Newalta Corporation ("Newalta") (TSX:NAL) today reported results for the fourth
quarter and year ended December 31, 2012.
FINANCIAL HIGHLIGHTS(1)
Three months ended Year ended
December 31, December 31,
($000s except % Increase % Increase
per share data) 2012 2011 (Decrease) 2012 2011 (Decrease)
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Revenue 198,445 184,089 8 726,209 682,828 6
Gross profit 39,037 42,740 (9) 169,758 165,509 3
- % of revenue 20% 23% (13) 23% 24% (4)
Net earnings 4,124 6,031 (32) 42,804 33,562 28
- per share
($) - basic 0.08 0.12 (33) 0.86 0.69 25
- per share
($) - basic
adjusted(2) 0.17 0.19 (11) 0.84 0.85 (1)
- per share
($) - diluted 0.08 0.12 (33) 0.85 0.68 25
Adjusted
EBITDA(2) 33,290 36,677 (9) 142,136 146,475 (3)
- per share
($)(2) 0.63 0.76 (17) 2.86 3.02 (5)
Cash from
operations 47,392 51,390 (8) 97,179 104,563 (7)
- per share
($) 0.90 1.06 (15) 1.96 2.15 (9)
Funds from
operations(2) 22,303 25,352 (12) 116,616 122,775 (5)
- per share
($)(2) 0.42 0.52 (19) 2.35 2.53 (7)
Maintenance
capital
expenditures(2) 12,089 11,914 1 34,952 31,051 13
Growth capital
expenditures(2) 45,311 33,375 36 137,388 86,629 59
Dividends
declared 5,424 3,889 39 18,918 14,818 28
- per share
($)(2) 0.10 0.08 25 0.38 0.31 23
Dividends paid 4,870 3,888 25 17,382 14,082 23
Book value per
share, December
31 11.82 11.15 6 11.82 11.15 6
Weighted average
shares
outstanding 52,741 48,569 9 49,690 48,569 2
Shares
outstanding,
December 31(3) 54,263 48,607 12 54,263 48,607 12
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(1) Management's Discussion and Analysis and Newalta's Consolidated Financial
Statements and notes are attached. References to Generally Accepted Accounting
Principles ("GAAP") are synonymous with IFRS and references to Consolidated
Financial Statements and notes are synonymous with Financial Statements.
(2) These financial measures do not have any standardized meaning prescribed by
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.
(3) Newalta has 54,410,235 shares outstanding as at February 13, 2013.
Management Commentary
"Steep declines in the prices for our recovered products and reduced drilling
activity in western Canada dampened otherwise solid performance in the quarter
and for the year," said Al Cadotte, President and CEO of Newalta. "Most of the
challenges we faced are dissipating and commodity prices are stabilizing.
Returns from our 2012 capital and strengthening market demand are expected to
drive improved results in the quarters ahead."
Fourth quarter results were below management's expectations as outlined in our
Q3 2012 outlook, primarily due to the following key factors:
-- Sharp decline in recovered crude oil and base oil prices in the latter
part of the quarter, directly impacting our results
-- Our pricing for conventional and heavy oil fell dramatically from
October over the latter part of the quarter, by 22% and 37%,
respectively, due to the wider differentials experienced across the
Western Canadian Sedimentary Basin ("WCSB"). The prices we receive
for conventional and heavy oil are tied to Edmonton Par and Bow
River. Further, Motiva (base oil) prices followed a similar pattern
declining by 7% during the quarter.
Commodity Pricing August 2012 to January 2013:
http://media3.marketwire.com/docs/213nal_graphs.pdf
-- Decline in drilling activity in western Canada
-- Active rigs fell by 28% in the quarter, year-over-year, much more
than anticipated. Reduced drilling activity primarily impacted our
drill site equipment rental business in western Canada, as evidenced
by equipment utilization declining from 68% in Q4 2011 to 36% in Q4
2012. Reduced waste volumes at oilfield facilities were offset by
increased recovered crude oil volumes as well as operational
efficiencies.
Active Rigs - Western Canada(1): http://media3.marketwire.com/docs/213nal_graphs.pdf
(1) Source - Canadian Association of Oilwell Drilling Contractors ("CAODC")
-- Early winter freeze-up, impacting processing volumes of Mature Fine
Tailings ("MFT")
-- Production delays driven by colder than expected weather restricted
processing of MFT. Most, if not all, of the shortfall is anticipated
to be recovered in 2013.
"Potential in our key growth areas remains unchanged and our business
fundamentals remain strong," said Mr. Cadotte. "We made significant progress
with our long-range growth plan in 2012, preparing us to capitalize on the many
opportunities present in all areas of the business in 2013.
We met a number of objectives in 2012, specifically, we:
-- increased our long-term onsite contract revenue base to 9% of revenue,
up from 3% in 2011;
-- established a leadership position in the area of MFT processing which
may lead to additional contract work;
-- grew our U.S. revenue by 25%;
-- aligned the organization in three new divisions to enhance customer
service and to support key growth areas;
-- strengthened the organization through talent development programs and
the addition of new talent, growing our employee base by 10% to over
2,200 people;
-- invested $137 million to drive growth in 2013;
-- increased the dividend by 25% compared to 2011; and,
-- completed a $77 million equity offering to strengthen our balance sheet.
"Our markets continue to improve but progress remains choppy. We have the
financial capacity, including proceeds from the recent equity financing, to
weather short-term fluctuations in commodity prices and market demand as we
experienced in the fourth quarter. We will continue to execute our long-term
plan to deliver strong, profitable growth and outstanding returns to investors
for many years ahead."
Results of Q4 2012 Compared to Q4 2011
-- Revenue increased 8%, Adjusted EBITDA and net earnings declined 9% and
32%, respectively. Lower prices for recovered products impacted Adjusted
EBITDA by $5.3 million;
-- Revenue and gross profit from Facilities were $122.9 million and $21.7
million, down 1% and 17%, respectively. Active rigs decreased by 28% and
meters drilled were down 20%. Cost efficiencies realized in the quarter
at our Western Facilities were offset by lower oilfield activity and the
impact of lower recovered product prices. Lower sales volumes and
increased procurement costs at Ville Ste-Catherine ("VSC") also impacted
results year-over-year;
-- Onsite revenue and gross profit in the quarter grew 26% and 5%,
respectively, to $75.5 million and $17.3 million. Strong demand for our
contract and project services was impacted by reduced drilling activity
and lower recovered oil prices;
-- Adjusted SG&A (SG&A before stock-based compensation and amortization)
was flat compared to last year at $19.5 million.
Results of 2012 Compared to 2011
-- Revenue was up 6%, Adjusted EBITDA was down 3% while net earnings
increased 28%. Stronger demand for our services was offset by the lower
value received for our products of $13.4 million and higher Adjusted
SG&A expenses. Lower finance charges, deferred income tax expense and a
gain on embedded derivatives contributed to the increase in net
earnings;
-- Facilities revenue and gross profit were $446.2 million and $100.0
million, down 4% and 6%, respectively. Gains from productivity
improvements and increased recovered oil volumes were offset by lower
recovered product prices, reduced waste volumes and lower lead sales at
VSC as well as lower oilfield activity;
-- Onsite revenue and gross profit grew 28% and 19%, respectively, to
$280.0 million and $69.7 million. Contributions from our MFT contract
and higher project activity more than offset the impact of lower
drilling activity and recovered crude oil prices;
-- Adjusted SG&A (SG&A before stock-based compensation and amortization)
was $74.3 million in 2012, a 9% increase over the prior year due to
investments in people and people development to support our growth in
2013. Adjusted SG&A remains in line with our expectation of 10% of
annual revenue;
-- Return on capital was 13.3% compared to 15.2% in 2011;
-- Total Debt to Adjusted EBITDA was 2.41 compared to 2.35 in 2011.
Other Highlights:
-- Capital expenditures for the three months and year ended December 31,
2012, were $57.4 million and $172.3 million, respectively, ahead of our
projected $155.0 million. The increased capital expenditure
predominantly relates to equipment for the MFT contract, technical
development, U.S. onsite projects and efficiency improvements in Western
Facilities. Growth capital expenditures for the quarter and year
primarily related to facility and service expansion at our Western
Facilities and equipment for contract work in our Heavy Oil business
unit;
-- Our 2013 capital budget remains at $190 million, a 10% increase over
2012 capital. Growth and maintenance capital expenditures are expected
to be $155 million and $35 million, respectively. We expect to spend
approximately 40% of the capital budget in the first half of 2013. We
may revise the capital budget, from time-to-time, in response to changes
in market conditions that materially impact our financial performance
and/or investment opportunities. The capital program will be
predominantly funded through cash flow from operations and the proceeds
from the equity offering completed in the fourth quarter of 2012;
-- In the fourth quarter, Newalta completed an equity financing with the
issuance of 5.5 million common shares for gross proceeds of $77 million
(net proceeds of $74.4 million);
-- A dividend of $0.10 per share ($0.40 per share annualized) was declared,
payable January 15, 2013 to shareholders of record December 31, 2012.
Quarterly Conference Call
Management will hold a conference call on Thursday, February 14, 2013 at 11:00
a.m. (ET) to discuss Newalta's performance for the fourth quarter and year ended
December 31, 2012. To participate in the teleconference, please call 1-
800-766-6630. 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, February, 21, 2013 by
dialing 1- 800-408-3053 and using the pass code 3871450 followed by the pound
sign.
About Newalta
Newalta is North America's leading provider of innovative, engineered
environmental solutions that enable customers to reduce disposal, enhance
recycling and recover valuable resources from industrial residues. We serve
customers onsite directly at their operations and through a network of 85
facilities in Canada and the U.S. Our proven processes, portfolio of more than
250 operating permits and excellent record of safety make us the first choice
provider of sustainability enhancing services to oil, natural gas,
petrochemical, refining, lead, manufacturing and mining markets. With a skilled
team of more than 2,000 people, two decade track record of profitable expansion
and unwavering commitment to commercializing new solutions, Newalta is
positioned for sustained future growth and improvement. Newalta trades on the
TSX as NAL. For more information, visit www.newalta.com.
NEWALTA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months and years ended December 31, 2012 and 2011
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 and the subsidiaries
of Newalta Corporation, 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;
-- anticipated industry activity levels;
-- 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 growth capital investments,
acquisitions and our technical development initiatives;
-- 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;
-- the highly regulated nature of the environmental services and waste
management business in which we operate;
-- dependence on our senior management team and other operations management
personnel with waste industry experience;
-- the competitive environment of our industry in Canada and the U.S.;
-- success of our growth, acquisition and technical development strategies
including integration of businesses and processes into our operations
and potential liabilities from acquisitions;
-- potential operational and safety risks and hazards and obtaining
insurance for such risks and hazards on reasonable financial terms;
-- the seasonal nature of our operations;
-- costs associated with operating our landfills and reliance on third
party waste volumes;
-- risk of pending and future legal proceedings;
-- our ability to attract and retain skilled employees and maintain
positive labour union relationships;
-- 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, and potential dilution for shareholders in the event of a sale
of additional shares;
-- financial covenants in our debt agreements that may restrict our ability
to engage in transactions or to obtain additional financing; 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 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 ("MD&A") contains references to
certain financial measures, including some that do not have any standardized
meaning prescribed by International Financial Reporting Standards ("IFRS" or
"GAAP") and may not be comparable to similar measures presented by other
corporations or entities. These financial measures are identified and defined
below:
"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
stock-based compensation. 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.
They are calculated as follows:
Three months ended Year ended
December 31, December 31,
($000s) 2012 2011 2012 2011
----------------------------------------------------------------------------
Net earnings 4,124 6,031 42,804 33,562
Add back:
Income taxes 706 2,578 11,208 14,187
Net Finance charges 5,238 8,505 13,357 28,191
Amortization 17,797 16,401 62,509 62,856
----------------------------------------------------------------------------
EBITDA 27,865 33,515 129,878 138,796
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Add back:
Stock-based compensation expense 5,425 3,162 12,258 7,679
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Adjusted EBITDA 33,290 36,677 142,136 146,475
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Weighted average number of shares 52,741 48,569 49,690 48,569
----------------------------------------------------------------------------
EBITDA per share 0.53 0.69 2.61 2.86
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Adjusted EBITDA per share 0.63 0.76 2.86 3.02
----------------------------------------------------------------------------
"Adjusted net earnings" and "Adjusted net earnings per share" are measures of
our profitability. Adjusted net earnings provides an indication of the results
generated by our principal business activities prior to recognizing stock-based
compensation expense and the gain or loss on embedded derivatives. Stock-based
compensation expense, a component of employee remuneration, can vary
significantly with changes in the price of our common shares. The gain on the
embedded derivative is a result of the change in the trading price of the
debentures and the volatility of the applicable bond market. As such, Adjusted
net earnings provides improved continuity with respect to the comparison of our
results over a period of time. Adjusted net earnings per share is derived by
dividing Adjusted net earnings by the basic weighted average number of shares.
Three months ended Year ended
December 31, December 31,
($000s) 2012 2011 2012 2011
----------------------------------------------------------------------------
Net earnings 4,124 6,031 42,804 33,562
Add back (deduct):
Stock-based compensation expense 5,425 3,162 12,258 7,679
Embedded derivative gain (602) - (13,439) -
----------------------------------------------------------------------------
Adjusted net earnings 8,947 9,193 41,623 41,241
----------------------------------------------------------------------------
Adjusted net earnings per share 0.17 0.19 0.84 0.85
----------------------------------------------------------------------------
"Book value per share" is used to assist management and investors in evaluating
the book value compared to the market value.
Year ended December 31,
($000s) 2012 2011
----------------------------------------------------------------------------
Total Equity 641,440 541,921
Shares outstanding, December 31, 54,263 48,607
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Book value per share 11.82 11.15
----------------------------------------------------------------------------
"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 IFRS. Funds from operations is derived from the consolidated
statements of cash flows and is calculated as follows:
Three months ended Year ended
December 31, December 31,
($000s) 2012 2011 2012 2011
----------------------------------------------------------------------------
Cash from operations 47,392 51,390 97,179 104,563
Add back (deduct) :
(Decrease) increase in non-cash (26,772) (27,749) 15,883 14,856
working capital
Decommissioning obligations 1,683 1,711 3,554 3,356
incurred
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Funds from operations 22,303 25,352 116,616 122,775
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Weighted average number of shares 52,741 48,569 49,690 48,569
----------------------------------------------------------------------------
Funds from operations per share 0.42 0.52 2.35 2.53
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"Return on capital" is used to assist management and investors in measuring the
returns realized from capital employed.
($000s) 2012 2011
----------------------------------------------------------------------------
Adjusted EBITDA 142,136 146,475
Total assets 1,318,758 1,165,021
Current liabilities 193,796 157,954
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Capital employed 1,124,962 1,007,067
----------------------------------------------------------------------------
2-Year net assets average 1,066,015 965,527
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Return on capital (%) 13.3% 15.2%
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Trailing Twelve-Month Return on Capital:
http://media3.marketwire.com/docs/213nal_graphs.pdf
References to EBITDA, EBITDA per share, Adjusted EBITDA, Adjusted EBITDA per
share, Adjusted net earnings, Adjusted net earnings per share, Funds from
operations, Funds from operations per share and Return on capital throughout
this document have the meanings set out above. Adjusted SG&A has the meaning
described in the section titled "Corporate and Other".
The following discussion and analysis should be read in conjunction with (i) the
audited consolidated financial statements of Newalta, and the notes thereto
("Financial Statements"), for the years ended December 31, 2012 and 2011, (ii)
the consolidated financial statements of Newalta and notes thereto and MD&A of
Newalta for the years ended December 31, 2011 and 2010, (iii) the most recently
filed Annual Information Form of Newalta and (iv) the unaudited condensed
consolidated interim financial statements of Newalta and the notes thereto and
MD&A for the quarters ended March, 31, 2012, June 30, 2012, and September 30,
2012. This information is available at SEDAR (www.sedar.com). Information for
the year ended December 31, 2012 along with comparative information for 2011, is
provided.
This MD&A is dated February 13, 2013, and takes into consideration information
available up to that date. Throughout this document, unless otherwise stated,
all currency is stated in Canadian dollars, and MT is defined as "tonnes" or
"metric tons".
SELECTED ANNUAL FINANCIAL INFORMATION(1)
($000s except per share data) 2012 2011 2010
----------------------------------------------------------------------------
Revenue 726,209 682,828 576,196
Gross Profit 169,758 165,509 138,390
- % of revenue 23% 24% 24%
Net earnings 42,804 33,562 16,122
- per share ($) - basic 0.86 0.69 0.33
- per share ($) - basic adjusted(2) 0.84 0.85 0.56
- per share ($) - diluted 0.85 0.68 0.33
Adjusted EBITDA(2) 142,136 146,475 118,795
- per share ($)(2) 2.86 3.02 2.45
Cash from operations 97,179 104,563 96,151
- per share ($) 1.96 2.15 1.98
Funds from operations(2) 116,616 122,775 96,874
- per share ($)(2) 2.35 2.53 2.00
Dividends declared 18,918 14,818 11,152
- per share ($)(2) 0.38 0.31 0.23
Dividends paid 17,382 14,082 10,424
Total Assets 1,318,758 1,165,021 1,047,677
Maintenance capital expenditures(2) 34,952 31,051 29,013
Growth capital expenditures(2) 137,388 86,629 47,535
Senior long-term debt - net of issue costs 76,500 68,493 51,520
Senior unsecured debentures(3) - principal
amount 250,000 250,000 125,000
Convertible debentures - principal amount - - 115,000
Weighted average shares outstanding 49,690 48,569 48,485
Shares outstanding, December 31, (4) 54,263 48,607 48,492
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(1) Management's Discussion and Analysis and Newalta's Consolidated Financial
Statements and notes are attached. References to Generally Accepted Accounting
Principles ("GAAP") are synonymous with IFRS and references to Consolidated
Financial Statements and notes are synonymous with Financial Statements.
(2) These financial measures do not have any standardized meaning prescribed by
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.
(3) Includes Series 1 and Series 2 Senior Unsecured Debentures ("Senior
Unsecured Debentures")
(4) Newalta has 54,410,235 shares outstanding as at February 13, 2013.
NEWALTA - WHO WE ARE
Newalta is North America's leading provider of innovative, engineered
environmental solutions that enable customers to reduce disposal, enhance
recycling and recover valuable resources from industrial residues. We serve
customers onsite directly at their operations and through a network of 85
facilities in Canada and the U.S. Our proven processes, portfolio of more than
250 operating permits and excellent record of safety make us the first choice
provider of sustainability enhancing services to oil, natural gas,
petrochemical, refining, lead, manufacturing and mining markets. With a skilled
team of more than 2,000 people, two decade track record of profitable expansion
and commitment to commercializing new solutions, Newalta is positioned for
sustained future growth and improvement.
Vision:
To be the North American leader in providing cost-effective engineered
environmental solutions for our customers.
2012 Review:
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Tactics Progress in 2012
Strategic
Objective
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Maximize Focus on productivity Excluding the impact of lower
Facilities improvements to drive prices received for our
Profitability incremental cash flow from recovered products, gross
existing assets profit grew to 24% compared
to 23% in 2011.
---------------------------------------------------------
Transfer existing services Expanded oil recycling
throughout the network to services into eastern Canada.
offer full breadth of Expanded our western Canadian
services to customers model to process oilfield
across Canada waste in Atlantic Canada.
---------------------------------------------------------
Expand Facility network to Constructed one satellite
take advantage of growth in that will be commissioned in
existing markets and new first half 2013. Identified
opportunities and pursuing multiple
locations in high activity
areas.
---------------------------------------------------------
Execute organic growth Completed over $40 million in
capital projects organic growth projects in
2012.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Recovery at Source Expand U.S. market presence Generated 25% revenue growth
(Onsite) in the U.S.
---------------------------------------------------------
Transition projects to Contracts now generate 9% of
contract service total revenue, compared to 3%
arrangements, specifically in 2011.
to add 4 new long-term Commissioned a three-year
contracts per year contract to process mature
fine tailings ("MFT"),
improving our stable stream
of future cash flows.
Continue to make good
progress on our pipeline of
contracts in the scoping and
development stage.
---------------------------------------------------------
Increase market share in Project revenue grew 12%
project activity in across the network.
multiple industry segments Projects generate 12% of
total revenue, up from 11% in
2011.
Commenced a multi-year
arrangement in the U.S. to
process slop oil emulsions on
a customer's site in the
Bakken.
---------------------------------------------------------
In Onsite, execute organic Completed over $65 million of
growth capital projects organic growth projects in
2012.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Process Deliver two new commercial Invested $12 million of
Commercialization processes with wide capital in 2012.
application to operations Two technologies in the
every year demonstration phase, with
commercial application
expected in 2013.
---------------------------------------------------------
Our Technical Development Ongoing. Assess pilot
team will search globally projects in progress for
and evaluate technologies commercial application and
for commercial application testing within our facility
network.
---------------------------------------------------------
Utilize facility network to Ongoing. Upgraded wastewater
expedite commercialization treatment plant to allow for
demonstration scale testing.
----------------------------------------------------------------------------
Effective January 1, 2013, we reorganized our reporting structure into three
divisions - New Markets, Oilfield and Industrial. We expect the reorganized
structure will facilitate a seamless service package to customers and optimize
our resource allocations.
We will continue to focus on our core values and business fundamentals to
improve returns on existing business lines. We will use our organic growth
investments to re-establish Return on capital to historic levels of 18% and
deliver the best cost-effective environmental solutions for our customers. We
have an inventory of low-risk, high-return projects to expand services, extend
our market coverage and to add long-term operating contracts. Our average
payback assumption on growth capital investments is approximately four years.
