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Newalta Inc. ("Newalta") (TSX:NAL) today announced financial results for the three months ended March 31, 2009.
"In Q1, revenue and EBITDA were down 25% and 65%, respectively, compared to the same period last year. Combined divisional net margin dropped 59% to $16 million, with the Western Division accounting for 69% of the decline. The steep decline in lead and crude oil prices compared to last year caused two-thirds of the drop in EBITDA. After a very slow start to the quarter, the rest of the business realized a revenue drop of 14% and an EBITDA decline of 24%," said Al Cadotte, Newalta's President and CEO.
"Recent indications are positive as commodity prices are rising, our markets are strengthening, and our onsite and heavy oil/SAGD services are continuing to grow. We have also reduced our cost base and improved the profitability of our operations. Our business has the capacity to generate strong cashflow and excellent return on capital.
"We are at the early stages of a program to restructure and reposition our business which began with the conversion to a corporation and with organizational changes as well as significant reductions to our cost base. We are now focused on driving strong bottom-line performance and reducing our debt to reestablish benchmarks of performance and to position the business for sustained profitable growth. Success will drive strong investor returns and provide the financial resources to continue to build our company."
<<
Financial results and highlights for the three months ended March 31,
2009
- Revenue decreased 25% to $112.5 million compared to Q1 2008. Net
earnings decreased 123% compared to Q1 2008, to a net loss of $4.4
million. EBITDA(1) decreased $22.1 million, or 65%, to $12.0 million
compared to Q1 2008. Excluding the change in commodity prices,
revenue, net earnings, and EBITDA in Q1 2009 were down from Q1 2008
by 14%, 51%, and 24%, respectively.
- Western's revenue and net margin(1) declined by 30% and 55% year-
over-year, respectively, due primarily to the decline in crude and
natural gas prices, which dropped 49% and 38%, respectively, and the
subsequent impact on North American drilling activity.
- Eastern's performance in Q1 declined with revenue and net margin down
17% and 74%, respectively, due to the 58% decline in lead pricing and
the weak Ontario economy.
- SG&A costs decreased, compared to last year by $1.2 million to $13.6
million. Q1 2009 SG&A also included non-recurring costs associated
with severance and organizational realignment.
- Maintenance capital expenditures(1) for the quarter were $2.0 million
compared to $1.2 million in 2008. Growth capital expenditures(1) were
$6.0 million compared to $16.7 million.
Other highlights
- We amended the terms of our credit facility with our Canadian lending
syndicate. The primary change to the credit facility is an increase
of the funded debt to EBITDA covenant from 3:00:1 to 3:50:1 for the
remainder of 2009. In addition, at the election of Newalta, the
principal amount of the credit facility was reduced from $425 million
to $375 million, leaving unused capacity of approximately $66
million. The maturity date remains October 12, 2010.
- Capital expenditures for 2009 have been reduced to $40 million,
comprised of $25 million for growth capital and $15 million for
maintenance capital. We continue to expect first half combined
capital spending to be $15 million.
- As we continue to be successful in securing new onsite project work
across Canada, including heavy oil/SAGD, we expect that a portion of
the $25 million in growth capital expenditures will be used to fund
these projects in the second half of the year.
- Prudent management of our balance sheet resulted in a reduction in
working capital to $32.4 million, an improvement of $68.0 million as
compared to March 31, 2008 and an improvement of $7.6 million as
compared to December 31, 2008.
- At the end of Q1 2009, senior long-term debt decreased $4.3 million
to $259.0 million, as compared to December 31, 2008. Excess cash will
be used to pay down debt.
- Management realigned the business with market conditions and reduced
the growth capital forecast and, as a result, 250 positions have been
eliminated. As well, effective April 1, Newalta suspended its
matching contributions to the Employee Profit Sharing Plan. These
actions are in addition to salary and hiring freezes and tight
controls on discretionary expenditures initiated in late 2008.
- Newalta's Board of Directors declared a dividend of $0.05 per share
to holders of record as at March 31, 2009 which was paid April 15,
2009.
