Source: Newalta Corp
Newalta Reports Strong Fourth Quarter and Year End 2011 Results
CALGARY, ALBERTA--(Marketwire - Feb. 15, 2012) - Newalta Corporation ("Newalta") (TSX:NAL) today reported solid gains in revenue, profitability and capital returns for the fourth quarter and year ended December 31, 2011.
-- 2011 revenue up 19%, Adjusted EBITDA up 23% and net earnings up 108%
compared to 2010
-- Year-end Return on capital of 15.2% compared to 12.9% last year
-- Increased dividends declared by 33% in 2011 compared to 2010
-- Invested $86.6 million in 2011 to drive growth in 2012
FINANCIAL HIGHLIGHTS(1)
Three months
ended Year ended
December 31, December 31,
($000s except per % %
share data) Increase Increase
(unaudited) 2011 2010 (Decrease) 2011 2010 (Decrease)
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Revenue 184,089 162,927 13 682,828 576,196 19
Gross profit(2) 42,740 39,273 9 165,509 138,390 20
- % of revenue 23% 24% (4) 24% 24% -
Net earnings 6,031 2,921 106 33,562 16,122 108
- per share ($) -
basic 0.12 0.06 100 0.69 0.33 109
- per share ($) -
basic adjusted(3) 0.19 0.20 (5) 0.85 0.56 52
- per share ($) -
diluted 0.12 0.06 100 0.68 0.33 106
Adjusted EBITDA(3) 36,677 33,647 9 146,475 118,795 23
- per share ($)(3) 0.76 0.69 10 3.02 2.45 23
Cash from operations 51,390 48,461 6 104,563 96,151 9
- per share ($) 1.06 1.00 6 2.15 1.98 9
Funds from
operations(3) 25,352 26,263 (3) 122,775 96,874 27
- per share ($)(3) 0.52 0.54 (4) 2.53 2.00 27
Maintenance capital
expenditures(3) 11,914 8,674 37 31,051 29,013 7
Growth capital
expenditures(3) 33,375 21,417 56 86,629 47,535 82
Dividends declared 3,889 3,152 23 14,818 11,152 33
- per share ($)(3) 0.08 0.065 23 0.305 0.23 33
Dividends paid 3,888 3,152 23 14,082 10,424 35
Book value per
share, December 31 11.15 10.81 3 11.15 10.81 3
Weighted average
shares outstanding 48,569 48,523 - 48,569 48,485 -
Shares outstanding,
December 31,(4) 48,607 48,492 - 48,607 48,492 -
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(1) Management's Discussion and Analysis and Newalta's Unaudited Consolidated Financial Statements and notes are attached. References to Generally Accepted Accounting Principles ("GAAP") are synonymous with IFRS.
(2) Gross Profit is a GAAP measure that was previously disclosed as Combined divisional net margin, a non-GAAP measure under previous GAAP.
(3) 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.
(4) Newalta has 48,607,327 shares outstanding as at February 14, 2012.
Management Commentary
"Performance in 2011 was strong across all business lines as we added new customers, expanded our engineered environmental solutions within existing markets and drove productivity and profitability enhancements consistent with our annual targets," said Al Cadotte, President and CEO of Newalta. "Annual Adjusted EBITDA increased $28 million, or 23%, largely due to improved market conditions, with 20% of the gain due to higher commodity prices. Fourth quarter performance was consistent with strong demand across all markets."
"We enter 2012 prepared for continued growth," said Mr. Cadotte. "Robust market activity combined with 2011 capital investments will contribute to our strong performance and attractive returns to investors in 2012."
Highlights of Q4 2011 Compared to Q4 2010
-- Revenue increased 13%, Adjusted EBITDA was up 9% and net earnings
increased 106%
-- A dividend of $0.08 per share ($0.32 per share annualized) was declared,
payable January 16, 2012 to shareholders of record December 31, 2011
-- On November 14, 2011, Newalta issued $125 million Senior Unsecured
Debentures with an eight-year term, bearing interest at the rate of
7.75% per annum. Newalta subsequently redeemed $115 million in
convertible debentures. These initiatives strengthen the balance sheet
and provide increased financial flexibility to meet the demands of
future growth.
Highlights of 2011 Compared to 2010
-- Adjusted EBITDA increased to 21.5% of revenue from 20.6%
-- Gross Profit was up 20%, due to Facilities and Onsite division increases
of 10% and 43%, respectively
-- Adjusted SG&A (SG&A before stock-based compensation and amortization)
was $68.3 million in 2011, consistent with our target of 10.0% of
revenue
-- Gross Debt to Adjusted EBITDA improved from 2.65 to 2.35
-- Four projects were converted into long-term Onsite contracts providing
stable cash flows for several years
Other Highlights:
-- Capital expenditures in 2012 are budgeted at $145 million. Growth
capital expenditures of $115 million are comprised of $45 million for
Facilities, $55 million for Onsite (including $10 million for U.S.
expansion), and $15 million for Technical Development and corporate
investments. Maintenance capital expenditures are expected to be $30
million. Capital expenditures will be primarily funded from funds from
operations. Approximately 60% of the capital is expected to be deployed
in the first half of 2012.
Quarterly Conference Call
Management will hold a conference call on Thursday, February 16, 2012 at 11:00 a.m. (ET) to discuss Newalta's performance for the fourth quarter and year ended December 31, 2011. To participate in the teleconference, please call 1-877-240-9772. 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, 24, 2012 by dialing 1- 800-408-3053 and using the pass code 6242104 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, 2011 and 2010
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) 2011 2010 2011 2010
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Net earnings 6,031 2,921 33,562 16,122
Add back (deduct):
Current income taxes 2,637 520 2,766 938
Deferred income taxes (59) 1,927 11,421 8,237
Finance charges 8,505 6,641 28,191 26,814
Amortization 16,401 14,801 62,856 55,630
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EBITDA 33,515 26,810 138,796 107,741
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Add back (deduct):
Stock-based compensation
expense 3,162 6,837 7,679 11,054
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Adjusted EBITDA 36,677 33,647 146,475 118,795
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Weighted average number of
shares 48,569 48,523 48,569 48,485
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EBITDA per share 0.69 0.55 2.86 2.22
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Adjusted EBITDA per share 0.76 0.69 3.02 2.45
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"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. Stock-based compensation expense, a component of employee remuneration, can vary significantly with changes in the price of our common shares. 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) 2011 2010 2011 2010
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Net earnings 6,031 2,921 33,562 16,122
Add back (deduct):
Stock-based compensation
expense 3,162 6,837 7,679 11,054
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Adjusted net earnings 9,193 9,758 41,241 27,176
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Adjusted net earnings per
share 0.19 0.20 0.85 0.56
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"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) 2011 2010
----------------------------------------------------------------------------
Total Equity 541,921 524,156
Shares outstanding, December 31, 48,607 48,492
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Book value per share 11.15 10.81
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"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) 2011 2010 2011 2010
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Cash from operations 51,390 48,461 104,563 96,151
Add back (deduct):
Increase (decrease) in
non-cash working capital (27,749) (23,324) 14,856 (1,461)
Decommissioning
obligations incurred 1,711 1,126 3,356 2,184
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Funds from operations 25,352 26,263 122,775 96,874
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Weighted average number of
shares 48,569 48,523 48,569 48,485
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Funds from operations per
share 0.52 0.54 2.53 2.00
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"Return on capital" is used to assist management and investors in measuring the returns realized from capital employed.
($000s) 2011 2010 ---------------------------------------------------------------------------- Adjusted EBITDA 146,475 118,795 Total assets 1,165,021 1,047,677 Current liabilities 157,954 123,691 ---------------------------------------------------------------------------- Capital employed 1,007,067 923,986 ---------------------------------------------------------------------------- 2-Year net assets average(1) 965,527 924,172 ---------------------------------------------------------------------------- Return on capital (%) 15.2% 12.9% ----------------------------------------------------------------------------
(1) 2010 2-Year net assets average is calculated using January 1, 2010 asset balance under IFRS.
Trailing Twelve-Month Return Capital: http://media3.marketwire.com/docs/215nal_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.
2011 is our first year reporting under International Financial Reporting Standards ("IFRS"). There was no impact to previously reported Adjusted EBITDA; however, prior year comparatives have been restated to reflect IFRS impacts to the previously reported 2010 results. References to Generally Accepted Accounting Principles ("GAAP") are synonymous with IFRS. Comparative figures presented in this MD&A for 2009 were prepared in accordance with previous Canadian GAAP and are not required to be restated in accordance with IFRS. See page 34 of this MD&A for more information on the impact of adopting IFRS.
On December 31, 2009, the sole unitholder of Newalta Income Fund (the "Fund") approved the wind-up of the Fund. Subsequent to year end, on January 1, 2010, Newalta Inc. was amalgamated with its wholly-owned operating subsidiary, Newalta Corporation, to form Newalta Corporation.
The following discussion and analysis should be read in conjunction with (i) the consolidated financial statements of Newalta, and the notes thereto, for the year ended December 31, 2011, (ii) the consolidated financial statements of Newalta and notes thereto and MD&A of Newalta for the year ended December 31, 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, 2011, June 30, 2011 and September 30, 2011. This information is available at SEDAR (www.sedar.com). Information for the year ended December 31, 2011, along with comparative information for 2010, is provided.
This MD&A is dated February 14, 2012, 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)
($000s except per share data) (unaudited) 2011 2010 2009 ---------------------------------------------------------------------------- Revenue 682,828 576,196 483,401 Gross Profit(2) 165,509 138,390 84,228 - % of revenue 24% 24% 17% Net earnings 33,562 16,122 3,099 - per share ($) - basic 0. 69 0.33 0.07 - per share ($) - basic adjusted(3) 0.85 0.56 0.12 - per share ($) - diluted 0.68 0.33 0.07 Adjusted EBITDA(3) 146,475 118,795 82,157 - per share ($)(3) 3.02 2.45 1.89 Cash from operations 104,563 96,151 83,518 - per share ($) 2.15 1.98 1.92 Funds from operations(3) 122,775 96,874 60,943 - per share ($)(3) 2.53 2.00 1.40 Dividends declared 14,818 11,152 8,141 - per share ($)(3) 0.305 0.23 0.20 Dividends paid 14,082 10,424 13,233 Total Assets 1,165,021 1,047,677 993,730 Maintenance capital expenditures(3) 31,051 29,013 8,589 Growth capital expenditures(3) 86,629 47,535 18,696 Senior long-term debt - net of issue costs 68,493 51,520 188,123 Senior unsecured debentures(4) - principal amount 250,000 125,000 125,000 Convertible debentures - principal amount - 115,000 115,000 Weighted average shares outstanding 48,569 48,485 43,536 Shares outstanding, December 31, (5) 48,607 48,492 48,476 ----------------------------------------------------------------------------
(1) Management's Discussion and Analysis and Newalta's Unaudited Consolidated Financial Statements ("Financial Statements") and notes thereto are attached. References to Generally Accepted Accounting Principles ("GAAP") are synonymous with IFRS. Comparative figures presented in this MD&A for 2009 were prepared in accordance with previous Canadian GAAP and are not required to be restated in accordance with IFRS.
(2) Gross Profit is a GAAP measure that was previously disclosed as Combined divisional net margin, a non-GAAP measure under previous Canadian GAAP.
(3) 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.
(4) Includes Series 1 and Series 2 Senior Unsecured Debentures ("Senior Unsecured Debentures")
(5) Newalta has 48,607,327 shares outstanding as at February 14, 2012.
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 unwavering 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.
2011 Review:
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Strategic Initiative Progress in 2011
Objective
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Maximize Drive higher returns on Improved Newalta Return on
Facilities existing assets capital from 12.9% in 2010
Profitability to 15.2%, near historic
level of 18%.
--------------------------------------------------------
Execute organic growth Over $30 million in organic
capital projects growth projects completed
in 2011.
--------------------------------------------------------
Expand Facilities services Ongoing. Planning was
offering completed for new services
to begin in mid 2012.
--------------------------------------------------------
Strategically construct Ongoing. Preliminary market
integrated facilities and analysis in progress for
satellites new facilities to be
constructed in 2012 to
2015, including 1 full
service facility, 8
satellite facilities and 2
transfer facilities.
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Recovery at Source Increase market share in 25% increase in project
(Onsite) short-term projects revenue nationally.
nationally
--------------------------------------------------------
Identify short-term Ongoing. Effective process
projects with long-term for identification
potential implemented throughout the
organization. At any point
in time, we have
approximately 10 to 15
potential contracts in the
scoping and proposal stage.
--------------------------------------------------------
Transition projects to Converted 4 projects to
long-term contract service contracts, including the
arrangements Syncrude MFT project,
providing a more stable
stream of future cashflow.
7 operating contracts and 3
in construction or design
at end of year.
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Process Evaluate technologies for Ongoing. Our Technical
Commercialization commercial application Development team identified
30 technologies to undergo
detailed evaluation.
--------------------------------------------------------
Advance identified There is a steady stream of
technologies to the new technologies moving
development and from initial evaluation
demonstration phase phase to development phase.
15 technologies in lab
testing phase.
--------------------------------------------------------
Utilize facility network to Ongoing. Evaluating
expedite commercialization application within
operations. 3 pilot
projects in progress.
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Moving forward, we will capitalize on strengthening markets and returns from our organic growth investments to reestablish Return on capital to historic levels 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 onsite operating contracts. Our average payback assumption on our growth capital investments is about four years.
Strategy:
The following table outlines our strategic focus through 2015 and the action plan in 2012 and 2013 to achieve our strategic objectives.
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Strategy Tactics Action Plan
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Maximize Focus on productivity Develop new products and
Facilities improvements to drive services at existing assets
Profitability incremental cash flow from to meet changing market
existing assets demands.
Invest $200
million in Improve material handling
organic growth and processes to reduce
projects and costs and increase
average 10% or efficiency.
more in revenue
growth per year. Introduce proven
technologies within our
Facility network to reduce
costs and improve
productivity.
--------------------------------------------------------
Transfer existing services Enhance and expand our oil
throughout the network to recycling capabilities
offer full breadth of across our facility
services to customers network.
across Canada
Expand processing
capabilities to provide
engineered environmental
solutions in new markets.
--------------------------------------------------------
Expand Facility network to Expand oil recycling
take advantage of growth in capacity to meet growing
existing markets and new demand.
opportunities
Establish 2 new operating
locations to improve
service to key markets in
Canada and U.S.
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Recovery at Source Expand US market presence Establish operating
(Onsite) locations in key markets to
meet increased demand from
Invest over $400 drilling activity.
million in growth
capital in Canada Expand drill site business
and U.S. and consistent with market
average 20% or activity.
more in revenue
growth per year. Expand water recycling
services consistent with
demand in shale plays.
--------------------------------------------------------
Transition projects to Continue project scoping
contract service process. Projects
arrangements, specifically identified with long term
to add 4 new long-term potential are typically
contracts per year converted to contracts
within 18 to 36 months of
identification.
We currently have 7
operating contracts and 3
contracts in the
construction stage. With
10-15 potential contracts
in the scoping and proposal
stage at any given time,
our objective is to have 15
contracts in operation by
end of 2013, generating
about $100 million in
revenue.
--------------------------------------------------------
Increase market share in Continue to expand service
project activity in offerings across Canada and
multiple industry segments utilize established
practices and partnerships
to gain market share in key
industries.
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Process Deliver two new commercial Advance identified
Commercialization processes with wide technologies to the
application to operations demonstration phase.
Support the every year
development of 2
commercial
processes
annually for
application in at
least 10
facilities or
customers sites
--------------------------------------------------------
Our Technical Development Assess pilot projects in
team will search globally progress for commercial
and evaluate technologies application and begin
for commercial application testing within facility
network.
--------------------------------------------------------
Utilize facility network to Schedule first commercial
expedite commercialization demonstration in 2012 at a
facility in Western Canada.
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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 31 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.
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Risks Mitigation
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Market recovery is slower than - Improve productivity
anticipated - Develop new technologies that make
our processes more effective and
Lower market activity can translate cost efficient
into reduced waste volumes and - Maintain debt leverage to provide
weaker commodity prices, impacting adequate financial flexibility
returns on existing assets and our - Utilize, as needed, proven
ability to invest in organic growth defensive toolkit to manage costs
capital. and capital expenditures
Deterioration of safety record - Since 1993, Safety has been
established as one of our core
Failure to meet customer safety values
standards while working on customer - Long standing history of safety
sites or at our facilities could excellence
result in the inability to operate - Our Environmental, Health and
on a customer site and could have Safety ("EH&S") team works with
pervasive implications for our operators, customers and regulators
Onsite strategy. 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 - Our onsite solutions are targeted
to minimize waste at the source as
Competition can come from waste an alternative to waste generators
producers processing streams internally managing waste
internally or new third party waste - Onsite operations require an
processors entering the market. excellent safety record and a
facility network for mobilization,
employee training and a backstop for
process guarantees, which we have
already established
- Barriers to entry include
facilities network infrastructure
and regulatory permits that are
difficult to replicate
Failure to commercialize identified - Staged approach for developing
technologies into our processes technologies, which differentiates
between proven and unproven
Failure to commercialize new technologies, ensures resources can
technologies could reduce our be redeployed efficiently to other
competitiveness. 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 - Support through our comprehensive
on-boarding program
Failure to effectively recruit, - Develop our people through our
retain and integrate top talent in Talent development program which
period of growth could negatively includes customized leadership
impact our ability to meet our long- training programs
term targets. - Engage new employees in EH&S
training programs and Safety
Leadership programs
- Use of cross functional training
and teams to promote integration
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CORPORATE OVERVIEW
Strong market demand across all of our services delivered continued year-over-year growth in Q4 2011, with revenue up 13% to $184.1 million and Adjusted EBITDA up 9% to $36.7 million. Net earnings grew to $6.0 million compared to $2.9 million in Q4 2010, an increase of 106%, as a result of growth in operational profitability. This flowed through to our Gross Debt to Adjusted EBITDA ratio which improved from 2.65 to 2.35 compared to Q4 2010. The ongoing improvement in financial leverage enhances our financial flexibility. In December, we were also successful in re-financing our debt structure, redeeming $115 million in convertible debentures and issuing $125 million in 8 year Series 2 Senior Unsecured Debentures. As a result of the early redemption of the convertible debentures, we incurred non-recurring financing charges which drove a 5% decrease in Q4 2011 Adjusted net earnings per share over Q4 2010.