Strategy:
The following table outlines our strategic focus through 2016 and the action
plan in 2013 and 2014 to achieve our strategic objectives.
----------------------------------------------------------------------------
Tactics Action Plan (2013-2014)
Strategic
Objectives
through 2016
----------------------------------------------------------------------------
----------------------------------------------------------------------------
New Markets Apply our successful western Establish two new U.S.
Canadian model to expand our operating locations to
presence in U.S. markets service key markets and meet
market demand.
Invest $475 Leverage drill site service
million in growth capabilities to further
capital in Canada develop customer
and U.S. while relationships that could lead
averaging 20% to longer term contract work.
revenue growth Expand water recycling
per year. services consistent with
demand in shale plays.
----------------------------------------------------------
Transition onsite project With 10-15 potential
work to longer term contract contracts in the scoping and
arrangements, to grow stable proposal stage at any given
revenue base time, our objective is to
have contracts representing
15% of our annual revenue, by
end of 2014.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Oilfield Focus on productivity Develop new products and
Invest $175 improvements to drive services at existing
million in incremental cash flow from facilities to meet changing
organic growth existing assets market demands.
projects while Improve material handling and
averaging 15% processes.
revenue growth Introduce proven technologies
per year. throughout the facility
network.
Industrial
Invest $180
million in
organic growth
projects while
averaging 10%
revenue growth
per year.
----------------------------------------------------------
Expand facility network to Establish two new Oilfield
take advantage of growth in satellites each year to
existing markets and new expand market presence in
opportunities western Canada.
Continue to move forward with
our objective of doubling the
oil recycling capacity of our
North Vancouver facility to
meet growing demand by 2016.
Establish two new Industrial
operating locations to
improve service to key
markets in Canada.
----------------------------------------------------------
Increase market share in Leverage our operating
onsite services in multiple experience and facility
industry segments network to gain market share
in key industries.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Process Search globally and evaluate Assess pilot projects in
Commercialization technologies for commercial progress for commercial
Invest $25 application application and begin testing
million to within facility network.
commercialize two Advance identified
new processes technologies to the
annually for use demonstration phase.
at our facilities
or on customer
sites.
----------------------------------------------------------
Leverage facility network to Continue demonstrating new
expedite commercialization technologies in our facility
network.
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RISKS TO OUR STRATEGY
While we remain optimistic about our long-term outlook, we are subject to a
number of risks and uncertainties in carrying out our activities. See page 32
for further discussion on our Risk Management program. A complete list of our
risk factors is disclosed in our most recently filed Annual Information Form.
----------------------------------------------------------------------------
Mitigation
Risks
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Market activity is lower than
anticipated Improve productivity
Lower market activity can translate Develop new technologies that make our
into reduced waste volumes and processes more effective and cost
weaker commodity prices, impacting efficient
returns on existing assets and our Maintain debt leverage to provide
capacity to invest in organic growth adequate financial flexibility
capital. Utilize, as needed, proven defensive
toolkit to manage costs and capital
expenditures
----------------------------------------------------------------------------
Deterioration of safety record
Failure to meet customer safety Since 1993, safety has been established
standards while working on customer as one of our core values
sites or at our facilities could Long standing history of safety
result in limitations in our ability excellence
to secure new contracts. Our Environmental, Health and Safety
("EH&S") team works with operators,
customers and regulators to ensure that
we foster a culture of safety and
prevention
Designs for facilities and onsite
equipment are subject to strict hazards
and operability studies and engineering
practices
----------------------------------------------------------------------------
Competition
Competition can come from generators Our onsite solutions are targeted to
of waste processing streams facilitate waste generators managing
internally or new third party waste their waste onsite
processors entering the market. We are well established in the industry
with an excellent safety record and a
facility network for mobilization,
employee training and a backstop for
process guarantees
Barriers to entry include facilities
network and infrastructure as well as
regulatory permits
----------------------------------------------------------------------------
Failure to commercialize identified
technologies into our processes Staged approach for developing
Failure to commercialize new technologies, which differentiates
technologies could reduce our between proven and unproven
competitiveness. technologies, ensures resources can be
redeployed efficiently to other
initiatives
Other initiatives include expansion of
services and business development
Performance from our current assets
employed is not contingent on the
commercialization of the identified
technologies
----------------------------------------------------------------------------
Organizational capabilities
Failure to effectively recruit, Develop our people through talent
retain and integrate top talent in development programs which include
period of growth could negatively customized leadership training and
impact our ability to meet our long- comprehensive on-boarding
term targets. Engage new employees in EH&S training
programs and Safety Leadership programs
Use of cross functional training and
teams to promote integration
----------------------------------------------------------------------------
CORPORATE OVERVIEW
Fourth quarter revenue was up 8% year-over-year to $198.4 million while Adjusted
EBITDA was $33.3 million, 9% lower compared to Q4 2011. Increased demand for our
onsite contracts and projects was more than offset by the impact of lower value
received for our recovered products and reduced oilfield activity. The impact of
the lower value received for recovered crude oil, base oil and lead was $5.3
million. In addition, drilling activity was down 28% year-over-year. Excluding
the lower value received for our products, Adjusted EBITDA would have been $38.6
million in Q4 2012. Reduced operational results and higher stock-based
compensation, offset in part by lower finance charges, caused net earnings to
decline 32% to $4.1 million in Q4 2012. Our Total Debt to Adjusted EBITDA ratio
increased from 2.35 in Q4 2011 to 2.41 in Q4 2012.
In 2012, revenue increased 6% to $726.2 million (2011 - $682.8 million) and
Adjusted EBITDA declined to $142.1 million (2011 - $146.5 million). Stronger
demand for our contract and project services was offset by the lower value
received for our products of $13.4 million, reduced oilfield activity and higher
Adjusted SG&A expenses. In addition, drilling activity in 2012 decreased 15%
from 2011. Excluding the lower value received for our products, Adjusted EBITDA
would have been $155.5 million in 2012. Net earnings for the year increased 28%
to $42.8 million. Lower finance charges, lower deferred income tax expense and
gain on embedded derivatives contributed to the increase in net earnings.
Revenue and gross profit from Facilities in the quarter were $122.9 million and
$21.7 million, down 1% and 17%, respectively, from Q4 2011. Compared to Q4 2011,
active rigs decreased 28% and meters drilled were down 19%. Declines in the
prices of crude oil, base oil and lead resulted in reduced prices received for
our products of $4.3 million. Western Facilities efficiency improvements for the
quarter were offset by the impact of lower oilfield activity. Eastern Facilities
were positively impacted by an increase in volumes at Stoney Creek Landfill
("SCL") as compared to Q4 prior year. VSC volumes were 11% lower than Q4 2011.
Compared to 2011, revenue and gross profit for the year declined 4% and 6%,
respectively. The impact of lower value received for our products was $11.8
million.
Onsite revenue and gross profit in the quarter were $75.5 million and $17.3
million, up 26% and 5%, respectively, from Q4 2011. Strong demand for our
contract and project services was impacted by lower value received for our
products and reduced drilling activity. Declines in the price of crude oil
resulted in reduced prices received for our products of $1.0 million. For the
year, revenue and gross profit increased 28% and 19%, respectively, from the
prior year. The increase was driven by our contract to process MFT and strong
demand for our project services. This increase was partially offset by the
impact of lower drilling activity and a decline in value received for our
products. The impact of lower value received for our products was $1.6 million.
Return on capital decreased to 13.3% in Q4 2012 from 15.2% in Q4 2011. During
the quarter, we closed an equity financing issuing 5.5 million shares for gross
proceeds of $77.0 million (net $74.4 million).
Revenue ($ millions) and Adjusted EBITDA ($ millions):
http://media3.marketwire.com/docs/213nal_graphs.pdf
Capital expenditures for the three months and year ended December 31, 2012, were
$57.4 million and $172.3 million, respectively, ahead of our projected spend of
$155.0 million. The increased capital expenditure predominantly relates to
equipment for the MFT contract, technical development, U.S. onsite projects and
efficiency improvements in Western Facilities. Growth capital expenditures for
the quarter and year primarily related to facility and service expansion at our
Western Facilities and equipment for contract work in our Heavy Oil business
unit.
OUTLOOK
To the end of January, the prices we receive for our recovered conventional and
heavy oil have increased 19% and 22%, respectively, compared to December 2012.
Drilling activity has improved 35% over Q4 2012. Base oil pricing has declined
9% from December 2012.
Returns from our 2012 capital and strengthening market demand are expected to
drive improved results in the quarters ahead. In the first half of 2013, we
anticipate ongoing strength across our three divisions while continued
short-term fluctuations impact the prices received for our recovered products.
Compared to Q1 2012, conventional and heavy oil prices for January are down 9%
and 24%, respectively. Drilling activity in Q1 2013 is expected to be
approximately 10% below Q1 2012. Base oil for January is 24% lower than Q1 2012.
We anticipate normal operations at VSC and SCL in the quarter.
In 2013, we will operate under the following three new divisions:
-- New Markets will continue to focus on growing long-term contracts,
strengthening our foundation of stable cash flow and maximizing cash
flow from existing assets. We will continue to grow our contract revenue
as a percentage of our total revenue. Our contract to process MFT will
enter into its second year and we expect higher volumes to be processed
in 2013 compared to 2012. Contributions from the MFT contract will
predominately be realized in Q2 and Q3, with no contribution in Q1. We
expect to continue to develop our U.S. platform, establishing two new
U.S. operating locations to service key markets and meet market demand.
-- Our Oilfield Division will drive organic growth by continuing to focus
on productivity improvements, expanding our facility network through the
addition of two new oilfield satellites, and adding new services. We
will also leverage our onsite capabilities to expand our market presence
within the conventional oilfield sector.
-- Our Industrial Division will focus on growing organically through
capacity expansions, expanding the facility network, productivity
improvements, adding new services and growing our onsite business. In
2013, we will proceed with detailed engineering plans to double the
capacity of our North Vancouver oil recycling process. We will also
establish one new industrial operating location to improve service to
key markets in 2013.
We have good visibility on our pipeline of organic growth capital projects,
extending well into 2014. Our 2013 capital budget remains at $190 million, with
growth capital and maintenance expenditures of $155 million and $35 million,
respectively. We expect to spend approximately 40% of the capital budget in the
first half of 2013. We may revise the capital budget, from time-to-time, in
response to changes in market conditions that materially impact our financial
performance and/or investment opportunities. The capital program will
predominately be funded by cash flow from operations and the proceeds from the
equity offering completed in the fourth quarter of 2012.
We continue to execute our business plan, reflecting a 15% and 20% revenue and
Adjusted EBITDA compound annual growth rate ("CAGR"), respectively, over the
plan period to 2016. Our strong balance sheet will allow us to weather
short-term fluctuations that may arise from time to time as we experienced in Q4
2012. We will work towards a debt leverage ratio of 2.0, and will remain well
within debt covenant thresholds through 2013.
With our continued focus on business fundamentals to improve returns on existing
assets, growth from our contract and project work, contributions from the 2012
capital program and continued market demand for our services, we are well
positioned for growth in 2013 and beyond.
RESULTS OF OPERATIONS - FACILITIES DIVISION
Overview
Facilities includes an integrated network of 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 at Ville
Ste-Catherine, Quebec, an engineered non-hazardous solid waste landfill located
at Stoney Creek, Ontario, and over 25 oilfield facilities throughout western
Canada. Facilities is organized into the Western Facilities, Eastern Facilities
and VSC business units.
The business units contributed the following to division revenue:
Three months ended Year ended
December 31, December 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Western Facilities 45% 49% 50% 47%
Eastern Facilities 25% 25% 26% 25%
VSC 30% 26% 24% 28%
----------------------------------------------------------------------------
Facilities Revenue ($ millions) and Facilities Gross Profit ($ millions):
http://media3.marketwire.com/docs/213nal_graphs.pdf
The following table compares Facilities' results for the periods indicated:
Three months ended Year ended
December 31, December 31,
($000s) 2012 2011 % change 2012 2011 % change
----------------------------------------------------------------------------
Revenue 122,899 124,234 (1) 446,217 463,606 (4)
Cost of Sales(1) 101,189 97,930 3 346,176 356,820 (3)
----------------------------------------------------------------------------
Gross Profit 21,710 26,304 (17) 100,041 106,786 (6)
----------------------------------------------------------------------------
Gross Profit as
% of revenue 18% 21% (14) 22% 23% (4)
----------------------------------------------------------------------------
Maintenance
capital 7,917 7,899 - 21,913 21,658 1
----------------------------------------------------------------------------
Growth capital 18,487 11,029 68 43,279 32,515 33
----------------------------------------------------------------------------
Assets 655,882 624,814
employed(2)(3) 5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes amortization of $9,006 and $32,019 for Q4 2012 and 2012
year-to-date, respectively, and $9,221 and $36,346 for Q4 2011 and 2011
year-to-date, respectively.
(2) "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.
Q4 2012 revenue and gross profit were $122.9 million and $21.7 million, down 1%
and 17%, respectively, from prior year. Western Facilities efficiency gains were
offset by the impact of reduced oilfield activity. At our Eastern Facilities,
performance was positively impacted by an increase in volumes at SCL compared to
prior year. A decline in the value of our crude oil, base oil and lead products
reduced our gross profit $4.3 million in Q4 2012. Excluding the lower value
received for our products, gross profit in Q4 2012 would have been $26.0
million, 20% of revenue.
In 2012, revenue and gross profit are $446.2 million and $100.0 million, down 4%
and 6%, respectively. Western Facilities performance was positively impacted by
efficiency gains and offset by reduced oilfield activity. Eastern Facilities
were down due to lower volumes at SCL compared to 2011. Performance was also
negatively affected by the lower value received for our products, reducing gross
profit by $11.8 million. Excluding the lower value received for our products,
gross profit would have increased 5% to $111.8 million in 2012, 24% of revenue
and above the prior year.
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; and
-- oil recycling, including the collection and processing of waste lube
oils and the sale of finished products.
Western Facilities draws its revenue primarily from industrial waste generators
and the oil and gas industry. Waste generated by the oil and gas industry is
affected by volatility in the prices of crude oil and natural gas and drilling
activity. Drilling activity will impact the volume of waste received with the
makeup of that waste being affected by specific drilling techniques employed.
Changes in the waste mix will impact the amount of crude oil recovered to our
account. Historically, for oilfield facilities, approximately 75% of our waste
volume relates to ongoing production resulting in a fairly stable revenue base.
Volatility in the price of crude oil impacts crude oil revenue. Fluctuations in
the Canadian/U.S. dollar exchange rate impact U.S. dollar sales, which account
for approximately 10% of Western Facilities revenue. Changes in environmental
regulations in western Canada also impact our business. Management is not aware
of any new legislation proposed that is expected to have a material impact on
our business and, regardless, we tend to have a positive bias to change in
environmental regulations.
Western Facilities revenue was down 9% compared to Q4 2011. Active rigs
decreased 28% and meters drilled were down 19% compared to Q4 2011 resulting in
a 21% decline in waste processing volumes year-over-year. Crude oil volumes
recovered increased 17% in the quarter as a result of processing higher oil
content waste. The value of the crude oil we recovered was impacted by a 14%
decline in Edmonton Par compared to Q4 2011. Oil recycling performance was
impacted by the reduced value of our base oil products as Motiva decreased 22%.
In 2012, revenue was up 4% compared to 2011, primarily due to improved
performance at the majority of our facilities. Growth at our oilfield facilities
was driven by a shift to higher oil content waste derived from production
related activities and increased recovered crude oil from the optimization of a
facility commissioned in 2011. Growth in oil recycling was driven by market
diversification initiatives which resulted in a shift to higher margin product
lines. This was tempered by the impact of the lower value received for our
products and the decrease in drilling activity.
Three months ended Year ended
December 31, December 31,
2012 2011 % change 2012 2011 % change
----------------------------------------------------------------------------
Waste processing
volumes ('000 m3) 126 159 (21) 487 545 (11)
Recovered crude oil
('000 bbl)(1) 76 65 17 267 230 16
Average crude oil
price received
(CDN$/bbl) 76.84 92.37 (17) 79.70 88.09 (10)
Recovered crude oil
sales ($ millions) 5.9 6.0 (2) 21.3 20.3 5
Edmonton par price
(CDN$/bbl)(2) 84.05 97.26 (14) 86.16 94.88 (9)
----------------------------------------------------------------------------
(1) Represents the total crude oil recovered and sold for our account.
(2) Edmonton par is an industry benchmark for conventional crude oil.
Recovered Crude - Western Facilities (in '000 bbl):
http://media3.marketwire.com/docs/213nal_graphs.pdf
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; and
-- Stoney Creek Landfill ("SCL"), an engineered non-hazardous solid waste
landfill with an annual permitted capacity of 750,000 MT of waste per
year.
Eastern Facilities draws its revenue from the following industries in eastern
Canada and the bordering U.S. states: automotive; construction; forestry;
manufacturing; mining; oil and gas; petrochemical; pulp and paper; refining;
steel; and transportation service. The broad customer and industry base helps to
diversify risk; however, the state of the economy as a whole will affect these
industries. In addition, Eastern Facilities is sensitive to changing
environmental regulations regarding waste treatment and disposal. Management is
not aware of any new environmental regulatory reviews underway that are expected
to have a material effect on Newalta and, regardless, we tend to have a positive
bias to change in environmental regulations.
In Q4 2012, volumes at SCL were up 11% from Q4 2011. Excluding SCL, Eastern
Facilities revenue was relatively flat year-over-year.
Compared to 2011, Eastern Facilities revenue decreased 4% for the year.
Excluding SCL, Eastern processing facilities improved 6% over prior year as a
result of improved demand for our services. Volumes received at SCL in 2012 were
at the maximum permitted capacity. In 2011, we received a one-time contingency
to continue to receive materials beyond the annual permitted volume from the
Ontario Ministry of the Environment.
Three months ended Year ended
December 31, December 31,
2012 2011 % change 2012 2011 % change
----------------------------------------------------------------------------
SCL Volume Collected
('000 MT) 228.3 205.7 11 750.0 874.3 (14)
----------------------------------------------------------------------------
SCL - Volume Collected (in '000 MT):
http://media3.marketwire.com/docs/213nal_graphs.pdf
Ville Ste-Catherine
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. Fluctuations in the price of lead affect our direct sales revenue and
waste battery procurement costs. Tolling fees are generally fixed, reducing our
exposure to fluctuations in lead prices. The cost to acquire waste batteries is
generally related to the trading price of lead at the time of purchase. As a
result of the shipping, processing and refining of lead, there is a lag between
the purchase and final sale of lead. Slow and modest changes in the value of
lead result in a relatively stable differential between the price received for
recycled lead and the cost to acquire lead acid waste batteries. However, sharp
short-term swings in the London Metal Exchange ("LME") price can distort this
relationship, resulting in a temporary disconnect in values.
Our objective is to ensure optimal performance at VSC, which historically has
meant balancing direct sales and tolling volumes equally. In 2012, our split was
approximately 50/50. Production volumes will be managed to optimize performance
under prevailing market conditions. In addition, fluctuation in the
U.S./Canadian dollar exchange rate impacts revenue and procurement.
Substantially all of VSC's revenue and the majority of our battery procurement
costs are denominated in U.S. dollars, with the balance of our operating costs
denominated in Canadian dollars.
Q4 2012 revenue was up 14% compared to prior year. The increase was mainly
attributable to a shift in our tolling/direct mix towards direct sales in
addition to a 4% increase in LME pricing. The lagged LME price increased to U.S.
$2,167/MT (Q4 2011 - U.S. $2,076). VSC volumes were 17,600 MT (Q4 2011 - 19,800
MT), in line with our quarterly average. The increase in price was more than
offset by increased procurement costs.
Compared to 2011, VSC revenue decreased 16%, primarily due to the decline in
lead price. Lagged LME price decreased 16% to U.S. $2,041/MT (2011 - U.S.
$2,435/MT). Sales volume in 2012 decreased 10% to 64,700 MT (2011 - 71,700 MT).
The direct and tolling split was consistent with 2011.
RESULTS OF OPERATIONS - ONSITE DIVISION
Overview
Onsite includes a network of more than 25 facilities with over 700 employees
across Canada and the U.S. Onsite services involves 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.
Our Onsite services, excluding drill site, generally follow a similar sales
cycle. We establish our market position through the execution of short-term
projects which ideally may lead to longer term contracts, providing a more
stable cash flow. The cycle to establish longer term contracts can be between 18
months to three years. Characteristics of projects and contracts are:
-- Projects: non-recurring and/or seasonal services completed in less than
one year, primarily completed between March and November and will vary
from period-to-period, and
-- Contracts: typically evolve from projects and are generally year round
arrangements based on fee for service solutions with terms longer than
one year and no direct commodity price exposure.
In addition, Onsite performance is affected by the customer's requirement for
Newalta to maintain a strong safety record. To address this requirement, our
Environmental, Health and Safety ("EH&S") team works with our people and our
customers to develop an EH&S culture and prevention strategy owned by operators
to ensure we maintain our strong record.
