
Constructive that there may be some contingent liabilities which would
Obligations meet the criteria for recognition under IFRS that would not
have been recognized under GAAP.
Other differences between IFRS and GAAP exist in relation to
the measurement of provisions, such as the methodology for
determining the best estimate where there is a range of
equally possible outcomes (IFRS uses the mid-point of the
range, whereas GAAP uses the low end of the range) and the
requirement under IFRS for provisions to be discounted where
material.
In measuring the Decommissioning Liability, the IFRS
requirement is based on management's best estimate of cash
flows discounted to present value using a discount rate
which is based on the risks specific to the liability
(unless those risks have been built into the cash flow
estimates). GAAP uses fair value of the obligation and cash
flows discounted using a credit adjusted risk-free rate to
discount cash flow estimates.
Newalta has not yet finalized its assessment of the ongoing
impact of this accounting policy change, but does not expect
the impact to be significant.
----------------------------------------------------------------------------
Share-Based Under GAAP, cash settled transactions and transactions
Payments containing settlement alternatives are measured and re-
measured at each reporting date using the intrinsic value
method. IFRS requires initial and subsequent measurement of
fair value by applying an option pricing model. The
difference will impact the accounting measurement of awards
of share appreciation rights and options granted under
Newalta's option plans adopted in 2006 and 2008.
Newalta has not yet finalized its assessment of the
transition impact of this accounting policy change. Future
differences between the fair value and intrinsic value of
outstanding SARs and options plans will result in different
measurements under IFRS and GAAP.
----------------------------------------------------------------------------
Income Taxes IFRS requires that deferred tax assets and liabilities must
be classified as non-current in the statement of financial
position. Under GAAP, future income taxes are classified as
current and non-current based on the classification of the
underlying assets or liabilities to which they relate, or,
if there is no underlying recognized asset or liability,
based on the expected reversal of the temporary difference.
GAAP, like IFRS, current tax represents the amount of income
taxes payable (recoverable) based on taxable profit (tax
loss) for the period and is measured based on tax rates and
laws that are enacted or substantively enacted at the
reporting date. However, the interpretation of
"substantively enacted" under GAAP may differ from IFRS.
Newalta's assessment of the impact of this accounting policy
change is ongoing.
----------------------------------------------------------------------------
/T/
The above list and related summaries should not be regarded as a complete list of changes that will result from transition to IFRS. It is intended to highlight those areas we believe to be most significant at this time; however, our assessment of the impacts of certain differences is still in process and not all decisions have been finalized where choices of accounting policies are available. Moreover, until a full set of financial statements under IFRS has been prepared, management will not be able to determine or precisely quantify all of the impacts that will result from converting to IFRS. There are significant ongoing International Accounting Standards Board ("IASB") projects that could affect the ultimate differences between GAAP and IFRS and their impact on Newalta's consolidated financial statements in future years. In particular, there may be additional new or revised IFRS standards in relation to income taxes, liabilities, leases, related party disclosures, and financial instruments. We have processes in place to ensure that such potential changes are monitored and evaluated. The future impacts of IFRS will also depend on the particular circumstances prevailing in those years. The differences described are those existing based on GAAP and IFRS as of August 4, 2010.
BUSINESS RISKS
Our business is subject to certain risks and uncertainties. Prior to making any investment decision regarding Newalta, investors should carefully consider, among other things, the risks described herein (including the risks and uncertainties listed on the front page of this Management's Discussion and Analysis) and the risk factors set forth in the most recently filed Annual Information Form of Newalta which are incorporated by reference herein.
FINANCIAL AND OTHER INSTRUMENTS
The carrying values of accounts receivable and accounts payable approximate the fair value of these financial instruments due to their short term maturities. Our credit risk from our customers is mitigated by our broad customer base and diverse product lines. In the normal course of operations, we are exposed to movements in U.S. dollar exchange rates relative to the Canadian dollar. The foreign exchange risk arises primarily from U.S. dollar denominated long-term debt and working capital. We have not entered into any financial derivatives to manage the risk for the foreign currency exposure as at June 30, 2010. In Q2 2010, our exposure to foreign exchange was mitigated by the rise in commodity prices as well as our U.S. dollar denominated long-term debt which served as a natural hedge, reducing our balance sheet exposure.
The floating interest rate profile of our long-term debt exposes us to interest rate risk. We do not use hedging instruments to mitigate this risk. The carrying value of the long-term debt approximates fair value due to its floating interest rates. For further information regarding our financial and other instruments, please refer to Note 18 to the consolidated financial statements for the year ended December 31, 2009.
In January 2010, we invested $4 million in shares and warrants in BioteQ Environmental Technologies Inc. This investment is classified as available for sale on our balance sheet and re-valued each quarter. The unrealized gain or loss on this investment is reflected on the Statements of Comprehensive Income and Accumulated Other Comprehensive Income.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
During the three months ended June 30, 2010, there have been no changes in the internal controls and procedures relating to disclosure and financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ADDITIONAL INFORMATION
Additional information relating to Newalta, including the Annual Information Form, is available through the internet on the Canadian SEDAR which can be accessed at www.sedar.com. Copies of the Annual Information Form of Newalta may be obtained from Newalta Corporation on the internet at www.newalta.com, by mail at 211 - 11th Avenue S.W., Calgary, Alberta T2R 0C6, or by facsimile at (403) 806-7032.