FINANCIAL RESULTS AND HIGHLIGHTS
-------------------------------------------------------------------------
For the three months
ended March 31
-------------------------------
%
Increase
($000s except per share/unit data) 2009 2008 (Decrease)
-------------------------------------------------------------------------
Revenue 112,538 150,176 (25)
Net (loss) earnings (4,381) 19,304 (123)
- per share/unit ($) - basic (0.10) 0.47 (121)
- per share/unit ($) - diluted (0.10) 0.46 (122)
EBITDA(1) 12,030 34,139 (65)
- per share/unit ($)(1) 0.28 0.82 (66)
Funds from operations(1) 6,809 27,167 (75)
- per share/unit ($)(1) 0.16 0.65 (75)
Maintenance capital expenditures(1) 2,046 1,249 64
Dividends/Distributions declared(1) 2,126 23,077 (91)
- per share/unit - ($)(1) 0.05 0.56 (91)
Cash distributed(1) 7,560 19,136 (60)
Growth capital expenditures(1) 6,069 16,724 (64)
Weighted average share/units outstanding 42,402 41,543 2
Share/units outstanding, March 31,(2) 42,494 41,660 2
-------------------------------------------------------------------------
(1) These financial measures do not have any standardized meaning
prescribed by Canadian generally accepted accounting principles
("GAAP") and are therefore unlikely to be comparable to similar
measures presented by other issuers. Non-GAAP financial measures are
identified and defined in the attached Management's Discussion and
Analysis.
(2) Newalta has 42,498,860 shares outstanding as of May 11, 2009.
Management's Discussion and Analysis and Newalta's unaudited consolidated
financial statements and notes thereto are attached.
>>
Management will hold a conference call on Tuesday, May 12, 2009 at 4:00 p.m. (ET) to discuss Newalta's performance for the three months ended March 31, 2009. To participate in the teleconference, please call 416-644-3423 or 1-800-732-9303. 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 Tuesday, May 19, 2009, by dialling 1-877-289-8525 using the pass code 21303582 followed by the pound sign.
Newalta Inc. is Canada's largest industrial waste management and environmental services provider and focuses on maximizing the value inherent in industrial waste through the recovery of saleable products and recycling. It also provides environmentally sound disposal of solid, non-hazardous industrial waste. With talented people and a national network of facilities, Newalta serves customers in the automotive, construction, forestry, lead, manufacturing, mining, oil and gas, petrochemical, pulp and paper, refining, steel and transportation service industries. Providing solid investor returns, exceptional customer service, safe operations and environmental stewardship has enabled Newalta to expand into new service sectors and geographic markets. Newalta Inc. trades on the TSX as NAL. For more information, visit www.newalta.com.
<<
NEWALTA INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended March 31, 2009 and 2008
>>
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 Inc., Newalta Income Fund (the "Fund"), and Newalta Corporation (the "Corporation" and together with Newalta Inc., the Fund, and other subsidiaries, "Newalta"), or their management, are intended to identify forward-looking statements. Such statements reflect the current views of Newalta with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation, general market conditions, oil and gas industry, commodity prices - oil, battery manufacturing industry and commodity prices - lead, debt service, future capital needs, exchange rates, dependence on senior management, seasonality of operations, growth, acquisition strategy, integration of businesses into Newalta's operations, potential liabilities from acquisitions, regulation, landfill operations, competition, risk of pending and future legal proceedings, employees, labour unions, fuel costs, access to industry and technology, possible volatility of the common share price, insurance, debt service, sales of additional shares, dependence on Newalta Corporation, nature of the debentures issued by Newalta, Canadian federal income tax, redemption of shares, and such other risks or factors described from time to time in the reports filed with securities regulatory authorities by Newalta.
By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Many other factors could also cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements and readers are cautioned that the foregoing list of factors is not exhaustive. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Furthermore, the forward-looking statements contained in this document are made as of the date of this document and the forward-looking statements in this document are expressly qualified by this cautionary statement. Unless otherwise required by law, Newalta does not intend, or assume any obligation, to update these forward-looking statements.