The business units contributed the following to division revenue:
Three months ended Year ended
December 31, December 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Western Onsite 40% 47% 43% 46%
Eastern Onsite 16% 15% 15% 14%
Heavy Oil 44% 38% 42% 40%
----------------------------------------------------------------------------
Onsite Revenue ($ millions) and Onsite Gross Profit ($ millions):
http://media3.marketwire.com/docs/213nal_graphs.pdf
The following table compares Onsite's results for the periods indicated:
Three months ended Year ended
December 31, December 31,
($000s) 2012 2011 % change 2012 2011 % change
----------------------------------------------------------------------------
Revenue 75,546 59,855 26 279,992 219,222 28
Cost of Sales(1) 58,219 43,419 34 210,275 160,499 31
----------------------------------------------------------------------------
Gross Profit 17,327 16,436 5 69,717 58,723 19
----------------------------------------------------------------------------
Gross Profit as
% of revenue 23% 27% (15) 25% 27% (7)
----------------------------------------------------------------------------
Maintenance
capital 2,352 3,520 (33) 7,865 7,419 6
----------------------------------------------------------------------------
Growth capital 16,186 17,441 (7) 68,365 41,956 63
----------------------------------------------------------------------------
Assets
employed(2) 348,036 289,530 20
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes amortization of $5,265 and $17,005 for Q4 2012 and 2012
year-to-date, respectively, and $4,356 and $15,230 for Q4 2011 and 2011
year-to-date, respectively.
(2) "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.
Q4 revenue increased 26% and gross profit was 5% higher compared to Q4 2011.
Strong demand for our contracts and project services was impacted by the decline
in the value of our recovered products and reduced waste volumes in Heavy Oil
facilities. Declines in the price of crude oil resulted in reduced prices
received for our products of $1.0 million. Lower drilling activity in the WCSB
resulted in lower utilization rates for drill site. Performance was positively
impacted by waste volumes processed under our MFT contract in the quarter.
For the year, revenue and gross profit increased 28% and 19%, respectively,
compared to prior year. Increased contract and project activity offset the
impact of lower drilling activity and lower value received for our products.
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) includes: industrial cleaning; site remediation; centrifugation;
and dredging and dewatering; and
-- environmental services serving primarily oil and gas customers.
Western Onsite performance is primarily affected by fluctuations in drilling
activity in western Canada and the U.S. We can also be impacted by the
competitive environment. To address these risks, we have developed a strong
customer partnership approach and service differentiation to secure Newalta
brand loyalty. Other onsite services for this business unit are in the early
stages of development. We are currently engaged primarily in short-term or
event-based projects, which will vary from quarter-to-quarter. Western Onsite is
also affected by market conditions in various other industries, including pulp
and paper, refining, mining and municipal dewatering.
Q4 2012 Western Onsite revenue increased 8% compared to Q4 2011. The growth was
driven by U.S. onsite projects including our multi-year arrangement in the U.S.
to process slop oil emulsions, and increased market demand for our industrial
onsite services in western Canada. Drill site utilization rates declined in the
quarter over prior year. Canadian utilization was negatively impacted by a 28%
decline in active rigs in western Canada. U.S. utilization improved 9% from Q4
2011 due to the deployment of new and existing equipment to more active areas.
For the year ended December 31, 2012, Western Onsite revenue increased 17%
compared to 2011 with contributions from onsite projects in the U.S. and
industrial onsite services in western Canada. In the third quarter, we entered
into a new multi-year arrangement in the U.S. to process slop oil emulsions on a
customer's site in the Bakken. The utilization rate for drill site equipment was
down 9% compared to 2011.
Three months ended Year ended
December 31, December 31,
2012 2011 % change 2012 2011 % change
----------------------------------------------------------------------------
Equipment
Utilization
Canada 36% 68% (47) 41% 52% (21)
U.S. 62% 57% 9 61% 62% (2)
Combined 51% 62% (18) 52% 57% (9)
Average
equipment
available 211 206 2 215 200 8
----------------------------------------------------------------------------
Eastern Onsite
Eastern Onsite revenue is derived from:
-- onsite service in eastern Canada, including: industrial cleaning;
centrifugation; and dredging and dewatering; and
-- a fleet of specialized vehicles and equipment for emergency response and
onsite processing.
Eastern Onsite services a broad range of industries in eastern Canada; however,
these industries are sensitive to the state of the economy in these regions.
Revenue grew 38% and 35% for the three month period and year ended December 31,
2012, respectively, as a result of increased customer adoption of our onsite
service model. We are engaged primarily in short-term or project based work,
which may vary from quarter-to-quarter. Similar to our model in other regions,
the strategy is to secure projects that can be converted into contracts. We
currently have one Eastern Onsite operating contract.
Heavy Oil
Our heavy oil services business began 17 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. Heavy Oil revenue is generated by facilities services
which includes the processing and disposal of oilfield-generated wastes,
including water disposal and landfilling as well as the sale of recovered crude
oil for our account. The balance of Heavy Oil revenue is generated from
specialized onsite services for heavy oil producers under projects and
contracts.
Heavy Oil facility revenue has an established customer base; however,
performance is affected by the amount of waste generated by producers and the
sale of crude oil recovered to our account. These streams vary due to volatility
in the price of heavy oil and drilling activity. To address this volatility,
over the past four years we have worked with customers to develop specialized
onsite services where revenue is based on processed volumes, eliminating our
exposure to crude oil prices for these services. In addition, these services
create cost savings and provide more environmentally beneficial solutions for
our customers. Growth in the business unit will come from our ability to attract
and retain customers as new heavy oil operations come on stream.
Q4 2012 Heavy Oil revenue increased 43% compared to Q4 2011. Processing under
our MFT contract drove the increase that was tempered by lower waste volumes
received at our facilities and the impact of lower pricing received for our
recovered crude oil product. Recovered crude oil volumes increased 12% over
prior year due to processing higher oil content waste. Waste volumes decreased
26% due to lower oilfield activity. Price per barrel received declined 23%
compared to prior year.
For the year, revenue increased 37% compared to 2011, driven by our MFT
contract, increased demand for our services and increased recovered crude oil
volumes. Recovered crude oil volumes increased 13% over 2011 due to processing
higher oil content waste.
To date, we have nine Heavy Oil contracts, seven of which were operating in Q4
2012. Contracts now generate 9% of total revenue compared to 3% in 2011.
Three months ended Year ended
December 31, December 31,
2012 2011 % change 2012 2011 % change
----------------------------------------------------------------------------
Waste processing
volumes ('000 m3) 146 197 (26) 655 615 7
Recovered crude oil
('000 bbl)(1) 55 49 12 216 191 13
Average crude oil
price received
(CDN$/bbl) 60.42 78.02 (23) 65.51 70.91 (8)
Recovered crude oil
sales ($ millions) 3.3 3.9 (15) 14.1 13.5 4
Bow River Hardisty
(CDN$/bbl)(2) 75.18 89.46 (16) 78.02 83.57 (7)
----------------------------------------------------------------------------
(1) Represents the total crude oil recovered and sold for our account.
(2) Bow River Hardisty is an industry benchmark for heavy crude oil.
Recovered Crude - Heavy Oil (in 000 bbl):
http://media3.marketwire.com/docs/213nal_graphs.pdf
CORPORATE AND OTHER
Three months ended Year ended
December 31, December 31,
($000s) 2012 2011 % change 2012 2011 % change
----------------------------------------------------------------------------
Selling, general
and
administrative
expenses
("SG&A") 28,489 25,187 13 100,031 87,232 15
Less:
Stock-based
compensation 5,425 3,162 72 12,258 7,679 60
Amortization 3,526 2,824 25 13,485 11,280 20
----------------------------------------------------------------------------
Adjusted SG&A 19,538 19,201 2 74,288 68,273 9
Adjusted SG&A
as a % of
revenue 9.8% 10.4% (6) 10.2% 10.0% 2
----------------------------------------------------------------------------
IFRS requires that amortization of corporate assets be included in SG&A
expenses. The above table removes stock-based compensation and amortization from
SG&A to provide improved transparency with respect to the comparison of our
results.
For Q4 2012, Adjusted SG&A was flat to prior year. For the year, Adjusted SG&A
increased due to investments in people and people development to support our
growth in 2013. Adjusted SG&A remains in line with our expectation of 10% of
annual revenue. Stock-based compensation expense increased for both the quarter
and year. It fluctuates based on the effects of vesting, volatility in our share
price and dividend rate changes. Approximately 55% of stock-based compensation
expense is estimated to be settled with equity, with the balance to be settled
in cash.
Three months ended Year ended
December 31, December 31,
($000s) 2012 2011 % change 2012 2011 % change
----------------------------------------------------------------------------
Research and
development 480 439 9 2,358 2,337 1
Research and
development as
a % of revenue 0.2% 0.2% - 0.3% 0.3% -
----------------------------------------------------------------------------
Research and development expenses are related to our Technical Development
group. They search globally and evaluate new technologies for commercial
application at our Facilities and on our customer sites. There is a steady
stream of new technologies moving through our Technical Development pipeline;
from identification and evaluation to the development phase. Our objective is to
deliver two new commercial processes every year.
Three months ended Year ended
December 31, December 31,
($000s) 2012 2011 % change 2012 2011 % change
----------------------------------------------------------------------------
Bank fees and
interest 228 703 (68) 4,336 4,200 3
Debenture
interest,
accretion of
issue costs, and
other(1) 4,996 7,268 (31) 19,978 21,853 (9)
----------------------------------------------------------------------------
Finance charges
before unwinding
of the
discount(2) 5,224 7,971 (34) 24,314 26,053 (7)
Unwinding of the
discount(3) 616 534 15 2,482 2,138 16
----------------------------------------------------------------------------
Finance charges 5,840 8,505 (31) 26,796 28,191 (5)
----------------------------------------------------------------------------
Non-cash gain on
embedded
derivatives(4) (602) - - (13,439) - -
----------------------------------------------------------------------------
Net Finance
charges 5,238 8,505 (38) 13,357 28,191 (53)
----------------------------------------------------------------------------
(1) Includes convertible debentures and senior unsecured debentures in 2011.
(2) Excludes capitalized interest of $1,595 and $4,664 in Q4 2012 and 2012
year-to-date, respectively, and $858 and $2,744 in Q4 2011 and 2011
year-to-date, respectively.
(3) Relates to decommissioning liability.
(4) Relates to the early redemption feature for the Series 1 and 2 senior
unsecured debentures.
The decrease in finance charges before the gain on the embedded derivatives and
the unwinding of the discount for the quarter and year-to-date is attributable
to unamortized issue costs expensed upon early redemption of the Convertible
Debentures in Q4 2011. The non-cash gain on the embedded derivatives is
associated with the early redemption feature for the Series 1 and Series 2
Senior Unsecured Debentures (collectively the "Senior Unsecured Debentures")
recognized during the quarter. The gain is an estimate of the fair value of the
embedded derivatives and is primarily impacted by the risk-free rate, market
volatility, and our credit spread. See Note 17 to the Financial Statements for
further information.
Finance charges associated with the Senior Unsecured Debentures include annual
coupon rates of 7.625% and 7.75%, respectively, as well as the accretion of
issue costs and gains or losses on the embedded derivatives for both series. In
2011, we had Convertible Debentures with an annual coupon rate of 7.0%, which
were refinanced in Q4 2011 with the Series 2 Senior Unsecured Debentures. See
"Liquidity and Capital Resources" in this MD&A for discussion of our long-term
borrowings.
Three months ended Year ended
December 31, December 31,
($000s) 2012 2011 % change 2012 2011 % change
----------------------------------------------------------------------------
Deferred taxes 706 2,578 (73) 11,208 14,187 (21)
----------------------------------------------------------------------------
Effective tax
rate 14.6% 29.9% (51) 20.8% 29.7% (30)
----------------------------------------------------------------------------
Deferred taxes decreased 73% and 21% to $0.7 million and $11.2 million,
respectively, in the quarter and for the year. The lower effective tax rate in
2012 resulted due to statutory and other rate decreases and changes in
non-deductible items including stock-based compensation expense and gain on
embedded derivatives. Our statutory tax rate in Canada is 25.72% for 2012 and
was 27.35% in 2011. Loss carry forwards were approximately $142 million at
December 31, 2012. We do not anticipate paying significant income tax until
2016.
CHANGES IN CONSOLIDATED FINANCIAL POSITION
As at As at
December December $
($000s) 31, 2012 31, 2011 change % change Commentary
----------------------------------------------------------------------------
Assets
See Consolidated
Cash 409 - 409 - Statements of Cash Flows
Accounts and
other Consistent with increase
receivables 150,347 134,172 16,175 12 in revenue
Increase primarily
Inventories related to higher
43,123 30,953 12,170 39 inventory at VSC
Property,
plant and
equipment 929,580 820,102 109,478 13 See Uses of Cash
Permits and
other
intangible
assets 58,614 59,593 (979) (2) -
Goodwill 102,615 102,897 (282) - -
Increase due to non-cash
gain on embedded
Other derivative related to
assets(1) Senior Unsecured
Debentures and higher
34,070 17,304 16,766 97 prepaid expenses
----------------------------------------------------------------------------
Equity and
liabilities
Bank See Consolidated
indebtedness - 6,168 (6,168) - Statements of Cash Flows
Accounts
payable and
accrued Increase related to
liabilities 181,876 144,067 37,809 26 higher capital spending
Increase relates to long-
Deferred term waste processing
revenue 6,494 3,830 2,664 70 contract
Dividends Increase in dividend rate
payable 5,426 3,889 1,537 40 and shares outstanding
----------------------------------------------------------------------------
Senior See Consolidated
secured debt 76,500 68,493 8,007 12 Statements of Cash Flows
Senior
unsecured
debentures 246,334 245,049 1,285 1 -
Other long- Change relates to non-
term current obligations under
liabilities 4,228 5,459 (1,231) (23) our Incentive plans
Increase relates to
Deferred tax current year taxable
liability 77,519 68,389 9,130 13 income
Increase due to change in
Decommissioni risk free rate. See
ng liability Critical Accounting
78,941 77,756 1,185 2 Estimates
Increase due primarily to
Equity equity offering completed
641,440 541,921 99,519 18 in Q4 2012
----------------------------------------------------------------------------
(1) Includes Prepaid expenses and other, and Other long-term assets
LIQUIDITY AND CAPITAL RESOURCES
The term liquidity refers to the speed with which a company's assets can be
converted into cash, or its ability to do so, as well as cash on hand. Liquidity
risk refers to the risk that we will encounter difficulty in meeting obligations
associated with financial obligations that are settled by cash or another
financial asset. Our liquidity risk may arise due to 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
liquidity risk management, refer to Note 17 to the Financial Statements for the
three months and year ended December 31, 2012.
Our debt capital structure is as follows:
December 31, December 31,
($000s) 2012 2011
----------------------------------------------------------------------------
Use of Credit Facility:
Amount drawn on Credit Facility 76,500 73,178
Less: Cash on Hand (310) -
Senior Unsecured Debentures 250,000 250,000
Letters of credit 16,046 21,332
----------------------------------------------------------------------------
Total Debt 342,236 344,510
Unused Credit Facility capacity 132,764 105,490
----------------------------------------------------------------------------
We continue to focus on managing our working capital accounts while supporting
our growth. Working capital at December 31, 2012, was $10.7 million (December
31, 2011 - $13.7 million). At current activity levels, working capital is
expected to be sufficient to meet our ongoing commitments and operational
requirements of the business. We continue to manage working capital well within
our prescribed targets, commensurate with activity levels. For further
information on credit risk management, please refer to Note 17 to the Financial
Statements for the three months and year ended December 31, 2012.
DEBT RATINGS
DBRS Limited ("DBRS") and Moody's Investor Service, Inc. ("Moody's") provide a
corporate and Senior Unsecured Debentures credit rating. On October 17, 2012,
DBRS upgraded our issuer rating to BB from BB (low) and revised the trend to
Stable from Positive. The rating change was attributable to our execution of the
business plan, and a growing onsite contract business that is more stable with
multi-year terms, strengthening our financial profile. DBRS has also upgraded
the Senior Unsecured Debentures to BB from BB (low) with the trend being Stable.
Moody's rating remains unchanged from November, 2010.
Category DBRS Moody's
----------------------------------------------------------------------------
Corporate Rating BB Ba3
Senior Unsecured Debentures BB B1
SOURCES OF CASH
Our liquidity needs can be sourced in several ways including: Funds from
operations, borrowings against or increases in 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 and proceeds from the sale of assets.
Credit Facility
At December 31, 2012, $132.8 million was available and undrawn 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 Total Debt for covenant purposes. Under
the Credit Facility, surety bonds (including performance and bid bonds) to a
maximum of $125 million are excluded from the definition of Total Debt. As at
December 31, 2012, surety bonds issued and outstanding totalled $43.8 million.
During the third quarter, the Credit Facility was amended and restated. The
Credit Facility now matures July 12, 2015. Management may, at its option,
request an extension of the Credit Facility on an annual basis. If no request to
extend the Credit Facility is made by management, the entire amount of the
outstanding indebtedness would be due in full on July 12, 2015. Under the
amended facility, the principal borrowing amount is $225 million and the maximum
Total Debt to Consolidated EBITDA ratio is 4:1. The facility requires us to be
in compliance with certain covenants. Our covenant ratios under the Credit
Facility remained well within their thresholds.
Financial performance relative to the financial ratio covenants(1) under the
Credit Facility is reflected in the table below.
December 31, December 31,
2012 2011 Threshold
----------------------------------------------------------------------------
Senior Secured Debt(2) to EBITDA(3) 0.66:1 0.65:1 2.75:1
maximum
Total Debt(4) to EBITDA(3) 2.46:1 2.38:1 4.00:1
maximum
Interest Coverage 5.09:1 5.86:1 2.25:1
minimum
----------------------------------------------------------------------------
(1) We are restricted from declaring dividends if we are in breach of any
covenants under our Credit Facility.
(2) Senior Secured Debt means the Total Debt less the Senior Unsecured Debentures.
(3) EBITDA is a non-IFRS 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 or dispositions as if
they had occurred at the beginning of the period.
(4) Total Debt comprises outstanding indebtedness under the Credit Facility,
including bank overdraft balance and the Senior Unsecured Debentures.
Our Total Debt was $342.2 million as at December 31, 2012, which reflected a
$2.3 million decrease over December 31, 2011. Proceeds of the equity financing
were offset by increased capital spending and lower EBITDA causing the Total
Debt to EBITDA ratio to increase from 2.38 in Q4 2011 to 2.47 in Q4 2012. Our
target for Total Debt to EBITDA ratio remains at or below 2.0. Our covenant
ratios under the Credit Facility remained well within their thresholds. We will
manage within our covenants throughout 2013.
Senior Unsecured Debentures
----------------------------------------------------------------------------
Term Series 1(1) Series 2(1)
----------------------------------------------------------------------------
Principal $125.0 million $125.0 million
----------------------------------------------------------------------------
Interest rate 7.625% 7.75%
----------------------------------------------------------------------------
Maturity November 23, 2017 November 14, 2019
----------------------------------------------------------------------------
Interest payable May 23 and November 23 each May 14 and November 14 in
(in arrears) year each year
----------------------------------------------------------------------------
Debentures are November 23, 2013 November 14, 2015
redeemable at the Redemption price equal to Redemption price equal to
option of Newalta 107.625% of the principal 107.75% of the principal
prior to: amount(2,3) or amount(2,3) or
In whole or in part, at a In whole or in part, at a
redemption price which is redemption price which is
equal to the greater of: equal to the greater of:
(a) the Canada Yield Price (a) the Canada Yield Price
(as defined in the trust (as defined in the trust
indenture) and indenture) and
(b) 101% of the aggregate (b) 101% of the aggregate
principal amount of Senior principal amount of Senior
Unsecured Debentures Unsecured Debentures
redeemed(3) redeemed(3)
----------------------------------------------------------------------------
Debentures are November 23, 2013 November 14, 2015
redeemable at the In whole or in part, at In whole or in part, at
option of Newalta redemption prices expressed redemption prices expressed
after: as percentages of the as percentages of the
principal(3) if redeemed principal(3) if redeemed
during the twelve month during the twelve month
period beginning on November period beginning on
23 of the years as follows: November 14 of the years as
2013 - 103.813%; follows:
2014 - 102.542%; 2015 - 103.875%;
2015 - 101.906%; 2016 - 101.938%;
2016 and thereafter - 100%. 2017 and thereafter - 100%.
----------------------------------------------------------------------------
(1) If a change of control occurs, Newalta will be required to offer to purchase
all or a portion of each debenture holder's Senior Unsecured Debentures, at a
purchase price in cash equal to 101% of the principal amount of the Senior
Unsecured Debentures offered for repurchase plus accrued interest to the date of
purchase
(2) Up to 35% of the aggregate principal amount with the net cash proceeds of
one or more public equity offerings
(3) Plus interest to the date of redemption
The Senior Unsecured Debentures are unsecured senior obligations and rank
equally with all other existing and future unsecured senior debt and senior to
any subordinated debt that may be issued by Newalta or any of its subsidiaries.
The Senior Unsecured Debentures are effectively subordinated to all secured debt
to the extent of collateral on such debt.
The trust indenture under which the Senior Unsecured Debentures have been issued
contains certain annual restrictions and covenants that, subject to certain
exceptions, limit our ability to incur additional indebtedness, pay dividends,
make certain loans or investments and sell or otherwise dispose of certain
assets subject to certain conditions, among other limitations.
Covenants under our trust indenture include:
----------------------------------------------------------------------------
Ratio December 31, December 31, Threshold
2012 2011
----------------------------------------------------------------------------
$25,000 + the
greater of
Senior Secured Debt including Letters $220,000 and
of Credit 92,546 94,510 1.75x EBITDA
$25,000
Cumulative finance lease obligations nil nil maximum
2.00:1
Consolidated Fixed Charge Coverage 5.09:1 5.86:1 minimum
Restricted
payments
Period end surplus for restricted cannot exceed
payments(1) 110,739 27,001 surplus
----------------------------------------------------------------------------
(1) We are restricted from declaring dividends, purchasing and redeeming shares
or making certain investments if the total of such amounts exceeds the period
end surplus for such restricted payments.
We will manage within our covenants throughout 2013.