Consolidated Balance Sheets
June 30, December 31,
($000s) (unaudited) 2010 2009
----------------------------------------------------------------------------
Assets
Current assets
Accounts receivable 102,173 84,317
Inventories 33,637 33,148
Investment (Note 2) 4,636 -
Prepaid expenses and other 8,930 6,183
----------------------------------------------------------------------------
149,376 123,648
Note receivable 965 978
Capital assets (Note 3) 698,058 701,884
Permits and other intangible assets (Note 4) 61,022 61,935
Goodwill (Note 3) 102,897 103,597
Future tax asset 1,925 1,688
----------------------------------------------------------------------------
1,014,243 993,730
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 86,522 90,191
Dividends payable 2,424 2,423
----------------------------------------------------------------------------
88,946 92,614
Senior long-term debt (Note 5) 201,993 188,123
Convertible debentures - debt portion 111,377 110,708
Other long-term liabilities (Note 9) 1,845 1,218
Future income taxes 43,262 39,164
Asset retirement obligations (Note 6) 22,259 21,903
----------------------------------------------------------------------------
469,682 453,730
----------------------------------------------------------------------------
Shareholders' Equity
Shareholders' capital (Note 7) 552,871 552,871
Convertible debentures - equity portion 1,850 1,850
Contributed surplus 1,679 1,679
Retained earnings (deficit) (12,371) (16,400)
Accumulated other comprehensive income 532 -
----------------------------------------------------------------------------
544,561 540,000
----------------------------------------------------------------------------
1,014,243 993,730
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statements of Operations and Retained Earnings (Deficit)
For the Three For the Six
Months Ended Months Ended
June 30 June 30,
($000s except per share data)
(unaudited) 2010 2009 2010 2009
----------------------------------------------------------------------------
Revenue 136,905 111,386 268,145 223,924
Expenses
Operating 95,052 80,576 183,110 167,477
Selling, general and administrative 15,543 12,870 31,355 26,477
Finance charges 6,194 6,137 12,446 11,717
Amortization and accretion (Note 3) 15,198 12,096 28,303 24,908
----------------------------------------------------------------------------
131,987 111,679 255,214 230,579
----------------------------------------------------------------------------
Earnings (loss) before taxes 4,918 (293) 12,931 (6,655)
Provision for (recovery of) income
taxes
Current 107 172 235 367
Future 1,656 (286) 3,819 (2,462)
----------------------------------------------------------------------------
1,763 (114) 4,054 (2,095)
----------------------------------------------------------------------------
Net earnings (loss) 3,155 (179) 8,877 (4,560)
Retained earnings (deficit),
beginning of period (13,102) (17,865) (16,400) (11,358)
Dividends (Note 11) (2,424) (1,470) (4,848) (3,596)
----------------------------------------------------------------------------
Retained earnings (deficit), end of
period (12,371) (19,514) (12,371) (19,514)
----------------------------------------------------------------------------
Net earnings (loss) per share
(Note 10) 0.07 - 0.18 (0.11)
----------------------------------------------------------------------------
Diluted earnings (loss) per share
(Note 10) 0.06 - 0.18 (0.11)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Loss) and Accumulated
Other Comprehensive Income
For the Three Months For the Six Months
Ended June 30, Ended June 30,
($000s) (unaudited) 2010 2009 2010 2009
----------------------------------------------------------------------------
Net earnings (loss) 3,155 (179) 8,877 (4,560)
Other comprehensive income:
Unrealized (loss) gain on available for
sale investment(1) (467) - 532 -
----------------------------------------------------------------------------
Other comprehensive income (467) - 532 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprehensive income (loss) 2,688 (179) 9,409 (4,560)
----------------------------------------------------------------------------
Accumulated other comprehensive income,
beginning of period 999 - - -
Other comprehensive income (467) - 532 -
----------------------------------------------------------------------------
Accumulated other comprehensive income,
end of period 532 - 532 -
----------------------------------------------------------------------------
(1) Net of tax of $0.1 million and $0.2 million for the three and six months
ended June 30, 2010.