For the year, demand for our services strengthened. Adjusted EBITDA and revenue increased by 23% and 19%, respectively. Approximately 80% of the improvement is attributable to higher activity levels and contributions from both capital investments and productivity improvements with the balance driven by higher commodity prices. These factors also contributed to a 108% increase in net earnings, and 109% increase in net earnings per share, over 2010. In 2011, we successfully transitioned four projects to long-term contracts and invested over $85 million in growth capital setting a foundation for strong growth in 2012. Our Return on capital improved from 12.9% in 2010 to 15.2% in 2011, moving towards our historic level of 18%.
Compared to Q4 2010, Facilities revenue increased 9%, while gross profit declined 7% due to weaker performance at VSC. Results at VSC were negatively impacted by lower lead pricing, a shift in product mix, higher procurement costs and an unscheduled shutdown. We expect improved performance at VSC in Q1 2012 compared to Q4 2011, supported by higher lead prices and improved procurement costs. For 2011, Facilities revenue and gross profit increased by 19% and 10%, respectively, compared to 2010. The improved performance resulted from higher activity levels across all lines of business, highlighted by increased drilling activity and higher event-based business at the Stoney Creek Landfill ("SCL"). Results were also positively impacted by improved commodity pricing.
Onsite delivered strong results for the quarter and the year, due to increased oil and gas related activity. Revenue and gross profit increased by 23% and 52%, respectively, compared to Q4, 2010. For the year, revenue increased by 17% over 2010 and gross profit increased by 43% for the second consecutive year. Gross profit as a percentage of revenue increased from 22% in 2010 to 27% in 2011. These improvements were driven primarily by higher utilization of drill site equipment and higher onsite project and contract revenue.
Trailing Twelve-Month Adjusted EBITDA: http://media3.marketwire.com/docs/215nal_graphs.pdf
2011 was a strong year of incremental growth. Our trailing twelve month Adjusted EBITDA improved for the eighth consecutive quarter to $146.5 million for the year ended December 31, 2011.
Capital expenditures, for the three months and year ended December 31, 2011, were $45.3 million and $117.7 million, respectively. Growth capital expenditures for the quarter and the year related primarily to drill site equipment in Western Onsite, centrifugation equipment in our Heavy Oil business unit and expansion in Western Facilities, including the completion of a new oilfield satellite facility. Total growth capital investment for 2011 was $86.6 million, nearly double the 2010 spend.
In August 2011, we entered into an agreement to invest $6 million for a 50% partnership interest in frac water recycling company, TerrAqua Resource Management, LLC ("TARM") of Williamsport, Pennsylvania. Capital expenditures exclude our investment in TARM.
Revenue and Adjusted EBITDA: http://media3.marketwire.com/docs/215nal_graphs.pdf
In 2011, our Technical Development team moved into the next phase of testing and assessing the most promising opportunities while continuing the global search for technologies. Compared to the year ended December 31 2010, our Research and Development operating expenditures increased by 36% to $2.3 million as our Technical Development program advanced. Several promising technologies, including wastewater treatment processes, metals recovery, gasification, and solids processing, have progressed to the testing phase.
OUTLOOK
We anticipate continued year-over-year improvement in performance in Q1 2012. Increased demand for our services and favorable commodity pricing will positively impact performance in Q1 2012. Performance in Q1 2012 is anticipated to be stronger than Q1 2011 due to increased crude oil activity, strengthening market conditions for Eastern Facilities, including better than prior year volumes at SCL, as well as growth from Onsite contract work and anticipated drill site equipment utilization nearing maximum functional capacity of 65%. This strong performance will be modestly offset by performance at VSC which will be lower than last year due to changes in lead pricing and procurement costs. We also expect strong contributions from our 2011 capital investments.
In 2012, Facilities anticipates that stable activity levels supported by strong commodity prices and asset optimization initiatives will drive growth. In Onsite, we will continue to focus on growing our portfolio of longer term contracts, strengthening our foundation of stable cash flow, and maximizing cash flow from our existing assets. With approximately 10 to 15 prospective contracts in the scoping or proposal stage at any point in time, we are targeting to secure four new contracts during the year. We remain confident that we will deliver attractive returns to our shareholders in the quarters ahead and expect ongoing improvement towards our historical corporate Return on capital average of 18%.
We have good visibility on our pipeline of organic growth capital projects, extending well into 2013. The depth of our pipeline of capital projects provides us with flexibility in how we respond to possible changes in our economic environment. Long-term commitments will be supported by contractual arrangements and the design and build of facilities will provide for their redeployment to follow market activity.
Capital expenditures in 2012 are budgeted at $145 million, comprised of growth capital expenditures of $115 million and maintenance capital of $30 million. Capital expenditures are anticipated to be predominantly funded from funds from operations. Approximately 60% of the capital is expected to be spent in the first half of 2012. The growth capital budget is up more than 30% over 2011 investments, driven by our extensive inventory of low-risk, high-return organic growth projects. Refer to Uses of Cash for further information on our capital budget for 2012.
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,
2011 2010 2011 2010
----------------------------------------------------------------------------
Western Facilities 51% 45% 49% 47%
Eastern Facilities 23% 21% 24% 22%
VSC 26% 34% 27% 31%
----------------------------------------------------------------------------
Facilities Revenue and Facilities Gross Profit: http://media3.marketwire.com/docs/215nal_graphs.pdf
The following table compares Facilities' results for the periods indicated:
Three months ended Year ended
December 31, December 31,
($000s) 2011 2010 % change 2011 2010 % change
----------------------------------------------------------------------------
Revenue(1) 125,014 115,193 9 469,368 394,540 19
Cost of Sales(2) 98,579 86,628 14 360,657 295,803 22
----------------------------------------------------------------------------
Gross Profit 26,435 28,565 (7) 108,711 98,737 10
----------------------------------------------------------------------------
Gross Profit as %
of revenue 21% 25% (16) 23% 25% (8)
----------------------------------------------------------------------------
Maintenance
capital 7,889 7,021 12 21,562 22,031 (2)
----------------------------------------------------------------------------
Growth capital 10,993 7,245 52 32,210 11,718 175
----------------------------------------------------------------------------
Assets employed(3) 631,305 588,467 7
----------------------------------------------------------------------------
(1) Includes nil in internal revenue in 2011 and $104 and $590 in Q4 2010 and Q4 2010 year-to-date respectively.
(2) Includes amortization of $9,248 and $36,464 for Q4 2011 and Q4 2011 year-to-date, respectively, and $8,786 and $30,652 for Q4 2010 and Q4 2010 year-to-date, respectively.
(3) "Assets employed" is provided to assist management and investors in determining the effectiveness of the use of the assets at a divisional level. Assets employed is the sum of capital assets, intangible assets and goodwill allocated to each division.
Performance in Q4 was consistent with improved market conditions compared to 2010. Revenue and gross profit were $125.0 million and $26.4 million, respectively. Revenue increased 9%; however gross profit declined 7%. The incremental revenue was due to growth in our Western and Eastern Facilities. The increase in Western Facilities is largely due to increased oilfield volumes coupled with stronger crude and base oil pricing. Performance at our Eastern Facilities increased year-over-year reflecting a steady improvement in market conditions and strong event-based business at the Stoney Creek Landfill ("SCL"). VSC continues to produce stable volumes; however, performance was impacted by lower lead pricing, higher procurement costs and an unscheduled shutdown.
2011 revenue and gross profit are $469.4 million and $108.7 million, up 19% and 10%, respectively. Performance reflected higher activity levels across all lines of business highlighted by increased drilling activity, and higher event-based business at SCL. Overall, net commodity prices positively impacted results, contributing approximately 40% to the increase in gross profit.
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 and the makeup of that waste. 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.
Q4 2011 Western Facilities revenue was up 23%, primarily due to stronger performance in oil recycling and higher crude and base oil pricing. The volume of crude oil recovered to Newalta's account and waste volumes were slightly up year-over-year, consistent with oil and gas activity. Oil Recycling revenue was up 42%, due to stronger base oil pricing and market diversification initiatives which resulted in a shift to higher margin product lines.
In 2011, revenue was up 22% due to increased oilfield drilling activity combined with higher crude and base oil prices. Wells drilled and completed increased 6% and 13%, respectively, driving a 12% increase in waste processing volumes. Oil Recycling contributed 38% of the annual revenue increase due to stronger base oil pricing and product sales. Industrial facilities remained relatively flat year-over-year.
Three months ended Year ended
December 31, December 31,
2011 2010 % change 2011 2010 % change
----------------------------------------------------------------------------
Waste processing
volumes ('000 m3) 159 152 5 545 486 12
Recovered crude
oil ('000 bbl)(1) 65 61 7 230 223 3
Average crude oil
price received
(CDN$/bbl) 92.37 76.27 21 88.09 73.48 20
Recovered crude
oil sales ($
millions) 6.0 4.6 30 20.3 16.4 24
Edmonton par price
(CDN$/bbl)(2) 97.26 80.21 21 94.88 77.34 23
----------------------------------------------------------------------------
(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: http://media3.marketwire.com/docs/215nal_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
-- 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 2011, Eastern Facilities revenue was up 22% compared to last year. Strong activity over the network drove increased revenue. Excluding the landfill, volumes in the processing facilities were up 40% year-over-year. For the quarter, SCL volumes were relatively flat compared to Q4 2010. As anticipated, SCL reached its maximum annual permitted volume of 750,000MT early in the quarter. Prior to reaching the limit, Newalta discussed with the Ontario Ministry of the Environment ("MOE") a number of possible contingency options, one of which was for the company to continue to receive materials beyond the permitted volume through to the end of the calendar year. With direction from the MOE, Newalta consulted the community liaison committee that operates as part of SCL's Certificate of Approval and the committee voted unanimously to support Newalta's proposal. As a result, SCL resumed operations shortly thereafter. This one-time contingency does not affect the annual permitted capacity at SCL.
Revenue was up 30% in 2011 compared to 2010, due to higher activity levels throughout Eastern Canada. SCL performance remains strong. In 2011, volumes at SCL averaged more than 200,000 MT per quarter, reflecting a strengthening in the market. Excluding the landfill, revenue from the eastern facilities continued to show improvement as market conditions steadied throughout the region.
In Q1 2012, we anticipate volumes to be in line with our historical quarterly average of 167,000 MT.
Three months ended Year ended
December 31, December 31,
2011 2010 % change 2011 2010 % change
----------------------------------------------------------------------------
SCL Volume
Collected ('000
MT) 205.7 211.0 (3) 874.3 684.2 28
----------------------------------------------------------------------------
SCL - Volume Collected: http://media3.marketwire.com/docs/215nal_graphs.pdf
Ville Ste-Catherine ("VSC")
VSC is our lead-acid battery recycling facility. This facility generates revenue from a combination of direct lead sales and tolling fees received for processing batteries. 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 2011, our split was 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.
In Q4, VSC revenue decreased by 19% compared to Q4 2010 largely due to lower lead prices and a shift in the sales mix. The lagged LME price decreased by 10% to $2,076 $U.S./MT compared to Q4 2010. Performance was also impacted by higher procurement costs and an unexpected shutdown. The demand for lead based products has some inherent market volatility which we've seen increase over the last couple of years. Generally, procurement costs are related to the trading price of lead at the time of purchase. However, from time to time, sharp swings in the LME price can distort this relationship resulting in a disconnect in values, as experienced in Q4 2011. To reduce our exposure, where possible, we will manage our tolling/direct sales split and pursue ways to supplement feedstock management strategies during periods of price instability.
2011 revenue increased 7% as a result of both higher lead prices and sales volume. Sales volumes increased by 6% to 71,700 MT, while the lagged LME price increased by 14% to $2,435 $U.S./MT The increase in price was offset by a weaker U.S. dollar and increased procurement costs.
In Q1 2012, we anticipate performance at VSC will be better than Q4 2011, but lower than last year due to a shift in product mix, and changes in lead pricing and procurement costs. We anticipate Q1 2012 production to be at or above 17,000 MT. We will continue to manage production volumes to capitalize on market conditions and maximize returns.
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,
2011 2010 2011 2010
----------------------------------------------------------------------------
Western Onsite 43% 44% 43% 39%
Eastern Onsite 18% 23% 17% 26%
Heavy Oil 39% 33% 40% 35%
----------------------------------------------------------------------------
Onsite Revenue and Onsite Gross Profit: http://media3.marketwire.com/docs/215nal_graphs.pdf
The following table compares Onsite's results for the periods indicated:
Three months ended Year ended
December 31, December 31,
($000s) 2011 2010 % change 2011 2010 % change
----------------------------------------------------------------------------
Revenue - external 59,075 47,838 23 213,460 182,246 17
Cost of Sales(1) 42,770 37,130 15 156,662 142,593 10
----------------------------------------------------------------------------
Gross Profit 16,305 10,708 52 56,798 39,653 43
----------------------------------------------------------------------------
Gross Profit as %
of revenue 28% 22% 27 27% 22% 23
----------------------------------------------------------------------------
Maintenance
capital 3,555 911 290 7,540 4,938 53
----------------------------------------------------------------------------
Growth capital 17,452 12,080 44 42,236 28,343 49
----------------------------------------------------------------------------
Assets employed(2) 296,028 252,698 17
----------------------------------------------------------------------------
(1) Includes amortization of $4,331 and $15,112 for Q4 2011 and 2011, respectively, and $3,323 and $12,837 for Q4 2010 and 2010, 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.
In Q4 2011, revenue and gross profit increased by 23% and 52%, respectively, over Q4 2010. Gross profit as a percentage of revenue increased to 28% compared to 22% last year. Growth from contracts in Heavy Oil, contributions from U.S. projects and higher utilization of equipment resulting from increased drilling activity, drove 50% of the incremental revenue flow through to gross profit.
For the year, revenue and gross profit improved by 17% and 43%, respectively. Improved utilization of equipment resulting from increased drilling activity and processing at the MFT project in Heavy Oil drove a 55% flow through of incremental revenue to gross profit. In addition, we were successful in converting four projects to contracts, increasing the total number of contracts both operating and in construction from six to ten in the year.
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 2011 Western Onsite revenue improved by 21% compared to Q4 2010. This is driven by increasing drilling activity in both western Canada and the U.S. and contributions from U.S. projects. Our utilization rate for drill site equipment rose to 62% from 57% in Q4 2010. As a result of capital investment, our fleet size increased by 12%. Q4 2011 utilization in Canada and the U.S. was 68% and 57%, respectively. Demand for our services was driven by activity in oil plays.
For the year, Western Onsite revenue improved by 27% compared to 2010, consistent with increased drilling activity in both western Canada and the U.S. For the year ended December 31 2011, our utilization rate for drill site equipment rose to 57% from 53% compared to 2010. For 2011, U.S. and Canadian utilization rates were 62% and 52%, respectively. For Q1 2012, based on higher demand in Canada combined with consistent drilling activity in the U.S., we anticipate approaching our maximum practical combined utilization rate of approximately 65%.
Three months ended Year ended
December 31, December 31,
2011 2010 % change 2011 2010 % change
----------------------------------------------------------------------------
Equipment
Utilization
Canada 68% 48% 42 52% 40% 30
US 57% 64% (11) 62% 65% (5)
Combined 62% 57% 9 57% 53% 8
Average equipment
available 206 184 12 200 179 12
----------------------------------------------------------------------------
Our utilization rate for drill site equipment is based on days in use. Taking into account mobilization/demobilization and travel between rig sites, we anticipate our maximum practical utilization to be 65%. This is based on current equipment allocations between the U.S. and Canada. Balancing our fleet equally between the U.S. and Canadian markets enables us to capitalize on changes in demand in both regions.
In addition to our growth in drill site services, Western Onsite was positively impacted by oil based processing projects in the U.S. We anticipate continued growth year-over-year in this business unit, consistent with increased drilling activity in both Canada and the U.S. and additional onsite project work.
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. Eastern Onsite is in the early stage of development as we have only been developing this business unit for two years.
We are currently engaged primarily in short-term, or event-based projects, which will vary from period-to-period. Revenue improved quarter-over-quarter; however, was down year-over-year. Eastern Onsite is in the early stage of development and its performance was consistent with the evolution of our onsite business. Our model is to convert projects into contracts and in Eastern Onsite we successfully converted a project at a major refinery into a contract.
Heavy Oil
Our heavy oil services business began 16 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.
In Q4 2011, Heavy Oil revenue increased by 43% compared to Q4 2010. This was driven equally by heavy oil contracts, increased waste volumes and higher commodity prices. 2011 revenue increased by 35% compared to 2010. The primary driver was the strong performance of heavy oil project and contract work. For the year ended December 31, 2011, recovered oil is consistent with the three year quarterly average of 48,000 bbls per quarter.