Equity Issuance
During the fourth quarter, we closed an equity financing with the issuance of
5.5 million shares at a price of $14.00 per share for gross proceeds of $77.0
million (net proceeds of $74.4 million). The funds were used to expand our
organic growth plan and contribute to the funding of customer-driven capital
projects. Proceeds of the offering were used to reduce indebtedness and for
general corporate purposes until fully invested.
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 periods indicated are as follows:
Three months ended Year ended
December 31, December 31,
($000s) 2012 2011 2012 2011
----------------------------------------------------------------------------
Growth capital expenditures 45,311 33,375 137,388 86,629
Maintenance capital expenditures 12,089 11,914 34,952 31,051
----------------------------------------------------------------------------
Total capital expenditures(1) 57,400 45,289 172,340 117,680
----------------------------------------------------------------------------
(1) The numbers in this table differ from Consolidated Financial Statements of
Cash Flows because the numbers above do not reflect the net change in working
capital related to capital asset accruals.
Total capital expenditures were $57.4 million for the three months ended
December 31, 2012. Growth capital expenditures for the quarter relate primarily
to facility and service expansion at our Western Facilities and equipment for
contract work in our Heavy Oil business unit. Maintenance capital expenditures
relate primarily to process equipment improvements at our facilities. Capital
expenditures were funded from funds from operations and our Credit Facility.
Total capital spending for 2012 was $172.3 million compared to $117.7 million in
2011. The increase over prior year was driven by additional equipment purchases
primarily for our project and contract related work, facility and service
expansion at our Western Facilities.
Our 2013 capital budget is $190 million, comprised of growth capital of $155
million and maintenance capital of $35 million. We expect to spend approximately
40% of the capital budget in the first half of 2013. We may revise the capital
budget, from time-to-time, in response to changes in market conditions that
materially impact our financial performance and/or investment opportunities. The
capital program will be funded by cash flow from operations and the proceeds
from the equity financing completed in the fourth quarter of 2012.
Our $155 million in growth capital investment for 2013 will be allocated among
the following areas:
New Markets $70 million
Oilfield $40 million
Industrial $30 million
Technical Development and
Corporate $15 million
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 $5.4 million in dividends or $0.10 per share, paid January 15, 2013, to
shareholders of record as at December 31, 2012.
During the quarter we implemented a Dividend Reinvestment Plan ("DRIP"). The
DRIP provides eligible Newalta shareholders with the opportunity to reinvest
their quarterly cash dividend to acquire additional shares at a purchase price
equal to 95% of the average market price (defined as the volume weighted average
trading price of the shares for the five trading days immediately preceding the
dividend payment date). The dividend paid to shareholders of record on December
31, 2012 was the first dividend eligible to be reinvested under the DRIP. The
full text of the DRIP and an Enrollment Form are available from Valiant Trust at
www.valianttrust.com or on Newalta's website at www.newalta.com.
As at February 13, 2013, Newalta had 54,410,235 shares outstanding, and
outstanding options to purchase up to 4,308,459 shares.
Contractual Obligations
Our contractual obligations, as at December 31, 2012 were:
----------------------------------------------------------------------------
Less than
($000s) Total one year 1-3 years 4-5 years Thereafter
----------------------------------------------------------------------------
Office leases 57,680 9,048 25,233 7,335 16,064
Operating leases(1) 23,705 6,226 17,372 107 -
Surface leases 2,500 465 1,395 465 175
Senior long-term debt(2) 76,500 - 76,500 - -
Senior unsecured
debentures 363,230 19,219 57,657 143,226 143,128
Purchase obligations 3,251 3,160 84 7 -
Other obligations(3) 187,302 187,302 - - -
----------------------------------------------------------------------------
Total commitments 714,168 225,420 178,241 151,140 159,367
----------------------------------------------------------------------------
(1) Operating leases relate to our vehicle fleet with terms ranging between 1
and 5 years.
(2) Senior long-term debt is gross of transaction costs. Interest payments are
not included.
(3) Other obligations is comprised primarily of accounts payable and accrued
liability balances.
SUMMARY OF QUARTERLY RESULTS
($000s except per share data) 2012
Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue 198,445 190,136 171,130 166,498
Earnings before taxes 4,830 21,951 22,992 7,143
Net earnings 4,124 15,236 18,626 4,819
Earnings per share ($) 0.08 0.31 0.38 0.10
Earnings per share ($) - adjusted 0.17 0.32 0.10 0.28
Diluted earnings per share ($) 0.08 0.31 0.38 0.10
Weighted average shares - basic 52,741 48,698 48,682 48,579
Weighted average shares - diluted 53,473 49,497 49,613 49,519
EBITDA 27,865 37,544 37,200 27,269
Adjusted EBITDA 33,290 42,526 30,248 36,073
----------------------------------------------------------------------------
($000s except per share data) 2011
Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue 184,089 182,023 164,294 152,422
Earnings before taxes 8,609 16,537 13,632 8,971
Net earnings 6,031 11,815 10,483 5,233
Earnings per share ($) 0.12 0.24 0.22 0.11
Earnings per share ($) - adjusted 0.19 0.25 0.20 0.21
Diluted earnings per share ($) 0.12 0.24 0.21 0.11
Weighted average shares - basic 48,569 48,607 48,523 48,495
Weighted average shares - diluted 49,286 49,403 49,318 48,949
EBITDA 33,515 41,691 33,648 29,942
Adjusted EBITDA 36,677 41,871 33,044 34,883
----------------------------------------------------------------------------
Quarterly performance is affected by, among other things, weather conditions,
timing of onsite projects, the value of our products, 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 the value of our products or event-based
waste receipts at SCL. As experienced over the last eight quarters, fluctuations
in the value of our products can impact results.
All four quarters in 2011 reflect continued strong demand for our products and
services. Revenue, Adjusted EBITDA, earnings before taxes and net earnings have
steadily improved quarter-over-quarter in line with market conditions from 2010.
Net earnings in Q2 relative to Q1 2011 were positively impacted by lower
stock-based compensation expense and lower related deferred tax expense.
Relative to Q3 2011, Q4 net earnings and Earnings before taxes were lower due to
lower Adjusted EBITDA as well as higher financing fees as a result of the early
redemption of the Convertible Debentures. Adjusted EBITDA was lower in Q4
relative to Q3 2011 due largely to lower contributions from Facilities resulting
from lower event-based business at SCL and weaker performance at VSC, as well as
higher Adjusted SG&A due to the timing of expenses.
Quarterly revenue in 2012 grew, reflecting strong demand for our services.
Compared to Q4 2011, Q1 2012 revenue was down and Adjusted EBITDA was flat.
Lower contributions from Onsite due to reduced activity at our Heavy Oil
facilities were offset by lower Adjusted SG&A costs. Net income was down 20%
over Q4 2011 due to seasonally lower contributions from Onsite and higher
stock-based compensation expense which were offset by lower finance charges.
Compared to Q1, Q2 2012 revenue was up slightly and net earnings increased
significantly due to lower stock-based compensation expense and net finance
charges. Adjusted EBITDA in Q2 2012 was down from Q1 due to the lower value
received for our products in the quarter and higher SG&A expenses. Revenue and
adjusted EBITDA in Q3 2012 increased compared to the prior quarter as a result
of growth in Onsite. Net earnings decreased in Q3 2012 due to higher stock-based
compensation expense. Fourth quarter revenue increased relative to Q3 2012 due
to increased demand for our onsite contracts and projects. Net earnings and
adjusted EBITDA in Q4 decreased from Q3 2012 due to the impact of lower value
received for our products, reduced oilfield activity and higher stock-based
compensation expense.
RECENT DEVELOPMENTS
On January 1, 2013, we reorganized our reporting structure into three divisions
- New Markets, Oilfield and Industrial. The changes to our operating structure
are based on:
-- improved alignment of our operations with our customers so that we can
provide a seamless service package and also focus our efforts on
developing new and innovative solutions for them;
-- providing the optimum structure to allocate management to execute our
growth plans; and,
-- improving the disclosure to our investors with additional detail on the
results of our areas of high growth (New Markets Division) while
retaining all of the previous information provided.
The reorganization of the three new divisions will be as follows:
New Markets
-- Heavy Oil Business Unit (includes heavy oil facilities and onsite)
-- U.S. Business Unit (includes U.S. facilities, drill site and onsite)
Oilfield
-- Includes oilfield facilities, oilfield onsite, environmental services
and Canadian drill site
Industrial
-- Western Business Unit (includes oil recycling, industrial facilities and
industrial onsite in western Canada)
-- Eastern Business Unit (includes VSC, SCL, industrial facilities and
industrial onsite in eastern Canada)
The tables below restate the historical segmented information from the
Facilities and Onsite divisions to the New Markets, Oilfield and Industrial
divisions.
New Markets - Information by Quarter
2012 2011
($000s) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----------------------------------------------------------------------------
Revenue 36,131 38,626 61,560 52,520 28,086 35,062 39,211 36,954
Cost of
Sales 21,931 24,676 39,026 35,452 19,337 22,272 25,651 24,154
----------------------------------------------------------------------------
Gross Profit 14,200 13,950 22,534 17,068 8,749 12,790 13,560 12,800
----------------------------------------------------------------------------
Gross Profit
as % of
revenue 39% 36% 37% 32% 31% 36% 35% 35%
----------------------------------------------------------------------------
Capital
Expenditure
s 17,516 30,326 7,499 16,951 1,932 7,845 5,205 16,193
----------------------------------------------------------------------------
Amortization
included in
Cost of
Sales 2,120 2,320 3,430 4,393 1,013 961 2,116 1,845
----------------------------------------------------------------------------
Business Unit Revenue Contribution %
----------------------------------------------------------------------------
Heavy Oil 63% 66% 74% 69% 62% 67% 70% 66%
----------------------------------------------------------------------------
U.S. 37% 34% 26% 31% 38% 33% 30% 34%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010
($000s) Q1 Q2 Q3 Q4
--------------------------------------------
Revenue 19,401 22,875 28,732 27,743
Cost of
Sales 12,453 15,688 19,017 18,713
--------------------------------------------
Gross Profit 6,948 7,187 9,715 9,030
--------------------------------------------
Gross Profit
as % of
revenue 36% 31% 34% 33%
--------------------------------------------
Capital
Expenditure
s 2,238 5,244 3,591 6,807
--------------------------------------------
Amortization
included in
Cost of
Sales 1,253 1,398 1,150 1,176
--------------------------------------------
Business Unit Revenue Contribution %
--------------------------------------------
Heavy Oil 81% 73% 68% 64%
--------------------------------------------
U.S. 19% 27% 32% 36%
--------------------------------------------
--------------------------------------------
New Markets - Year to Date Information
2012 2011
($000s) Q1 Q2-YTD Q3-YTD Q4-YTD Q1 Q2-YTD Q3-YTD Q4-YTD
----------------------------------------------------------------------------
Revenue 36,131 74,757 136,317 188,837 28,086 63,148 102,359 139,313
Cost of
Sales 21,931 46,607 85,633 121,085 19,337 41,609 67,260 91,414
----------------------------------------------------------------------------
Gross Profit 14,200 28,150 50,684 67,752 8,749 21,539 35,099 47,899
----------------------------------------------------------------------------
Gross Profit
as % of
revenue 39% 38% 37% 36% 31% 34% 34% 34%
----------------------------------------------------------------------------
Capital
Expenditure
s 17,516 47,842 55,341 72,292 1,932 9,777 14,982 31,175
----------------------------------------------------------------------------
Amortization
included in
Cost of
Sales 2,120 4,440 7,870 12,263 1,013 1,974 4,090 5,934
----------------------------------------------------------------------------
Business Unit Revenue Contribution %
----------------------------------------------------------------------------
Heavy Oil 63% 65% 69% 69% 62% 65% 66% 66%
----------------------------------------------------------------------------
U.S. 37% 35% 31% 31% 38% 35% 34% 34%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010
($000s) Q1 Q2-YTD Q3-YTD Q4-YTD
--------------------------------------------
Revenue 19,401 42,276 71,008 98,751
Cost of
Sales 12,453 28,141 47,158 65,871
--------------------------------------------
Gross Profit 6,948 14,135 23,850 32,880
--------------------------------------------
Gross Profit
as % of
revenue 36% 33% 34% 33%
--------------------------------------------
Capital
Expenditure
s 2,238 7,482 11,073 17,880
--------------------------------------------
Amortization
included in
Cost of
Sales 1,253 2,651 3,800 4,976
--------------------------------------------
Business Unit Revenue Contribution %
--------------------------------------------
Heavy Oil 81% 76% 73% 71%
--------------------------------------------
U.S. 19% 24% 27% 29%
--------------------------------------------
--------------------------------------------
Oilfield - Information by Quarter
2012 2011
($000s) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----------------------------------------------------------------------------
Revenue 50,452 38,951 47,178 44,486 43,299 32,723 46,491 51,134
Cost of
Sales 30,937 28,491 30,442 29,665 23,194 19,370 28,400 31,579
----------------------------------------------------------------------------
Gross Profit 19,515 10,460 16,736 14,821 20,105 13,353 18,091 19,555
----------------------------------------------------------------------------
Gross Profit
as % of
revenue 39% 27% 35% 33% 46% 41% 39% 38%
----------------------------------------------------------------------------
Capital
Expenditure
s 6,749 5,347 9,303 14,698 5,859 8,623 14,772 12,781
----------------------------------------------------------------------------
Amortization
included in
Cost of
Sales 3,185 2,692 2,987 3,086 3,730 3,340 3,895 4,423
----------------------------------------------------------------------------
2010
($000s) Q1 Q2 Q3 Q4
--------------------------------------------
Revenue 38,322 30,659 36,062 40,906
Cost of
Sales 23,290 18,201 19,690 23,056
--------------------------------------------
Gross Profit 15,032 12,458 16,372 17,850
--------------------------------------------
Gross Profit
as % of
revenue 39% 41% 45% 44%
--------------------------------------------
Capital
Expenditure
s 1,043 3,108 6,060 10,551
--------------------------------------------
Amortization
included in
Cost of
Sales 3,676 3,334 3,251 3,712
--------------------------------------------
Oilfield - Year to Date Information
2012 2011
($000s) Q1 Q2-YTD Q3-YTD Q4-YTD Q1 Q2-YTD Q3-YTD Q4-YTD
----------------------------------------------------------------------------
Revenue 50,452 89,403 136,581 181,067 43,299 76,022 122,513 173,647
Cost of
Sales 30,937 59,428 89,870 119,535 23,194 42,564 70,964 102,543
----------------------------------------------------------------------------
Gross Profit 19,515 29,975 46,711 61,532 20,105 33,458 51,549 71,104
----------------------------------------------------------------------------
Gross Profit
as % of
revenue 39% 34% 34% 34% 46% 44% 42% 41%
----------------------------------------------------------------------------
Capital
Expenditure
s 6,749 12,096 21,399 36,097 5,859 14,482 29,254 42,035
----------------------------------------------------------------------------
Amortization
included in
Cost of
Sales 3,185 5,877 8,864 11,950 3,730 7,070 10,965 15,387
----------------------------------------------------------------------------
2010
($000s) Q1 Q2-YTD Q3-YTD Q4-YTD
--------------------------------------------
Revenue 38,322 68,981 105,043 145,949
Cost of
Sales 23,290 41,491 61,181 84,237
--------------------------------------------
Gross Profit 15,032 27,490 43,862 61,712
--------------------------------------------
Gross Profit
as % of
revenue 39% 40% 42% 42%
--------------------------------------------
Capital
Expenditure
s 1,043 4,151 10,211 20,762
--------------------------------------------
Amortization
included in
Cost of
Sales 3,676 7,010 10,261 13,973
--------------------------------------------
Industrial - Information by Quarter
2012 2011
($000s) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
----------------------------------------------------------------------------
Revenue 79,915 93,553 81,398 101,439 81,037 96,509 96,321 96,001
Inter-
segment
Revenue - - - - - - - -
Cost of
Sales 70,752 79,127 71,661 94,291 70,673 83,961 83,112 85,616
----------------------------------------------------------------------------
Gross Profit 9,163 14,426 9,737 7,148 10,364 12,548 13,209 10,385
----------------------------------------------------------------------------
Gross Profit
as % of
revenue 11% 15% 12% 7% 13% 13% 14% 11%
----------------------------------------------------------------------------
Capital
Expenditure
s 4,013 6,864 8,863 13,293 3,006 7,514 8,903 10,915
----------------------------------------------------------------------------
Amortization
included in
Cost of
Sales 6,112 6,047 5,860 6,792 6,388 7,084 9,472 7,311
----------------------------------------------------------------------------
Business Unit Revenue Contribution %
----------------------------------------------------------------------------
Western 26% 25% 32% 22% 23% 23% 27% 26%
----------------------------------------------------------------------------
Eastern 74% 75% 68% 78% 77% 77% 73% 74%
----------------------------------------------------------------------------
VSC as % of
Industrial 34% 32% 18% 36% 41% 38% 27% 33%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010
($000s) Q1 Q2 Q3 Q4
--------------------------------------------
Revenue 73,517 83,371 80,330 94,278
Inter-
segment
Revenue 157 189 139 104
Cost of
Sales 62,865 72,159 71,275 81,989
--------------------------------------------
Gross Profit 10,809 11,401 9,194 12,393
--------------------------------------------
Gross Profit
as % of
revenue 15% 13% 11% 13%
--------------------------------------------
Capital
Expenditure
s 2,447 5,618 10,425 9,898
--------------------------------------------
Amortization
included in
Cost of
Sales 5,464 6,076 5,779 7,221
--------------------------------------------
Business Unit Revenue Contribution %
--------------------------------------------
Western 20% 23% 28% 22%
--------------------------------------------
Eastern 80% 77% 72% 78%
--------------------------------------------
VSC as % of
Industrial 39% 34% 30% 42%
--------------------------------------------
--------------------------------------------
Industrial - Year to Date Information
2012 2011
($000s) Q1 Q2-YTD Q3-YTD Q4-YTD Q1 Q2-YTD Q3-YTD Q4-YTD
----------------------------------------------------------------------------
Revenue 79,915 173,468 254,866 356,305 81,037 177,546 273,867 369,868
Inter-
segment
Revenue - - - - - - - -
Cost of
Sales 70,752 149,879 221,540 315,831 70,673 154,634 237,746 323,362
----------------------------------------------------------------------------
Gross Profit 9,163 23,589 33,326 40,474 10,364 22,912 36,121 46,506
----------------------------------------------------------------------------
Gross Profit
as % of
revenue 11% 14% 13% 11% 13% 13% 13% 13%
----------------------------------------------------------------------------
Capital
Expenditure
s 4,013 10,877 19,740 33,033 3,006 10,520 19,423 30,338
----------------------------------------------------------------------------
Amortization
included in
Cost of
Sales 6,112 12,159 18,019 24,811 6,388 13,472 22,944 30,255
----------------------------------------------------------------------------
Business Unit Revenue Contribution %
----------------------------------------------------------------------------
Western 26% 26% 28% 26% 23% 23% 25% 25%
----------------------------------------------------------------------------
Eastern 74% 74% 72% 74% 77% 77% 75% 75%
----------------------------------------------------------------------------
VSC as % of
Industrial 34% 33% 28% 30% 41% 40% 35% 35%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010
($000s) Q1 Q2-YTD Q3-YTD Q4-YTD
--------------------------------------------
Revenue 73,517 156,888 237,218 331,496
Inter-
segment
Revenue 157 346 485 589
Cost of
Sales 62,865 135,024 206,299 288,287
--------------------------------------------
Gross Profit 10,809 22,210 31,404 43,798
--------------------------------------------
Gross Profit
as % of
revenue 15% 14% 13% 13%
--------------------------------------------
Capital
Expenditure
s 2,447 8,065 18,490 28,388
--------------------------------------------
Amortization
included in
Cost of
Sales 5,464 11,540 17,319 24,540
--------------------------------------------
Business Unit Revenue Contribution %
--------------------------------------------
Western 20% 22% 24% 23%
--------------------------------------------
Eastern 80% 78% 76% 77%
--------------------------------------------
VSC as % of
Industrial 39% 36% 34% 36%
--------------------------------------------
--------------------------------------------
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance sheet arrangements.
SENSITIVITIES
Our stock-based compensation expense is sensitive to changes in our share price.
At December 31, 2012, a $1 change in our share price between $12 per share and
$18 per share has a $3.0 - $4.0 million direct impact on annual stock-based
compensation reflected in SG&A. We anticipate that approximately 55% of
stock-based compensation will be settled in cash in future periods.
Our revenue is sensitive to changes in commodity prices for crude oil, base oils
and lead. These factors have both a direct and indirect impact on our business.
The direct impact of these commodity prices is reflected in the revenue received
from the sale of products such as crude oil, base oils and lead. Historically
approximately 25% of our revenue is sensitive to direct impact of commodity
prices. The indirect impact is the effect that the variations of these factors,
including natural gas, has on activity levels of our customers and, therefore,
demand for our services. Management actively manages the indirect impact by
strategically geographically balancing mobile assets to meet demand and shifts
in activity levels where necessary. The indirect impacts of these fluctuations
previously discussed are not quantifiable.
The following table provides management's estimates of fluctuations in key
inputs and prices and the direct impact on revenue from product sales and SG&A:
----------------------------------------------------------------------------
Change in Impact on
benchmark ($) Annual
Revenue ($)
----------------------------------------------------------------------------
LME lead price ($U.S./MT)(1)(2) 220 7.7 million
Edmonton Par crude oil price ($/bbl)(1) 1.00 0.3 million
Bow River crude oil price ($/bbl)(1) 1.00 0.3 million
Motiva Base oil ($/litre)(3)(4) 0.05 0.8 million
----------------------------------------------------------------------------
(1) Based on 2012 performance and volumes
(2) Excludes impact of LME on feedstock which offsets the impact of LME on revenue.