Consolidated Statements of Cash Flows
For the Three Months For the Six Months
Ended June 30 Ended June 30,
($000s) (unaudited) 2010 2009 2010 2009
----------------------------------------------------------------------------
Net inflow (outflow) of cash related
to the following activities:
Operating Activities
Net earnings (loss) 3,155 (179) 8,877 (4,560)
Items not requiring cash:
Amortization and accretion 15,198 12,096 28,303 24,908
Future income tax expense (recovery) 1,656 (286) 3,819 (2,462)
Stock based compensation expense 224 - 1,639 -
Other 106 2,145 774 2,700
----------------------------------------------------------------------------
Funds from Operations 20,339 13,776 43,412 20,586
Increase (decrease) in non-cash
working capital (Note 14) (12,353) (1,715) (24,412) 21,760
Asset retirement expenditures
incurred (358) (253) (635) (496)
----------------------------------------------------------------------------
7,628 11,808 18,365 41,850
----------------------------------------------------------------------------
Investing Activities
Additions to capital assets
(Note 14) (13,919) (9,554) (23,937) (28,281)
Net proceeds on sale of capital
assets 1,425 649 1,480 1,255
Purchase of investment (Note 2) - - (4,000) -
----------------------------------------------------------------------------
(12,494) (8,905) (26,457) (27,026)
----------------------------------------------------------------------------
Financing Activities
Issuance of shares - 4 - 252
Increase (decrease) in debt 7,289 (844) 12,927 (5,532)
Decrease in note receivable 1 62 13 141
Dividends (Note 11) (2,424) (2,125) (4,848) (9,685)
----------------------------------------------------------------------------
4,866 (2,903) 8,092 (14,824)
----------------------------------------------------------------------------
Net cash flow - - - -
Cash - beginning of period - - - -
----------------------------------------------------------------------------
Cash - end of period - - - -
----------------------------------------------------------------------------
Supplementary information:
Interest paid 7,495 7,588 10,837 10,125
Income taxes paid 200 424 300 424
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
Notes to the Interim Consolidated Financial Statements
For the three and six months ended June 30, 2010 and 2009
(all tabular data in $000s except per share and ratio data) (unaudited)
Newalta Corporation (the "Corporation" or "Newalta") was incorporated on October 29, 2008 pursuant to the laws of the Province of Alberta. Newalta completed an internal reorganization resulting in a name change from Newalta Inc. to Newalta Corporation effective January 1, 2010. Newalta provides cost-effective solutions to industrial customers to improve their environmental performance with a focus on recycling and recovery of products from industrial residues. These services are provided both through our network of 80 facilities across Canada and at our customers' facilities where we mobilize our equipment and people to process material directly onsite. Our customers operate in a broad range of industries including the oil and gas, petrochemical, refining, lead, manufacturing and mining industries.
NOTE 1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements ("financial statements") include the accounts of Newalta. The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). Certain information and disclosures normally required to be included in the notes to the audited annual financial statements have been omitted or condensed. These financial statements and the notes thereto should be read in conjunction with the consolidated financial statements of Newalta Inc. for the year ended December 31, 2009 as contained in the Annual Report for fiscal 2009.
The accounting principles applied are consistent with those as set out in the annual financial statements of Newalta Inc. for the year ended December 31, 2009.
USE OF ESTIMATES AND ASSUMPTIONS
Accounting measurements at interim dates inherently involve reliance on estimates and the results of operations for the interim periods shown in these financial statements are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the accompanying financial statements include all adjustments necessary to present fairly the consolidated results of Newalta's operations and cash flows for the periods ended June 30, 2010 and 2009.
NOTE 2. INVESTMENT
During the first quarter of 2010, Newalta acquired 3,636,364 common shares, at a price of $1.10 per share from the treasury of BioteQ Environmental Technologies Inc. ("BioteQ") for consideration of $4 million. This resulted in an initial gain of $2.8 million based on the closing bid price on the date of acquisition of the shares, including a value of $1.7 million assigned to warrants. Each share purchased includes a warrant to acquire an additional common share of BioteQ at $1.375 during the first year and $1.65 thereafter. The warrants expire after 5 years. This investment has been classified as available for sale. The warrants have been valued using a binomial valuation methodology, with an expected volatility of 44%, a risk-free interest rate of 2.2% and no expected dividend. Shares are carried at fair market value, based on the closing bid price as of the balance sheet date.
NOTE 3. DISPOSAL OF CAPITAL ASSETS AND GOODWILL
During the six months ended June 30, 2010, Newalta disposed of certain land, transport vehicles, building assets and associated goodwill with a net book value of $3.6 million for proceeds of $2.2 million of which $0.7 million remained receivable as at June 30, 2010. The resulting net loss of $1.4 million, including the disposal of goodwill having a carrying value of $0.7 million, is included in amortization and accretion in the consolidated statements of operations and retained earnings.
/T/
NOTE 4. PERMITS AND OTHER INTANGIBLE ASSETS
----------------------------------------------------------------------------
June 30, December 31,
2010 2009
----------------------------------------------------------------------------
Cost Accumulated Net Book Cost Accumulated Net Book
Amortization Value Amortization Value
----------------------------------------------------------------------------
Indefinite
permits 53,037 - 53,037 53,012 - 53,012
Expiring
permits/rights 14,650 (6,710) 7,940 14,650 (6,338) 8,312
Non-
competition
contracts 6,020 (5,975) 45 6,020 (5,409) 611
----------------------------------------------------------------------------
Total 73,707 (12,685) 61,022 73,682 (11,747) 61,935
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NOTE 5. SENIOR LONG-TERM DEBT
----------------------------------------------------------------------------
June 30, December 31,
2010 2009
----------------------------------------------------------------------------
Commitments under credit facility(1) 204,206 191,280
Issue costs (2,213) (3,157)
----------------------------------------------------------------------------
Senior long-term debt 201,993 188,123
----------------------------------------------------------------------------
(1)Includes all outstanding cheques as at period end.