In Q3 2011, we were awarded a three year contract to process Mature Fine Tailings (MFT) in a commercial demonstration process. The contract is at Syncrude's oil sands mine operations near Fort McMurray, Alberta. For the last two years, we have been working on scale up projects with Syncrude to prove the application of centrifugation for processing MFT. Construction of the equipment for this contract commenced in Q4 2011 and operations are expected to commence in late Q2 2012. This contract is anticipated to generate approximately $20.0 million in stable annual revenue over the next three years.
To date, we have nine Heavy Oil contracts, six of which were operating in Q4 2011. The remaining three contracts are in design or construction and are anticipated to be commissioned in the first half of 2012.
Three months ended Year ended
December 31, December 31,
2011 2010 % change 2011 2010 % change
----------------------------------------------------------------------------
Waste processing
volumes ('000 m3) 197 170 16 615 562 9
Recovered crude
oil ('000 bbl)(1) 49 46 7 191 196 (3)
Average crude oil
price received
(CDN$/bbl) 78.02 60.41 29 70.91 59.85 18
Recovered crude
oil sales ($
millions) 3.9 2.8 39 13.5 11.7 15
Bow River Hardisty
(CDN$/bbl)(2) 89.46 71.72 25 83.57 71.06 18
----------------------------------------------------------------------------
(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: http://media3.marketwire.com/docs/215nal_graphs.pdf
CORPORATE AND OTHER
Three months ended Year ended
December 31, December 31,
($000s) 2011 2010 % change 2011 2010 % change
----------------------------------------------------------------------------
Selling, general
and
administrative
expenses ("SG&A") 25,187 26,678 (6) 87,232 84,566 3
Less:
Stock-based
compensation 3,162 6,837 (54) 7,679 11,054 (31)
Amortization(1) 2,824 2,690 5 11,280 12,139 (7)
----------------------------------------------------------------------------
Adjusted SG&A 19,201 17,151 12 68,273 61,373 11
Adjusted SG&A as
a % of revenue 10.4% 10.5% (1) 10.0% 10.7% (7)
----------------------------------------------------------------------------
(1) Includes nil in loss on sale of fixed assets in Q4 2011 and 2011 and nil in Q4 2010 and $1,663 in 2010.
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 2011 and year-to-date, Adjusted SG&A was in line with our expectation of 10% of revenue. This reflects our disciplined approach to managing SG&A as our revenue base increases. Stock-based compensation expense is driven by our share price, vesting schedule and dividend increases. Changes in our share price will continue to drive stock-based compensation. Approximately 60% of stock-based compensation expense is estimated to be settled with equity, with the balance to be settled in cash. Stock-based compensation grants outstanding at December 31, 2011 that settle only in cash had a weighted average remaining life of approximately three years with a weighted average exercise price of $9.69. In 2012, we anticipate Adjusted SG&A to be 10% of revenue.
Three months ended Year ended
December 31, December 31,
($000s) 2011 2010 % change 2011 2010 % change
----------------------------------------------------------------------------
Research and
development 439 586 (25) 2,337 1,713 36%
Research and
development as
a % of revenue 0.2% 0.4% (50) 0.3% 0.3% -
----------------------------------------------------------------------------
Research and development expenses are related to our Technical Development group. Compared to 2010, our operating expenditures increased as our Technical Development program advanced. Expenditures were below our budget of $3.0 million.
Our objective is to deliver two new commercial processes with wide application to operations every year. The following table reflects our Technical Development group's three-step process to commercialization as well as a progress update to December 31, 2011.
----------------------------------------------------------------------------
Step Description Number of
Technologies
----------------------------------------------------------------------------
Step 1 - Lab Bench Involves conducting a 15
Scale development or lab bench scale
evaluation of the technology to
determine probability of
successful operation, possible
uses within our network, and
actions to reduce risks going
forward.
----------------------------------------------------------------------------
Step 2 - Measure feasibility and 3
Demonstration/Pilot performance of technology in a
phase "real world" setting.
----------------------------------------------------------------------------
Step 3 - Technology is commercialized 1st project
Commercialization within our facility network and scheduled for 2012
on our customer sites as new
business line, revenue stream or
process improvement
----------------------------------------------------------------------------
Three months ended Year ended
December 31, December 31,
($000s) 2011 2010 % change 2011 2010 % change
----------------------------------------------------------------------------
Bank fees and
interest 703 2,368 (70) 4,200 14,375 (71)
Debentures
interest and
accretion of
issue costs(1) 7,268 3,782 92 21,853 10,472 109
----------------------------------------------------------------------------
Finance charges
before
unwinding of
the discount(2) 7,971 6,150 30 26,053 24,847 5
Unwinding of the
discount(3) 534 491 9 2,138 1,967 9
----------------------------------------------------------------------------
Finance charges 8,505 6,641 28 28,191 26,814 5
----------------------------------------------------------------------------
(1) Includes convertible debentures and senior unsecured debentures.
(2) Excludes capitalized interest of $858 and $2,744 in Q4 2011 and 2011 respectively, and $454 and $803 in Q4 2010 and 2010 respectively.
(3) Related to decommissioning liability.
Under IFRS, Finance charges includes unwinding of the discount related to the decommissioning liability - under previous Canadian GAAP, it was included in amortization and accretion expense.
Finance charges before unwinding of the discount related to the decommissioning liability are higher for the quarter and for year ended December 31, 2011, than the corresponding periods in 2010. The increase was largely due to the early redemption of our Convertible Debentures, which were redeemed in Q4 2011. Unamortized issue costs of $1.6 million related to the Convertible Debentures were expensed to financing charges at the time of redemption. Finance charges associated with the Convertible Debentures included an annual coupon rate of 7.0% as well as the accretion of issue costs and the discount on the debt portion of the Convertible Debentures. Finance charges associated with the Series 1 Senior Unsecured Debentures and Series 2 Senior Unsecured Debentures ("Senior Unsecured Debentures") include annual coupon rates of 7.625% and 7.75%, respectively, as well as the accretion of issue costs for both series. 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) 2011 2010 % change 2011 2010 % change
----------------------------------------------------------------------------
Current tax 2,637 520 407 2,766 938 195
Deferred tax (59) 1,927 (103) 11,421 8,237 39
----------------------------------------------------------------------------
Provision for
income taxes 2,578 2,447 5 14,187 9,175 55
----------------------------------------------------------------------------
Current tax in 2011 resulted from non-recurring U.S. related taxes. The increase in deferred income tax expense for the year compared to 2010 is primarily due to higher taxable income. The effective tax rates for Q4 2011 and the year ended December 31, 2011 were 29.9% and 29.7%, respectively. Compared to 2010, the lower effective tax rate resulted from a reduction to the statutory tax rate and a lesser impact from non-deductible costs related to stock-based compensation. Our statutory tax rate in Canada was 27.35% and 29.13% for 2011 and 2010, respectively. Loss carry forwards were approximately $142 million at December 31, 2011. Other than provincial capital taxes and U.S. state and federal income taxes, we do not anticipate paying significant income tax for the next two years. See "Critical Accounting Estimates - Income Taxes" in this MD&A for further discussion.
CHANGES IN FINANCIAL POSITION
December 31,
($000s) % Commentary
2011 2010 $ change change
----------------------------------------------------------------------------
Assets
Accounts and other Consistent with
receivables 134,172 102,378 31,794 31 increase in revenue
Inventories Consistent with
higher activity
30,953 26,645 4,308 16 levels
Property, plant and See Uses of Cash on
equipment 820,102 741,793 78,309 11 page 22
Permits and other -
intangible assets 59,593 60,579 (986) (2)
Goodwill 102,897 102,897 - - -
Other assets(1) Increase due to long
17,304 13,385 3,919 29 term investments
----------------------------------------------------------------------------
Equity and
liabilities
Bank indebtedness See Unaudited
Consolidated
Statements of Cash
6,168 169 5,999 3,550 Flows
Accounts payable and Consistent with
accrued liabilities higher activity
147,897 120,370 27,527 23 levels
Dividends payable Increase in Dividend
3,889 3,152 737 23 rate
----------------------------------------------------------------------------
Senior secured See Unaudited
debt(2) Consolidated
Statements of Cash
68,493 51,520 16,973 33 Flows
Convertible See LIQUIDITY AND
debentures - debt CAPITAL RESOUCES on
portion - 112,074 (112,074) (100) page 23
Senior unsecured See LIQUIDITY AND
debentures CAPITAL RESOUCES on
245,049 122,050 122,999 101 page 23
Other liabilities 5,459 5,327 132 2 -
Deferred tax See Note 14 to the
liability 68,389 54,491 13,898 26 Financial Statements
Decommissioning Increase due to
liability change in risk free
rate. See Note 10 to
the Financial
77,756 54,368 23,388 43 Statements
Equity See Unaudited
Consolidated
Statement of Changes
541,921 524,156 17,765 3 in Equity
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(1) Includes Investment, Prepaid expenses and other, and Other long-term assets
(2) Includes Bank indebtedness
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 from general day-to-day cash requirements and in the management of our assets, liabilities and capital resources. Liquidity risk is managed against our financial leverage to meet obligations and commitments in a balanced manner. For further information on our risk management, refer to Note 18 to the Financial Statements for the three months and year ended December 31, 2011.
Our debt capital structure is as follows:
($000s) December 31, 2011 December 31, 2010 ---------------------------------------------------------------------------- Use of Credit Facility: Amount drawn on Credit Facility(1) 73,178 53,859 Senior Unsecured Debentures 250,000 125,000 Letters of credit 21,332 21,477 ---------------------------------------------------------------------------- Total Debt A 344,510 200,336 Unused Credit Facility capacity(2) 105,490 124,664 ---------------------------------------------------------------------------- Convertible Debentures B - 115,000 ---------------------------------------------------------------------------- Gross Debt(3) =A+B 344,510 315,336 ----------------------------------------------------------------------------
(1) See Note 7 to the Financial Statements for the three months and year ended December 31, 2011. The net senior secured debt at December 31, 2011 was $68.5 million.
(2) Management elected to reduce our borrowing capacity to $200 million on December 17, 2010 from $350 million.
(3) Previously described as Total Secured and Unsecured Debt.
We continue to focus on managing our working capital accounts while supporting our growth. Working capital at December 31, 2011 was $13.7 million compared to $16.9 million at December 31, 2010. At current activity levels, working capital is expected to be sufficient to meet our ongoing commitments and operational requirements of the business. We will continue to manage working capital prudently with increasing activity levels.
For further information on credit risk management, please refer to Note 18 to the Financial Statements for the three months and year ended December 31, 2011.
DEBT RATINGS
In November 2010, DBRS Limited ("DBRS") and Moody's Investor Service, Inc. ("Moody's") provided a corporate and Series 1 Senior Unsecured Debentures credit rating. On October 11 2011, DBRS revised the trend on the existing BB (low) Issuer Rating to Positive from Stable. The trend change was attributed to improved operating performance exceeding DBRS's expectation, and a stronger Onsite business portfolio with the addition of long term contracts. DBRS also reduced the rating on the Senior Unsecured Debentures to BB (low) from BB to reflect their expectation of a lower recovery rating assuming that we will increase the amount of unsecured debt as part of our convertible debenture refinancing strategy. As anticipated in November, we issued an additional $125 million in Senior Unsecured Debentures and redeemed the Convertible Debentures with the proceeds. See Senior Unsecured Debentures on page 26 for further information.
The DBRS instrument rating is now harmonized with the issuer rating and we would expect that any upward changes in our issuer rating would increase the instrument rating. Moody's ratings remains unchanged.
The ratings are as follows:
Category DBRS Moody's ---------------------------------------------------------------------------- Corporate Rating BB (low) Ba3 Senior Unsecured Debentures BB B1
Both DBRS and Moody's obligations rating are speculative and non investment-grade credit quality.
SOURCES OF CASH
Our liquidity needs can be sourced in several ways including: Funds from operations, borrowings against our Credit Facility, new debt instruments, the issuance of securities from treasury, return of letters of credit or replacement of letters of credit with other types of financial security, proceeds from the sale of assets and payments of dividends to shareholders.
On November 14, 2011, Newalta issued $125.0 million of 7.75% Series 2 Senior Unsecured Debentures. The net proceeds from this issuance were used to redeem our Convertible Debentures at a cost of $1,000 per Convertible Debenture plus a payment in respect of all accrued and unpaid interest on these debentures for an aggregate purchase price of $115.3 million. See Senior Unsecured Debentures on page 26 for further information.
Credit Facility
Newalta has a $200 million Credit Facility, maturing December 17, 2013, with annual extensions available at our option. At December 31, 2011, $105.5 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 agreement, 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, 2011, surety bonds issued and outstanding totalled $38.3 million.
Financial performance relative to the financial ratio covenants(1) under the Credit Facility is reflected in the table below. There is no impact on our covenants for changes related to IFRS.
December 31, 2011 December 31, 2010 Threshold
----------------------------------------------------------------------------
Senior Secured Debt(2)
to EBITDA(3) 0.65:1 0.63:1 2.75:1 maximum
Total Debt(4) to
EBITDA(3) 2.38:1 1.68:1 3.50:1 maximum
Interest Coverage 5.86:1 4.97:1 2.25:1 minimum
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(1) We are restricted from declaring dividends if we are in breach of the covenants under our Credit Facility.
(2) 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 and the Senior Unsecured Debentures, but excludes the Convertible Debentures.
Gross Debt to Adjusted EBITDA: http://media3.marketwire.com/docs/215nal_graphs.pdf
Our Gross Debt was $344.5 million as at December 31, 2011 which reflected a $29.2 million increase over December 31, 2010. As a result of higher Adjusted EBITDA, Gross Debt to Adjusted EBITDA ratio improved to 2.35 from 2.65 in Q4 2010. The ongoing improvement provides Newalta with greater financial flexibility and will reduce future financing costs. Our target for Gross Debt to Adjusted 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 2012.
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
option of Newalta - Redemption price equal to - Redemption price equal to
prior to: 107.625% of the principal 107.75% of the principal
amount(2,3) amount(2,3)
or 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
option of Newalta In whole or in part, at In whole or in part, at
after: redemption prices expressed redemption prices expressed
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 period beginning on
November 23 of the years as November 14 of the years as
follows: follows:
- 2013 - 103.813%; - 2015 - 103.875%;
- 2014 - 102.542%; - 2016 - 101.938%;
- 2015 - 101.906%; - 2017 and thereafter -
100%.
- 2016 and thereafter -
100%.
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(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
During the year ended December 31, 2011, financing fees of $2.5 million were incurred in connection with the issuance of the Series 2 Senior Unsecured Debentures. These fees have been recorded as deferred financing costs and are being amortized using the effective interest method over the term of the respective Senior Unsecured Debentures.
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:
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December December
($000s except ratio) 31, 2011 31, 2010 Threshold
----------------------------------------------------------------------------
Senior Secured Debt including
Letters of Credit 94,510 75,336 $245,000 maximum
Cumulative finance lease
obligations nil nil $25,000 maximum
Consolidated Fixed Charge
Coverage 5.86:1 4.97:1 2.00:1 minimum
Period end surplus for restricted Restricted payments
payments(1) 27,001 17,084 cannot exceed surplus
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(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.
Our covenant ratios remain well within their thresholds. We will manage within our covenants throughout 2012.
USES OF CASH
Our primary uses of funds include maintenance and growth capital expenditures as well as acquisitions, payment of dividends, operating and SG&A expenses and the repayment of debt.
Capital Expenditures
"Growth capital expenditures" or "growth and acquisition capital expenditures" are capital expenditures that are intended to improve our efficiency and productivity, allow us to access new markets and diversify our business. Growth capital, or growth and acquisition capital, are reported separately from maintenance capital because these types of expenditures are discretionary. "Maintenance capital expenditures" are capital expenditures to replace and maintain depreciable assets at current service levels. Maintenance capital expenditures are reported separately from growth activity because these types of expenditures are not discretionary and are required to maintain current operating levels.
Capital expenditures for the three months and year ended December 31, 2011 were:
Three months ended Year ended
December 31, December 31,
($000s) 2011 2010 2011 2010
----------------------------------------------------------------------------
Growth capital expenditures 33,375 21,417 86,629 47,535
Maintenance capital expenditures 11,914 8,674 31,051 29,013
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Total capital expenditures(1)(2) 45,289 30,091 117,680 76,548
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(1)The numbers in this table differ from Unaudited Consolidated Financial Statements of Cash Flows because the numbers above do not reflect the net change in working capital related to capital asset accruals.
(2) Capital expenditures exclude our investment in TARM.
Total capital expenditures were $45.3 million and $117.7 million for three months and year ended December 31, 2011. Growth capital expenditures for the quarter and the year relate primarily to drill site equipment in Western Onsite, centrifugation equipment for contract work in our Heavy Oil business unit and expansion in Western Facilities, including the completion of a new oilfield satellite facility. For 2011, approximately 25% of our growth capital was related to Heavy Oil contracts and projects. Maintenance capital expenditures related primarily to equipment replacement and centrifuge refurbishments and process equipment improvements at our facilities.
Total capital spending for 2011 was $117.7 million which was above our most recent capital spending announcement. The increase in capital spending was driven by a combination of the three year contract to process mature fine tailings ("MFT"), and the opportunistic approach Management took to complete several additional unbudgeted projects to position our business for savings and growth in the future.
Capital expenditures in 2012 are budgeted at $145 million, comprised of growth capital of $115 million and maintenance capital of $30 million. Capital expenditures are anticipated to be predominantly funded from funds from operations. Approximately 60% of the capital is expected to be spent in the first half of 2012.