(3) In 2011, we changed our base oil benchmark from the Gulf Coast to Motiva to
reflect the improved quality of our recycled oil.
(4) Based on 2012 volumes of 18 million litres
RISK MANAGEMENT
To effectively manage the risk associated with our business and strategic
objectives, we continue to implement an enterprise risk management (ERM) system.
This process provides the framework to understand and prioritize risks faced by
our organization. We use a matrix to identify and analyze the potential impact,
probability and risk mitigation strategy for each key risk. Risk categories
identified include:
-- Strategic - risk to earnings, capital, and strategic objectives arising
due to changes in the business environment
-- Operational - risk of loss due to failed internal processes and systems,
human and technical errors, or external events
-- Financial - risk associated with financial processes, obligations, and
assets
-- People - risk to Business Plan due to recruiting, training, labour
availability, union relations, and managerial structure
-- Legal/Regulatory - risk of loss due to compliance with laws, ethical
standards, disclosure, and contractual obligations
-- Technology and Data - risk that IT systems are not adequate to support
strategic and business objectives
CRITICAL ACCOUNTING ESTIMATES
The preparation of the consolidated financial statements in conformity with IFRS
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of any contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for the period. Such estimates relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
actual results may differ from estimated amounts as transactions are settled in
the future. Amounts recorded for amortization, accretion, future decommissioning
obligations, embedded derivatives, deferred income taxes, valuation of warrants
and impairment calculations are based on estimates. By their nature, these
estimates are subject to measurement uncertainty, and the impact of the
difference between the actual and the estimated costs on the financial
statements of future periods could be material.
Recoverability of Asset Carrying Values
Newalta assesses its property, plant and equipment, intangibles and goodwill for
impairment at the cash generating unit ("CGU") level by comparing the carrying
amount to the recoverable amount of the underlying assets. Judgment is required
in the aggregation of assets into CGU's. The determination of the recoverable
amount involves estimating the CGU's fair value less costs to sell or its
value-in-use, which is based on its discounted future cash flows using an
applicable discount rate. Future cash flows are calculated based on management's
best estimate of future inflation and are discounted based on management's
current assessment of market conditions.
Our determination, as at December 31, 2012, was that there was no impairment.
Decommissioning Liability
Newalta recognizes a provision for future remediation and post abandonment
activities in the consolidated financial statements as the net present value of
the estimated future expenditures required to settle the estimated future
obligation at the balance sheet date. The recorded liability increases over time
to its future amount through unwinding of the discount. The measurement of the
decommissioning liability involves the use of estimates and assumptions
including the discount rate, the expected timing of future expenditures and the
amount of future abandonment costs. Decommissioning estimates are reviewed
annually and estimated by management, in consultation with Newalta's engineers
and environmental, health and safety staff, on the basis of current regulations,
costs, technology and industry standards.
Revisions to the estimated amount or timing of the obligations are reflected
prospectively as increases or decreases to the recorded liability and the
related asset. Actual decommissioning expenditures, up to the recorded liability
at the time, are drawn against the liability as the costs are incurred. Amounts
capitalized to the related assets are amortized to income in line with the
depreciation of the underlying asset.
Fair Value Calculation on Share-Based Payments and Stock Appreciation Rights
We have two share-based compensation plans: the 2006 Option Plan and the 2008
Option Plan (collectively the "Option Plans"). Under the Option Plans, we may
grant to directors, officers, employees and consultants of Newalta or any of its
affiliates, options to acquire up to 10% of the issued and outstanding shares.
The fair value of share-based payments is calculated using a Black-Scholes
option pricing model, depending on the characteristics of the share-based
payment. There are a number of estimates used in the calculation such as the
future forfeiture rate, expected option life and the future price volatility of
the underlying security which can vary from actual future events. The factors
applied in the calculation are management's best estimates based on historical
information and future forecasts.
We may also grant stock appreciation rights ("SARs") to directors, officers,
employees and consultants of Newalta Corporation or any of its affiliates. SARs
entitle the holder thereof to receive cash from Newalta in an amount equal to
the positive difference between the grant price and the trading price of our
common shares on the exercise date. The grant price is calculated based on the
five-day volume weighted average trading price of our common shares on the TSX.
The fair value at the date of grant is calculated using the Black-Scholes option
pricing model method with the share-based compensation expense recognized over
the vesting period of the options. There are a number of estimates used in the
calculation such as the future forfeiture rate, expected option life and the
future price volatility of the underlying security which can vary from actual
future events. The factors applied in the calculation are management's best
estimates based on historical information and future forecasts.
Taxation
The calculation of deferred income taxes is based on a number of assumptions
including estimating the future periods in which temporary differences, tax
losses and other tax credits will reverse. Tax interpretations, regulations and
legislation in the various jurisdictions in which we operate are subject to
change.
Derivative Instruments
The estimated fair value of derivative instruments resulting in financial assets
and liabilities, by their very nature, are subject to measurement uncertainty.
Leases
Newalta makes judgments in determining whether certain leases, in particular
those with long contractual terms where the lessee is the sole user and Newalta
is the lessor, are operating or finance leases.
Revenue
Newalta may enter into arrangements with customers which contain multiple
elements in which revenue is recognized for each unit of accounting when earned
based on the relative fair value of each unit of accounting as determined by
internal or third party analyses of market-based prices. Significant judgment is
required to allocate contract consideration to each unit of accounting and
determine whether the arrangement is a single unit of accounting or a multiple
element arrangement. Depending upon how such judgment is exercised, the timing
and amount of revenue recognized could differ significantly.
FUTURE ACCOUNTING POLICY CHANGES
As of January 1, 2013 with the exception of IFRS 9, which is expected to be
effective as of January 1, 2015, we are required to adopt the following
standards and amendments as issued by the International Accounting Standards
Board ("IASB"), which are not expected to have a material impact on our
consolidated financial statements.
-- IFRS 10, "Consolidated Financial Statements", which is the result of the
IASB's project to replace Standing Interpretations Committee 12,
"Consolidation - Special Purpose Entities" and the consolidation
requirements of IAS 27, "Consolidated and Separate Financial
Statements". The new standard eliminates the current risk and rewards
approach and establishes control as the single basis for determining
consolidation of an entity.
-- IFRS 12, "Disclosure of Interests in Other Entities", which outlines the
required disclosures for interests in subsidiaries and joint
arrangements. The new disclosures require information that will assist
financial statement users to evaluate the nature, risks and financial
effects associated with an entity's interests in subsidiaries and joint
arrangements.
-- IFRS 11, "Joint Arrangements", which is the result of the IASB's project
to replace IAS 31, "Interest in Joint Ventures". The new standard
redefines joint operations and joint ventures and requires joint
operations to be proportionately consolidated and joint ventures to be
equity accounted. Under IAS 31, joint ventures could be proportionately
consolidated.
-- IFRS 13, "Fair Value Measurement", which provides a common definition of
fair value, establishes a framework for measuring fair value under IFRS
and enhances the disclosures required for fair value measurements. The
standard applies where fair value measurements are required and does not
require new fair value measurements.
-- IFRS 9, "Financial Instruments", which is the result of the first phase
of the IASB's project to replace IAS 39, "Financial Instruments:
Recognition and Measurement". The new standard replaces the current
multiple classification and measurement models for financial assets and
liabilities with a single model that has only two classification
categories: amortized cost and fair value.
BUSINESS RISKS AND RISK MANAGEMENT
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 MD&A and throughout this MD&A)
and the risk factors set forth in the most recently filed Annual Information
Form of Newalta which are incorporated by reference herein. For further
information on our risk management framework, please refer to page 43 of our
2011 Annual Report.
The Annual Information Form is available through the internet on the Canadian
System for Electronic Document Analysis and Retrieval ("SEDAR") which can be
accessed at www.sedar.com. Copies of the Annual Information Form may be
obtained, on request without charge, from Newalta Corporation at 211 - 11th
Avenue S.W., Calgary, Alberta T2R 0C6, or by facsimile at (403) 806-7032.
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. Historically, on an annual basis, our top 25 customers
generate approximately 40% of our total revenue, with 12% of these customers
having a credit rating of A or higher and 52% of these customers having ratings
of BBB or higher. 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 December 31, 2012.
Management assesses our working capital foreign exchange exposure regularly and
may draw U.S. denominated long-term debt as required, which serves as a natural
hedge, to mitigate 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 senior
secured 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 17 to the Financial Statements for the three months and
year ended December 31, 2012.
During the year, we recorded an impairment of $1.6 million on our available for
sale financial asset due to a decline in investment value. The change in value
has been reclassified from other comprehensive loss to finance charges in
accordance with IAS 39 requirements.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
The Chief Executive Officer and the Chief Financial Officer (collectively the
"Certifying Officers") have evaluated the design and effectiveness of our
disclosure controls and procedures as of December 31, 2012, and have concluded
that such disclosure controls and procedures were effective. In additional, the
Certifying Officers have evaluated the design and effectiveness of our internal
control over financial reporting as of December 31, 2012, and have concluded
that such internal controls over financial reporting were effective. There have
not been any changes in the internal control over financial reporting in Q4 of
2012 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
(Expressed in thousands of Canadian Dollars)
December 31, December 31,
2012 2011
----------------------------------------------------------------------------
Assets
Current assets
Cash 409 -
Accounts and other receivables 150,347 134,172
Inventories (Note 3) 43,123 30,953
Prepaid expenses and other 10,627 6,558
----------------------------------------------------------------------------
204,506 171,683
Non-current assets
Property, plant and equipment (Note 4) 929,580 820,102
Permits and other intangible assets (Note 5) 58,614 59,593
Other long-term assets (Note 6) 23,443 10,746
Goodwill (Note 5) 102,615 102,897
----------------------------------------------------------------------------
TOTAL ASSETS 1,318,758 1,165,021
----------------------------------------------------------------------------
Liabilities
Current liabilities
Bank indebtedness - 6,168
Accounts payable and accrued liabilities 181,876 144,067
Deferred revenue 6,494 3,830
Dividends payable 5,426 3,889
----------------------------------------------------------------------------
193,796 157,954
Non-current liabilities
Senior secured debt (Note 7) 76,500 68,493
Senior unsecured debentures (Note 8) 246,334 245,049
Other liabilities (Note 9) 4,228 5,459
Deferred tax liability (Note 10) 77,519 68,389
Decommissioning liability (Note 11) 78,941 77,756
----------------------------------------------------------------------------
TOTAL LIABILITIES 677,318 623,100
----------------------------------------------------------------------------
Shareholders' Equity
Shareholders' capital (Note 12) 394,048 317,386
Contributed surplus 2,881 2,700
Retained earnings 247,565 223,679
Accumulated other comprehensive loss (3,054) (1,844)
----------------------------------------------------------------------------
TOTAL EQUITY 641,440 541,921
----------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,318,758 1,165,021
----------------------------------------------------------------------------
The accompanying notes to the financial statements are an integral component of
the financial statements.
Consolidated Statements of Operations
(Expressed in thousands of Canadian Dollars)
(Except per share data)
For the three months For the year
ended December 31, ended December 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Revenue 198,445 184,089 726,209 682,828
Cost of sales 159,408 141,349 556,451 517,319
----------------------------------------------------------------------------
Gross profit 39,037 42,740 169,758 165,509
----------------------------------------------------------------------------
Selling, general and
administrative 28,489 25,187 100,031 87,232
Research and development 480 439 2,358 2,337
----------------------------------------------------------------------------
Earnings before finance charges
and income taxes 10,068 17,114 67,369 75,940
----------------------------------------------------------------------------
Finance charges (Note 18) 5,840 8,505 26,796 28,191
Embedded derivative gain (Note
17) (602) - (13,439) -
----------------------------------------------------------------------------
Net financing charges expense 5,238 8,505 13,357 28,191
----------------------------------------------------------------------------
Earnings before income taxes 4,830 8,609 54,012 47,749
----------------------------------------------------------------------------
Income tax expense (Note 10) 706 2,578 11,208 14,187
----------------------------------------------------------------------------
Net earnings 4,124 6,031 42,804 33,562
----------------------------------------------------------------------------
Net earnings per share (Note 14) 0.08 0.12 0.86 0.69
Diluted earnings per share (Note
14) 0.08 0.12 0.85 0.68
----------------------------------------------------------------------------
Supplementary information:
Amortization included within cost
of sales 14,271 13,577 49,024 51,576
Amortization included in selling,
general and administrative 3,526 2,824 13,485 11,280
----------------------------------------------------------------------------
Total amortization 17,797 16,401 62,509 62,856
----------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian Dollars)
For the three months For the year
ended December 31, ended December 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Net earnings 4,124 6,031 42,804 33,562
Other comprehensive loss:
Exchange difference on
translating foreign
operations 1,340 (460) (2,678) (460)
Unrealized loss on available
for sale financial assets(1)
(Note 17) (64) (255) (159) (1,971)
Transfer of available for sale
financial assets to financing
charges (Note 6) 70 - 1,627 -
----------------------------------------------------------------------------
Other comprehensive loss 1,346 (715) (1,210) (2,431)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprehensive income 5,470 5,316 41,594 31,131
----------------------------------------------------------------------------
(1) Net of tax of nil and nil for the three months and year ended December 31,
2012, respectively ($0.1 million and $0.2 million for the three months and year
ended December 31, 2011, respectively).
The accompanying notes to the financial statements are an integral component of
the financial statements.
Consolidated Statement of Changes in Equity
(Expressed in thousands of Canadian Dollars)
Equity
portion of
Shareholders' convertible Contributed
capital debentures surplus
---------------------------------------------------------------------------
Balance, December 31, 2010 315,934 1,021 1,679
---------------------------------------------------------------------------
Changes in equity for year ended
December 31, 2011
Exercise of options 1,452 - -
Redemption of convertible
debentures - (1,021) 1,021
Dividends declared - - -
Other comprehensive loss - - -
Net earnings for the year - - -
---------------------------------------------------------------------------
Balance, December 31, 2011 317,386 - 2,700
---------------------------------------------------------------------------
Changes in equity for year ended
December 31, 2012
Exercise of options 2,443 - -
Issuance of shares (Note 12) 74,400 - -
Cancellation of shares (181) - 181
Dividends declared - - -
Other comprehensive loss - - -
Net earnings for the year - - -
---------------------------------------------------------------------------
Balance, December 31, 2012 394,048 - 2,881
---------------------------------------------------------------------------
Accumulated
other
Retained comprehensive
earnings income (loss) Total
----------------------------------------------------------------------------
Balance, December 31, 2010 204,935 587 524,156
----------------------------------------------------------------------------
Changes in equity for year ended
December 31, 2011
Exercise of options - - 1,452
Redemption of convertible
debentures - - -
Dividends declared (14,818) - (14,818)
Other comprehensive loss - (2,431) (2,431)
Net earnings for the year 33,562 - 33,562
----------------------------------------------------------------------------
Balance, December 31, 2011 223,679 (1,844) 541,921
----------------------------------------------------------------------------
Changes in equity for year ended
December 31, 2012
Exercise of options - - 2,443
Issuance of shares (Note 12) - - 74,400
Cancellation of shares - - -
Dividends declared (18,918) - (18,918)
Other comprehensive loss - (1,210) (1,210)
Net earnings for the year 42,804 - 42,804
----------------------------------------------------------------------------
Balance, December 31, 2012 247,565 (3,054) 641,440
----------------------------------------------------------------------------
The accompanying notes to the financial statements are an integral component of
the financial statements.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian Dollars)
For the three months For the year
ended December 31, ended December 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Cash provided by (used for):
Operating Activities
Net earnings 4,124 6,031 42,804 33,562
Adjustments for:
Amortization 17,796 16,401 62,509 62,856
Income taxes provision (Note
10) 706 2,578 11,208 14,187
Income taxes paid (188) (1,514) (231) (1,809)
Stock-based compensation
expense (Note 9) 4,455 3,003 8,955 6,084
Finance charges 5,840 8,505 26,796 28,191
Embedded derivative gain (Note
17) (602) - (13,439) -
Finance charges paid (10,343) (9,502) (22,075) (20,083)
Other 515 (150) 89 (213)
----------------------------------------------------------------------------
Funds from Operations 22,303 25,352 116,616 122,775
Decrease (increase) in non-cash
working capital (Note 20) 26,772 27,749 (15,883) (14,856)
Decommissioning costs incurred (1,683) (1,711) (3,554) (3,356)
----------------------------------------------------------------------------
Cash from Operating Activities 47,392 51,390 97,179 104,563
----------------------------------------------------------------------------
Investing Activities
Additions to property, plant
and equipment (Note 4) (48,616) (46,786) (157,669) (117,143)
Proceeds on sale of property,
plant, and equipment 1,925 1,023 2,573 1,220
Other - - 100 (5,757)
----------------------------------------------------------------------------
Cash used in Investing
Activities (46,691) (45,763) (154,996) (121,680)
----------------------------------------------------------------------------
Financing Activities
Issuance of shares 73,920 - 74,562 1,249
Issuance of senior unsecured
debentures - 122,557 - 122,557
Redemption of convertible
debentures - (115,000) - (115,000)
(Decrease) increase in senior
secured debt (71,000) (12,755) 7,496 16,154
Increase (decrease) in bank
indebtedness - 3,384 (6,168) 5,999
Decrease in note receivable 70 75 264 240
Dividends paid (Note 15) (4,870) (3,888) (17,382) (14,082)
----------------------------------------------------------------------------
Cash from Financing Activities (1,880) (5,627) 58,772 17,117
----------------------------------------------------------------------------
Effect of foreign exchange on
cash 311 - (546) -
----------------------------------------------------------------------------
Change in cash (868) - 409 -
Cash, beginning of year 1,277 - - -
----------------------------------------------------------------------------
Cash, end of year 409 - 409 -
----------------------------------------------------------------------------
The accompanying notes to the financial statements are an integral component of
the financial statements.
Notes to the Consolidated Financial Statements
For the years ended December 31, 2012 and 2011.
(All tabular data in thousands of Canadian Dollars except per share and ratio data)
NOTE 1. CORPORATE STRUCTURE
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 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 oil and gas, petrochemical, refining, lead, manufacturing and mining
industries.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Statement of Compliance
These consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") and include the accounts of
Newalta and its wholly-owned subsidiaries. All intercompany balances and
transactions including revenue and expenses have been eliminated. These
consolidated financial statements are prepared using IFRS accounting policies
which became Canadian Generally Accepted Accounting Principles for publicly
accountable enterprises and were adopted by the Corporation for fiscal years
beginning on January 1, 2011.
These consolidated financial statements were approved by the Board of Directors
on February 12, 2013.
Basis of Preparation
The consolidated financial statements have been prepared on the historical cost
basis except for certain financial instruments that are measured at fair value,
as explained in the accounting policies below. Historical cost is generally
based on the fair value of the consideration given in exchange for assets.
The principal accounting policies are set out below.
a) Cash and cash equivalents
Cash and cash equivalents are defined as cash and short-term deposits with
maturities of three months or less, when purchased.
b) Inventories
Inventories are comprised of oil, lead and other recycled products, spare parts
and supplies, and are recorded at the lower of cost and net realizable value.
Inventories are valued using the weighted average costing method. Cost of
finished goods includes the laid down cost of materials plus the cost of direct
labour applied to the product and the applicable share of overhead expense. Cost
of other items of inventories comprise the laid down cost.
c) Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated amortization
and impairment. Amortization rates are calculated to amortize the costs, net of
residual value, over the assets' estimated useful lives. Significant parts of
property, plant and equipment that have different depreciable lives are
amortized separately.
Plant and equipment is principally depreciated at rates of 5-10% of the
declining balance (buildings, site improvements, tanks and mobile equipment) or
from 5-14 years straight line (vehicles, computer hardware and software and
leasehold improvements), depending on the expected life of the asset. Some
equipment is depreciated based on utilization rates. The utilization rate is
determined by dividing the cost of the asset by the estimated future hours of
service. Residual values, up to 20% of original cost, may be established for
buildings, site improvements, and tanks. These residual values are not
depreciated. The estimated useful lives, residual values and amortization
methods are reviewed at the end of each reporting period, with the effect of any
changes in estimate accounted for on a prospective basis.
Landfill assets represent the costs of landfill available space, including
original acquisition cost, incurred landfill construction and development costs,
including gas collection systems installed during the operating life of the
site, and capitalized landfill closure and post-closure costs. The cost of
landfill assets, together with projected landfill construction and development
costs for permitted capacity, is amortized on a per-unit basis as landfill space
is consumed. Management annually updates landfill capacity estimates, based on
survey information provided by independent engineers, and projected landfill
construction and development costs. The impact on annual amortization expense of
changes in estimated capacity and construction costs is accounted for
prospectively.
d) Permits and other intangible assets
Permits and other intangible assets are stated at cost, less accumulated
amortization and impairment, and consist of certain production processes,
trademarks, permits and agreements which are amortized over the period of the
contractual benefit of 8 to 20 years on a straight line basis. Certain permits
are deemed to have indefinite lives and therefore are not amortized. There are
nominal fees to renew these permits provided that Newalta remains in good
standing with regulatory authorities.
e) Leases
Lessee
All of the Corporation's leases are classified as operating leases and the
leased assets are not recognized in the Corporation's consolidated balance
sheets. Payments made under operating leases are recognized in profit or loss on
a straight-line basis over the term of the lease unless another systematic basis
is representative of the time pattern of the user's benefit, including any
rent-free periods. Lease incentives are recognized as an integral part of the
total lease expense, over the term of the lease.