/T/
The Credit Facility's maturity date is October 12, 2011. An extension of the Credit Facility may be granted at the option of the lenders. If an extension is not granted, the entire amount of the outstanding indebtedness would be due in full at the maturity date. The facility also requires Newalta to be in compliance with certain covenants. At June 30, 2010, Newalta was in compliance with all covenants.
NOTE 6. RECONCILIATION OF ASSET RETIREMENT OBLIGATIONS
The total future asset retirement obligations were estimated by management based on the anticipated costs to abandon and reclaim facilities and wells, and the projected timing of these expenditures. The reconciliation of estimated and actual expenditures for the period is provided below: /T/
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months Six months
ended June 30, ended June 30,
----------------------------------------------------------------------------
2010 2009 2010 2009
----------------------------------------------------------------------------
Asset retirement obligations, beginning of
period 22,121 21,299 21,903 21,094
Expenditures incurred to fulfill obligations (358) (253) (635) (496)
Accretion 496 465 991 913
----------------------------------------------------------------------------
Asset retirement obligations, end of period 22,259 21,511 22,259 21,511
----------------------------------------------------------------------------
/T/
NOTE 7. SHAREHOLDERS' CAPITAL
Authorized capital of Newalta Corporation consists of an unlimited number of common shares and an unlimited number of preferred shares issuable in series.
The following table is a summary of the changes in shareholders' capital during the year ended December 31, 2009 and the six months ended June 30, 2010: /T/
Shares (#) Amount ($)
----------------------------------------------------------------------------
Shares outstanding as at December 31, 2008 42,400 509,369
Shares issued (net of issue costs) 6,136 44,227
Shares cancelled and returned to treasury (60) (725)
----------------------------------------------------------------------------
Shares outstanding as at December 31, 2009 48,476 552,871
Share issuance costs - (56)
Shares issued (net of issue costs) 11 56
----------------------------------------------------------------------------
Shares outstanding as at June 30, 2010 48,487 552,871
----------------------------------------------------------------------------
NOTE 8. CAPITAL DISCLOSURES
Newalta's capital structure consists of:
----------------------------------------------------------------------------
June 30, December 31,
2010 2009
----------------------------------------------------------------------------
Senior long-term debt 204,206 191,280
Letters of Credit issued as financial security
to third parties (Note 12) 25,127 22,137
Convertible debentures, debt portion 111,377 110,708
Shareholders' equity 544,561 540,000
----------------------------------------------------------------------------
885,271 864,125
----------------------------------------------------------------------------
/T/
The objectives in managing the capital structure are to:
- Utilize an appropriate amount of leverage to maximize return on Shareholders' equity, and
- To provide for borrowing capacity and financial flexibility to support Newalta's operations.
Management and the Board of Directors review and assess Newalta's capital structure and dividend policy at least at each regularly scheduled board meeting which are held at a minimum four times annually. The financial strategy may be adjusted based on the current outlook of the underlying business, the capital requirements to fund growth initiatives and the state of the debt and equity capital markets. In order to maintain or adjust the capital structure, Newalta may:
- Issue shares from treasury
- Issue new debt securities
- Cause the return of letters of credit with no additional financial security requirements
- Replace outstanding letters of credit with bonds or other types of financial security
- Amend, revise, renew or extend the terms of its then existing long-term debt facilities
- Enter into new agreements establishing new credit facilities
- Adjust the amount of dividends paid to shareholders, and/or
- Sell idle, redundant or non-core assets.
Management monitors the capital structure based on measures required pursuant to the Credit Facility agreement which restricts Newalta from declaring dividends and distributing cash if the Corporation is in breach of a covenant under the Credit Facility. These measures include:
/T/
----------------------------------------------------------------------------
Ratio June 30, 2010 December 31, 2009 Threshold
----------------------------------------------------------------------------
Current(1) 1.68:1 1.34:1 1.10:1 minimum
Funded Debt(2) to 3.00:1 maximum
EBITDA(3)(4) 2.09:1 2.60:1
Fixed Charge Coverage(5) 3.25:1 2.24:1 1.00:1 minimum
----------------------------------------------------------------------------
(1) Current Ratio means, the ratio of consolidated current assets to
consolidated net current liabilities (excluding the current portion of
long-term debt and capital leases outstanding, if any).
(2) Funded Debt is a non-GAAP measure, the closest measure of which is long-
term senior debt. Funded Debt is generally defined as long-term debt and
capital leases including any current portion thereof but excluding
future income taxes and future site restoration costs. Funded Debt is
calculated by adding the senior long-term debt to the amount of letters
of credit outstanding at the reporting date. In calculating Funded Debt,
letters of credit returned after the end of a fiscal quarter but prior
to the date that is 45 days following the end of the first, second or
third interim period (90 days following the end of the annual period)
are excluded.