The growth capital budget is up more than 30% over our 2011 expenditures, driven by our extensive inventory of low-risk, high-return organic growth projects. Growth capital expenditures for 2012 will be allocated as follows:
Onsite $55 million Facilities $45 million Technical Development and Corporate $15 million
Onsite growth capital includes approximately $30 million for three onsite contracts in design or construction, including the Syncrude MFT project and $10 million for expansion of our U.S. business. The remaining capital will focus on expansion of our drill site business.
Growth capital in Facilities relates primarily to the completion of a new oilfield satellite facility, the expansion of oilfield services, oil recycling and process improvements. Technical Development growth capital will focus on advancing our lab and pilot testing programs including the construction of a commercial demonstration plant based on a promising technology piloted in 2011. Maintenance capital expenditures will relate to the construction of additional landfill cells, process improvements and equipment replacement.
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.
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 $3.9 million in dividends or $0.08 per share, paid January 16, 2012 to shareholders of record as at December 31, 2011.
We expect to pay a dividend of $0.08 per share to shareholders of record on March 31, 2012. The Board will continue to review future dividends, taking into account all factors noted above.
As at February 14, 2012, Newalta had 48,607,327 shares outstanding, and outstanding options to purchase up to 4,218,959 shares.
Contractual Obligations
Our contractual obligations, as at December 31, 2011, were:
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Less than
($000s) Total one year 1-3 years 4-5 years Thereafter
----------------------------------------------------------------------------
Office leases 58,368 7,805 22,453 7,166 20,944
Operating leases(1) 17,182 8,706 8,313 163 -
Surface leases 2,656 1,184 954 318 200
Senior long-term
debt(2) 68,493 - 68,493 - -
Senior unsecured
debentures 382,449 19,219 57,657 19,219 286,354
Purchase obligations 23,553 23,525 21 7 -
Other obligations 151,786 151,786 - - -
----------------------------------------------------------------------------
Total commitments 704,487 212,225 157,891 26,873 307,498
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(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.
SUMMARY OF QUARTERLY RESULTS
2011
($000s except per share data) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue 184,089 182,023 164,294 152,422
Earnings before taxes 8,609 16,537 13,632 8,971
Net earnings 6,031 11,815 10,483 5,233
Earnings per share ($) 0.12 0.24 0.22 0.11
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
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2010
($000s except per share data) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue 162,927 145,124 136,905 131,240
Earnings before taxes 5,368 8,926 3,894 7,111
Net earnings 2,921 5,867 2,386 4,949
Earnings per share ($) 0.06 0.12 0.05 0.10
Diluted earnings per share ($) 0.06 0.12 0.05 0.10
Weighted average shares - basic 48,523 48,487 48,487 48,480
Weighted average shares - diluted 48,934 48,909 48,844 48,826
EBITDA 26,810 28,470 25,598 26,863
Adjusted EBITDA 33,647 29,705 26,573 28,867
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Quarterly performance is affected by, among other things, weather conditions, timing of onsite projects, commodity prices, foreign exchange rates, market demand and the timing of our growth capital investments as well as acquisitions and the contributions from those investments. Growth capital investments completed in the first half of the year will tend to strengthen the second half financial performance. Revenue from certain business units is impacted by seasonality. However, due to the diversity of our business, the impact is limited on a consolidated basis. For example, waste volumes received at our oilfield facilities decline in the second quarter due to road bans which restrict drilling activity. This decline is offset by increased activity in our Eastern Onsite business unit due to the aqueous nature of work performed, as well as potentially by fluctuations in commodity prices or event-based waste receipts at SCL. As experienced over the last eight quarters, fluctuations in commodity prices can dramatically impact our results.
Quarterly 2010 revenue, earnings before taxes and net earnings reflect continued improvements each quarter in commodity prices and productivity and cost efficiencies combined with strengthened demand across all business units. In Q3 2010, strong performance in Western Facilities, Heavy Oil and Western Onsite was partially offset by lower contributions from VSC and SCL. Q4 2010 revenue and Adjusted EBITDA continued to improve driven by strong market activity in Western Facilities and increased demand for Western Onsite services. The Q4 2010 decrease in earnings before taxes and net earnings was due to higher stock-based stock compensation.
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. 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.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
SENSITIVITIES
Our stock-based compensation expense is sensitive to changes in our share price. A $1 change in our share price, between $12 per share and $20 per share, has a $3.2 million direct impact on annual stock-based compensation reflected in SG&A, before the effects of vesting. We anticipate that approximately 40% of stock-based compensation will be settled in cash in future periods.
Our revenue is sensitive to changes in commodity prices for crude oil, base oils and lead. These factors have both a direct and indirect impact on our business. The direct impact of these commodity prices is reflected in the revenue received from the sale of products such as crude oil, base oils and lead. Historically, approximately 25% of our revenue is sensitive to direct impact of commodity prices. The indirect impact is the effect that the variations of these factors, including natural gas, has on activity levels of our customers and, therefore, demand for our services. Management actively manages the indirect impact by strategically geographically balancing mobile assets to meet demand and shifts in activity levels where necessary. The indirect impacts of these fluctuations previously discussed are not quantifiable.
The following table provides management's estimates of fluctuations in key inputs and prices and the direct impact on revenue from product sales and SG&A:
----------------------------------------------------------------------------
Change in Impact on Annual
benchmark ($) Revenue ($)
----------------------------------------------------------------------------
LME lead price ($U.S./MT)(1) (2) 220 7.5 million
Edmonton Par crude oil price ($/bbl)(1) 1.00 0.3 million
Motiva Base oil ($/litre)(1)(3) 0.05 0.8 million
----------------------------------------------------------------------------
(1) Based on 2011 performance and volumes.
(2) Excludes impact of LME on feedstock which offsets the impact of LME on revenue.
(3) In 2011, we changed out base oil benchmark from the Gulf Coast to Motiva to reflect the improved quality of our recycled oil.
RISK MANAGEMENT
To effectively manage the risk associated with our business and strategic objectives, we are implementing 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
from 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 Financial Statements in accordance with IFRS requires management to make estimates with regard to the reported amounts of revenue and expenses and the carrying values of assets and liabilities. These estimates are based on historical experience and other factors determined by management. Because this involves varying degrees of judgment and uncertainty, the amounts currently reported in the Financial Statements could, in the future, prove to be inaccurate. With the adoption of IFRS, these critical accounting estimates have been updated accordingly.
Amortization
Amortization of property, plant and equipment and intangible assets incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change impacting the operation of plant and equipment.
Decommissioning Liability and Accretion
Decommissioning liability is estimated by management based on the anticipated costs to abandon and reclaim all our facilities and landfills as well as the projected timing of the costs to be incurred in future periods. Management, in consultation with our engineers and environmental, health and safety staff, estimates these costs based on current regulations, costs, technology and industry standards. The fair value estimate is capitalized as part of the cost of the related asset and depreciated over the asset's useful life. The useful lives of the assets and the long-term commitments of certain sites range from 20 to 300 years.
At December 31, 2011, we revised our estimate for the decommissioning liability for changes in the status of the assets, changes in the discount rates and changes in the estimated costs of abandonment and reclamation. The change in estimate resulted in a $24.6 million increase in the decommissioning liability from December 31, 2010. The net present value of the decommissioning liability accrued on the consolidated balance sheet at December 31, 2011 was $77.0 million ($54.6 million at January 1, 2010 and $54.4 million at December 31, 2010). The total estimated future cost for decommissioning liability at December 31, 2011, was $7.0 billion. The majority of the undiscounted future decommissioning liability relates to SCL in Ontario, which are expected to be incurred over the next 300 years. Excluding SCL, the total undiscounted future costs are $147.2 million. A discount rate of 2.5% (4% as at December 31, 2010) and an inflation rate of 2% (2% as at December 31, 2010) was used to calculate the present value of Newalta's decommissioning liabilities with the exception of Stoney Creek Landfill which used a discount rate of 6% (4% as at December 31, 2010).
The balance of the liability is adjusted each period for the unwinding of the discount, with the associated expense included in finance charges. The change of estimate does not have a material impact on the unwinding of the discount. The decommissioning liability is based on estimates that may change as more experience is obtained or as general market conditions change impacting the future cost of abandoning our facilities.
Impairment
We perform an asset impairment test at each balance sheet date and whenever events or circumstances make it possible that impairment may have occurred. Determining whether impairment has occurred requires a valuation of the respective cash generating unit, based on its future discounted cash flows. In applying this methodology, we rely on a number of factors, including; actual operating results; future business plans; economic projections; and market data.
Our determination as at December 31, 2011 and December 31, 2010 was that there was no impairment.
Income Taxes
Current income tax expense predominantly represents capital taxes paid in eastern Canada, federal and provincial income taxes and U.S. taxation imposed on the U.S. subsidiary. Tax losses generated under the income fund structure are expected to provide shelter from any significant corporate current tax exposure for the next two years.
Deferred taxes are estimated based on temporary differences between the book value and tax value of assets and liabilities using the applicable future income tax rates under current law. The change in these temporary differences results in a deferred income tax expense or recovery. The applicable deferred income tax rate for each entity is calculated based on provincial allocation calculations and the expected timing of reversal of temporary differences. Changes in the assumptions used to derive the deferred income tax rate could have a material impact on the deferred income tax expense or recovery incurred in the period.
Permits and Other Intangibles
Permits and other intangibles represent the book value of expiring permits and rights, indefinite permits and non-competition contracts. The intrinsic value of the permits relates to the breadth of the terms and conditions and the types of waste we are able to process. In today's regulatory environment, management believes an operator would be unable to obtain similar permits with the same scope of operations. Therefore, management estimates that the value of our permits could be greater than its book value.
Stock-Based Compensation
We have three share-based 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, 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 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 share-based compensation expense 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 allow for individuals to settle their options in cash. Accordingly, 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. Forfeitures are estimated and accounted for at the grant date and adjusted, if necessary, in subsequent periods.
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. 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 share-based compensation expense recognized over the vesting period of the options. Forfeitures are estimated and accounted for at the grant date and adjusted, if necessary, in subsequent periods.
Newalta has a cash-settled deferred share unit ("DSUs") plan for which 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 with a corresponding increase in liabilities over the vesting period of the units. 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.
A cash-settled Performance Share Unit ("PSUs") incentive plan has been established for officers and other eligible employees. Under this plan, notional PSUs are granted upon commencement in the plan and vest at the end of a three-year term. The vested PSUs are automatically paid out in cash upon vesting at a value determined by the fair market value of 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 fair value of the PSUs is accrued in accounts payable and charged to earnings on a straight-line basis over the three-year term. 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 and PSU changes, if any, are recorded as stock-based compensation expense.
A Restricted Share Unit ("RSUs") incentive plan has been established for officers and other eligible employees. Under this plan, notional RSUs are granted upon commencement in the plan 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 accounts payable and charged to earnings 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 and RSU changes, if any, are recorded as stock-based compensation expense.
FUTURE ACCOUNTING POLICY CHANGES
As of January 1, 2013, we are required to adopt the following standards and amendments as issued by the IASB, which should not have a material impact on our financial statements. We do not plan to early adopt any of the standards outlined below.
-- 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
accounted.
-- 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.
INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
Effective January 1, 2011, we adopted IFRS. Our financial statements for 2011 have been prepared in accordance with IFRS and the comparative year for 2010 has been restated to reflect our transition date of January 1, 2010. IFRS uses a conceptual framework similar to previous Canadian GAAP, but there are differences in recognition, measurement and disclosures.
A summary of the key areas where changes in accounting policies have impacted our consolidated financial statements is presented below. This summary should not be regarded as a complete list of the changes that have resulted from the transition to IFRS. Rather, it is intended to highlight those areas management believes to be the most significant.
Most adjustments required on transition to IFRS have been made retrospectively against opening retained earnings as of the transition date.
The key areas that impact previously reported 2010 Net earnings are: Decommissioning liability, capitalization of borrowing costs, stock-based compensation and deferred tax. Information regarding the individual changes are included in Note 22 to the Unaudited Condensed Consolidated Financial Statements for the three months and year ended December 31, 2011. There are no changes to previously reported 2010 Adjusted EBITDA.
Decommissioning liability under IFRS increased by $33 million with a corresponding $18 million increase to the value of assets and a reduction of $15 million to retained earnings, as a result of the change in calculation methodologies. The effect on gross profit and net earnings was higher depreciation. Unwinding of the discount related to the decommissioning liability has been re-classified to finance charges where under previous Canadian GAAP, was included in amortization and accretion expense. The calculation change in decommissioning liability had no material impact on the unwinding of the discount related to the decommissioning liability.
Capitalization of borrowing costs is mandatory under IFRS for capital projects that meet the qualifying criteria. Under previous Canadian GAAP, this was optional and borrowing costs were not capitalized by Newalta. The capitalization of borrowing costs reduced finance charges, resulting in a positive impact to net earnings.
Stock-based compensation for the 2006 and 2008 option plans, and SARS are calculated using a different model. IFRS values the outstanding incentives plans at fair value. Under previous Canadian GAAP, we accounted for the plans by reference to their intrinsic value. The change in methodology under IFRS resulted in a negative impact to 2010 net earnings.
The majority of the change in deferred tax relates to the tax impact of the key areas discussed above.
Impact on 2010 Net Earnings
Impact
Impact Increase /
Facilities Onsite Increase / (Decrease)
Impact Q4 Impact Q4 (Decrease) Full Year
($000s) 2010 2010 Q4 2010 2010
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Decommissioning Liability -
Increased asset value drives
increased depreciation (394) (10) (404) (1,624)
Unwinding of the discount
related to the
decommissioning liability re-
classified as finance charges 436 58 494 1,982
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Impact to Gross Profit 42 48 90 358
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Unwinding of the discount
related to the
decommissioning liability re-
classified as finance charges
and revaluation (492) (1,966)
Stock-based compensation (15) (1,536)
Capitalization of borrowing
costs for qualifying projects 458 819
Deferred tax 19 384
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Impact to Net Earnings 60 (1,941)
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The key areas that impact the previously reported 2010 Balance Sheet are; decommissioning liability (as described above), tax basis of goodwill including intangibles and the treatment of the trust units upon conversion from a trust to a Corporation.
Under previous Canadian GAAP, deferred tax on intangibles and goodwill upon acquisition was effectively eliminated. This is not the case with IFRS. This impact created a deferred tax liability of $7.3 million.
Trust units issued prior to our conversion to a Corporation were classified as a financial liability rather than an equity instrument. As a result, the liability associated with the trust units was measured at fair value through net earnings up until December 31, 2008, the date of conversion from a Trust to a Corporation. This resulted in a $238 million increase to retained earnings and decrease to shareholders capital.
Please refer to Note 22 in the Financial Statements for the three months and year ended December 31, 2011 for a reconciliation of the IFRS financial statements to previously released financial statements prepared under previous Canadian GAAP.
BUSINESS RISKS
Our business is subject to certain risks and uncertainties. Prior to making any investment decision regarding Newalta, investors should carefully consider, among other things, the risks described herein (including the risks and uncertainties listed on the front page of this 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.
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 44% of our total revenue, with 12% of these customers having a credit rating of A or higher and 44% 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, 2011. In 2011, our exposure to foreign exchange was mitigated by our U.S. dollar denominated long-term debt, which served as a natural hedge, reducing our balance sheet exposure. The floating interest rate profile of our long-term debt exposes us to interest rate risk. We do not use hedging instruments to mitigate this risk. The carrying value of the 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 18 to the Financial Statements for the three months and year ended December 31, 2011.
In January 2010, we invested $4 million in shares and warrants in BioteQ Environmental Technologies Inc. The portion of the investment allocated to shares has been classified as available for sale and the portion of the investment allocated to warrants is a derivative accounted for much like held-for-trading investments. The investment is re-valued each quarter. The unrealized gain or loss on the shares is reflected on the Unaudited Consolidated Statements of Comprehensive Income and Accumulated Other Comprehensive Income, whereas the unrealized gain or loss for warrants is reflected on the Unaudited Consolidated Financial Statements of Operations under Finance charges.