Leases where the Corporation assumes substantially all the risks and rewards of
ownership would be classified as finance leases and the corresponding asset
would be classified as property, plant and equipment and the liability as
obligations under finance lease.
Leases may include additional payments for real estate taxes, maintenance and
insurance. These amounts are expensed in the period to which they relate.
Lessor
Assets subject to operating leases are recognized and classified according to
the nature of the asset. Initial direct costs incurred in negotiating and
arranging an operating lease are added to the carrying amount of the leased
asset and expensed over the lease term on the same basis as the lease income.
The depreciation policy for leased assets is consistent with the depreciation
policy for similar owned assets.
f) Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net identifiable assets of acquired businesses.
g) Impairments
Impairments are recorded when the recoverable amount of assets are less than
their carrying amounts. The recoverable amount is the higher of an asset's fair
value less cost to sell or its value in use. Impairment losses, other than those
relating to goodwill, are evaluated for potential reversals when events or
changes in circumstances warrant such consideration.
The carrying values of all assets are reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. Additionally, the carrying values of identifiable intangible assets
with indefinite lives and goodwill are tested annually for impairment.
For the purpose of impairment testing, goodwill is allocated to cash generating
units ("CGU") and management has determined that the appropriate CGUs for
Newalta are: the Western Facilities business unit, Eastern Facilities business
unit, Ville Ste-Catherine ("VSC") business unit, and Onsite division. Goodwill
is allocated to those CGUs that are expected to benefit from the business
combination in which the goodwill arose.
When the net book value of a CGU is higher than its value in use, the difference
is an impairment loss. An impairment loss is first written off against any
goodwill associated with the CGU with any remaining impairment loss
proportionally allocated to the assets of that CGU. Management determined that
as at December 31, 2012 and December 31, 2011 there were no impairments of
property, plant and equipment, intangibles and goodwill.
h) Decommissioning liabilities
Newalta provides for estimated future decommissioning costs for all its
facilities based on the useful lives of the assets and the long-term commitments
of certain sites. Over this period, Newalta recognizes the liability for the
future decommissioning liabilities associated with property, plant and
equipment. These obligations are initially measured at the discounted future
value of the liability. This value is capitalized as part of the cost of the
related asset and amortized over the asset's useful life. The balance of the
liability is adjusted each period for the unwinding of the discount, with the
associated expense included within finance charges. Decommissioning costs are
estimated by management, in consultation with Newalta's engineers and
environmental, health and safety staff, on the basis of current regulations,
costs, technology and industry standards. Actual decommissioning costs are
charged against the provision as incurred.
i) Revenue recognition
Revenue is recognized in the period products are delivered or services provided
and when all the following conditions have been satisfied:
-- Newalta has transferred the significant risks and rewards of ownership
of the goods to the buyer;
-- Newalta retains no continuing managerial involvement to the degree
usually associated with ownership or effective control over the goods
sold;
-- the amount of revenue can be measured reliably;
-- it is probable that the economic benefits associated with the
transaction will flow to Newalta; and
-- the costs incurred or to be incurred in respect of the transaction can
be measured reliably.
The major sources of revenue relate to the processing of waste material and the
sale of recycled products recovered from the waste. Revenue is recognized when
waste material is received and a risk and reward transferred for the waste.
Revenue from the sale of recycled products is recognized when products are
delivered to customers or pipelines. For construction projects, revenue is
recognized on a percentage of completion basis. For onsite projects and
contracts, processing revenue is recognized on a per-day fee, throughput,
percentage of completion basis, or over the life of the project.
Newalta offers complete and integrated solutions to meet customer needs. These
solutions may involve the delivery of multiple services and products occurring
at different points in time and/or over different periods in time. As
appropriate, these multiple element arrangements are separated into their units
of accounting based upon their relative fair values when the delivered item has
value to the customer on a stand-alone basis. If the fair value of the delivered
item is not reliably measurable, then the revenue is allocated based on the
difference between the total arrangement consideration and the fair value of the
undelivered item.
Revenue from operating leases includes revenue from the service of operating the
assets as well as revenue for the lease of the assets. Revenue for the service
of operating the assets is recognized on a units of production basis at the
average unit price. Revenue attributed to the lease of the assets is recognized
on a straight-line basis over the lease term, unless another systematic basis is
more representative of the time pattern in which use benefit derived from the
leased asset is diminished.
j) Research and development
Research and development costs are incurred in the design, testing and
commercialization of Newalta's products and services. Research costs, other than
capital expenditures, are expensed as incurred. The costs incurred in developing
new technologies are expensed as incurred unless they meet the criteria under
IFRS for deferral and amortization. These costs will be amortized over the
estimated useful life of the product, commencing with commercial production. In
the event that a product program for which costs have been deferred is modified
or cancelled, the Corporation will assess the recoverability of the deferred
costs and if considered unrecoverable, will expense the costs in the period the
assessment is made.
k) Taxation
The tax expense for the year comprises current and deferred tax. Tax is
recognized in the statements of operations, except to the extent that it relates
to items recognized in other comprehensive income or directly in equity. In this
case, the tax is also recognized in other comprehensive income or directly in
equity, respectively.
Newalta and its wholly-owned subsidiaries follow the liability method of
accounting for income taxes. Deferred income tax assets and liabilities are
measured based upon temporary differences between the carrying values of assets
and liabilities and their tax base. Income tax expense is computed based on the
change during the year in the deferred income tax assets and liabilities.
Effects of changes in tax laws and tax rates are recognized when substantively
enacted.
Deferred tax assets are also recognized for the benefits from tax losses and
deductions with no accounting basis, provided those benefits are probable to be
realized. Deferred income tax assets and liabilities are determined based on the
tax laws and rates that are anticipated to apply in the period of estimated
realization.
l) Earnings per share
Basic earnings per share is calculated using the weighted average number of
shares outstanding during the year. Diluted earnings per share is calculated by
adding the weighted average number of shares outstanding during the year to the
additional shares that would have been outstanding if potentially dilutive
shares had been issued, using the "treasury stock" method.
m) Stock-based incentive plans
The Corporation's stock-based incentive plans consist of stock options, stock
appreciation rights and share units, and are granted to executives, employees
and non-employee directors.
Stock options
Newalta has three stock-based option compensation plans, the 2003 Option Plan
(the "2003 Plan"), the 2006 Option Plan (the "2006 Plan") and the 2008 Option
Plan (the "2008 Plan"). Under the option plans, Newalta may grant to directors,
officers, employees and consultants of Newalta or any of its affiliates, rights
to acquire up to 10% of the issued and outstanding common shares of the
Corporation (the "Shares").
The 2003 Plan is an equity-settled plan where the fair value of options at the
date of grant is calculated using the Black-Scholes option pricing model method
with the stock-based compensation expense recorded as a selling, general and
administrative expense that is recognized over the vesting period of the
options, with a corresponding increase to contributed surplus. When options are
exercised, the proceeds, together with the amount recorded in contributed
surplus, are transferred to shareholders' capital. Forfeitures are estimated and
accounted for at the grant date and adjusted, if necessary, in subsequent
periods.
The 2006 Plan and the 2008 Plan are both stock-based payment awards that allow
for individuals to settle their options in cash. The fair value at the date of
grant is calculated using the Black-Scholes option pricing model method with the
stock-based compensation expense recorded as a selling, general and
administrative expense that is recognized over the vesting period of the options
with a corresponding entry to either accrued liabilities or other liabilities.
The fair value is subsequently re-measured at the end of each reporting period.
Forfeitures are estimated and accounted for at the grant date and adjusted, if
necessary, in subsequent periods.
Stock appreciation rights ("SARs")
SARs entitle the holder thereof to receive cash from Newalta in an amount equal
to the positive difference between the grant price and the trading price of
Newalta's common shares on the exercise date. The grant price is calculated
based on the five-day volume weighted average trading price of Newalta's Shares
on the Toronto stock exchange ("TSX"). SARs generally expire five years after
they have been granted and the vesting period is determined by the Board of
Directors of Newalta. The fair value at the date of grant is calculated using
the Black-Scholes option pricing model method with the stock-based compensation
expense recognized over the vesting period of the options and recorded as a
selling, general and administrative expense with a corresponding entry to
accrued liabilities or other liabilities. The fair value is subsequently
re-measured at the end of each reporting period. Forfeitures are estimated and
accounted for at the grant date and adjusted, if necessary, in subsequent
periods.
Share units
Newalta has a cash-settled Deferred Share Unit ("DSUs") plan that has been
established for non-executive directors. Under this plan, notional DSUs are
granted annually and vest immediately. The measurement of the compensation
expense and corresponding liability for these awards is based on the fair value
of the award, and is recognized as a stock-based compensation expense which is
recorded as a selling, general and administrative expense with a corresponding
increase in accrued liabilities. Dividend equivalent grants, if any, are
recorded as stock-based compensation expense in the period the dividend is paid.
The liability is re-measured at each reporting date and at settlement date. Any
changes in the fair value of the liability are recognized in earnings. 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 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.
A cash-settled Performance Share Unit ("PSUs") incentive plan has been
established for officers and other eligible employees. Under this plan, notional
PSUs may be granted based on corporate performance criterion and vest after
three years. The vested PSUs are automatically paid out in cash upon vesting at
a value determined by the fair market value of the Corporation's shares at
December 31 of the vesting year and based on the number of PSUs held multiplied
by a vesting factor. The vesting factor is based on performance conditions
established by the Board of Directors prior to the date of grant of the PSUs.
The stock-based compensation expense of the PSUs is recorded as a selling,
general and administrative expense on a straight-line basis over the vesting
period with a corresponding entry to either accrued liabilities or other
liabilities. This estimated value is adjusted each period based on the
period-end trading price of the Corporation's Shares and an estimated vesting
factor with any changes in the fair value of the liability being recognized in
earnings. Dividend equivalent grants, if any, are recorded as stock-based
compensation expense in the period the dividend is paid.
A Restricted Share Unit ("RSUs") incentive plan has been established for
officers and other eligible employees. Under this plan, notional RSUs are
granted and vest annually over a two-year term or immediately upon termination
of employment by a participant. Upon vesting, RSUs are automatically paid out in
Shares purchased on the open market in a number equal to the number of RSUs
held. The fair value of the RSUs is accrued in accrued liabilities and charged
to earnings as a selling, general and administrative expense upon grant. This
estimated value is adjusted each period based on the period-end trading price of
the Corporation's Shares with the resulting gains or losses included in
earnings. Dividend equivalent grants, if any, are charged to earnings in the
period the dividend is paid.
n) Financial instruments
Classification
All financial instruments are classified into one of five categories and are
initially recognized at fair value and subsequently measured as noted in the
table below.
----------------------------------------------------------------------------
Category Subsequent Measurement
----------------------------------------------------------------------------
Financial assets at fair value Fair value and changes in fair value are
through profit and loss recognized in net earnings
("FVTPL")
Held-to-maturity investments Amortized cost, using the effective interest
method
Loans and receivables Amortized cost, using the effective interest
method
Available-for-sale financial Fair value and changes in fair value are
assets ("AFS") recorded in other comprehensive income until
the instrument is derecognized or impaired
Financial liabilities Amortized cost, using the effective interest
method
----------------------------------------------------------------------------
Cash and accounts and other receivables are classified as loans and receivables.
Senior secured debt, senior unsecured debentures, bank indebtedness, accounts
payable and accrued liabilities, dividends payable and other liabilities are
classified as financial liabilities.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of
impairment at the end of each reporting period. Financial assets are considered
to be impaired when there is objective evidence that, as a result of one or more
events that occurred after the initial recognition of the financial asset, the
estimated future cash flows of the investment have been affected.
----------------------------------------------------------------------------
Category Impairment methodology Indicators of Impairment
----------------------------------------------------------------------------
Available for Cumulative gains or losses Significant or prolonged
sale equity previously recognized on other decline in the fair value of
investments comprehensive income are the security below its cost
reclassified to profit or loss
in the period
----------------------------------------------------------------------------
Financial Difference between the asset's The following indicators apply
assets carried carrying amount and the to the remaining three
at amortized present value of estimated categories:
cost future cash flows, discounted - Significant financial
at the financial asset's difficulty of the issuer or
original effective interest counterparty
rate
- Breach of contract, such as
default or delinquency in
interest of principal payments
- It becomes probable that the
borrower will enter bankruptcy
or financial reorganization
- Disappearance of an active
market for that asset because
of financial difficulties
----------------------------------------------
Financial Difference between the asset's
assets that carrying amount and the
are carried at present value of estimated
cost future cash flows, discounted
at the financial asset's
original effective interest
rate
----------------------------------------------
Other Carrying amount of the
financial financial asset is reduced by
assets the impairment loss directly
for all financial assets with
the exception of trade
receivables, where the
carrying amount is reduced
through the use of an
allowance account
----------------------------------------------------------------------------
Embedded derivatives
The embedded derivatives are classified at fair value through profit and loss
("FVTPL"). They have been valued using the option adjusted spread ("OAS") model,
which requires management to make judgements, estimates and assumptions. They
are valued at fair value upon initial recognition and at the end of each
reporting period with gains and losses recognized through finance charges in the
consolidated statement of operations.
Transaction costs
Transaction costs incurred with respect to the credit facility are deferred and
amortized using the straight-line method over the term of the facility. The
asset is recognized in prepaid expenses and other on the balance sheet while the
amortization is included in financing charges within net income. Transaction
costs associated with other financial liabilities are netted against the related
liability.
o) Functional and presentation currency
Each of the Corporation's subsidiaries is measured using the currency of the
primary economic environment in which the entity operates (the "functional
currency"). The consolidated financial statements are presented in Canadian
dollars, which is the Corporation's functional currency.
Upon consolidation, the financial statements of the subsidiary that have a
functional currency different from that of the Corporation are translated into
Canadian dollars whereby assets and liabilities are translated at the rate of
exchange at the balance sheet date, revenues and expenses are translated at
average monthly exchange rates (as this is considered a reasonable approximation
of actual rates), and gains and losses in translation are recognized in the
shareholders' equity section as accumulated other comprehensive income.
Effective December 31, 2011, the functional currency of Newalta's United States
subsidiary changed from the Canadian dollar to the United States dollar as a
result of changes in its economic circumstances.
If the Corporation were to dispose of its entire interest in a foreign
operation, or to lose control, joint control, or significant influence over a
foreign operation, the foreign currency gains or losses accumulated in other
comprehensive income related to the foreign operation would be recognized in net
earnings. If the Corporation were to dispose of part of an interest in a foreign
operation which remains a subsidiary, a proportionate amount of foreign currency
gains or losses accumulated in other comprehensive income related to the
subsidiary would be reallocated between controlling and non-controlling
interests.
p) Borrowing costs
Borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset form part of the cost of that asset. A
qualifying asset is an asset that requires a period of six months or greater to
get ready for its intended use or sale.
q) Critical judgments and estimate uncertainties in applying accounting policies
The preparation of the consolidated financial statements in conformity with IFRS
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of any contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for the period. Such estimates relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
actual results may differ from estimated amounts as transactions are settled in
the future. Amounts recorded for amortization, accretion, future decommissioning
obligations, deferred income taxes, valuation of warrants and impairment
calculations are based on estimates. By their nature, these estimates are
subject to measurement uncertainty, and the impact of the difference between the
actual and the estimated costs on the financial statements of future periods
could be material.
The following are the critical judgments that management has made in applying
the Corporation's accounting policies and that have the most significant effect
on the amounts recognized in the consolidated financial statements.
Recoverability of asset carrying values
Newalta assesses its property, plant and equipment, intangibles and goodwill for
impairment at the CGU level by comparing the carrying amount to the recoverable
amount of the underlying assets. Judgment is required in the aggregation of
assets into CGU's. The determination of the recoverable amount involves
estimating the CGU's fair value less costs to sell or its value-in-use, which is
based on its discounted future cash flows using an applicable discount rate.
Future cash flows are calculated based on management's best estimate of future
inflation and are discounted based on management's current assessment of market
conditions.
Decommissioning liability
Newalta recognizes a provision for future remediation and post abandonment
activities in the consolidated financial statements as the net present value of
the estimated future expenditures required to settle the estimated future
obligation at the balance sheet date. The recorded liability increases over time
to its future amount through the unwinding of the discount. The measurement of
the decommissioning liability involves the use of estimates and assumptions
including the discount rate, the expected timing of future expenditures and the
amount of future abandonment costs. Decommissioning estimates are reviewed
annually and estimated by management, in consultation with Newalta's engineers
and environmental, health and safety staff, on the basis of current regulations,
costs, technology and industry standards.
Revisions to the estimated amount or timing of the obligations are reflected
prospectively as increases or decreases to the recorded liability and the
related asset. Actual decommissioning expenditures, up to the recorded liability
at the time, are drawn against the liability as the costs are incurred. Amounts
capitalized to the related assets are amortized to income in line with the
depreciation of the underlying asset.
Fair value calculation on stock-based payments
The fair value of stock-based payments is calculated using a Black-Scholes
option pricing model, depending on the characteristics of the stock-based
payment. There are a number of estimates used in the calculation such as the
future forfeiture rate, expected option life and the future price volatility of
the underlying security which can vary from actual future events. The factors
applied in the calculation are management's best estimates based on historical
information and future forecasts.
Taxation
The calculation of deferred income taxes is based on a number of assumptions
including estimating the future periods in which temporary differences, tax
losses and other tax credits will reverse. Tax interpretations, regulations and
legislation in the various jurisdictions in which the Corporation and its
subsidiaries operate are subject to change.
Derivative instruments
The estimated fair value of derivative instruments resulting in financial assets
and liabilities, by their very nature, are subject to measurement uncertainty.
Leases
Newalta makes judgments in determining whether certain leases, in particular
those with long contractual terms where the lessee is the sole user and Newalta
is the lessor, are operating or finance leases.
Revenue
Newalta may enter into arrangements with customers which contain multiple
elements in which revenue is recognized for each unit of accounting when earned
based on the relative fair value of each unit of accounting as determined by
internal or third party analyses of market-based prices. Significant judgment is
required to allocate contract consideration to each unit of accounting and
determine whether the arrangement is a single unit of accounting or a multiple
element arrangement. Depending upon how such judgment is exercised, the timing
and amount of revenue recognized could differ significantly.
r) Recent pronouncements issued
As of January 1, 2013 with the exception of IFRS 9, which is expected to be
effective as of January 1, 2015, Newalta will be required to adopt the following
standards and amendments as issued by the IASB, which are not expected to have a
material impact on the Corporation's consolidated financial statements.
-- IFRS 10, "Consolidated Financial Statements", which is the result of the
IASB's project to replace Standing Interpretations Committee 12,
"Consolidation - Special Purpose Entities" and the consolidation
requirements of IAS 27, "Consolidated and Separate Financial
Statements". The new standard eliminates the current risk and rewards
approach and establishes control as the single basis for determining the
consolidation of an entity.
-- IFRS 12, "Disclosure of Interests in Other Entities", which outlines the
required disclosures for interests in subsidiaries and joint
arrangements. The new disclosures require information that will assist
financial statement users to evaluate the nature, risks and financial
effects associated with an entity's interests in subsidiaries and joint
arrangements.
-- IFRS 11, "Joint Arrangements", which is the result of the IASB's project
to replace IAS 31, "Interest in Joint Ventures". The new standard
redefines joint operations and joint ventures and requires joint
operations to be proportionately consolidated and joint ventures to be
equity accounted. Under IAS 31, joint ventures could be proportionately
consolidated.
-- IFRS 13, "Fair Value Measurement", which provides a common definition of
fair value, establishes a framework for measuring fair value under IFRS
and enhances the disclosures required for fair value measurements. The
standard applies where fair value measurements are required and does not
require new fair value measurements.
-- IFRS 9, "Financial Instruments", which is the result of the first phase
of the IASB's project to replace IAS 39, "Financial Instruments:
Recognition and Measurement". The new standard replaces the current
multiple classification and measurement models for financial assets and
liabilities with a single model that has only two classification
categories: amortized cost and fair value.
NOTE 3. INVENTORIES
Inventories consist of the following:
----------------------------------------------------------------------------
December 31, 2012 December 31, 2011
----------------------------------------------------------------------------
Lead 23,165 12,502
Recycled and processed products 6,828 5,291
Recovered crude oil 5,928 7,274
Parts and supplies 7,202 5,886
----------------------------------------------------------------------------
Total inventories 43,123 30,953
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The cost of inventories expensed in cost of sales for the three months and year
ended December 31, 2012, was $32.5 million and $88.0 million respectively (for
the three months and year ended December 31, 2011 - $25.6 million and $90.8
million respectively). Inventories are pledged as general security under the
credit facility.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
----------------------------------------------------------------------------
Plant and
Land equipment Landfill Total
----------------------------------------------------------------------------
Cost
Balance, December 31, 2010 14,696 910,580 117,202 1,042,478
Additions during the year - 122,980 18,517 141,497
Disposals during the year - (1,804) - (1,804)
----------------------------------------------------------------------------
Balance, December 31, 2011 14,696 1,031,756 135,719 1,182,171
----------------------------------------------------------------------------
Additions during the year - 163,843 8,349 172,192
Disposals during the year (3) (7,011) - (7,014)
----------------------------------------------------------------------------
Balance, December 31, 2012 14,693 1,188,588 144,068 1,347,349
----------------------------------------------------------------------------
Accumulated Amortization
Balance, December 31, 2010 - (254,338) (46,347) (300,685)
Amortization for the year - (46,156) (15,719) (61,875)
Disposals during the year - 491 - 491
----------------------------------------------------------------------------
Balance, December 31, 2011 - (300,003) (62,066) (362,069)
----------------------------------------------------------------------------
Amortization for the year - (49,729) (10,385) (60,114)
Disposals during the year - 4,414 - 4,414
----------------------------------------------------------------------------
Balance, December 31, 2012 - (345,318) (72,451) (417,769)
----------------------------------------------------------------------------
Carrying amounts
As at December 31, 2011 14,696 731,753 73,653 820,102
As at December 31, 2012 14,693 843,270 71,617 929,580
----------------------------------------------------------------------------
For the three months and year ended December 31, 2012, Newalta capitalized $1.6
million and $4.7 million respectively, (for the three months and year ended
December 31, 2011 - $0.9 million and $2.7 million respectively) of borrowing
costs using a capitalization rate of 6.25% and 6.3% respectively (December 31,
2011 - 6.64% and 6.5% respectively).