(3) EBITDA is a non-GAAP measure, the closest measure of which is net
earnings. For the purpose of calculating the covenant, EBITDA is defined
as the trailing twelve-months consolidated net income for Newalta before
the deduction of interest, taxes, depreciation and amortization, and
non-cash items (such as non-cash stock-based compensation and gains or
losses on asset dispositions). Additionally, EBITDA is normalized for
any acquisitions completed during that time frame and excludes any
dispositions incurred as if they had occurred at the beginning of the
trailing twelve-months.
(4) Funded Debt to EBITDA means the ratio of consolidated Funded Debt to the
aggregate EBITDA for the trailing twelve-months.
(5) Fixed Charge Coverage Ratio means, based on the trailing twelve-month
period, EBITDA less unfinanced capital expenditures and cash taxes to
the sum of the aggregate of principal payments (including amounts under
capital leases, if any), interest (excluding accretion for the
convertible debentures), dividends paid for such period, other than cash
payments in respect of a dividend reinvestment plan, if any. Unlike the
Funded Debt to EBITDA ratio, the Fixed Charge Coverage ratio trailing
twelve-month EBITDA is not normalized for acquisitions or dispositions.
/T/
NOTE 9. LONG-TERM INCENTIVE PLANS
a) The 2008 Option Plan
On January 4, 2010 a total of 842,500 options were granted to certain directors, officers and employees of the Corporation. The options were granted at the market price of $8.07 per share. Each tranche of the options vest over a three year period (with a five year life), and the holder of the option can exercise the option for either a share of Newalta or an amount of cash equal to the difference between the exercise price and the market price at the time of exercise. The options granted under the 2008 Plan have therefore been accounted for as stock appreciation options and the total compensation expense for these options was $0.1 million and $0.8 million for the three and six months ended June 30, 2010 ($0.1 million for the same periods in 2009).
b) Share Appreciation Rights
On January 4, 2010, 490,000 share appreciation rights were granted to certain employees of the Corporation at the market price of $8.07. On March 11, 2010, 40,000 share appreciation rights were granted to an officer of the Corporation at the market price of $8.70. Each tranche of these rights vests over a three year period (with a five year life). On this same date, the expiry date of 155,000 rights previously granted to an Officer, was amended such that the expiry date of such rights be five years from the initial grant date.
The holder of the right has the option to exercise the right for an amount of cash equal to the difference between the exercise price and the market price at the time of exercise. The rights granted have been accounted for as stock appreciation rights. Total compensation expense for these rights was $0.1 million and $0.8 million for the three and six months ended June 30, 2010 ($0.1 million for the same periods in 2009).
c) Deferred Share Unit Plan
In May 2010, Newalta implemented a Deferred Share Unit Plan pursuant to which deferred share units ("DSU") may be granted to non-employee members of the Board of Directors on an annual basis. The number of deferred share units granted to a participant is calculated by dividing (i) a specified dollar amount of the participant's annual retainer, by (ii) the five-day volume weighted average trading price of the shares of Newalta traded through the facilities of the Toronto Stock Exchange on the trading days immediately preceding the date of grant. Dividends paid on the shares of Newalta are credited as additional DSUs. Each DSU entitles the holder to receive a cash payment equal to the five-day volume weighted average trading price of the shares preceding the date of redemption. The DSUs vest immediately and may only be redeemed within the period beginning on the date a holder ceases to be a participant under the plan and ending on December 31 of the following calendar year.
During the quarter, an aggregate of 15,463 DSUs were granted to the non-employee members of the Board of Directors representing the 2010 grant. Total compensation expense for these DSUs was $0.1 million for the three and six months ended June 30, 2010 (nil for the same periods in 2009).
d) Other Long-term liabilities
Other long-term liabilities consist of non-current obligations under the Corporation's long-term incentive plans.
NOTE 10. EARNINGS PER SHARE
Basic earnings per share calculations for the three and six months ended June 30, 2010 and 2009 were based on the weighted average number of shares outstanding for the periods. Diluted earnings per share include the potential dilution of the outstanding options to acquire shares and from the conversion of the Debentures.
The calculation of dilutive earnings per share does not include anti-dilutive options. These options would not be exercised during the period because their exercise price is higher than the average market price for the period. The inclusion of these options would cause the diluted earnings per share to be overstated. The number of excluded options for the three and six months ended June 30, 2010 was 1,072,700 (1,937,000 for the same periods in 2009).
The dilutive earnings per share calculation does not include the impact of anti-dilutive Debentures. These debentures would not be converted to shares during the period because the current period interest (net of tax) per share obtainable on conversion exceeds basic earnings per share. The inclusion of the Debentures would cause the diluted earnings per share to be overstated. The number of shares issuable on conversion of the Debentures excluded for the three and six months ended June 30, 2010 was 5,000,000 (5,000,000 for the same periods in 2009).