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, 2011, and have concluded that such disclosure controls and procedures were effective. In addition, the Certifying Officers have evaluated the design and effectiveness of our internal control over financial reporting as of December 31, 2011, 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 2011 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)
(Unaudited)
December 31, January 1,
December 2010 2010
31, 2011 (Note 22) (Note 22)
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Assets
Current assets
Cash and cash equivalents - - 3,920
Accounts and other receivables 134,172 102,378 84,317
Inventories (Note 3) 30,953 26,645 33,148
Investment (Note 4) 802 4,274 -
Prepaid expenses and other 5,756 7,292 6,183
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171,683 140,589 127,568
Non-current assets
Property, plant and equipment (Note 5) 820,102 741,793 721,656
Permits and other intangible assets
(Note 6) 59,593 60,579 61,935
Other long-term assets (Note 4) 10,746 1,819 2,666
Goodwill (Note 6) 102,897 102,897 103,597
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TOTAL ASSETS 1,165,021 1,047,677 1,017,422
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Equity and liabilities
Current liabilities
Bank indebtedness 6,168 169 -
Accounts payable and accrued
liabilities 147,897 120,370 90,642
Dividends payable 3,889 3,152 2,423
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157,954 123,691 93,065
Non-current liabilities
Senior secured debt (Note 7) 68,493 51,520 192,043
Convertible debentures - debt portion
(Note 9) - 112,074 110,725
Senior unsecured debentures (Note 8) 245,049 122,050 -
Other liabilities (Note 13) 5,459 5,327 1,647
Deferred tax liability (Note 14) 68,389 54,491 46,856
Decommissioning liability (Note 10) 77,756 54,368 54,585
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TOTAL LIABILITIES 623,100 523,521 498,921
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Shareholders' Equity
Shareholders' capital (Note 11) 317,386 315,934 315,836
Convertible debentures - equity portion
(Note 9) - 1,021 1,021
Contributed surplus 2,700 1,679 1,679
Retained earnings 223,679 204,935 199,965
Accumulated other comprehensive (loss)
income (1,844) 587 -
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TOTAL EQUITY 541,921 524,156 518,501
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TOTAL EQUITY AND LIABILITIES 1,165,021 1,047,677 1,017,422
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Consolidated Statements of Operations
(Expressed in thousands of Canadian Dollars)
(Except per share data) (Unaudited)
For the three months For the year ended
ended December 31, December 31,
2011 2010 2011 2010
(Note 22) (Note 22)
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Revenue 184,089 162,927 682,828 576,196
Cost of sales 141,349 123,654 517,319 437,806
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Gross profit 42,740 39,273 165,509 138,390
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Selling, general and
administrative 25,187 26,678 87,232 84,566
Research and development 439 586 2,337 1,713
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Earnings before finance
charges and income tax 17,114 12,009 75,940 52,111
Finance charges 8,505 6,641 28,191 26,814
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Earnings before income taxes 8,609 5,368 47,749 25,297
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Provision for income taxes
(Note 14)
Current 2,637 520 2,766 938
Deferred (59) 1,927 11,421 8,237
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2,578 2,447 14,187 9,175
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Net earnings 6,031 2,921 33,562 16,122
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Net earnings per share (Note
15) 0.12 0.06 0.69 0.33
Diluted earnings per share
(Note 15) 0.12 0.06 0.68 0.33
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Supplementary information:
Amortization included within
cost of sales 13,577 12,111 51,576 43,491
Amortization included in
selling, general and
administrative 2,824 2,690 11,280 12,139
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Total amortization 16,401 14,801 62,856 55,630
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Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian Dollars)
(Unaudited)
For the three months For the year ended
ended December 31, December 31,
2011 2010 2011 2010
(Note 22) (Note 22)
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Net earnings 6,031 2,921 33,562 16,122
Other comprehensive (loss)
income:
Exchange difference on
translating foreign
operations (460) - (460) -
Unrealized (loss) gain on
investment in shares(1) (255) 55 (1,971) 587
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Other comprehensive (loss)
income (715) 55 (2,431) 587
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Comprehensive income 5,316 2,976 31,131 16,709
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(1) Net of tax of $0.1 million and $0.2 million for the three months and year ended December 31, 2011, respectively ($0.1 million and $0.3 million for the three months and year ended December 31, 2010, respectively).
Consolidated Statement of Changes in Equity
(Expressed in thousands of Canadian Dollars)
(Unaudited)
Contributed
Equity surplus
portion of (shared-
Shareholders' convertible based
capital debentures payments)
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Balance, January 1, 2010 315,836 1,021 1,679
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Changes in equity for year ended
December 31, 2010
Exercise of options 98 - -
Dividends declared - - -
Unrealized gain on investment in
shares - - -
Net earnings for the period - - -
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Balance, December 31, 2010 315,934 1,021 1,679
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Changes in equity for year ended
December 31, 2011
Exercise of options 1,452 - -
Redemption of convertible debentures - (1,021) 1,021
Dividends declared - - -
Unrealized loss on investment in
shares - - -
Exchange difference on translating
foreign operations - - -
Net earnings for the period - - -
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Balance, December 31, 2011 317,386 - 2,700
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Accumulated
other
comprehensive
Retained income (loss)
earnings (Note 4) Total
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Balance, January 1, 2010 199,965 - 518,501
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Changes in equity for year ended
December 31, 2010
Exercise of options - - 98
Dividends declared (11,152) - (11,152)
Unrealized gain on investment in
shares - 587 587
Net earnings for the period 16,122 - 16,122
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Balance, December 31, 2010 204,935 587 524,156
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Changes in equity for year ended
December 31, 2011
Exercise of options - - 1,452
Redemption of convertible debentures - - -
Dividends declared (14,818) - (14,818)
Unrealized loss on investment in
shares - (1,971) (1,971)
Exchange difference on translating
foreign operations - (460) (460)
Net earnings for the period 33,562 - 33,562
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Balance, December 31, 2011 223,679 (1,844) 541,921
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Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian Dollars)
(Unaudited)
For the three months For the year ended
ended December 31, December 31,
2011 2010 2011 2010
(Note 22) (Note 22)
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Cash provided by (used for):
Operating Activities
Net earnings 6,031 2,921 33,562 16,122
Adjustments for:
Amortization 16,401 14,801 62,856 55,630
Income taxes provision (Note
14) 2,578 2,447 14,187 9,175
Income taxes paid (1,514) (165) (1,809) (783)
Stock-based compensation
expense (Note 13) 3,003 6,778 6,084 10,856
Finance charges expense 8,505 6,641 28,191 26,812
Finance charges paid (9,502) (6,774) (20,083) (20,919)
Other (150) (386) (213) (19)
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25,352 26,263 122,775 96,874
Decrease (increase) in non-cash
working capital (Note 20) 27,749 23,324 (14,856) 1,461
Decommissioning costs incurred (1,711) (1,126) (3,356) (2,184)
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51,390 48,461 104,563 96,151
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Investing Activities
Additions to property, plant
and equipment (Note 5) (46,786) (26,728) (117,143) (68,332)
Proceeds on sale of property,
plant and equipment 1,023 306 1,220 2,694
Purchase of investment (Note 4) - - - (4,000)
Purchase of other long-term
asset (Note 4) - - (5,757) -
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(45,763) (26,422) (121,680) (69,638)
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Financing Activities
Issuance of shares - 27 1,249 27
Issuance of senior unsecured
debentures 122,557 122,010 122,557 122,010
Redemption of convertible
debentures (115,000) - (115,000) -
(Decrease) increase in senior
secured debt (12,755) (138,771) 16,154 (142,303)
Increase (decrease) in bank
indebtedness 3,384 (2,197) 5,999 169
Decrease in note receivable 75 44 240 88
Dividends paid (Note 16) (3,888) (3,152) (14,082) (10,424)
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(5,627) (22,039) 17,117 (30,433)
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Decrease in cash and cash
equivalents - - - (3,920)
Cash and cash equivalents,
beginning of period - - - 3,920
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Cash and cash equivalents, end
of period - - - -
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Notes to the Consolidated Financial Statements
For the three months and years ended December 31, 2011 and 2010.
(All tabular data in thousands of Canadian Dollars except per share and ratio data)
(Unaudited)
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 85 facilities across Canada and at our customers' facilities where we mobilize our equipment and people to process material directly onsite. Over the past 17 years, the nature of our business has evolved and definitions of what is considered "waste" have been transformed. 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 unaudited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and include the accounts of Newalta and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. These unaudited 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.
An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Corporation for comparative periods and as at January 1, 2010, the date of transition, is provided in note 22.
These unaudited consolidated financial statements were approved by the Board of Directors on February 14, 2012.
Basis of Preparation
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 inventory 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.
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, straight line. 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) Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets of acquired businesses.
f) 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: our 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 January 1, 2010, December 31, 2010 and December 31, 2011 there were no impairments of indefinite life intangibles and goodwill.
g) 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 (20 to 300 years). Over this period, Newalta recognizes the liability for the future decommissioning liabilities associated with property, plant and equipment. These obligations are initially measured at fair value, which is the discounted future value of the liability. This fair 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 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. Actual decommissioning costs are charged against the provision as incurred.
h) 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 liability is assumed for the waste. Revenue on 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, revenue is recognized on a per-day fee, throughput or on a percentage of completion basis.
i) 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.
j) Current and deferred taxes
The tax expense for the period 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 basis. Deferred 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 more likely than not 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.
k) 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 and the "if converted" method for the convertible debentures.
l) Share-based incentive plans
The Corporation's share-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 share-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 share-based compensation expense 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 share-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 share-based compensation expense recognized over the vesting period of the options. 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 our common shares on the exercise date. The grant price is calculated based on the five-day volume weighted average trading price of our Shares on the 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 share-based compensation expense recognized over the vesting period of the options and recorded as a selling, general and administrative expense. 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 for which 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 with a corresponding increase in liabilities over the vesting period of the units. 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 vest immediately and may only be redeemed within the period beginning on the date a holder ceases to be a participant under the plan and ending on December 31 of the following calendar year.
A cash-settled Performance Share Unit ("PSUs") incentive plan has been established for officers and other eligible employees. Under this plan, notional PSUs are granted upon commencement in the plan and vest at the end of a three-year term. The vested PSUs are automatically paid out in cash upon vesting at a value determined by the fair market value of 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 fair value of the PSUs is accrued in accounts payable and charged to earnings on a straight-line basis over the three-year term. 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 upon commencement in the plan 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 accounts payable and charged to earnings 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 recorded as stock-based compensation expense in the period the dividend is paid.
m) 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.
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Category Subsequent Measurement
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Financial assets at fair value
through profit and loss Fair value and changes in fair value are
("FVTPL") recognized in net earnings
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 recorded in other comprehensive income until
the instrument is derecognized or impaired
Financial liabilities Amortized cost, using the effective interest
method
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Cash and cash equivalents and accounts receivable are classified as loans and receivables. Newalta's portion of the BioteQ Environmental Technologies Inc. ("BioteQ") investment allocated to shares is classified as available for sale. The other portion of the BioteQ investment is allocated to warrants and is a derivative accounted for much like financial assets at FVTPL. Senior secured debt, senior unsecured debentures, convertible debentures, bank indebtedness, accounts payable and accrued liabilities and dividends payable are classified as financial liabilities.
Convertible Debentures
Newalta presented outstanding Convertible Debentures in their debt and equity component parts on the consolidated balance sheets. The debt component represented the total discounted present value of the semi-annual interest obligations to be satisfied by cash and the principal payment due at maturity, using the rate of interest that would have been applicable to a non-convertible debt instrument of comparable term and risk at the date of issue. Typically, this results in an accounting value assigned to the debt component of the Convertible Debentures which is less than the principal amount due at maturity. The debt component presented on the consolidated balance sheets accreted over the term of the relevant debenture to the face value of the outstanding debentures at maturity. The difference was reflected in finance charges, reflecting the effective yield of the debt component of the Convertible Debentures. The equity component of the Convertible Debentures was presented under Shareholders' Equity on the consolidated balance sheets, and represented the value ascribed to the conversion right granted to the holder offset by the related deferred tax liability. The equity component remained fixed over the term of the related Convertible Debentures. If a holder had chosen to convert their Convertible Debentures into Shares, a proportionate amount of both the debt and equity components would have been transferred to Shareholders' Capital. Accretion and interest expense for the Convertible Debentures were reflected as finance charges on the consolidated statements of operations.
Transaction Costs
Transaction costs associated with other financial liabilities are netted against the related liability.
n) 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 unaudited consolidated financial statements are presented in Canadian dollars, which is Newalta 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.
o) Critical judgments in applying accounting policies
The preparation of the unaudited 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 unaudited consolidated financial statements.
Recoverability of asset carrying values
Newalta assesses its property, plant and equipment, intangibles and goodwill for impairment by comparing the carrying amount to the recoverable amount of the underlying assets. The determination of the recoverable amount involves estimating the asset'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 and post abandonment activities in the unaudited 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 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.
Fair value calculation on share-based payments
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.
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.
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) Provisions
General
Provisions are recognized based on an estimate of expenditures required to settle present obligations at the end of the reporting period. The provision is risk adjusted to take into account any uncertainties. When the effect of the time value of money is material, the amount of a provision is equal to the present value of the future expenditures required to settle the obligations. The discount rate reflects the current assessment of the time value of money and risks specific to the liability when those risks have not already been reflected as an adjustment to future cash flows.
Decommissioning liabilities
The fair value of future obligations for property abandonment and site restoration is recognized as a decommissioning liability on the balance sheet with a corresponding increase to the carrying amount of the related asset. The recorded liability increases over time to its future amount through accretion charges to income. 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 charged to the liability as the costs are incurred. Amounts capitalized to the related assets are amortized to income consistent with the depreciation of the underlying asset.
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 unaudited 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, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Lead 12,502 10,160 15,259
Recycled and processed products 5,291 5,622 8,316
Recovered crude oil 7,274 4,637 3,667
Parts and supplies 5,886 6,226 5,906
----------------------------------------------------------------------------
Total inventory 30,953 26,645 33,148
----------------------------------------------------------------------------
The cost of inventory expensed in operating expenses for the year ended December 31, 2011, was $90.8 million ($77.1 million for the same period in 2010). Inventories are pledged as general security under our credit facility.
NOTE 4. INVESTMENT AND OTHER LONG-TERM ASSETS
a) 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 includes 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. The common shares are marked to market at each period end with changes in fair value recorded in other comprehensive income. For the year ended December 31, 2011 an unrealized loss of $2.0 million (net of tax $0.2 million) was recorded in accumulated other comprehensive income.
The warrants are classified as fair value through profit and loss and are revalued at each period end with the change in fair value recognized in earnings. For the three months and year ended December 31, 2011, the Corporation recorded an unrealized loss of $0.3 million and $1.2 million, respectively (three months and year ended December 31, 2010 - unrealized gain of $0.1 million and $0.6 million, respectively) which is included in finance charges. As at December 31, 2011, the fair value was calculated using the following assumptions: an expected volatility of 81.3%, a risk-free interest rate of 1.2% and no expected dividend.
b) TerraAqua Resource Management LLC ("TARM")
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 unaudited consolidated financial statements include Newalta's share of net earnings from the date that joint control commenced, based on our present 50% ownership interest in TARM. Newalta's share of earnings for the three months and year ended December 31, 2011, as well as the assets and liabilities as at December 31, 2011, are not significant.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
----------------------------------------------------------------------------
Plant and
Land equipment Landfill Total
----------------------------------------------------------------------------
Cost
Balance, January 1, 2010 14,813 853,215 105,442 973,470
Additions during the
year - 64,788 11,760 76,548
Disposals during the
year (117) (7,423) - (7,540)
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
Accumulated Amortization
Balance, January 1, 2010 - (213,991) (37,823) (251,814)
Amortization for the
year - (43,080) (8,524) (51,604)
Disposals during the
year - 2,733 - 2,733
----------------------------------------------------------------------------
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)
----------------------------------------------------------------------------
Carrying amounts
As at January 1, 2010 14,813 639,224 67,619 721,656
As at December 31, 2010 14,696 656,242 70,855 741,793
As at December 31, 2011 14,696 731,753 73,653 820,102
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For the year ended December 31, 2011, the Corporation capitalized $2.7 million (year ended December 31, 2010 - $0.8 million) of borrowing costs using a capitalization rate of 6.5% (December 31, 2010 - 5.9%).
NOTE 6. PERMITS, INTANGIBLE ASSETS AND GOODWILL
----------------------------------------------------------------------------
Definite
life Non-
Indefinite permits/ competition
permits rights contracts Total
----------------------------------------------------------------------------
Cost
Balance, January 1, 2010 53,012 14,650 6,020 73,682
Additions during the year 25 - - 25
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
Accumulated Amortization
(1)
Balance, January 1, 2010 - 6,338 5,409 11,747
Amortization for the year - 770 611 1,381
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
Carrying amounts
As at January 1, 2010 53,012 8,312 611 61,935
As at December 31, 2010 53,037 7,542 - 60,579
As at December 31, 2011 53,037 6,556 - 59,593
----------------------------------------------------------------------------
(1) Amortization is included in cost of sales and selling, general and administrative expenses in the Consolidated Statements of Operations.
Intangibles have been allocated to the following CGUs:
----------------------------------------------------------------------------
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
West Facilities 850 962 1,125
East Facilities 41,833 42,707 43,267
Onsite 1,010 1,010 985
VSC 15,900 15,900 15,900
----------------------------------------------------------------------------
59,593 60,579 61,277
----------------------------------------------------------------------------
Goodwill has been allocated to the following CGUs:
----------------------------------------------------------------------------
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
West Facilities 13,212 13,212 13,212
East Facilities 31,170 31,170 31,170
Onsite 58,515 58,515 59,215
----------------------------------------------------------------------------
102,897 102,897 103,597
----------------------------------------------------------------------------
In assessing property, plant and equipment, goodwill and intangible assets for impairment at December 31, 2011, December 31, 2010 and January 1, 2010, 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, 2011, December 31, 2010 or January 1, 2010.
Key assumptions included the following:
Year ended December Periods West East Onsite
31, 2011 Facilities Facilities VSC
----------------------------------------------------------------------------
Weighted average 2016 and
growth rate beyond 2.9% 2.9% 3.6% 2.9%
2012 and
Pre-tax discount rate beyond 11.1% 11.9% 14.9% 18.5%
----------------------------------------------------------------------------
Year ended December Periods West East Onsite
31, 2010 Facilities Facilities VSC
----------------------------------------------------------------------------
Weighted average 2015 and
growth rate beyond 2.9% 2.9% 3.6% 2.9%
2011 and
Pre-tax discount rate beyond 13.4% 13.5% 15.0% 19.3%
----------------------------------------------------------------------------
As at January 1, 2010 Periods West East Onsite
Facilities Facilities VSC
----------------------------------------------------------------------------
Weighted average 2014 and
growth rate beyond 2.9% 2.9% 3.6% 2.9%
2010 and
Pre-tax discount rate beyond 14.0% 12.3% 14.1% 17.8%
----------------------------------------------------------------------------
In the West Facilities, Onsite and VSC CGUs, reasonably possible changes in key assumptions would not cause the recoverable amount of goodwill to fall below the carrying value. In the East Facilities CGU, the recoverable amount exceeded the carrying amount by $26.4 million in 2011. However, reasonable possible changes in certain key assumptions could cause the carrying amount to exceed the recoverable amount, which would result in a write down of goodwill by an amount of the excess. A reduction in the discount rate by 1.3% would reduce the recoverable amount of the East Facilities CGU to its carrying amount, with no other changes to assumptions.