NOTE 5. PERMITS, INTANGIBLE ASSETS AND GOODWILL
----------------------------------------------------------------------------
Definite
life Non-
Indefinite permits/ competition
permits rights contracts Total
----------------------------------------------------------------------------
Cost
Balance, December 31, 2010 53,037 14,650 6,020 73,707
Additions during the year - 56 - 56
Disposal during the year - (200) - (200)
----------------------------------------------------------------------------
Balance, December 31, 2011 53,037 14,506 6,020 73,563
----------------------------------------------------------------------------
Expired intangibles - (2,850) (6,020) (8,870)
----------------------------------------------------------------------------
Balance, December 31, 2012 53,037 11,656 - 64,693
----------------------------------------------------------------------------
Accumulated Amortization (1)
Balance, December 31, 2010 - (7,108) (6,020) (13,128)
Amortization for the year - (1,042) - (1,042)
Disposal during the year - 200 - 200
----------------------------------------------------------------------------
Balance, December 31, 2011 - (7,950) (6,020) (13,970)
----------------------------------------------------------------------------
Amortization for the year - (979) - (979)
Expired intangibles - 2,850 6,020 8,870
----------------------------------------------------------------------------
Balance, December 31, 2012 - (6,079) - (6,079)
----------------------------------------------------------------------------
Carrying amounts
As at December 31, 2011 53,037 6,556 - 59,593
As at December 31, 2012 53,037 5,577 - 58,614
----------------------------------------------------------------------------
(1) Amortization is included in cost of sales and selling, general and
administrative in the Consolidated Statements of Operations.
Intangibles have been allocated to the following CGUs:
----------------------------------------------------------------------------
December 31, 2012 December 31, 2011
----------------------------------------------------------------------------
West Facilities 683 850
East Facilities 41,411 41,833
Onsite 620 1,010
VSC 15,900 15,900
----------------------------------------------------------------------------
58,614 59,593
----------------------------------------------------------------------------
Goodwill has been allocated to the following CGUs:
----------------------------------------------------------------------------
December 31, 2012 December 31, 2011
----------------------------------------------------------------------------
West Facilities 12,182 12,182
East Facilities 34,027 34,027
Onsite 56,406 56,688
----------------------------------------------------------------------------
102,615 102,897
----------------------------------------------------------------------------
In assessing goodwill and indefinite life intangible assets for impairment at
December 31, 2012 and December 31, 2011, Newalta compared the aggregate
recoverable amount of the assets included in the CGUs to their respective
carrying amounts. The recoverable amount has been determined based on the value
in use of the CGUs using the four year cash flow business plan approved by
management and the Board of Directors that made use of observable markets for
inputs. For periods beyond the four year business plan, cash flows were
extrapolated using growth rates that do not exceed the long-term average in each
CGU. The weighted average growth rate reflects a nominal inflationary rate as
required by IFRS that is calculated over the remaining useful life of each CGU.
There was no impairment as at December 31, 2012 and December 31, 2011.
Key assumptions included the following:
Year ended December 31, West East
2012 Periods Facilities Facilities Onsite VSC
----------------------------------------------------------------------------
Weighted average growth
rate 2017 and beyond 2.9% 2.9% 3.6% 2.9%
Pre-tax discount rate 2013 and beyond 12.7% 14.9% 17.5% 18.6%
----------------------------------------------------------------------------
Year ended December 31, West East
2011 Periods Facilities Facilities Onsite VSC
----------------------------------------------------------------------------
Weighted average growth
rate 2016 and beyond 2.9% 2.9% 3.6% 2.9%
Pre-tax discount rate 2012 and beyond 11.1% 11.9% 14.9% 18.5%
----------------------------------------------------------------------------
In all CGUs, reasonably possible changes in key assumptions would not cause the
recoverable amount of goodwill to fall below the carrying value.
NOTE 6. OTHER ASSETS
a) Other assets
BioteQ Environmental Technologies Inc. ("BioteQ")
During the first quarter of 2010, Newalta acquired 3,636,364 units, at a price
of $1.10 per share from the treasury of BioteQ for cash consideration of $4
million. Each unit purchased included a common share and 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. The fair value of the warrants is
estimated using a binomial methodology and the common shares based on a publicly
available quoted price.
The common shares are classified as available-for-sale and are marked to market
at each period end with changes in fair value recorded in other comprehensive
income. As at December 31, 2012 an unrealized loss of $0.2 million (net of tax
of nil) was recorded in accumulated other comprehensive income.
During 2012 an impairment test was performed for Newalta's investment in BioteQ.
For the year ended December 31, 2012, Newalta recorded an impairment on common
shares of $1.6 million due to a decline in investment value. The change in value
has been reclassified from other comprehensive loss to finance charges in
accordance with IAS 39 requirements.
The warrants are classified as fair value through profit and loss ("FVTPL") and
are revalued at each period end with the change in fair value recognized in
earnings. For the year ended December 31, 2012, the Corporation recorded an
unrealized loss of $0.1 million (year ended December 31, 2011 - unrealized loss
of $1.2 million) which is included in finance charges. As at December 31, 2012,
the fair value was calculated using the following assumptions: an expected
volatility of 55.2% (December 31, 2011 - 81.3%), a risk-free interest rate of
1.1% (December 31, 2011 - 1.2%) and no expected dividend (December 31, 2011 - no
expected dividend).
b) Other long-term assets consist of the following:
----------------------------------------------------------------------------
December 31, 2012 December 31, 2011
----------------------------------------------------------------------------
Embedded derivative (Note 17) 14,138 -
Investment in TerraAqua Resource
Management LLC ("TARM") 6,043 6,362
Deferred tax asset 2,874 3,732
Note receivable 388 652
----------------------------------------------------------------------------
23,443 10,746
----------------------------------------------------------------------------
TerraAqua Resource Management LLC
During the third quarter of 2011, Newalta acquired a 50% interest in TARM in
exchange for cash consideration of $5.8 million. This joint venture is included
within other long-term assets. Newalta's interest in TARM is accounted for under
the equity method and these consolidated financial statements include Newalta's
share of net earnings from the date that joint control commenced, based on the
present 50% ownership interest in TARM. Newalta's share of earnings for the year
ended December 31, 2012, as well as the assets and liabilities as at December
31, 2012, are not significant.
NOTE 7. SENIOR SECURED DEBT
December 31, 2012 December 31, 2011
----------------------------------------------------------------------------
Senior secured debt 76,500 70,010
Issue costs(1) - (1,517)
----------------------------------------------------------------------------
Senior secured debt 76,500 68,493
----------------------------------------------------------------------------
(1) Issue costs related to the facility have been included in prepaid
expenses and other in 2012 and will be amortized over the extended
credit facility term.
On July 12, 2012, Newalta amended and extended its revolving Credit Facility
("Credit Facility"). The maturity of this Credit Facility is July 12, 2015. The
principal borrowing amount was increased from $200 million to $225 million, the
maximum Total Debt to EBITDA has been increased from 3.5:1 to 4:1, and the
lending syndicate increased from five to six institutions. The Credit Facility
is available to fund growth capital expenditures and for general corporate
business purposes as well as to provide letters of credit to third parties for
financial security up to a maximum amount of $60 million. Newalta may, at its
option, request an extension of the credit facility on an annual basis. If no
request to extend the Credit Facility is made by Newalta, the entire amount of
the outstanding indebtedness would be due in full on July 12, 2015. The facility
also requires Newalta to be in compliance with certain covenants. At December
31, 2012, and December 31, 2011, Newalta was in compliance with all covenants.
During the year ended December 31, 2012, credit facility fees of $1.5 million
(year ended December 31, 2011 - nil) were incurred in connection with the
amending and extending of the revolving credit facility. These fees have been
recorded in prepaid expenses and other and will be amortized over the extended
credit facility term.
NOTE 8. SENIOR UNSECURED DEBENTURES
The trust indenture under which the senior unsecured debentures have been issued
requires Newalta to be in compliance with certain covenants as at December 31 of
each year. At December 31, 2012 and December 31, 2011, Newalta was in compliance
with all covenants.
December 31, 2012 December 31, 2011
----------------------------------------------------------------------------
Senior unsecured debentures series 1 125,376 125,000
Senior unsecured debentures series 2 125,322 125,000
Issue costs (4,364) (4,951)
----------------------------------------------------------------------------
Senior unsecured debentures 246,334 245,049
----------------------------------------------------------------------------
Series 1
On November 23, 2010, Newalta issued $125.0 million of 7.625% series 1 senior
unsecured debentures ("series 1"). The series 1 debentures mature on November
23, 2017. The series 1 debentures bear interest at 7.625% per annum and such
interest is payable in equal instalments semi-annually in arrears on May 23 and
November 23 in each year, which commenced on May 23, 2011. The series 1
debentures are unsecured senior obligations and rank equally with all other
existing and future unsecured senior debt and senior to any subordinated debt
that may be issued by Newalta or any of its subsidiaries. The series 1
debentures are effectively subordinated to all secured debt to the extent of
collateral on such debt.
Prior to November 23, 2013, Newalta may on one or more occasions:
-- Redeem up to 35% of the aggregate principal amount of the series 1
debentures, with the net cash proceeds of one or more public equity
offerings at a redemption price equal to 107.625% of the principal
amount, plus accrued and unpaid interest to the date of redemption.
-- Redeem the series 1 debentures, in whole or in part, at a redemption
price which is equal to the greater of (a) the Canada Yield Price (as
defined in the trust indenture) and (b) 101% of the aggregate principal
amount of series 1 debentures redeemed, plus, in each case, accrued and
unpaid interest to the redemption date.
After November 23, 2013, the series 1 debentures are redeemable at the option of
Newalta, in whole or in part, at redemption prices expressed as percentages of
the principal amount, plus in each case accrued interest to the redemption date,
if redeemed during the twelve month period beginning on November 23 of the years
as follows: Year 2013 - 103.813%; Year 2014 - 102.542%; Year 2015 - 101.906%;
Year 2016 and thereafter - 100%.
If a change of control occurs, Newalta will be required to offer to purchase all
or a portion of each debenture holder's series 1 debentures, at a purchase price
in cash equal to 101% of the principal amount of the series 1 debentures offered
for repurchase plus accrued interest to the date of purchase.
Series 2
On November 14, 2011, Newalta issued $125.0 million of 7.75% series 2 senior
unsecured debentures ("series 2"). The series 2 debentures mature on November
14, 2019. The series 2 debentures bear interest at 7.75% per annum and such
interest is payable in equal instalments semi-annually in arrears on May 14 and
November 14 in each year, commencing on May 14, 2012. The series 2 debentures
are unsecured senior obligations and rank equally with all other existing and
future unsecured senior debt and senior to any subordinated debt that may be
issued by Newalta or any of its subsidiaries. The series 2 debentures are
effectively subordinated to all secured debt to the extent of collateral on such
debt.
Prior to November 14, 2015, Newalta may on one or more occasions:
-- Redeem up to 35% of the aggregate principal amount of the series 2
debentures, with the net cash proceeds of one or more public equity
offerings at a redemption price equal to 107.75% of the principal
amount, plus accrued and unpaid interest to the date of redemption.
-- Redeem the series 2 debentures, in whole or in part, at a redemption
price which is equal to the greater of (a) the Canada Yield Price (as
defined in the trust indenture) and (b) 101% of the aggregate principal
amount of series 2 debentures redeemed, plus, in each case, accrued and
unpaid interest to the redemption date.
After November 14, 2015, the series 2 debentures are redeemable at the option of
Newalta, in whole or in part, at redemption prices expressed as percentages of
the principal amount, plus in each case accrued interest to the redemption date,
if redeemed during the twelve month period beginning on November 14 of the years
as follows: Year 2015 - 103.875%; Year 2016 - 101.938%; Year 2017 and thereafter
- 100%.
If a change of control occurs, Newalta will be required to offer to purchase all
or a portion of each debenture holder's series 2 debentures, at a purchase price
in cash equal to 101% of the principal amount of the series 2 debentures offered
for repurchase plus accrued interest to the date of purchase.
NOTE 9. INCENTIVE PLANS
a) Option Plans
For the year ended December 31, 2012, the weighted average price of our shares
at the date of exercise of the options was $14.66 (for the year ended December
31, 2011 - $12.63).
A summary of the status of Newalta's option plans as of December 31, 2012 and
December 31, 2011 and changes during the period is presented as follows:
----------------------------------------------------------------------------
Weighted Weighted Weighted
2008 average 2006 average 2003 average
option exercise option exercise option exercise
plan price plan price plan price
(000s) ($/share) (000s) ($/share) (000s) ($/share)
----------------------------------------------------------------------------
At December 31,
2010 1,667 6.67 708 16.99 353 21.37
----------------------------------------------------------------------------
Granted 893 12.01 - - - -
Exercised (129) 5.80 - - - -
Forfeited - - (5) 32.38 (128) 17.95
----------------------------------------------------------------------------
At December 31,
2011 2,431 8.68 703 16.88 225 23.27
----------------------------------------------------------------------------
Granted (1) 924 12.80 - - - -
Exercised (241) 7.34 - - - -
Forfeited (108) 8.88 (13) 21.88 (225) 23.27
----------------------------------------------------------------------------
At December 31,
2012 (2) 3,006 10.05 690 16.79 - -
----------------------------------------------------------------------------
Exercisable at
December 31,
2012 1,067 8.08 690 16.79 - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Each tranche of the options vest over a three year period (with a five
year life).
(2) The fair value was calculated using the Black-Scholes method of
valuation, assuming 26.30% volatility (December 31, 2011 - 45.23%), a
weighted average expected annual dividend yield of 2.86% (December 31,
2011 - 2.71%), a risk free rate of 1.14% (December 31, 2011 - 0.95%) and
a 3% forfeiture rate (December 31, 2011 - 3%) by period.
----------------------------------------------------------------------------
Options Weighted Weighted Options Weighted
outstanding average average exercisable average
Range of exercise December 31, remaining exercise December 31, exercise
prices ($/share) 2012 life price 2012 price
----------------------------------------------------------------------------
3.81 - 5.40 602 1.0 5.28 396 5.28
7.54 - 8.07 650 2.0 8.07 387 8.07
11.93 - 14.00 1,765 3.4 12.38 359 12.42
14.00 - 19.46 657 0.6 16.66 592 16.82
23.14 - 25.50 22 0.2 25.19 23 25.19
----------------------------------------------------------------------------
3,696 2.3 11.30 1,757 11.50
----------------------------------------------------------------------------
----------------------------------------------------------------------------
b) Share Appreciation Rights ("SARs")
For the year ended December 31, 2012, the weighted average price of our shares
at the date of exercise of the SARs was $14.17 (for the year ended December 31,
2011 - $12.67).
Changes in the number of outstanding SARs were as follows:
----------------------------------------------------------------------------
Weighted
average
SARs exercise price
(000s) ($/right)
----------------------------------------------------------------------------
At December 31, 2010 1,427 7.53
----------------------------------------------------------------------------
Granted 945 12.24
Exercised (156) 5.95
Forfeited (75) 8.69
----------------------------------------------------------------------------
At December 31, 2011 2,141 9.69
----------------------------------------------------------------------------
Granted (1) 812 12.70
Exercised (426) 7.23
Forfeited (179) 11.37
----------------------------------------------------------------------------
At December 31, 2012 (2) 2,348 11.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at December 31, 2012 733 10.34
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Each tranche of the SARs vest over a three year period (with a five year
life).
(2) The fair value was calculated using the Black-Scholes method of
valuation, assuming 26.30% volatility (December 31, 2011 - 45.23%), a
weighted average expected annual dividend yield of 2.86% (December 31,
2011 - 2.71%), a risk free rate of 1.14% (December 31, 2011 - 0.95%) and
an 8% forfeiture rate (December 31, 2011 - 5%) by period.
----------------------------------------------------------------------------
SARs Weighted Weighted SARs Weighted
outstanding average average exercisable average
Range of exercise December remaining exercise December exercise
prices ($/share) 31, 2011 life price 31, 2011 price
----------------------------------------------------------------------------
5.31 - 8.76 690 1.6 6.85 368 6.95
11.93 - 16.65 1,658 3.4 12.79 365 13.76
----------------------------------------------------------------------------
2,348 2.8 11.04 733 10.34
----------------------------------------------------------------------------
----------------------------------------------------------------------------
c) Share Unit Plans
Changes in the number of outstanding share units under our Deferred Share Unit,
Performance Share Unit and Restricted Share Unit plans were as follows:
----------------------------------------------------------------------------
Units
(000s)
----------------------------------------------------------------------------
At December 31, 2010 16
Granted 129
----------------------------------------------------------------------------
At December 31, 2011 145
Granted 112
Exercised (25)
----------------------------------------------------------------------------
At December 31, 2012 232
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at December 31, 2012 -
----------------------------------------------------------------------------
d) Stock-based Compensation Expense
The following table summarizes the stock-based compensation expense recorded for
all plans within selling, general and administrative expense on the Consolidated
Statements of Operations:
For the three
months ended For the year ended
December 31, December 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Stock option plans - non-cash
expense 3.141 1,663 6,250 3,059
----------------------------------------------------------------------------
SARs and share unit plans - cash
expense 970 159 3,303 1,595
SARs and share unit plans - non-
cash expense 1,314 1,340 2,705 3,025
----------------------------------------------------------------------------
Total expense - SARs and share
unit plans 2,284 1,499 6,008 4,620
----------------------------------------------------------------------------
Total stock-based compensation
expense 5,425 3,162 12,258 7,679
----------------------------------------------------------------------------
----------------------------------------------------------------------------
e) Incentive Plan Liabilities
As at December 31, 2012, the total liability related to the Corporation's
incentive plans was $27.0 million, with $22.8 million classified as current and
$4.2 million classified as non-current (December 31, 2011 total incentive plan
liabilities of $19.8 million, with $14.4 million classified as current and $5.5
million classified as non-current). The current liability associated with the
Corporation's incentive plans is included in Accounts payable and accrued
liabilities in the balance sheet. Non-current liability is recorded in Other
liabilities in the balance sheet.
NOTE 10. INCOME TAX
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Newalta's deferred income tax assets and liabilities are as follows:
Canadian Tax Jurisdiction:
----------------------------------------------------------------------------
December 31, 2012 December 31, 2011
----------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment 117,716 110,260
Goodwill and intangible assets 18,652 17,869
----------------------------------------------------------------------------
136,368 128,129
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred income tax assets:
Non-capital loss carry forwards 30,921 34,251
Decommissioning liabilities 20,303 19,684
Deferred financing and equity issuance
costs 522 165
Deferred revenue 1,670 1,043
Deferred expense 4,857 4,100
Tax credit relating to components of
other comprehensive income 223 198
Other 353 299
----------------------------------------------------------------------------
58,849 59,740
----------------------------------------------------------------------------
Net deferred income tax liability 77,519 68,389
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. Tax Jurisdiction:
----------------------------------------------------------------------------
December 31, 2012 December 31, 2011
----------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment 3,942 -
----------------------------------------------------------------------------
3,942 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred income tax assets:
Non-capital loss carry forwards 6,180 1,527
Property, plant and eqiupment - 1,824
Other 636 345
----------------------------------------------------------------------------
6,816 3,696
----------------------------------------------------------------------------
Net deferred income tax asset 2,874 3,696
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-capital loss carry forwards relating to Canadian operations total $124.5
million and relating to our U.S. operations total $17.7 million. The losses
relating to Canadian operations will begin expiring in 2026 and losses relating
to U.S. operations will begin expiring in 2029.
The income tax expense differs from the amount computed by applying Canadian
statutory rates to operating income for the following reasons:
For the year ended December 31,
----------------------------------------------------------------------------
2012 2011
----------------------------------------------------------------------------
Consolidated earnings of Newalta
Corporation before taxes and
distributions to shareholders 54,012 47,749
Current statutory income tax rate 25.72% 27.35%
----------------------------------------------------------------------------
Computed tax expense at statutory rate 13,892 13,059
Increase (decrease) in taxes resulting
from:
Unrealized gain on embedded derivatives (3,457) -
Stock-based compensation expense and non-
deductible costs 893 1,211
Other (120) (83)
----------------------------------------------------------------------------
Reported income tax expense 11,208 14,187
----------------------------------------------------------------------------
NOTE 11. RECONCILIATION OF DECOMMISSIONING LIABILITY
The total future decommissioning liability was estimated by management based on
the anticipated costs to abandon and reclaim facilities and wells, and the
projected timing of these expenditures. The net present value of this amount,
$78.9 million (December 31, 2011 - $77.8 million) has been accrued on the
consolidated balance sheets at December 31, 2012. The total estimated future
cost for decommissioning liability at December 31, 2012, was $402.0 million over
an expected range to 200 years. During the second quarter, future costs were
reduced largely due to the obligation at Stoney Creek landfill decreasing from
300 to 200 years. Newalta used the Bank of Canada's long term bond rate of 2.37%
as at December 31, 2012 (December 31, 2011 - 2.5%) and an inflation rate of 2%
(December 31, 2011 - 2%) to calculate the present value of the decommissioning
liability with the exception of Stoney Creek landfill for which we used a
discount rate of 6% (December 31, 2011 - 6%). The reconciliation of estimated
and actual expenditures for the period is provided below:
----------------------------------------------------------------------------
Decommissioning liability as at January 1, 2011 54,368
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Actual expenditures incurred to fulfill obligations (3,356)
Unwinding of discount 2,138
Change in estimate(1) 24,606
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Decommissioning liability as at December 31, 2011 77,756
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Actual expenditures incurred to fulfill obligations (3,554)
Unwinding of discount 2,482
Change in estimate(1) 2,257
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Decommissioning liability as at December 31, 2012 78,941
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Changes in the discount rates and in the estimated costs of abandonment
and reclamation are factors resulting in a change in estimate.