/T/
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
2010 2009 2010 2009
----------------------------------------------------------------------------
Weighted average number of shares 48,487 42,498 48,484 42,450
Net additional shares if rights
exercised 357 - 290 -
Net additional shares if debentures
converted - - - -
----------------------------------------------------------------------------
Diluted weighted average number of
shares 48,844 42,498 48,774 42,450
----------------------------------------------------------------------------
----------------------------------------------------------------------------
/T/
NOTE 11. DIVIDENDS DECLARED AND PAID
During the quarter, Newalta declared a dividend of $0.05 per share to holders of shares of record on June 30, 2010. This dividend was paid on July 15, 2010.
NOTE 12. COMMITMENTS
As at June 30, 2010, Newalta had issued letters of credit and surety bonds in respect of compliance with environmental licenses in the amount of $25.1 million and $21.1 million respectively.
NOTE 13. FINANCIAL INSTRUMENTS
a) Fair Value of Financial Assets and Liabilities
Newalta's financial instruments include accounts receivable, investment, note receivable, accounts payable and accrued liabilities, dividends payable, senior long-term debt and debentures. The fair values of Newalta's financial instruments that are included in the consolidated balance sheet, with the exception of the debentures, approximate their recorded amount due to the short term nature of those instruments for accounts receivable, accounts payable and accrued liabilities and for senior long-term debt and the note receivable due to the floating nature of the interest rate applicable to these instruments. The fair values incorporate an assessment of credit risk. The carrying values of Newalta's financial instruments at June 30, 2010 are as follows:
----------------------------------------------------------------------------
Total
Held for Loans and Available Other Carrying
trading Receivables for sale Liabilities Value
----------------------------------------------------------------------------
Accounts receivable - 102,173 - - 102,173
Investment - - 4,636 - 4,636
Note receivable - 965 - - 965
Accounts payable and
accrued liabilities - - - 86,522 86,522
Dividends payable - - - 2,424 2,424
Senior long-term
debt(1) - - - 201,993 201,993
----------------------------------------------------------------------------
(1) Net of related costs.
The fair value of the Debentures is based on the closing trading price on
the Toronto Stock Exchange as follows:
----------------------------------------------------------------------------
As at June 30, 2010
Carrying value(1) Quoted fair value
----------------------------------------------------------------------------
7% Convertible debentures due
November 30, 2012 113,227 119,025
----------------------------------------------------------------------------
(1) Includes both the debt and equity portions.
/T/
Newalta categorizes its financial instruments carried at fair value into one of three different levels depending on the significance of inputs employed in their measurement.
Level 1 includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date. An active market for an asset or liability is considered to be a market where transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Instruments valued using Level 1 inputs include our Debentures.
Level 2 includes valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. Financial instruments in this category are valued using models or other industry standard valuation techniques derived from observable market data. Such valuation techniques include inputs such as quoted forward prices, time value, volatility factors and broker quotes that can be observed or corroborated in the market for the entire duration of the derivative instrument. Instruments valued using Level 2 inputs include our investment in BioteQ.
Level 3 includes valuations based on inputs which are less observable, unavailable or where the observable data does not support a significant portion of the instruments' fair value. Generally, Level 3 valuations are longer dated transactions, occur in less active markets, occur at locations where pricing information is not available, or have no binding broker quote to support Level 2 classification. At June 30, 2010 and December 31, 2009, Newalta did not have any Level 3 assets or liabilities.
b) Financial Instrument Risk Management
Credit risk and economic dependence
Newalta is subject to credit risk on its trade accounts receivable balances. The customer base is large and diverse and no single customer balance exceeds 20% of total accounts receivable. Newalta views the credit risks on these amounts as normal for the industry. Credit risk is minimized by Newalta's broad customer base and diverse product lines and is mitigated by the ongoing assessment of the credit worthiness of its customers as well as monitoring the amount and age of balances outstanding.
Revenue from Newalta's largest customer represented 14% of revenue for the three and six months ended June 30, 2010 (14% and 10% for the three and six months ended June 30, 2009). This revenue is recognized within our Facilities segment.
Based on the nature of its operations, established collection history, and industry norms, receivables are not considered past due until 90 days after invoice date although standard payment terms require payment within 30 to 120 days. Depending on the nature of the service and/or product, customers may be provided with extended payment terms while Newalta gathers certain processing or disposal data. Included in the Corporation's trade receivable balance, are receivables totalling $0.9 million which are considered to be outstanding beyond normal repayment terms at June 30, 2010. A provision of $0.8 million has been established as an allowance for doubtful accounts. Newalta does not hold any collateral over these balances.