RECONCILIATION OF NON-GAAP MEASURES
This Management's Discussion and Analysis contains references to certain financial measures, including some that do not have any standardized meaning prescribed by Canadian generally accepted accounting principles ("GAAP") and may not be comparable to similar measures presented by other corporations or entities. These financial measures are identified and defined below:
"EBITDA" and "EBITDA per share" is a measure of Newalta's operating profitability. EBITDA provides an indication of the results generated by Newalta's principal business activities prior to how these activities are financed, assets are amortized or how the results are taxed in various jurisdictions. EBITDA is derived from the consolidated statements of operations, comprehensive income and retained earnings. EBITDA per share is derived by dividing EBITDA by the basic weighted average number of shares. They are calculated as follows:
<<
-------------------------------------------------------------------------
Three months ended
March 31,
($000s) 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) (4,381) 19,304
Add back (deduct):
Current income taxes 195 236
Future income taxes (2,176) (2,998)
Finance charges 5,580 6,266
Interest revenue - (41)
Amortization and accretion 12,812 11,372
-------------------------------------------------------------------------
EBITDA 12,030 34,139
-------------------------------------------------------------------------
Weighted average number of shares/units 42,402 41,543
-------------------------------------------------------------------------
EBITDA per share 0.28 0.82
-------------------------------------------------------------------------
>>
"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 continuing operations or operating profits for the period nor should it be viewed as an alternative to cash flow from operating activities, net earnings or other measures of financial performance calculated in accordance with GAAP. Funds from operations is derived from the consolidated statements of cash flows and is calculated as follows:
<<
-------------------------------------------------------------------------
Three months ended
March 31,
($000s) 2009 2008
-------------------------------------------------------------------------
Cash from operations 30,042 8,745
Add back (deduct):
Changes in non-cash working capital (23,476) 17,810
Asset retirement costs incurred 243 612
-------------------------------------------------------------------------
Funds from operations 6,809 27,167
-------------------------------------------------------------------------
Weighted average number of shares/units 42,402 41,543
-------------------------------------------------------------------------
Funds from operations per share 0.16 0.65
-------------------------------------------------------------------------
>>
"Net margin" and "Combined divisional net margin" are used by management to analyze divisional operating performance. Net margin and combined divisional net margin as presented are not intended to represent earnings before taxes nor should it be viewed as an alternative to net earnings or other measures of financial performance calculated in accordance with GAAP. Net margin is calculated from the segmented information contained in the notes to the consolidated financial statements and is defined as revenue less operating and amortization and accretion expenses. Combined divisional net margin is calculated from the segmented information contained in the notes to the consolidated financial statements and is defined as revenue less operating and amortization and accretion expenses for both the Western and Eastern division. Combined divisional net margin excludes inter-segment eliminations and unallocated revenue and expenses.
<<
-------------------------------------------------------------------------
Three months ended
March 31,
($000s) 2009 2008
-------------------------------------------------------------------------
Earnings (loss) before taxes (6,362) 16,542
Add back (deduct):
Selling,general, and administrative 13,607 14,835
Finance charges 5,580 6,266
-------------------------------------------------------------------------
Net margin 12,825 37,643
-------------------------------------------------------------------------
Unallocated(1) 3,204 1,860
-------------------------------------------------------------------------
Combined divisional net margin 16,029 39,503
-------------------------------------------------------------------------
(1) Management does not allocate selling, general and administrative,
taxes, and interest costs in the segment analysis.
>>
References to, EBITDA, EBITDA per share, funds from operations, net margin and combined divisional net margin, throughout this document have the meanings set out above.
Throughout this document, unless otherwise stated, all currency is stated in Canadian dollars and MT is defined as "tonnes" or "metric tons".