NOTE 7. SENIOR SECURED DEBT
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Gross senior secured debt 70,010 53,859 195,200
Issue costs (1,517) (2,339) (3,157)
----------------------------------------------------------------------------
Senior secured debt 68,493 51,520 192,043
----------------------------------------------------------------------------
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 December 17, 2013. The facility also requires Newalta to be in compliance with certain covenants. At December 31, 2011, December 31, 2010 and January 1, 2010, Newalta was in compliance with all covenants.
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, 2011 and December 31, 2010, Newalta was in compliance with all covenants.
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Senior unsecured debentures
Series 1 - gross 125,000 125,000 -
Senior unsecured debentures
Series 2 - gross 125,000 - -
Issue costs (4,951) (2,950) -
----------------------------------------------------------------------------
Senior unsecured debt 245,049 122,050 -
----------------------------------------------------------------------------
Series 1
On November 23, 2010, Newalta issued $125.0 million of 7.625% Series 1 Unsecured Debentures. The Series 1 Senior Unsecured Debentures mature on November 23, 2017. The Series 1 Senior Unsecured 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 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 Series 1 Senior Unsecured 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
Senior Unsecured 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 Senior Unsecured 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 Senior Unsecured Debentures redeemed, plus,
in each case, accrued and unpaid interest to the redemption date.
After November 23, 2013, the Series 1 Senior Unsecured 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 Senior Unsecured Debentures, at a purchase price in cash equal to 101% of the principal amount of the Series 1 Senior Unsecured 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 Unsecured Debentures. The Series 2 Senior Unsecured Debentures mature on November 14, 2019. The Series 2 Senior Unsecured 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 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 Series 2 Senior Unsecured 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
Senior Unsecured 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 Senior Unsecured 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 Senior Unsecured Debentures redeemed, plus,
in each case, accrued and unpaid interest to the redemption date.
After November 14, 2015, the Series 2 Senior Unsecured 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 Senior Unsecured Debentures, at a purchase price in cash equal to 101% of the principal amount of the Series 2 Senior Unsecured Debentures offered for repurchase plus accrued interest to the date of purchase.
Financing Fees
During the three months and year ended December 31, 2011, financing fees of $2.5 million (three months and year ended December 31, 2010 - $3.0 million) were incurred in connection with the issuance of the Senior Unsecured Debentures. These fees have been recorded against the debentures and are being amortized using the effective interest method over the term of the respective Senior Unsecured Debentures.
NOTE 9. REDEMPTION OF CONVERTIBLE DEBENTURES
In December 2011, Newalta redeemed all of the outstanding Convertible debentures ($115 million principal amount, $113.4 million net of the related unamortized issuance costs of $1.6 million) at a cost of $1,000 per Convertible Debenture plus a payment in respect of all accrued and unpaid interest for an aggregate purchase price of $115.3 million. The unamortized issuance costs of $1.6 million were expensed to finance charges at the time of redemption. The equity portion of the Convertible Debentures of $1.0 million was reclassified into contributed surplus.
NOTE 10. 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, $77.8 million ($54.6 million at January 1, 2010 and $54.4 million at December 31, 2010) has been accrued on the consolidated balance sheet at December 31, 2011. The total estimated future cost for decommissioning liability at December 31, 2011, was $7.0 billion. The majority of the undiscounted future decommissioning liabilities relate to the Stoney Creek landfill in Ontario, which are expected to be incurred over the next 300 years. Excluding the landfill, the total undiscounted future cost is $147.2 million. A discount rate of 2.5% (4% as at December 31, 2010) and an inflation rate of 2% (2% as at December 31, 2010) was used to calculate the present value of Newalta's decommissioning liabilities with the exception of Stoney Creek landfill which used a discount rate of 6% (4% as at December 31, 2010). The reconciliation of estimated and actual expenditures for the period is provided below:
---------------------------------------------------------------------------- Decommissioning liability as at January 1, 2010 54,585 ---------------------------------------------------------------------------- Actual expenditures incurred to fulfill obligations (2,184) Unwinding of discount 1,967 ---------------------------------------------------------------------------- Decommissioning liability as at December 31, 2010 54,368 ---------------------------------------------------------------------------- Actual expenditures incurred to fulfill obligations (3,356) Unwinding of discount 2,138 Change in estimate(1) 24,606 ---------------------------------------------------------------------------- Decommissioning liability as at December 31, 2011 77,756 ----------------------------------------------------------------------------
(1) Changes in the discount rates and in the estimated costs of abandonment and reclamation are factors resulting in a change in estimate.
NOTE 11. SHAREHOLDERS' CAPITAL
Authorized capital of Newalta Corporation consists of an unlimited number of shares and an unlimited number of preferred shares issuable in series. The following table is a summary of the changes in shareholders' capital during the periods:
Shares (#) Amount ($)
----------------------------------------------------------------------------
Shares outstanding as at January 1, 2010 48,476 315,836
----------------------------------------------------------------------------
Shares issued on exercise of options 16 98
----------------------------------------------------------------------------
Shares outstanding as at December 31, 2010 48,492 315,934
----------------------------------------------------------------------------
Shares issued on exercise of options 115 1,452
----------------------------------------------------------------------------
Shares outstanding as at December 31, 2011 48,607 317,386
----------------------------------------------------------------------------
NOTE 12. CAPITAL DISCLOSURES
Newalta's capital structure consists of:
----------------------------------------------------------------------------
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Senior secured debt (1) 70,010 53,859 195,200
Letters of Credit issued as
financial security to third
parties (Note 17) 21,332 21,477 22,137
Convertible debentures, debt
portion - 112,074 110,725
Senior unsecured debentures(1) 250,000 125,000 -
Shareholders' equity 541,921 524,156 518,501
----------------------------------------------------------------------------
883,263 836,566 846,563
----------------------------------------------------------------------------
(1) Gross of transaction costs
The objectives in managing the capital structure are to:
-- Utilize an appropriate amount of leverage to maximize return on
Shareholders' equity; and
-- To provide for borrowing capacity and financial flexibility to support
Newalta's operations.
Management and the Board of Directors review and assess Newalta's capital structure and dividend policy at least at each regularly scheduled board meeting which are held at a minimum four times annually. The financial strategy may be adjusted based on the current outlook of the underlying business, the capital requirements to fund growth initiatives and the state of the debt and equity capital markets. In order to maintain or adjust the capital structure, Newalta may:
-- Issue shares from treasury;
-- Issue new debt securities;
-- Cause the return of letters of credit with no additional financial
security requirements;
-- Replace outstanding letters of credit with bonds or other types of
financial security;
-- Redeem all or a portion of the convertible debentures and refinance the
related obligation;
-- Amend, revise, renew or extend the terms of its then existing long-term
debt facilities;
-- Enter into new agreements establishing new credit facilities;
-- Adjust the amount of dividends paid to shareholders; and/or
-- Sell idle, redundant or non-core assets.
Management monitors the capital structure based on covenants required pursuant to the Credit Facility.
Covenants under our Credit Facility(1) include:
----------------------------------------------------------------------------
December 31, December 31,
Ratio 2011 2010 Threshold
----------------------------------------------------------------------------
Senior Secured Debt(2) to
EBITDA(3) 0.65:1 0.63:1 2.75:1 maximum
Total Debt(4) to EBITDA(3) 2.38:1 1.68:1 3.50:1 maximum
Interest Coverage 5.86:1 4.97:1 2.25:1 minimum
----------------------------------------------------------------------------
(1) We are restricted from declaring dividends if we are in breach of the covenants under our Credit Facility.
(2) Senior Secured Debt means the Total Debt less the Senior Unsecured Debentures.
(3) EBITDA is a non-GAAP measure, the closest measure of which is net earnings. For the purpose of calculating the covenant, EBITDA is defined as the trailing twelve months consolidated net income for Newalta before the deduction of interest, taxes, depreciation and amortization, and non-cash items (such as non-cash stock-based compensation and gains or losses on asset dispositions). Additionally, EBITDA is normalized for any acquisitions 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 overdraft balance and the Senior Unsecured Debentures, but excludes the existing $115 million Convertible 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 our trust indenture include:
----------------------------------------------------------------------------
Ratio December 31, December 31,
2011 2010 Threshold
----------------------------------------------------------------------------
Senior Secured Debt including
Letters of Credit 94,510 75,336 $245,000 maximum
Cumulative finance lease
obligations nil nil $25,000 maximum
Consolidated Fixed Charge
Coverage 5.86:1 4.97:1 2.00:1 minimum
Period end surplus for Restricted
restricted payments(1) payments cannot
27,001 17,084 exceed surplus
----------------------------------------------------------------------------
(1) We are restricted from declaring dividends, purchasing and redeeming shares or making certain investments if the total of such amounts exceeds the period end surplus for such restricted payments.
NOTE 13. INCENTIVE PLANS
a. Option Plans
A summary of the status of Newalta's option plans as of January 1, 2010, December 31, 2010 and December 31, 2011 and changes during the periods ended on those dates is presented as follows:
----------------------------------------------------------------------------
Weighted
average
2008 option exercise price 2006 option
plan (000s) ($/share) plan (000s)
----------------------------------------------------------------------------
At January 1, 2010 887 5.34 718
----------------------------------------------------------------------------
Granted 843 8.07 -
Exercised (18) 5.31 -
Forfeited (45) 7.15 (10)
Cancelled - - -
----------------------------------------------------------------------------
At December 31, 2010 1,667 6.67 708
----------------------------------------------------------------------------
Granted (1) 893 12.01 -
Exercised (129) 5.80 -
Forfeited - - (5)
Cancelled - - -
----------------------------------------------------------------------------
At December 31, 2011 (2) 2,431 8.68 703
----------------------------------------------------------------------------
Exercisable at December 31,
2011 587 6.50 539
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted Weighted
average average
exercise price 2003 option exercise price
($/share) plan (000s) ($/share)
----------------------------------------------------------------------------
At January 1, 2010 16.95 365 21.00
----------------------------------------------------------------------------
Granted - - -
Exercised - - -
Forfeited 14.00 (12) 10.52
Cancelled - - -
----------------------------------------------------------------------------
At December 31, 2010 16.99 353 21.37
----------------------------------------------------------------------------
Granted (1) - - -
Exercised - - -
Forfeited 32.38 (128) 17.95
Cancelled - - -
----------------------------------------------------------------------------
At December 31, 2011 (2) 16.88 225 23.27
----------------------------------------------------------------------------
Exercisable at December 31,
2011 16.97 225 23.27
----------------------------------------------------------------------------
(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 45.23% (December 31, 2010 - 51.07%) volatility, a weighted average expected dividend yield of 2.71% (December 31, 2010 - 2.58%) annually, a risk free rate of 0.95% (December 31, 2010 - 1.68%) and a 3% (December 31, 2010 - 3%) forfeiture rate by period.
----------------------------------------------------------------------------
Range of Options Weighted Weighted Options Weighted
exercise outstanding average average exercisable average
prices December 31, remaining exercise December 31, exercise
($/share) 2011 life price 2011 price
----------------------------------------------------------------------------
3.81 - 5.40 728 2.1 5.29 317 5.28
7.54 - 8.07 809 3.1 8.06 258 8.05
11.93 - 14.00 968 3.9 12.16 56 14.00
14.00 - 19.46 600 1.3 16.86 457 16.87
23.14 - 25.50 254 0.5 23.49 252 23.48
----------------------------------------------------------------------------
3,359 2.6 11.38 1,340 13.55
----------------------------------------------------------------------------
For the three months and year ended December 31, 2011, the weighted average share price at the date of exercise of the Newalta option plans was $nil and $12.63, respectively (three months and year ended December 31, 2010 - $10.23 and $9.67, respectively).
b. Share Appreciation Rights ("SARs")
Changes in the number of outstanding SARs were as follows:
----------------------------------------------------------------------------
Weighted
average
SARs exercise price
(000s) ($/right)
----------------------------------------------------------------------------
At January 1, 2010 876 6.99
----------------------------------------------------------------------------
Granted 610 8.20
Exercised (36) 5.31
Forfeited (23) 8.07
Cancelled - -
----------------------------------------------------------------------------
At December 31, 2010 1,427 7.53
----------------------------------------------------------------------------
Granted (1) 945 12.24
Exercised (156) 5.95
Forfeited (75) 8.69
Cancelled - -
----------------------------------------------------------------------------
At December 31, 2011 (2) 2,141 9.69
----------------------------------------------------------------------------
Exercisable at December 31, 2011 454 9.23
----------------------------------------------------------------------------
(1) The fair value was calculated using the Black-Scholes method of valuation, assuming a 5 year expected life as at December 31, 2011 and 2010.
(2) The fair value was calculated using the Black-Scholes method of valuation, assuming 45.23% (December 31, 2010 - 51.07%) volatility, a weighted average expected dividend yield of 2.71% (December 31, 2010 - 2.58%) annually, a risk free rate of 0.95% (December 31, 2010 - 1.68%) and a 3% (December 31, 2010 - 3%) forfeiture rate by period.
----------------------------------------------------------------------------
Range of SARs Weighted Weighted SARs Weighted
exercise outstanding average average exercisable average
prices December 31, remaining exercise December 31, exercise
($/share) 2011 life price 2011 price
----------------------------------------------------------------------------
5.31 - 8.76 1,093 2.6 6.73 329 6.41
11.93 - 16.65 1,048 3.9 12.77 125 16.65
----------------------------------------------------------------------------
2,141 3.2 9.69 454 9.23
----------------------------------------------------------------------------
For the three months and year ended December 31, 2011, the weighted average share price at the date of exercise of the Newalta SARs was $12.68 and $12.67, respectively (three months and year ended December 31, 2010 - $10.80 and $9.34, respectively).
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 January 1, 2010 -
Granted 16
----------------------------------------------------------------------------
At December 31, 2010 16
Granted 129
----------------------------------------------------------------------------
At December 31, 2011 145
----------------------------------------------------------------------------
Exercisable at December 31, 2011 -
----------------------------------------------------------------------------
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 For the year ended
ended December 31, December 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
Stock option plans - cash
expense - - - -
Stock option plans - non-
cash expense 1,663 4,121 3,059 6,530
----------------------------------------------------------------------------
Total expense - stock option
plans 1,663 4,121 3,059 6,530
----------------------------------------------------------------------------
SARs and share unit plans -
cash expense 159 59 1,595 197
SARs and share unit plans -
non-cash expense 1,340 2,657 3,025 4,327
----------------------------------------------------------------------------
Total expense - SARs and
share unit plans 1,499 2,716 4,620 4,524
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total stock-based
compensation expense 3,162 6,837 7,679 11,054
----------------------------------------------------------------------------
e. Other Liabilities
Other liabilities consist of non-current obligations under the Corporation's incentive plans.
NOTE 14. 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 liabilities and assets are as follows:
Canadian Tax Jurisdiction:
----------------------------------------------------------------------------
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment 110,260 99,843 96,908
Goodwill and intangible assets 17,869 16,926 16,095
----------------------------------------------------------------------------
128,129 116,769 113,003
----------------------------------------------------------------------------
Deferred income tax assets:
Non-capital loss carry forwards 34,251 44,056 46,502
Decommissioning liability 19,684 13,884 13,940
Deferred financing and equity 165 304 1,121
issuance costs
Deferred revenue 1,043 941 2,362
Deferred expense 4,100 3,406 1,997
Tax charge (credit) relating to 198 (90) -
components of other comprehensive
income
Other - allowance for doubtful 299 (223) 225
accounts
----------------------------------------------------------------------------
59,740 62,278 66,147
----------------------------------------------------------------------------
Net deferred income tax liability 68,389 54,491 46,856
----------------------------------------------------------------------------
U.S. Tax Jurisdiction:
----------------------------------------------------------------------------
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Deferred income tax assets:
Property, plant and equipment 1,824 - -
Non-capital loss carry forwards 1,527 929 1,688
Other 345 - -
----------------------------------------------------------------------------
Net deferred income tax asset from
U.S. operations 3,696 929 1,688
----------------------------------------------------------------------------
Non-capital loss carry forwards relating to Canadian operations total $137.8 million and relating to our U.S. operations total $4.3 million. These losses will begin expiring in 2026.
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,
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Consolidated earnings of Newalta Corporation
before taxes and distributions to shareholders 47,749 25,297
Current statutory income tax rate 27.35% 29.13%
----------------------------------------------------------------------------
Computed tax expense at statutory rate 13,059 7,369
Increase (decrease) in taxes resulting from:
Capital taxes - 509
Stock-based compensation expense and non-
deductible costs 1,211 2,088
Other (83) (791)
----------------------------------------------------------------------------
Reported income tax expense 14,187 9,175
----------------------------------------------------------------------------
NOTE 15. EARNINGS PER SHARE
Basic earnings per share calculations for the year ended December 31, 2011 and 2010 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 and from the potential conversion of the convertible debentures.
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 three months and year ended December 31, 2011 was 1,019,000 (1,060,200 for the three months and year ended December 31, 2010).
The convertible debentures were not included in the December 31, 2011 earnings per share calculations as they were redeemed during the fourth quarter of 2011. The December 31, 2010 dilutive earnings per share calculations does not include the impact of anti-dilutive Debentures. These Debentures would not be converted to shares during the period because the current period interest (net of tax) per share obtainable on conversion exceeds basic earnings per share. The inclusion of the Debentures would cause the diluted earnings per share to be overstated. The number of shares issuable on conversion of the Debentures excluded for the three months and year ended December 31, 2010 was 5,000,000.