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Trade Allowance
Receivables aged by for doubtful
Aging invoice date accounts Net Receivables
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June 30, December 31, June 30, December 31, June 30, December 31,
2010 2009 2010 2009 2010 2009
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Current 62,222 53,981 12 13 62,210 53,968
31-60 days 16,202 15,454 5 21 16,197 15,433
61-90 days 3,753 3,159 32 65 3,721 3,094
91 days + 860 791 721 725 139 66
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Total 83,037 73,385 770 824 82,267 72,561
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/T/
To determine the recoverability of a trade receivable, management analyzes accounts receivable, first identifying customer groups that represent minimal risk (large oil and gas and other low risk large companies, governments and municipalities). Impairment of the remaining accounts is determined by identifying specific accounts that are at risk, and then by applying a formula based on aging to the remaining amounts receivable. All amounts identified as impaired are provided for in an allowance for doubtful accounts. /T/
The changes in this account for the six months ended June 30, 2010 are as follows: ---------------------------------------------------------------------------- Allowance for doubtful accounts June 30, 2010 ---------------------------------------------------------------------------- Balance, beginning of period 824 Additional amounts provided for (112) Amounts written off as uncollectible (180) Amounts recovered during the period 238 ---------------------------------------------------------------------------- Balance, end of period 770 ---------------------------------------------------------------------------- /T/
Liquidity risk Ultimate responsibility for liquidity risk management rests with the Board of Directors of Newalta, which has built an appropriate liquidity risk management framework for the management of the Corporation's short, medium and long-term funding and liquidity management requirements. Management mitigates liquidity risk by maintaining adequate reserves, banking facilities and other borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Interest rate risk Newalta is exposed to interest rate risk to the extent that its credit facility has a variable interest rate. Management does not enter into any derivative contracts to manage the exposure to variable interest rates. The Debentures have a fixed interest rate until November 30, 2012, at which point, any remaining Debentures will need to be repaid or refinanced. The table below provides an interest rate sensitivity analysis for the three and six months ended June 30, 2010: /T/
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Three months ended Six months ended
June 30, 2010 June 30, 2010
----------------------------------------------------------------------------
Net earnings
----------------------------------------------------------------------------
If interest rates increased by 1% with
all other values held constant (374) (750)
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/T/
Market risk Market risk is the risk that the fair value or future cash flows of Newalta's financial instruments will fluctuate because of changes in market prices. Newalta is exposed to foreign exchange market risk. Foreign exchange risk refers to the risk that the value of a financial commitment, recognised asset or liability will fluctuate due to changes in foreign currency exchange rates. The risk arises primarily from U.S. dollar denominated long-term debt and working capital. As at June 30, 2010, Newalta had $27.3 million in working capital and $17.4 million in long-term debt denominated in U.S. dollars. Management has not entered into any financial derivatives to manage the risk for the foreign currency exposure as at June 30, 2010. The table below provides a foreign currency sensitivity analysis on long-term debt and working capital outstanding as at June 30, 2010: /T/
Net earnings
----------------------------------------------------------------------------
If the value of the U.S. dollar increased by $0.01 with all
other variables held constant 73
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/T/
Newalta is exposed to investment risk as the Company holds investments in the common shares of BioteQ which give rise to market risk and share price variance. Management monitors the trading of these shares in order to minimize this risk. The table below provides a sensitivity analysis on this investment as at June 30, 2010: /T/
Other
Comprehensive
Income
----------------------------------------------------------------------------
If the value of BioteQ's shares increased by $0.01 with all
other variables held constant 27
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NOTE 14. CASH FLOW STATEMENT INFORMATION
The following tables provide supplemental information.
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Changes in current assets (19,337) 2,123 (25,728) 37,750
Changes in current liabilities 7,853 (7,169) (3,668) (35,322)
Investment (535) 4,636
Dividends / distributions payable - 3 (1) 5,438
Stock based compensation, foreign
exchange and other 546 (345) (234) (571)
Changes in capital asset accruals (880) 3,673 583 14,375
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Total increase (decrease) in non-cash
working capital (12,353) (1,715) (24,412) 21,760
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Three months ended Six months ended
June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
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Foreign exchange (633) 1,017 (645) 1,156
Accretion of convertible debentures 337 311 668 649
Amortization of deferred financing
charges 471 588 943 981
Other (70) (78) (194) (156)
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Total other items not requiring cash 105 (1,838) 772 2,630
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Three months ended Six months ended
June 30, June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash additions to capital assets
during the year (14,799) (5,881) (23,354) (13,906)
Changes in capital asset accruals 880 (3,673) (583) (14,375)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total cash additions to capital
assets (13,919) (9,554) (23,937) (28,281)
----------------------------------------------------------------------------
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/T/