The following discussion and analysis should be read in conjunction with (i) the consolidated financial statements of Newalta Inc. and the notes thereto for the three months ended March 31, 2009, (ii) the consolidated financial statements of Newalta Inc. and notes thereto and Management's Discussion and Analysis of Newalta Inc. for the year ended December 31, 2008, (iii) the most recently filed Annual Information Form of Newalta Inc., and (iv) the consolidated interim financial statements of the Fund and the notes thereto and Management's Discussion and Analysis for the three months ended March 31, 2008. Information for the three months ended March 31, 2009 along with comparative information for 2008, is provided.
This Management's Discussion and Analysis is dated May 11, 2009 and takes into consideration information available up to that date.
<<
FINANCIAL RESULTS AND HIGHLIGHTS
-------------------------------------------------------------------------
For the three months
ended March 31
-------------------------------
%
Increase
($000s except per share/unit data) 2009 2008 (Decrease)
-------------------------------------------------------------------------
Revenue 112,538 150,176 (25)
Net (loss) earnings (4,381) 19,304 (123)
- per share/unit ($) - basic (0.10) 0.47 (121)
- per share/unit ($) - diluted (0.10) 0.46 (122)
EBITDA 12,030 34,139 (65)
- per share/unit ($) 0.28 0.82 (66)
Funds from operations 6,809 27,167 (75)
- per share/unit ($) 0.16 0.65 (75)
Maintenance capital expenditures 2,046 1,249 64
Dividends/Distributions declared 2,126 23,077 (91)
- per share/unit - ($) 0.05 0.56 (91)
Cash distributed 7,560 19,136 (60)
Growth capital expenditures 6,069 16,724 (64)
Weighted average share/units outstanding 42,402 41,543 2
Share/units outstanding, March 31, 42,494 41,660 2
-------------------------------------------------------------------------
>>
CORPORATE OVERVIEW
The year started off with a decline in our base business as commodity prices continued to be soft and our customers deferred waste shipments and projects to reduce costs and conserve cash. Market conditions and commodity prices improved throughout the quarter; however, this recovery was not sufficient to overcome the very weak start. The market appears to have stabilized as waste shipments continue to improve and project work has been initiated within our customer base. We responded aggressively through the quarter to adapt our cost structure to the business environment and growth investment opportunities. Our pricing for services across all service lines was maintained.
<<
Table 1: Consolidated Revenue and Consolidated EBITDA
http://files.newswire.ca/788/2009_Q1_Graphs.pdf
>>
Revenue, net earnings, and EBITDA in Q1 2009 were down from Q1 2008 by 25%, 123%, and 65%, respectively. Combined divisional net margin was down 59% or $23.5 million, with the Western Division accounting for $16.2 million of the decline, and Eastern Division down $7.2 million. Commodity price declines, for lead and crude oil, in Q1 as compared to the prior year represented approximately two-thirds of the combined margin decline. The remainder of the decline was related to general weakness in our markets. Excluding the change in commodity prices, revenue, net earnings, and EBITDA in Q1 2009 were down from Q1 2008 by 14%, 51%, and 24%, respectively.
<<
-------------------------------------------------------------------------
Impact of Impact of
change in market
commodity and other
Q1 2008 prices(1) changes Q1 2009
-------------------------------------------------------------------------
Revenue 150,176 (17,034) (20,604) 112,538
Expenses
Operating 101,161 (3,203) (11,057) 86,901
Selling, general and
administrative 14,835 - (1,228) 13,607
Finance charges 6,266 - (686) 5,580
Amortization and accretion 11,372 - 1,440 12,812
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings (loss) 19,304 (13,831) (9,854) (4,381)
-------------------------------------------------------------------------
EBITDA 34,139 (13,831) (8,278) 12,030
-------------------------------------------------------------------------
(1) The change in commodity prices is defined as the change in the price
received for recovered crude oil and the change in the price of lead,
in each instance, in Canadian dollars.
>>
Since December 31, 2008, continued prudent management of our balance sheet resulted in a reduction in working capital of $7.6 million to $32.4 million. Senior long-term debt decreased $4.3 million to $259.0 million. The terms of our Credit Facility were amended on April 22, 2009 in order to provide additional flexibility to manage our business in the quarters ahead. The primary change was an increase of the funded debt to EBITDA covenant from 3.00:1 to 3.50:1 for 2009. Other amendments will provide greater flexibility to manage working capital, issue performance bonds, and absorb restructuring costs.