NOTE 12. SHAREHOLDERS' CAPITAL
Authorized capital of the Corporation consists of an unlimited number of 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 periods:
Common Shares Shares (#) Amount ($)
----------------------------------------------------------------------------
Shares outstanding as at January 1, 2011 48,492 315,934
Shares issued on exercise of options 115 1,452
----------------------------------------------------------------------------
Shares outstanding as at December 31, 2011 48,607 317,386
----------------------------------------------------------------------------
Shares issued on equity offering(1) 5,500 74,400
Shares issued on exercise of options 168 2,443
Cancellation of shares (12) (181)
----------------------------------------------------------------------------
Shares outstanding as at December 31, 2012 54,263 394,048
----------------------------------------------------------------------------
(1) Issue costs are $2.8 million, net of tax of $0.7 million for 2012
Newalta instituted a dividend reinvestment plan ("DRIP") effective with the
January 2013 dividend payable whereby eligible shareholders could elect to
reinvest their cash dividends in additional Corporate Shares at a 5% discount to
market price.
NOTE 13. CAPITAL DISCLOSURES
Newalta's capital structure consists of:
----------------------------------------------------------------------------
December 31, 2012 December 31, 2011
----------------------------------------------------------------------------
Senior secured debt (1) 76,500 70,010
Letters of credit issued as financial 16,046 21,332
security to third parties (Note 16)
Senior unsecured debentures(1) 250,698 250,000
Shareholders' equity 641,440 541,921
----------------------------------------------------------------------------
984,684 883,263
----------------------------------------------------------------------------
(1) Excludes transaction costs
The objectives in managing the capital structure are to:
-- Align our debt structure with our asset structure;
-- Utilize an appropriate amount of leverage to maximize return on
Shareholders' equity; and
-- 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;
-- Draw on existing credit facility and/or 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 covenants required pursuant
to the Credit Facility.
Covenants under our Credit Facility(1) include:
----------------------------------------------------------------------------
Ratio December 31, 2012 December 31, 2011 Threshold
----------------------------------------------------------------------------
Senior secured debt(2) to
EBITDA(3) 0.66:1 0.65:1 2.75:1 maximum
Total debt(4) to EBITDA(3) 2.46:1 2.38:1 4.00:1 maximum
Interest Coverage 5.09:1 5.86:1 2.25:1 minimum
----------------------------------------------------------------------------
(1) We are restricted from declaring dividends if we are in breach of any
covenants under our credit facility.
(2) Senior secured debt means the total debt less the senior unsecured
debentures.
(3) EBITDA is a non-IFRS 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 or dispositions as if they had occurred at the
beginning of the period.
(4) Total debt comprises outstanding indebtedness under the credit facility,
including our bank surplus or overdraft balance and the senior unsecured
debentures.
The trust indenture under which the senior unsecured debentures have been issued
also contains certain annual restrictions and covenants that, subject to certain
exceptions, limit our ability to incur additional indebtedness, pay dividends,
make certain loans or investments and sell or otherwise dispose of certain
assets subject to certain conditions, among other limitations.
Covenants under the trust indenture include:
----------------------------------------------------------------------------
Ratio December 31, 2012 December 31, 2011 Threshold
----------------------------------------------------------------------------
Senior Secured Debt $25,000 + the
including Letters of greater of
Credit $220,000 and
92,546 94,510 1.75x EBITDA
Cumulative finance
lease obligations nil nil $25,000 maximum
Consolidated Fixed
Charge Coverage 5.09:1 5.86:1 2.00:1 minimum
Period end surplus for Restricted
restricted payments(1) payments cannot
110,739 27,001 exceed surplus
----------------------------------------------------------------------------
(1) We are restricted from declaring dividends, purchasing and redeeming
shares or making certain investments if the total of such amounts
exceeds the period end surplus for such restricted payments.
NOTE 14. EARNINGS PER SHARE
Basic earnings per share calculations for the year ended December 31, 2012 and
2011 were based on the weighted average number of shares outstanding for the
respective years. Diluted earnings per share include the potential dilution of
outstanding options under incentive plans to acquire shares.
The calculation of diluted 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 year ended December 31, 2012
was 680,000 (1,019,000 for the year ended December 31, 2011).
For the three months For the year ended
ended December 31, December 31,
----------------------------------------------------------------------------
2012 2011 2012 2011
----------------------------------------------------------------------------
Weighted average number of shares 52,741 48,569 49,690 48,569
Net additional shares if options
exercised 732 717 833 685
----------------------------------------------------------------------------
Diluted weighted average number of
shares 53,473 49,286 50,523 49,254
----------------------------------------------------------------------------
NOTE 15. DIVIDENDS DECLARED
For the three months For the year ended
ended December 31, December 31,
----------------------------------------------------------------------------
2012 2011 2012 2011
----------------------------------------------------------------------------
Total dividends declared per share 0.100 0.080 0.380 0.305
----------------------------------------------------------------------------
On December 17, 2012 Newalta declared a dividend of $0.10 per share to holders
of shares of record on December 31, 2012. This dividend was paid on January 15,
2013.
NOTE 16. COMMITMENTS
a) Debt and Lease Commitments
Newalta has annual commitments for senior long-term debt, debentures, leased
property and equipment and short-term amounts payable as follows:
----------------------------------------------------------------------------
2013 2014 2015 2016 2017 Thereafter Total
----------------------------------------------------------------------------
Amount drawn on
credit facility(1)
(Note 7) - - 76,500 - - - 76,500
Senior unsecured
debentures (Note
8) 19,219 19,219 19,219 19,219 143,226 143,128 363,230
----------------------------------------------------------------------------
Total debt
commitments 19,219 19,219 95,719 19,219 143,226 143,128 439,730
----------------------------------------------------------------------------
Office leases 9,048 8,646 8,470 8,117 7,335 16,064 57,680
Operating leases 6,226 5,083 2,590 9,699 107 - 23,705
Surface leases 465 465 465 465 465 175 2,500
Accounts payable
and accrued
liabilities 181,876 - - - - - 181,876
Dividends payable 5,426 - - - - - 5,426
Purchase obligation 3,160 41 36 7 7 - 3,251
----------------------------------------------------------------------------
Total debt and
other commitments 225,420 33,454 107,280 37,507 151,140 159,367 714,168
----------------------------------------------------------------------------
(1) Gross of transaction costs. Interest payments are not reflected.
b) Letters of Credit and Surety Bonds
As at December 31, 2012, Newalta had issued letters of credit and surety bonds
in respect of compliance with environmental licenses in the amount of $16.0
million and $43.8 million, respectively ($21.3 million and $38.3 million as at
December 31, 2011).
NOTE 17. FINANCIAL INSTRUMENTS
Fair Value of Financial Assets and Liabilities
Newalta's financial instruments include cash, bank indebtedness, accounts and
other receivables, other assets, accounts payable and accrued liabilities,
dividends payable, senior secured debt and senior unsecured debentures. The fair
values of Newalta's financial instruments that are included in the consolidated
balance sheets, with the exception of the debentures, approximate their recorded
amount due to the short-term nature of those instruments for cash, bank
indebtedness, accounts and other receivable, accounts payable and accrued
liabilities, dividends payable, senior secured 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 December 31, 2012 are as follows:
----------------------------------------------------------------------------
Total
Loans and Other carrying
FVTPL receivables AFS liabilities value
----------------------------------------------------------------------------
Cash 409 - - - 409
Accounts and other
receivables - 150,347 - - 150,347
Other assets - - 547 - 547
Other long-term
assets(1) 14,138 388 - - 14,526
Accounts payable and
accrued liabilities - - - 181,867 181,867
Dividends payable - - - 5,426 5,426
Senior secured debt - - - 76,500 76,500
----------------------------------------------------------------------------
(1) Excludes non-financial instruments.
The fair value of the unsecured senior debentures is based on open market
quotation as follows:
----------------------------------------------------------------------------
As at December 31, 2012 Carrying value Quoted fair value
----------------------------------------------------------------------------
7.625% series 1 senior unsecured
debentures due November 23, 2017 125,376 133,750
----------------------------------------------------------------------------
7.75% series 2 senior unsecured
debentures due November 14, 2019 125,322 135,313
----------------------------------------------------------------------------
Embedded Derivatives
The senior unsecured debentures have early redemption features at values based
on percentages of the principal amount plus accrued and unpaid interest. Due to
the redemption rates being fixed, an embedded derivative exists when compared to
current market rates. Newalta estimates the fair value of the embedded
derivatives using a valuation model that considers the current bond prices and
spreads associated with the senior unsecured debentures. Newalta has recognized
gains of $1.3 million and $13.4 million for the three months and year ended
December 31, 2012, respectively (for the three months and year ended December
31, 2011 - nil) and has determined the fair value of the embedded derivative for
the senior unsecured debentures to be $14.1 million as at December 31, 2012. A
corresponding embedded derivative asset was included within other long-term
assets on the balance sheet. Subsequent changes in fair value will be included
in finance charges on the consolidated statements of operations.
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.
Newalta's cash, senior unsecured debentures and senior secured debt are
classified as level 1 financial instruments.
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 the embedded derivative within the senior unsecured debentures.
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 December 31, 2012 and 2011, Newalta did not have any
significant Level 3 assets or liabilities.
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 one customer balance represented 10% of
total accounts receivable at December 31, 2012, (no single customer was greater
than 10% as at December 31, 2011). This account receivable is recognized within
the Onsite segment. 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. Newalta's assessment of credit risk has remained unchanged from the
prior year.
Revenue from Newalta's largest customer represented 10% of revenue for the year
ended December 31, 2012 (13% for the year ended December 31, 2011). This revenue
is recognized within the Facilities segment. No other customer's revenue
exceeded 10% for the period presented.
Based on the nature of 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 90 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 $5.0 million (December 31, 2011 - $2.8 million), which are considered
to be outstanding beyond normal repayment terms at December 31, 2012. A
provision of $0.5 million (December 31, 2011 - $0.3 million) has been
established as an allowance for doubtful accounts. No additional provision has
been made as there has not been a significant change in credit quality and the
amounts are still considered collectible. Newalta does not hold any collateral
over these balances but may hold credit insurance for specific non-domestic
customer accounts. Total accounts receivable of $150.3 million is comprised of
$106.8 million of trade receivables, accrued receivables of $27.6 million and
other receivables of $15.9 million.
----------------------------------------------------------------------------
Trade receivables Allowance for doubtful
Aging aged by invoice date accounts Net receivables
----------------------------------------------------------------------------
Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,
2012 2011 2012 2011 2012 2011
----------------------------------------------------------------------------
Current 69,640 76,063 12 38 69,628 76,025
31-60 days 27,740 22,204 7 24 27,733 22,180
61-90 days 4,481 8,016 58 50 4,423 7,966
91 days + 4,965 2,757 403 173 4,562 2,584
----------------------------------------------------------------------------
Total 106,826 109,040 480 285 106,346 108,755
----------------------------------------------------------------------------
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 at
risk are provided for in an allowance for doubtful accounts. The changes in this
account for the years ended December 31, 2012 and 2011 are as follows:
Allowance for doubtful accounts December 31, 2012 December 31, 2011
----------------------------------------------------------------------------
Balance, beginning of year 285 341
Net increase in provision 154 44
Net amounts recovered (written off as
uncollectible) 41 (100)
----------------------------------------------------------------------------
Balance, end of year 480 285
----------------------------------------------------------------------------
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. Newalta's
assessment of liquidity risk has remained unchanged from the prior year.
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 senior
unsecured debentures have fixed interest rates until their maturity dates, at
which point, any remaining amounts owing under these debentures will need to be
repaid or refinanced. Newalta's assessment of interest rate risk has remained
unchanged from the prior year. The table below provides an interest rate
sensitivity analysis to net earnings as at period end:
----------------------------------------------------------------------------
For the three months For the year ended
ended December 31, December 31,
----------------------------------------------------------------------------
2012 2011 2012 2011
----------------------------------------------------------------------------
If interest rates increased
by 1% with all other values
held constant (193) (126) (854) (548)
----------------------------------------------------------------------------
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, recognized 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 December 31, 2012, Newalta had $11.8 million in net working
capital and nil in long-term debt both denominated in U.S. dollars. Management
has not entered into any financial derivatives to manage the risk for the
foreign currency exposure as at December 31, 2012. Newalta's assessment of
market risk has remained unchanged from the prior year.
The table below provides a foreign currency sensitivity analysis to net earnings
on long-term debt and working capital outstanding as at period end:
----------------------------------------------------------------------------
2012 2011
----------------------------------------------------------------------------
If the value of the U.S. dollar in relation to the
CDN dollar increased by $0.01 with all other
variables held constant 67 133
----------------------------------------------------------------------------
NOTE 18. FINANCE CHARGES
For the three months For the year
ended December 31, ended December 31,
2012 2011 2012 2011
Interest:
Senior secured debt 1,260 967 5,322 3,815
Senior unsecured
debentures 4,805 3,601 19,219 10,732
Convertible debentures - 1,684 - 7,721
Other 349 346 1,235 1,123
Amortization of issue costs 330 361 1,502 4,262
Unwinding of discount 617 2,371 2,482 2,138
Capitalized borrowing costs (1,595) (927) (4,664) (2,813)
Revaluation and transfer of
AFS financial assets 74 102 1,700 1,213
----------------------------------------------------------------------------
Finance charges 5,840 8,505 26,796 28,191
----------------------------------------------------------------------------
NOTE 19. RELATED PARTIES
Significant subsidiaries
The consolidated financial statements include the financial statements of
Newalta and our subsidiaries as at December 31, 2012 and 2011. Transactions
between each subsidiary and the subsidiaries and parent are eliminated on
consolidation. Newalta did not have any material related party transactions with
entities outside the consolidated group in the years ended December 31, 2012 and
2011. The following is a list of the major subsidiary and related party of our
operations:
Ownership interest
Country of
Incorporation 2012 2011
----------------------------------------------------------------------------
Newalta Environmental
Services Inc. Subsidiary United States 100% 100%
----------------------------------------------------------------------------
TerraAqua Resource
Management LLC Joint venture United States 50% 50%
----------------------------------------------------------------------------
Key Management Personnel
Key management personnel are comprised of Newalta's Board of Directors and
Executive Committee. The remuneration of key management personnel during the
year was as follows:
----------------------------------------------------------------------------
Year ended December 31,
----------------------------------------------------------------------------
2012 2011
----------------------------------------------------------------------------
Short term benefits 4,276 5,460
Stock-based payments 4,424 1,819
----------------------------------------------------------------------------
Total remuneration 8,700 7,279
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NOTE 20. CASH FLOW STATEMENT INFORMATION
The following tables provide supplemental information:
----------------------------------------------------------------------------
For the three months
ended For the year ended
December 31, December 31,
----------------------------------------------------------------------------
2012 2011 2012 2011
----------------------------------------------------------------------------
Decrease (increase) in
accounts and other
receivables 10,514 11,787 (16,059) (31,794)
(Increase) decrease in
inventories (4,121) 494 (12,170) (4,308)
Decrease (increase) in
prepaid expenses and other 2,050 4,084 (4,557) 1,447
Increase in accounts payable
and accrued liabilities 26,493 10,065 31,414 20,281
(Decrease) increase in
accounts payable and
accrued liabilities related
to purchases of property,
plant and equipment (8,164) 1,319 (14,511) (482)
----------------------------------------------------------------------------
Total decrease (increase) in
non-cash working capital 26,772 27,749 (15,883) (14,856)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months
ended For the year ended
December 31, December 31,
----------------------------------------------------------------------------
2012 2011 2011 2011
----------------------------------------------------------------------------
Additions to property, plant
and equipment during the
year (56,780) (45,467) (172,180) (117,625)
Increase (decrease) in
accounts payable and
accrued liabilities related
to purchases of property,
plant and equipment 8,164 (1,319) 14,511 482
----------------------------------------------------------------------------
Total cash additions to
property, plant and
equipment (48,616) (46,786) (157,669) (117,143)
----------------------------------------------------------------------------
NOTE 21. SEGMENTED INFORMATION
Onsite and Facilities 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.
As at and for the three months ended December 31, 2012
Unallocated Consolidated
Facilities Onsite (2) Total
----------------------------------------------------------------------------
Revenue 122,899 75,546 - 198,445
Cost of sales (1) 101,189 58,219 - 159,408
----------------------------------------------------------------------------
Gross profit 21,710 17,327 - 39,037
Selling, general and
administrative(2) - - 28,489 28,489
Research and development - - 480 480
Net financing charges - - 5,238 5,238
----------------------------------------------------------------------------
Earnings before taxes 21,710 17,327 (34,207) 4,830
----------------------------------------------------------------------------
Property, plant and
equipment expenditures 26,404 18,538 12,458 57,400
----------------------------------------------------------------------------
Goodwill 46,209 56,406 - 102,615
----------------------------------------------------------------------------
Total assets 783,290 432,811 102,657 1,318,758
----------------------------------------------------------------------------
Total liabilities 255,577 40,032 381,709 677,318
----------------------------------------------------------------------------
As at and for the three months ended December 31, 2011
Unallocated Consolidated
Facilities Onsite (2) Total
----------------------------------------------------------------------------
Revenue 124,234 59,855 - 184,089
Cost of sales (1) 97,930 43,419 - 141,349
----------------------------------------------------------------------------
Gross profit 26,304 16,436 - 42,740
Selling, general and
administrative(2) - - 25,187 25,187
Research and development - - 439 439
Net financing charges - - 8,505 8,505
----------------------------------------------------------------------------
Earnings before taxes 26,304 16,436 (34,131) 8,609
----------------------------------------------------------------------------
Property, plant and
equipment expenditures 18,928 20,961 5,400 45,289
----------------------------------------------------------------------------
Goodwill 46,209 56,688 - 102,897
----------------------------------------------------------------------------
Total assets 718,748 349,083 97,190 1,165,021
----------------------------------------------------------------------------
Total liabilities 164,997 127,874 330,229 623,100
----------------------------------------------------------------------------
(1) Cost of sales includes net amortization of $14,271 for Q4 2012
(Facilities $9,006 and Onsite $5,265) and $13,577 for Q4 2011
(Facilities $9,221 and Onsite $4,356).
(2) Selling, general and administrative includes amortization of $3,526 for
Q4 2012 and $2,824 for Q4 2011.
As at and for the year ended December 31, 2012
Unallocated
Facilities Onsite (2)Consolidated
----------------------------------------------------------------------------
Revenue 446,217 279,992 - 726,209
Cost of sales (1) 346,176 210,275 - 556,451
----------------------------------------------------------------------------
Gross profit 100,041 69,717 - 169,758
Selling, general and
administrative(2) - - 100,031 100,031
Research and development - - 2,358 2,358
Net financing charges - - 13,357 13,357
----------------------------------------------------------------------------
Earnings before taxes 100,041 69,717 (115,746) 54,012
----------------------------------------------------------------------------
Property, plant and
equipment expenditures 65,192 76,230 30,918 172,340
----------------------------------------------------------------------------
Goodwill 46,209 56,406 - 102,615
----------------------------------------------------------------------------
Total assets 783,290 432,811 102,657 1,318,758
----------------------------------------------------------------------------
Total liabilities 255,577 40,032 381,709 677,318
----------------------------------------------------------------------------
As at and for the year ended December 31, 2011
Unallocated
Facilities Onsite (2)Consolidated
----------------------------------------------------------------------------
Revenue 463,606 219,222 - 682,828
Cost of sales (1) 356,820 160,499 - 517,319
----------------------------------------------------------------------------
Gross profit 106,786 58,723 - 165,509
Selling, general and
administrative(2) - - 87,232 87,232
Research and development - - 2,337 2,337
Net financing charges - - 28,191 28,191
----------------------------------------------------------------------------
Earnings before taxes 106,786 58,723 (117,760) 47,749
----------------------------------------------------------------------------
Property, plant and
equipment expenditures 54,173 49,375 14,132 117,680
----------------------------------------------------------------------------
Goodwill 46,209 56,688 - 102,897
----------------------------------------------------------------------------
Total assets 718,748 349,083 97,190 1,165,021
----------------------------------------------------------------------------
Total liabilities 164,997 127,874 330,229 623,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Cost of sales includes amortization of $49,024 (Facilities $32,019 and
Onsite $17,005) and $51,576 for 2011 (Facilities $36,346 and Onsite
$15,230).
(2) Selling, general and administrative includes amortization of $13,485 for
2012 and $11,280 for 2011.
NOTE 22. PRIOR YEAR INFORMATION
Deferred revenue, which was previously grouped with accounts payable and accrued
liabilities, is now presented separately.
FOR FURTHER INFORMATION PLEASE CONTACT:
Newalta Corporation
Anne M. Plasterer
Executive Director, Investor Relations
(403) 806-7019
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