For the three months For the year ended
ended December 31, December 31,
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Weighted average number of
shares 48,569 48,523 48,569 48,485
Net additional shares if
options exercised 717 411 685 298
Net additional shares if
debentures converted - - - -
----------------------------------------------------------------------------
Diluted weighted average
number of shares 49,286 48,934 49,254 48,783
----------------------------------------------------------------------------
NOTE 16. DIVIDENDS DECLARED
For the three months For the year ended
ended December 31, December 31,
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Total dividends declared per
share 0.08 0.065 0.305 0.23
----------------------------------------------------------------------------
On December 15, 2011 Newalta declared a dividend of $0.08 per share to holders of shares of record on December 31, 2011. This dividend was paid on January 16, 2012.
NOTE 17. 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:
----------------------------------------------------------------------------
2012 2013 2014 2015 2016 Thereafter Total
----------------------------------------------------------------------------
Amount drawn on
credit facility(1)
(Note 7) - 68,493 - - - - 68,493
Senior unsecured
debentures (Note 8) 19,219 19,219 19,219 19,219 19,219 286,354 382,449
----------------------------------------------------------------------------
Total debt
commitments 19,219 87,712 19,219 19,219 19,219 286,354 450,942
----------------------------------------------------------------------------
Office leases 7,805 7,776 7,390 7,287 7,166 20,944 58,368
Operating leases 8,706 4,277 2,850 1,186 163 - 17,182
Surface leases 1,184 318 318 318 318 200 2,656
Accounts payable and
accrued liabilities147,897 - - - - - 147,897
Dividends payable 3,889 - - - - - 3,889
----------------------------------------------------------------------------
Total debt and other
commitments 188,700 100,083 29,777 28,010 26,866 307,498 680,934
----------------------------------------------------------------------------
(1) Gross of transaction costs. Interest payments are not reflected.
b) Letters of Credit and Surety Bonds
As at December 31, 2011, Newalta had issued letters of credit and surety bonds in respect of compliance with environmental licenses in the amount of $21.3 million and $38.3 million, respectively ($21.5 million and $31.5 million as at December 31, 2010 and $22.1 million and $20.2 million as at January 1, 2010).
NOTE 18. FINANCIAL INSTRUMENTS
Fair Value of Financial Assets and Liabilities
Newalta's financial instruments include cash and cash equivalents, investment, bank indebtedness, accounts receivable, note receivable, accounts payable and accrued liabilities, dividends payable, senior long-term 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 accounts receivable, accounts payable and accrued liabilities and for 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, 2011 are as follows:
----------------------------------------------------------------------------
Total
Loans and Available Other Carrying
FVTPL Receivables for sale Liabilities Value
----------------------------------------------------------------------------
Accounts
receivable - 134,172 - - 134,172
Investment 73 - 729 - 802
Other long-term
assets(1) - 688 - - 688
Bank
indebtedness - - - 6,168 6,168
Accounts payable
and accrued
liabilities - - - 147,897 147,897
Dividends
payable - - - 3,889 3,889
Senior secured
debt(2) - - - 68,493 68,493
----------------------------------------------------------------------------
1. Excludes non-financial instruments.
2. Net of related costs.
The fair value of the Unsecured Senior Debentures is based on open market quotation as follows:
----------------------------------------------------------------------------
As at December 31, 2011 Quoted fair
Carrying value value
----------------------------------------------------------------------------
7.625% Series 1 senior unsecured debentures due
November 23, 2017 125,000 127,813
----------------------------------------------------------------------------
7.75% Series 2 senior unsecured debentures due
November 14, 2019 125,000 126,563
----------------------------------------------------------------------------
Newalta categorizes its financial instruments carried at fair value into one of three different levels, depending on the significance of inputs employed in their measurement.
Level 1 includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date. An active market for an asset or liability is considered to be a market where transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Instruments valued using Level 1 inputs include our investment in shares of BioteQ.
Level 2 includes valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. Financial instruments in this category are valued using models or other industry standard valuation techniques derived from observable market data. Such valuation techniques include inputs such as quoted forward prices, time value, volatility factors and broker quotes that can be observed or corroborated in the market for the entire duration of the derivative instrument. Instruments valued using Level 2 inputs include our investment in warrants of BioteQ.
Level 3 includes valuations based on inputs which are less observable, unavailable or where the observable data does not support a significant portion of the instruments' fair value. Generally, Level 3 valuations are longer dated transactions, occur in less active markets, occur at locations where pricing information is not available or have no binding broker quote to support Level 2 classification. At December 31, 2011, December 31, 2010 and January 1, 2010, 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 no single customer balance exceeded 10% of total accounts receivable at December 31, 2011, (one customer - 19% as at December 31, 2010). Newalta views the credit risks on these amounts as normal for the industry. Credit risk is minimized by Newalta's broad customer base and diverse product lines, and is mitigated by the ongoing assessment of the credit worthiness of its customers as well as monitoring the amount and age of balances outstanding.
Revenue from Newalta's largest customer represented 13% and 13% of revenue for the three months and year ended December 31, 2011, respectively (17% and 14% for the three months and year ended December 31, 2010, respectively). This revenue is recognized within our Facilities segment. No other customer's revenue exceeded 10% for the periods presented.
Based on the nature of our 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 $2.8 million (December 31, 2010 - $2.2 million), which are considered to be outstanding beyond normal repayment terms at December 31, 2011. A provision of $0.3 million (December 31, 2010 - $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.
----------------------------------------------------------------------------
Trade receivables Allowance for doubtful
Aging aged by invoice date accounts
----------------------------------------------------------------------------
Dec 31, Dec 31, Jan 1, Dec 31, Dec 31, Jan 1,
2011 2010 2010 2011 2010 2010
----------------------------------------------------------------------------
Current 76,063 60,867 53,981 38 22 13
31-60 days 22,204 11,730 15,454 24 1 21
61-90 days 8,016 3,001 3,159 50 20 65
91 days + 2,757 2,220 791 173 298 725
----------------------------------------------------------------------------
Total 109,040 77,818 73,385 285 341 824
----------------------------------------------------------------------------
-------------------------------------------------
Aging Net receivables
-------------------------------------------------
Dec 31, Dec 31, Jan 1,
2011 2010 2010
-------------------------------------------------
Current 76,025 60,845 53,968
31-60 days 22,180 11,729 15,433
61-90 days 7,966 2,981 3,094
91 days + 2,584 1,922 66
-------------------------------------------------
Total 108,755 77,477 72,561
-------------------------------------------------
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, 2011 and December 31, 2010 are as follows:
December 31, December 31,
Allowance for doubtful accounts 2011 2010
----------------------------------------------------------------------------
Balance, beginning of year 341 824
Increase in amounts provided for 44 108
Net amounts written off as uncollectible (100) (591)
----------------------------------------------------------------------------
Balance, end of year 285 341
----------------------------------------------------------------------------
Liquidity risk
Ultimate responsibility for liquidity risk management rests with the Board of Directors of Newalta, which has built an appropriate liquidity risk management framework for the management of the Corporation's short, medium and long-term funding and liquidity management requirements. Management mitigates liquidity risk by maintaining adequate reserves, banking facilities and other borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.
Interest rate risk
Newalta is exposed to interest rate risk to the extent that its Credit Facility has a variable interest rate. Management does not enter into any derivative contracts to manage the exposure to variable interest rates. The 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. The table below provides an interest rate sensitivity analysis to net earnings as at period end:
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2011 2010 2011 2010
----------------------------------------------------------------------------
If interest rates
increased by 1% with
all other values held
constant (126) (210) (548) (668)
----------------------------------------------------------------------------
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, 2011, Newalta had $47.0 million in net working capital and $30.0 million 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, 2011.
The table below provides a foreign currency sensitivity analysis to net earnings on long-term debt and working capital outstanding as at period end:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
If the value of the U.S. dollar in relation to the CDN
dollar increased by $0.01 with all other variables held
constant 133 1
----------------------------------------------------------------------------
NOTE 19. RELATED PARTIES
Significant subsidiaries
The unaudited consolidated financial statements include the financial statements of Newalta and our subsidiaries as at December 31, 2011 and December 31, 2010. 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, 2011 and 2010. The following is a list of the major subsidiary and related party of our operations:
Ownership interest
Country of
Incorporation 2011 2010
----------------------------------------------------------------------------
Newalta
Environmental
Services Inc. Subsidiary United States 100% 100%
----------------------------------------------------------------------------
TerraAqua Resource
Management LLC Joint venture United States 50% -
----------------------------------------------------------------------------
Key Management Personnel
Key management personnel are comprised of Newalta's Board of Directors and Executive Management Committee. The remuneration of key management personnel during the year was as follows:
----------------------------------------------------------------------------
Year ended December 31,
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Short term benefits 5,460 4,248
Share-based payments 1,819 4,543
----------------------------------------------------------------------------
Total remuneration 7,279 8,791
----------------------------------------------------------------------------
NOTE 20. CASH FLOW STATEMENT INFORMATION
The following tables provide supplemental information:
----------------------------------------------------------------------------
For the three months For the year ended
ended December 31, December 31,
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Decrease (increase) in
accounts receivable 11,787 13,332 (31,794) (18,061)
Decrease (increase) in
inventories 494 4,799 (4,308) 6,502
Decrease (increase) in
prepayments 4,084 240 1,447 (1,375)
Increase in accounts
payable and accrued
liabilities 10,065 8,283 20,281 22,468
Increase (decrease) in
accounts payable and
accrued liabilities
related to purchases of
property, plant and
equipment 1,319 (3,330) (482) (8,073)
----------------------------------------------------------------------------
Total decrease (increase)
in non-cash working
capital 27,749 23,324 (14,856) 1,461
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months For the year ended
ended December 31, December 31,
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Additions to property,
plant and equipment
during the year (45,467) (30,058) (117,625) (76,405)
(Increase) decrease in
accounts payable and
accrued liabilities
related to purchases of
property, plant and
equipment (1,319) 3,330 482 8,073
----------------------------------------------------------------------------
Total cash additions to
property, plant and
equipment (46,786) (26,728) (117,143) (68,332)
----------------------------------------------------------------------------
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, 2011
Inter- Unallocated Consolidated
Facilities Onsite segment (3) Total
----------------------------------------------------------------------------
External revenue 125,014 59,075 - - 184,089
Cost of sales (1) 98,579 42,770 - - 141,349
----------------------------------------------------------------------------
Gross profit 26,435 16,305 - - 42,740
Selling, general and
administrative - - - 25,187 25,187
Research and
development - - - 439 439
Finance charges - - - 8,505 8,505
----------------------------------------------------------------------------
Earnings before taxes 26,435 16,305 (34,131) 8,609
----------------------------------------------------------------------------
Property, plant and
equipment
expenditures 18,882 21,007 - 5,400 45,289
----------------------------------------------------------------------------
Goodwill 44,381 58,516 - - 102,897
----------------------------------------------------------------------------
Total assets 716,904 350,927 - 97,190 1,165,021
----------------------------------------------------------------------------
Total liabilities 157,849 135,022 - 330,229 623,100
----------------------------------------------------------------------------
As at and for the three months ended December 31, 2010
Inter- Unallocated Consolidated
Facilities Onsite segment (3) Total
----------------------------------------------------------------------------
External revenue 115,089 47,838 - - 162,927
Inter segment
revenue(2) 104 - (104) - -
Cost of sales (1) 86,628 37,130 (104) - 123,654
----------------------------------------------------------------------------
Gross profit 28,565 10,708 - - 39,273
Selling, general and
administrative - - - 26,678 26,678
Research and
development - - - 586 586
Finance charges - - - 6,641 6,641
----------------------------------------------------------------------------
Earnings before
taxes 28,565 10,708 - (33,905) 5,368
----------------------------------------------------------------------------
Property, plant and
equipment
expenditures 14,265 12,991 - 2,835 30,091
----------------------------------------------------------------------------
Goodwill 44,381 58,516 - - 102,897
----------------------------------------------------------------------------
Total assets 648,431 299,957 - 99,289 1,047,677
----------------------------------------------------------------------------
Total liabilities 198,298 140,856 - 184,367 523,521
----------------------------------------------------------------------------
(1) Cost of sales includes amortization of $13,579 (Facilities $9,248 and Onsite $4,331) and $12,109 for 2010 (Facilities $8,786 and Onsite $3,323).
(2) Inter-segment revenue is recorded at market, less the costs of serving external customers.
(3) Management does not allocate selling, general and administrative, research and development, taxes, and finance charges in the segment analysis.
As at and for the year ended December 31, 2011
Inter- Unallocated Consolidated
Facilities Onsite segment (3) Total
----------------------------------------------------------------------------
External revenue 469,368 213,460 - - 682,828
Cost of sales (1) 360,657 156,662 - - 517,319
----------------------------------------------------------------------------
Gross profit 108,711 56,798 - - 165,509
Selling, general and
administrative - - - 87,232 87,232
Research and
development - - - 2,337 2,337
Finance charges - - - 28,191 28,191
----------------------------------------------------------------------------
Earnings before taxes 108,711 56,798 (117,760) 47,749
----------------------------------------------------------------------------
Property, plant and
equipment
expenditures 53,772 49,776 - 14,132 117,680
----------------------------------------------------------------------------
Goodwill 44,381 58,516 - - 102,897
----------------------------------------------------------------------------
Total assets 716,904 350,927 - 97,190 1,165,021
----------------------------------------------------------------------------
Total liabilities 157,849 135,022 - 330,229 623,100
----------------------------------------------------------------------------
As at and for the year ended December 31, 2010
Inter- Unallocated Consolidated
Facilities Onsite segment (3) Total
----------------------------------------------------------------------------
External revenue 393,950 182,246 - - 576,196
Inter segment
revenue(2) 590 - (590) - -
Cost of sales (1) 295,803 142,593 (590) - 437,806
----------------------------------------------------------------------------
Gross profit 98,737 39,653 - - 138,390
Selling, general and
administrative - - - 84,566 84,566
Research and
development - - - 1,713 1,713
Finance charges - - - 26,814 26,814
----------------------------------------------------------------------------
Earnings before
taxes 98,737 39,653 - (113,093) 25,297
----------------------------------------------------------------------------
Property, plant and
equipment
expenditures 33,749 33,281 - 9,518 76,548
----------------------------------------------------------------------------
Goodwill 44,381 58,516 - - 102,897
----------------------------------------------------------------------------
Total assets 648,431 299,957 - 99,289 1,047,677
----------------------------------------------------------------------------
Total liabilities 198,298 140,856 - 184,367 523,521
----------------------------------------------------------------------------
(1) Cost of sales includes amortization of $51,576 (Facilities $36,464 and Onsite $15,112) and $43,489 for 2010 (Facilities $30,652 and Onsite $12,837).
(2) Inter-segment revenue is recorded at market, less the costs of serving external customers.
(3) Management does not allocate selling, general and administrative, research and development, taxes, and finance charges in the segment analysis.
NOTE 22. EXPLANATION OF TRANSITION TO IFRS
As at January 1, 2010, the date of transition, the Corporation has elected the following exemptions permitted by IFRS 1 First time adoption of IFRS:
1. Business combinations: Newalta elected not to restate any business
combination before the transition date.
2. Share-based payments: Newalta elected not to restate share-based
payments relating to equity instruments that vested before the
transition date and liabilities that were settled before the transition
date.
3. Arrangements containing a lease: Newalta elected to not retrospectively
apply requirements relating to arrangements containing a lease. Newalta
has only reviewed arrangements that were in existence at the date of
transition.
4. Newalta has elected under IFRS 1 to not retrospectively apply changes in
existing decommissioning, restoration and similar liabilities. At the
date of transition Newalta restated the provision in accordance with the
requirement of the IFRS 1 exemption.
5. Capitalization of the borrowing costs: Newalta elected not to capitalize
borrowing costs before the transition date.
The accounting policies set out in these unaudited consolidated financial statements have been applied in preparing the financial statements for the three months and year ended December 31, 2011, the comparative information presented in these unaudited financial statements for the three months and year ended December 31, 2010 and in the preparation of an opening IFRS statement of financial position as at January 1, 2010 (the Corporation's date of transition).
In preparing its opening IFRS statement of financial position, the Corporation has adjusted amounts reported previously in its consolidated financial statements prepared in accordance with previous Canadian GAAP. An explanation of how the transition from previous Canadian GAAP to IFRS has affected the Corporation's financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.