We continued our comprehensive cost control program that included hiring restrictions, suspended salary increases and restricted travel and other discretionary expenses. We remain committed to tightly managing costs throughout 2009. Since November 2008, we have eliminated 250 positions or 12.5% of our workforce through a combination of normal attrition and targeted staff reductions. Effective April 1, 2009, Newalta suspended its matching contributions to the Employee Profit Sharing Plan ("EPSP"). Although these changes did not materially affect our Q1 results, they establish a new cost base consistent with the current market and projected growth of the business.
Our planned capital spending for 2009 has been reduced by approximately 60%, from $103 million to $40 million. Maintenance capital is now projected to be $15 million compared to the previously announced $28 million. Growth capital spending is now projected to be $25 million, compared to the previously announced $75 million. As we continue to be successful in securing new onsite project work across Canada, including heavy oil/SAGD, we expect that a portion of the $25 million in growth capital expenditures will be used to fund these projects in the second half of the year. Excess cash will be used to pay down debt.
OUTLOOK
In Q2 2008, revenue was $142.9 million and EBITDA was $26.6 million. Since the start of 2009, commodity prices have steadily increased. We anticipate the improved performance experienced late in Q1 across our business lines to continue in Q2. Aggressive pursuit of onsite projects, projects in the Heavy Oil business unit and Stoney Creek Landfill volumes are also anticipated to contribute to Q2 performance. Commissioning the second kiln at Ville Ste. Catherine will continue through Q2 and is anticipated to be completed early in the second half of the year.
The actions that we have taken have rationalized our cost structure in line with current market conditions and growth investments. These initiatives will positively impact results in Q2 2009. The Q1 2009 savings from the cost containment program were mostly offset by the additional reorganization costs, but we expect to realize the full cost reduction benefit from these initiatives for the remainder of the year. Commencing in Q2, year over year cost savings are estimated to be approximately $8 million per quarter. Gains in managing working capital should also be maintained for the remainder of 2009. With commodity price levels and market activity at current levels, Q2 will demonstrate the continued improvement in performance we began to experience at the end of Q1. We enter Q2 with improved financial flexibility, a strengthened competitive position. We are poised to capitalize on opportunities as the economy recovers.
RESULTS OF OPERATIONS - WESTERN DIVISION
Overview
Western operates more than 55 facilities with more than 750 people in British Columbia, Alberta, Saskatchewan, Texas and Wyoming. We have reorganized our business units within the Western Division to Facilities, Heavy Oil and Drill Site to better align our structure with our key strategic growth areas. Western is operated and managed as an integrated set of assets to provide a broad range of seamless waste management and recycling services to customers.
<<
Western's performance is affected by the following factors:
- fluctuation in the price of crude oil
- the amount of waste generated by producers
- state of the oil and gas industry in western Canada
- natural gas drilling activity
- fluctuation in the U.S./Canadian dollar exchange rate
- the strength of other industries in western Canada, including:
construction, forestry, mining, petrochemical, pulp and paper,
refining, and transportation service industries
The business units contributed the following to division revenue:
-------------------------------------------------------------------------
Q1 2009 Q1 2008
-------------------------------------------------------------------------
Facilities 71% 75%
Heavy Oil 18% 16%
Drill Site 11% 9%
-------------------------------------------------------------------------
Table 2: Western Revenue and Western Net Margin
http://files.newswire.ca/788/2009_Q1_Graphs.pdf
The following table compares Western's results for the periods indicated:
-------------------------------------------------------------------------
($000s) Q1 2009 Q1 2008 % Change
-------------------------------------------------------------------------
Revenue - external 65,970 93,973 (30)
Revenue - internal 156 301 (48)
Operating costs 46,376 58,936 (21)
Amortization and accretion 6,319 5,661 12
-------------------------------------------------------------------------
Net margin 13,431 29,677 (55)
-------------------------------------------------------------------------
Net margin as % of revenue 20% 32% (38)
-------------------------------------------------------------------------
Maintenance capital 1,330 1,060 25
-------------------------------------------------------------------------
Growth capital(1) 1,264 6,363 (80)
-------------------------------------------------------------------------
Assets employed(2) 431,311 399,319 8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Growth capital does not include acquisitions.