NOTE 15. SEGMENTED INFORMATION Effective January 1, 2010, Newalta reorganized its reporting structure into two divisions, Onsite and Facilities, which constitute our two reportable segments. The reportable segments are distinct strategic business units whose operating results are regularly reviewed by the Corporation's executive officers in order to assess financial performance and make resource allocation decisions. The reportable segments have separate operating management and operate in distinct competitive and regulatory environments. The Facilities segment includes the processing of industrial and oilfield-generated wastes including collection, treatment, and disposal; clean oil terminalling; custom treating; the sale of recovered crude oil for our account; oil recycling; and lead battery recycling. The Onsite segment involves the mobilization of equipment and staff to process waste at our customer sites, including the processing of oilfield-generated wastes, the sale of recovered crude oil; industrial cleaning; site remediation; dredging and dewatering; and drill site processing including solids control and drill cuttings management. Newalta had previously reported Western and Eastern reportable segments. As such 2009 comparative information has been restated to present information under the applicable new segments. /T/
For the Three Months Ended June 30, 2010
Inter- Consolidated
Facilities Onsite segment Unallocated(3) Total
----------------------------------------------------------------------------
External revenue 92,332 44,573 - - 136,905
Inter segment
revenue(1) 189 - (189) - -
Operating expense 62,953 32,288 (189) - 95,052
Amortization and
accretion expense 7,545 3,352 - 4,301 15,198
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Net margin 22,023 8,933 - (4,301) 26,655
Selling, general
and administrative - - - 15,543 15,543
Finance charges - - - 6,194 6,194
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Earnings (loss)
before taxes 22,023 8,933 - (26,038) 4,918
----------------------------------------------------------------------------
Capital
expenditures and
acquisitions(2) 5,829 8,052 - 1,595 15,476
----------------------------------------------------------------------------
Goodwill 44,381 58,516 - - 102,897
----------------------------------------------------------------------------
Total assets 646,757 286,848 - 80,638 1,014,243
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----------------------------------------------------------------------------
For the Three Months Ended June 30, 2009
Inter- Consolidated
Facilities Onsite segment Unallocated(3) Total
----------------------------------------------------------------------------
External revenue 75,654 35,732 - - 111,386
Inter segment
revenue(1) 341 - (341) - -
Operating expense 53,698 27,219 (341) - 80,576
Amortization and
accretion expense 6,602 2,149 - 3,345 12,096
----------------------------------------------------------------------------
Net margin 15,695 6,364 - (3,345) 18,714
Selling, general
and
administrative - - - 12,870 12,870
Finance charges - - - 6,137 6,137
----------------------------------------------------------------------------
Earnings (loss)
before taxes 15,695 6,364 - (22,352) (293)
----------------------------------------------------------------------------
Capital
expenditures and
acquisitions(2) 3,285 1,596 - 1,113 5,994
----------------------------------------------------------------------------
Goodwill 44,381 59,216 - - 103,597
----------------------------------------------------------------------------
Total assets 650,820 273,909 - 78,786 1,003,515
----------------------------------------------------------------------------
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(1) Inter-segment revenue is recorded at market, less the costs of serving
external customers.
(2) Includes capital asset additions and the purchase price of acquisitions.
(3) Management does not allocate selling, general and administrative, taxes,
and interest costs in the segment analysis.
For the Six Months Ended June 30, 2010
Inter- Consolidated
Facilities Onsite segment Unallocated(3) Total
----------------------------------------------------------------------------
External revenue 183,924 84,221 - - 268,145
Inter segment
revenue(1) 346 - (346) - -
Operating expense 121,839 61,617 (346) - 183,110
Amortization and
accretion expense 14,663 6,718 - 6,922 28,303
----------------------------------------------------------------------------
Net margin 47,768 15,886 - (6,922) 56,732
Selling, general
and administrative - - - 31,355 31,355
Finance charges - - - 12,446 12,446
----------------------------------------------------------------------------
Earnings (loss)
before taxes 47,768 15,886 - (50,723) 12,931
----------------------------------------------------------------------------
Capital
expenditures and
acquisitions(2) 7,982 11,627 - 4,497 24,106
----------------------------------------------------------------------------
Goodwill 44,381 58,516 - - 102,897
----------------------------------------------------------------------------
Total assets 646,757 286,848 - 80,638 1,014,243
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the Six Months Ended June 30, 2009
Inter- Consolidated
Facilities Onsite segment Unallocated(3) Total
----------------------------------------------------------------------------
External revenue 152,599 71,325 - - 223,924
Inter segment
revenue(1) 497 - (497) - -
Operating expense 111,648 56,326 (497) - 167,477
Amortization and
accretion expense 13,209 5,150 - 6,549 24,908
----------------------------------------------------------------------------
Net margin 28,239 9,849 - (6,549) 31,539
Selling, general
and
administrative - - - 26,477 26,477
Finance charges - - - 11,717 11,717
----------------------------------------------------------------------------
Earnings (loss)
before taxes 28,239 9,849 - (44,743) (6,655)
----------------------------------------------------------------------------
Capital
expenditures and
acquisitions(2) 8,258 3,392 - 2,459 14,109
----------------------------------------------------------------------------
Goodwill 44,381 59,216 - - 103,597
----------------------------------------------------------------------------
Total assets 650,820 273,909 - 78,786 1,003,515
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Inter-segment revenue is recorded at market, less the costs of serving
external customers.
(2) Includes capital asset additions and the purchase price of acquisitions.
(3) Management does not allocate selling, general and administrative, taxes,
and interest costs in the segment analysis.
/T/
Newalta Corporation Anne M. MacMicken Executive Director, Investor Relations (403) 806-7019 www.newalta.com