Reconciliation of the Consolidated Balance Sheets
As at January 1, 2010
(Expressed in thousands of Canadian Dollars)
Previous Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents a - 3,920 3,920
Accounts receivable 84,317 - 84,317
Inventories 33,148 - 33,148
Prepaid expenses and other 6,183 - 6,183
----------------------------------------------------------------------------
123,648 3,920 127,568
Non-current assets
Property, plant and equipment b 701,884 19,772 721,656
Permits and other intangibles 61,935 - 61,935
Other long-term assets 2,666 - 2,666
Goodwill 103,597 - 103,597
----------------------------------------------------------------------------
TOTAL ASSETS 993,730 23,692 1,017,422
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities c 90,191 451 90,642
Dividend payable 2,423 - 2,423
----------------------------------------------------------------------------
92,614 451 93,065
Non-current liabilities
Senior secured debt a 188,123 3,920 192,043
Convertible debentures - debt
portion d 110,708 17 110,725
Other liabilities c 1,218 429 1,647
Deferred tax liability g 39,164 7,692 46,856
Decommissioning liability b 21,903 32,682 54,585
----------------------------------------------------------------------------
TOTAL LIABILITIES 453,730 45,191 498,921
----------------------------------------------------------------------------
Shareholder's Equity
Shareholder's capital g,h 552,871 (237,035) 315,836
Convertible debentures -
equity portion d,g 1,850 (829) 1,021
Contributed surplus 1,679 - 1,679
Retained earnings b,c,d,g,h,j (16,400) 216,365 199,965
----------------------------------------------------------------------------
TOTAL EQUITY 540,000 (21,499) 518,501
----------------------------------------------------------------------------
TOTAL EQUITY AND LIABILITIES 993,730 23,692 1,017,422
----------------------------------------------------------------------------
Reconciliation of the Consolidated Balance Sheets
As at December 31, 2010
(Expressed in thousands of Canadian Dollars)
Previous Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Assets
Current Assets
Accounts receivable 102,378 - 102,378
Inventories 26,645 - 26,645
Investment 4,274 - 4,274
Prepaid expenses and other 7,292 - 7,292
----------------------------------------------------------------------------
140,589 - 140,589
Non-current assets
Property, plant and equipment b,e 722,840 18,953 741,793
Permits and other intangibles 60,579 - 60,579
Other long-term assets 1,819 - 1,819
Goodwill 102,897 - 102,897
----------------------------------------------------------------------------
TOTAL ASSETS 1,028,724 18,953 1,047,677
----------------------------------------------------------------------------
Liabilities
Current liabilities
Bank indebtedness a - 169 169
Accounts payable and accrued
liabilities c 118,218 2,152 120,370
Dividend payable 3,152 - 3,152
----------------------------------------------------------------------------
121,370 2,321 123,691
Non-current liabilities
Senior secured debt a 51,689 (169) 51,520
Convertible debentures - debt
portion d 112,073 1 112,074
Senior unsecured debentures 122,050 - 122,050
Other liabilities c 5,063 264 5,327
Deferred tax liability g 47,183 7,308 54,491
Decommissioning liability b 21,700 32,668 54,368
----------------------------------------------------------------------------
TOTAL LIABILITIES 481,128 42,393 523,521
----------------------------------------------------------------------------
Shareholders' Equity
Shareholders' capital g,h 552,969 (237,035) 315,934
Convertible debentures -
equity portion d,g 1,850 (829) 1,021
Contributed surplus 1,679 - 1,679
Retained earnings b,c,d,e,g,h,j (9,489) 214,424 204,935
Accumulated other
comprehensive income 587 - 587
----------------------------------------------------------------------------
TOTAL EQUITY 547,596 (23,440) 524,156
----------------------------------------------------------------------------
TOTAL EQUITY AND LIABILITIES 1,028,724 18,953 1,047,677
----------------------------------------------------------------------------
Reconciliation of the Consolidated Statements of Operations and Comprehensive Income
For the three months ended December 31, 2010
(Expressed in thousands of Canadian Dollars)
Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Revenue 162,927 - 162,927
Operating expenses i 111,543 (111,543) -
Cost of sales b,i - 123,654 123,654
----------------------------------------------------------------------------
Gross profit 39,273
----------------------------------------------------------------------------
Selling, general and
administrative c,i 23,972 2,706 26,678
Research and development 586 - 586
Finance charges b,d,e,f 6,608 33 6,641
Amortization i 14,891 (14,891) -
----------------------------------------------------------------------------
Earnings before taxes 5,327 41 5,368
----------------------------------------------------------------------------
Provisions for income taxes
Current 520 - 520
Deferred g 1,945 (18) 1,927
----------------------------------------------------------------------------
2,465 (18) 2,447
----------------------------------------------------------------------------
Net earnings j 2,862 59 2,921
----------------------------------------------------------------------------
Other comprehensive income 55 - 55
----------------------------------------------------------------------------
Comprehensive income j 2,917 59 2,976
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per Share 0.06 - 0.06
----------------------------------------------------------------------------
Diluted earnings per Share 0.06 - 0.06
----------------------------------------------------------------------------
Reconciliation of the Consolidated Statements of Operations and Comprehensive Income
For the year ended December 31, 2010
(Expressed in thousands of Canadian Dollars)
Effect of
Canadian transition
Note GAAP to IFRS IFRS
----------------------------------------------------------------------------
Revenue 576,196 - 576,196
Operating expenses i 394,317 (394,317) -
Cost of sales b,i - 437,806 437,806
----------------------------------------------------------------------------
Gross profit 138,390
----------------------------------------------------------------------------
Selling, general and
administrative c,i 70,891 13,675 84,566
Research and development 1,713 - 1,713
Finance charges b,d,e,f 25,663 1,151 26,814
Amortization i 55,990 (55,990) -
----------------------------------------------------------------------------
Earnings before taxes 27,622 (2,325) 25,297
----------------------------------------------------------------------------
Provisions for income taxes
Current 938 - 938
Deferred g 8,621 (384) 8,237
----------------------------------------------------------------------------
9,559 (384) 9,175
----------------------------------------------------------------------------
Net earnings j 18,063 (1,941) 16,122
----------------------------------------------------------------------------
Other comprehensive income 587 - 587
----------------------------------------------------------------------------
Comprehensive income j 18,650 (1,941) 16,709
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per Share 0.37 (0.04) 0.33
----------------------------------------------------------------------------
Diluted earnings per Share 0.37 (0.04) 0.33
----------------------------------------------------------------------------
The following notes provide additional supplementary information regarding the impact of the transition to IFRS:
a. Reclassification of cash and cash equivalents (bank indebtedness)
Under IFRS, within the consolidated balance sheets, cash and cash equivalents (bank indebtedness) are disclosed separately. Under Canadian GAAP, cash and cash equivalents (bank indebtedness) were included as part of senior secured debt.
b. Provision for decommissioning liabilities
As at January 1, 2010, the Corporation conducted an analysis of the discount rate used to calculate the present value of its decommissioning liability.
Under Canadian GAAP - Consistent with IFRS treatment, provisions for decommissioning liabilities were previously measured based on the estimated cost of decommissioning, discounted to its net present value upon initial recognition. Decommissioning liabilities were however not subsequently remeasured to reflect period end discount rates.
Under IFRS - Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a change in the current market-based discount rate results in a change in the measurement of the provision. As a result, the decommissioning liability recorded has been re-measured using the discount rate in effect at January 1, 2010 and each subsequent reporting period, with an adjustment recorded to the corresponding property, plant and equipment.
Impact on Consolidated Balance Sheets
December 31,
January 1,2010 2010
----------------------------------------------------------------------------
Increase in property, plant and equipment 19,772 18,150
Increase in decommissioning liabilities (32,682) (32,668)
----------------------------------------------------------------------------
Decrease in retained earnings (12,910) (14,518)
----------------------------------------------------------------------------
Impact on Consolidated Statements of Comprehensive Income
Three months Year ended
ended December December 31,
31, 2010 2010
----------------------------------------------------------------------------
Increase in cost of sales 405 1,620
Decrease in finance charges (1) (12)
----------------------------------------------------------------------------
Net decrease in comprehensive income 404 1,608
----------------------------------------------------------------------------
Share based payments
Measurement of liabilities
Under Canadian GAAP - The Corporation accounted for the 2006 Plan, the 2008 Plan and the share appreciation rights ("SARs") by reference to their intrinsic value.
Under IFRS - The related liabilities have been adjusted to reflect the fair value of the outstanding incentives plans by applying an option pricing model. As a result, Newalta adjusted expenses associated with its share based incentive plans to reflect the changes of the fair values of these awards.
Forfeitures
Under Canadian GAAP - Forfeitures of awards were recognized as they occurred.
Under IFRS - Forfeiture estimates are recognized on the grant date based on management's best estimate of the expected number of forfeitures to be made in all subsequent periods.
Impact on Consolidated Balance Sheets
December 31,
January 1,2010 2010
----------------------------------------------------------------------------
Increase in accounts payable and accrued
liabilities (451) (2,152)
Increase in other liabilities (429) (264)
----------------------------------------------------------------------------
Decrease in retained earnings (880) (2,416)
----------------------------------------------------------------------------
Impact on Consolidated Statements of Comprehensive Income
Three months Year ended
ended December December 31,
31, 2010 2010
----------------------------------------------------------------------------
Increase in selling, general and
administrative 15 1,536
----------------------------------------------------------------------------
Decrease in comprehensive income (15) (1,536)
----------------------------------------------------------------------------
d. Convertible debentures
Initial measurement of debt and equity portions
Under Canadian GAAP - Initially, the fair value of liability and equity component is measured separately. The value of the liability and equity components is then adjusted on a pro-rata basis so that the sum equals the total value of the convertible debenture.
Under IFRS - As these debentures were issued prior to the Corporation's conversion from a Trust, the option to convert the debt into equity in the form of trust units was considered a derivative financial instrument. The option to settle the debt in Trust units caused it to be classified as a financial liability rather than an equity instrument up until the date of conversion from a Trust to a Corporation on December 31, 2008.
This resulted in the derivative being measured at fair value through net earnings and the liability portion being measured at amortized cost up until December 31, 2008. Upon conversion to a Corporation, the derivative value was allocated to equity.
Issuance costs
Under Canadian GAAP - Transaction costs associated with the issuance of the convertible debentures are included in the financial liability.
Under IFRS - Transactions costs that are directly attributable to the issuance of the convertible debentures are allocated to the liability and equity component of the convertible debenture at initial recognition.
Impact on Consolidated Balance Sheets
January 1, December 31,
2010 2010
----------------------------------------------------------------------------
Increase in convertible debenture - debt
portion (17) (1)
Decrease in convertible debenture - equity
portion 479 479
----------------------------------------------------------------------------
Increase in retained earnings 462 478
----------------------------------------------------------------------------
Impact on Consolidated Statements of Comprehensive Income
Three months Year ended
ended December December 31,
31, 2010 2010
----------------------------------------------------------------------------
Decrease in finance charges (4) (16)
Increase in comprehensive income 4 16
----------------------------------------------------------------------------
e. Capitalized borrowing costs
Under IFRS, an entity must capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, as part of the cost of that asset. The Corporation capitalized borrowing costs on a prospective basis, on any new qualifying project after the date of transition.
Impact on Consolidated Balance Sheets
January 1, December 31,
2010 2010
----------------------------------------------------------------------------
Increase in property, plant and equipment - 803
----------------------------------------------------------------------------
Increase in retained earnings - 803
----------------------------------------------------------------------------
Impact on Consolidated Statements of Comprehensive Income
Three months Year ended
ended December December 31,
31, 2010 2010
----------------------------------------------------------------------------
Decrease in finance charges (454) (803)
----------------------------------------------------------------------------
Increase in comprehensive income 454 803
----------------------------------------------------------------------------
f. Reclassification of the unwinding of discount associated with
decommissioning liabilities
Under Canadian GAAP - The unwinding of the discount associated with decommissioning liabilities was presented in the consolidated statements of operations within amortization expense.
Under IFRS - The unwinding of the discount associated with decommissioning liabilities is presented in the consolidated statements of operations within finance charges.
Impact on Consolidated Statements of Comprehensive Income
Three months Year ended
ended December December 31,
31, 2010 2010
----------------------------------------------------------------------------
Decrease in amortization expense (497) (1,982)
----------------------------------------------------------------------------
Increase in finance charges 497 1,982
----------------------------------------------------------------------------
Increase (decrease) in comprehensive income - -
----------------------------------------------------------------------------
g. Deferred tax
Impact of conversion from a Trust to Corporation on December 31, 2008
Under Canadian GAAP - Income tax accounting is applied for share issue costs and any related future income tax that was created at the time of conversion from a Trust to a Corporation.
Under IFRS - The tax impact is classified according to the nature of the transaction. In the case of the conversion from a Trust to a Corporation, deferred taxes associated with the share issuance costs resulting from the conversion, are recorded as an adjustment to shareholders' capital.
Convertible debentures
Under Canadian GAAP - Deferred income tax related to the equity portion of the convertible debentures is recognized through earnings.
Under IFRS- The tax impact is classified according to the nature of the transaction. In the case of the bifurcation of the convertible debentures, the deferred tax impact is recorded as an adjustment to the equity portion of the convertible debentures.
Tax basis of intangible assets, including goodwill
Under Canadian GAAP - The tax basis of intangible assets included the balance in the cumulative eligible capital pool plus the non-taxable portion (25% of the carrying amount). This would effectively eliminate any deferred tax on intangible assets upon acquisition.
Under IFRS - Deferred taxes are not recognized where goodwill or intangibles are acquired outside of a business combination. As Newalta's goodwill and intangible assets have predominantly been acquired through business combinations, this results in a deferred tax liability.
Impact on Consolidated Balance Sheets
January 1, December 31,
2010 2010
----------------------------------------------------------------------------
Increase in shareholder's capital (note h) (971) (971)
Decrease in convertible debenture - equity
portion 350 350
Increase in deferred tax liability (7,692) (7,308)
----------------------------------------------------------------------------
Decrease in retained earnings (8,313) (7,929)
----------------------------------------------------------------------------
Other earnings adjustments
The first quarter and full year earnings adjustments related to capitalization of borrowing costs, decommissioning liabilities, share-based payments and convertible debentures discussed in b) through e) above, had the following additional tax related impact on the Consolidated Statements of Comprehensive Income:
Three months Year ended
ended December December 31,
31, 2010 2010
----------------------------------------------------------------------------
Decrease in provision for deferred taxes (18) (384)
----------------------------------------------------------------------------
Increase (decrease) in comprehensive income 18 384
----------------------------------------------------------------------------
h. Shareholders' Capital
Impact of conversion from a Trust to Corporation on December 31, 2008
Under Canadian GAAP - Trust units issued under the Trust Indenture in place prior to our conversion to a Corporation were considered equity.
Under IFRS - Trust units issued prior to our conversion to a Corporation were classified as a financial liability rather than an equity instrument. As a result, the liability associated with the trust units was measured at fair value through net earnings up until December 31, 2008, the date of conversion from a Trust to a Corporation.
Impact on Consolidated Balance Sheets
January 1, December 31,
2010 2010
----------------------------------------------------------------------------
Decrease in shareholders' capital (238,006) (238,006)
----------------------------------------------------------------------------
Increase in retained earnings 238,006 238,006
----------------------------------------------------------------------------
This change had no impact on our Statements of Comprehensive Income for the year ended December 31, 2010.
i. Summary of presentation changes to cost of sales and selling, general
and administrative expense, and reclassification of unwinding of
discount to finance charges
Operating expenses presented as cost of sales
Under Canadian GAAP - Operating expenses were presented as a separate line item within the consolidated statement of operations.
Under IFRS- Operating expenses of $111,573 and $394,317 for the three months and year ended December 31, 2010, respectively, are now presented within the consolidated statement of operations and comprehensive income, as cost of sales.
Amortization presented based on function of expense
Under Canadian GAAP - Amortization of property, plant and equipment was presented as a separate line item within the consolidated statement of operations.
Under IFRS- The amortization of property, plant and equipment and intangible assets is now presented based on the function of expense to which its relates, being either part of cost of sales or part of selling, general and administrative expense.
Unwinding of discount related to decommissioning liabilities presented as finance charges
Under Canadian GAAP - The expense associated with the unwinding of the discount related to decommissioning liabilities was presented as part of amortization expense within the consolidated statement of operations.
Under IFRS - The expenses associated with the unwinding of the discount related to decommissioning liabilities is presented as finance charges.
Impact on Consolidated Statements of Comprehensive Income
Three months Year ended
ended December December 31,
Note 31, 2010 2010
----------------------------------------------------------------------------
Amortization disclosed
separately under Canadian GAAP (14,891) (55,990)
Amortization allocated to cost
of sales 11,704 41,869
Amortization allocated to
selling, general and
administrative expense 2,690 12,139
Unwinding of discount
reclassified to finance charges f 497 1,982
----------------------------------------------------------------------------
Net decrease in comprehensive
income - -
----------------------------------------------------------------------------
j. Summary of changes to retained earnings and comprehensive income:
Impact on Consolidated Balance Sheets
January 1, December 31,
Note 2010 2010
----------------------------------------------------------------------------
Decommissioning liability
increase net impact b (12,910) (14,518)
Share-based payments liability
valuation impact c (880) (2,416)
Convertible debentures valuation
impact d 462 478
Capitalization of borrowing
costs impact e - 803
Deferred tax impact g (8,313) (7,929)
Shareholder's capital re-
measurement due to trust units h 238,006 238,006
----------------------------------------------------------------------------
Increase in retained earnings 216,365 214,424
----------------------------------------------------------------------------
Impact on Consolidated Statements of Comprehensive Income
Three months Year ended
ended December December 31,
Note 31, 2010 2010
----------------------------------------------------------------------------
Decommissioning liability impact b (404) (1,608)
Share-based payments valuation
impact c (15) (1,536)
Convertible debentures accretion
impact d 4 16
Capitalization of borrowing
costs e 454 803
Deferred tax impact g 18 384
----------------------------------------------------------------------------
Increase in comprehensive income 59 (1,941)
----------------------------------------------------------------------------
k. Statement of cash flows
Consistent with requirement of IAS 7, Statement of Cash Flows, interest paid and income taxes paid are now disclosed separately in the Statement of Cash Flows.
Additionally, borrowing costs capitalized in relation to qualifying assets are presented within additions to property, plant and equipment ($1.6 million and $2.7 million for the three months and year ended December 31, 2011, respectively and $0.7 million and $0.8 million for the same periods in 2010).
There are no other material differences between the statement of cash flows presented under IFRS and the statement of cash flows presented under previous Canadian GAAP.
Contact Information:
Anne M. Plasterer
Executive Director, Investor Relations
(403) 806-7019
www.newalta.com