(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.
>>
Our markets experienced weakness in demand in Q1 2009, especially within the first half of the quarter, combined with reduced crude oil pricing. Oilfield waste volumes were down 14%, as compared to the prior year, with a 26% decline at Facilities and flat Heavy Oil volumes. Customers reduced expenditures as projects were postponed and waste shipments were delayed. In addition, well completions in March were delayed to take advantage of the April 1, 2009 Alberta Government royalty rebate.
In Q1 2009, crude oil sales and waste volumes accounted for approximately two-thirds of the margin decline compared to Q1 2008. Recovered crude oil volumes remained relatively flat in Q1 2009 at 108,000 bbls. Our crude oil price received declined 50% from the prior year. In addition, off spec production processed by us for our SAGD customers was down. As a result, crude oil sales to our account declined approximately $8 million, year over year. Drill site equipment-in-use was down in both Canada and the U.S., with utilization dropping from 48% in Q1 2008 to 31% in Q1 2009.
Consistent with corporate initiatives, the Division's operating costs were reduced and approximately 15% of positions, primarily in Facilities and Drill Site, were eliminated by the end of Q1 2009. These actions, combined with improved crude oil pricing and new Heavy Oil projects that are anticipated to come on-line in Q2, will positively impact performance in Q2.
<<
Facilities
The Facilities business unit is integral to our operations, providing the
operational expertise and management capacity to support key business
initiatives. Facilities revenue is primarily generated from:
- the processing and disposal of industrial and oilfield-generated
wastes, including collection, treatment, water disposal, clean oil
terminalling, custom treating, and landfilling
- sale of recovered crude oil for our account
- oil recycling, including the collection and processing of waste
lube oils and the sale of finished products
- onsite service in western Canada, excluding services provided by
Heavy Oil
- environmental services comprised of environmental projects and
drilling waste management services
>>
With the temporary weakness in our markets, Facilities performance was down. Revenue fell 34% from Q1 2008 driven primarily by the 50% year-over-year change in recovered crude oil prices, and the fall in waste processing and water disposal volumes, down 26% and 16%, respectively. The remainder of the business unit revenue was also down in the quarter. However, base oil sales, which had an extremely weak start to the year, recovered to normal volumes in the last half of the quarter. Similarly, crude oil prices increased 45% in the last month of the quarter versus the first month of the quarter.
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-------------------------------------------------------------------------
Q1 2009 Q1 2008 % change
-------------------------------------------------------------------------
Waste processing volumes ('000 m(3)) 100 135 (26)
Recovered crude oil ('000 bbl)(1) 56 65 (14)
Average crude oil price
received (CDN$/bbl) 44.90 89.70 (50)
Recovered oil sales ($ millions) 2.5 5.8 (57)
Edmonton par price (CDN$/bbl)(2) 49.36 96.61 (49)
-------------------------------------------------------------------------
(1) Represents the total crude oil recovered and sold for our account.
(2) Edmonton par is an industry benchmark for conventional crude oil.
The average trailing twelve month price we received for recovered
crude oil has averaged between 89% and 92% of Edmonton Par
Table 3: Facilities - Waste processing volumes
http://files.newswire.ca/788/2009_Q1_Graphs.pdf
Table 4: Facilities - Recovered crude oil
http://files.newswire.ca/788/2009_Q1_Graphs.pdf
>>
Heavy Oil
Newalta's heavy oil services business began 15 years ago with facilities at Hughenden and Elk Point, Alberta. Using the centrifugation experience gained at processing heavy oil waste streams, Newalta launched a new onsite service for customers in the heavy oil market. This business has evolved from managing heavy oil in Newalta's facility network to operating equipment on customers' sites. Leveraging our facilities as staging areas, Newalta delivers a broad range of specialized services at numerous customer sites under short and long-term arrangements.
Heavy Oil business unit revenue is generated from three main areas:
<<
- specialized onsite services under short and long-term arrangements
- processing and disposal of oilfield-generated wastes, including
water disposal, and landfilling
- sale of recovered crude oil for our account
>>
Apart from the decline in crude oil prices, Heavy Oil experienced reasonably strong performance. Recovered crude oil volumes increased 21% but price declined 45%. Waste processing volumes were flat year over year. As a result, revenue fell 20% from Q1 2008.
We continue to be successful in securing new onsite projects. In April, we commissioned a new long-term contract, and we are negotiating our first ten year agreement. Fees received for onsite services are generally based on processing volumes and are not directly susceptible to fluctuations in crude oil pricing.
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-------------------------------------------------------------------------
Q1 2009 Q1 2008 % change
-------------------------------------------------------------------------
Waste processing volumes ('000 m(3)) 127 130 (2)
Recovered crude oil ('000 bbl)(1) 52 43 21
Average crude oil price
received (CDN$/bbl) 36.43 68.69 (47)
Recovered oil sales ($ millions) 1.9 3.0 (37)
Bow River Hardisty (CDN$/bbl)(2) 45.41 76.66 (41)
-------------------------------------------------------------------------
(1) Represents the total crude oil recovered and sold for our account.
(2) Bow River Hardisty is an industry benchmark for heavy crude oil. The
average trailing twelve month price we received for recovered crude
oil has averaged between 93% and 96% of Bow River Hardisty.
Table 5: Heavy Oil - Waste processing volumes
http://files.newswire.ca/788/2009_Q1_Graphs.pdf
Table 6: Heavy Oil - Recovered crude oil
http://files.newswire.ca/788/2009_Q1_Graphs.pdf
>>
Drill Site
Our Drill Site strategy is to develop a fully integrated service offering in the U.S. including fixed facility waste processing as well as onsite and drill site services that are similar to Newalta's western Canadian business. Although Newalta's current market share is very small, we expect to continue to expand services and establish operations in these markets through steady organic development.
Drill Site business unit revenue is presently generated primarily from the supply and operation of drill site processing equipment, including equipment for solids control and drill cuttings management. Currently, Drill Site delivers 11% of divisional revenue or 6% of consolidated revenue.
In both the U.S. and Canada, drilling fell significantly in March due primarily to reduced activity from low natural gas prices. As a result, revenue in Q1 2009 fell by 12% as compared to the prior year. Our equipment-in-use fell from 67 to 52 units in Q1 2009, with the U.S. operations representing approximately 60% of the decline.
<<
The table below reflects the changes in average drill site equipment-in-
use and utilization:
-------------------------------------------------------------------------
Q1 2009 Q1 2008 % change
-------------------------------------------------------------------------
Average equipment-in-use(1)
Canada 31 37 (16)
U.S. 21 30 (30)
-------------------------------------------------------------------------
52 67 (22)
-------------------------------------------------------------------------
Average equipment available 170 141 20
-------------------------------------------------------------------------
Utilization 31% 48% (33)
-------------------------------------------------------------------------
(1) "Average equipment in use" is calculated by taking the product of the
total amount of average processing equipment and the utilization rate
for the period. Average equipment available is adjusted by 10% for
maintenance and transportation. Maximum utilization of 100%
represents 90% of the total number of processing days.
Table 7 - Drill Site
http://files.newswire.ca/788/2009_Q1_Graphs.pdf
>>
RESULTS OF OPERATIONS - EASTERN DIVISION
Overview
Eastern provides industrial waste management, recycling and other environmental services to markets located in eastern Canada through its integrated network of over 30 facilities with more than 715 employees. This network has two business units, Québec/Atlantic and Ontario, and features Canada's largest lead-acid battery recycling facility with two long body kilns, located in Ville Ste-Catherine, Québec ("VSC") with a combined annual capacity of approximately 80,000MT. The network also includes an engineered non-hazardous solid waste landfill located in Stoney Creek, Ontario ("SCL") with an annual permitted capacity of 750,000MT of waste per year and, based on current volumes, has an estimated remaining life of 10 years. The business units contributed the following to division revenue:
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-------------------------------------------------------------------------
Q1 2009 Q1 2008
-------------------------------------------------------------------------
Québec/Atlantic 74% 70%
Ontario 26% 30%
-------------------------------------------------------------------------
Eastern's performance is affected by the following factors:
- fluctuations in the LME trading price of lead
- supply and demand in the North American battery manufacturing
industry
- fluctuation in the U.S./Canadian dollar exchange rate
- market conditions in eastern Canada and bordering U.S. states,
including: automotive, construction, forestry, manufacturing,
mining, oil and gas, petrochemical, pulp and paper, refining,
steel, and transportation service industries
The following table compares Eastern's results for the periods indicated:
-------------------------------------------------------------------------
($000s) Q1 2009 Q1 2008 % Change
-------------------------------------------------------------------------
Revenue - external 46,568 56,162 (17)
Operating costs 40,681 42,526 (4)
Amortization and accretion 3,289 3,810 (14)
-------------------------------------------------------------------------
Net margin 2,598 9,826 (74)
-------------------------------------------------------------------------
Net margin as % of revenue 6% 17% (65)
-------------------------------------------------------------------------
Maintenance capital 717 161 345
-------------------------------------------------------------------------
Growth capital(1) 3,398 6,106 (44)
-------------------------------------------------------------------------
Assets employed(2) 352,399 328,857 7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Growth capital does not include acquisitions.
(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.
Table 8: Eastern Revenue and Western Net Margin
http://files.newswire.ca/788/2009_Q1_Graphs.pdf
>>
Eastern's weaker performance in Q1 2009 compared to Q1 2008 was largely attributable to the 60% decline in LME lead prices. Improvements in Québec/Atlantic, excluding VSC, substantially offset the decline in Ontario. The impact of lower lead prices represented approximately 80% of the margin decline in the east. Signs of a moderate recovery within the quarter were evidenced by improved LME lead pricing throughout the quarter and a steady recovery in activity levels in Ontario during the last half of the quarter.
Consistent with corporate initiatives, the Division's operating costs were reduced and approximately 8% of positions, predominantly in Ontario, were eliminated by the end of Q1 2009. These actions, combined with improving lead prices, continued strength in Québec/Atlantic facilities, ongoing improvement in event-based Ontario landfill tonnages, and increased onsite projects, should positively impact performance in Q2.
<<
Québec/Atlantic
The Québec/Atlantic Canada business unit revenue is derived from:
- VSC, a lead-acid battery recycling facility in Québec
- waste treatment and transfer fixed facilities that process,
consolidate, and bulk hazardous waste
- onsite services, including a fleet of specialized vehicles and
equipment for waste transport and onsite processing
>>
Overall, the decline in revenue was due primarily to the weak average LME price for lead. Excluding VSC, the Québec/Atlantic facilities and onsite services delivered improved performance in Q1 compared to the same period in 2008 despite a weaker economic environment.
LME lead prices for the quarter were 60% lower than in Q1 2008. Excluding lead tonnage produced by Kiln 2, lead tonnage sold increased 6%, to 11,300 MT. During the commissioning process of Kiln 2, we capitalized the costs, net of any revenue. The split between direct sales and tolling was 71% direct sales and 29% tolling in Q1 2009. Kiln 1 operated 82 days out of 90 available days, with eight days of scheduled maintenance at the beginning of January.
Commissioning of Kiln 2 is anticipated to be completed early in the second half of the year. Utilization of Kiln 2 will be dependant on the availability of feedstock, stable LME pricing at or above current levels, and solid demand for finished product.
<<
The table below highlights the lead sold in 2009 and the percentage by
weight of direct sales and tolling.
-------------------------------------------------------------------------
Q1 2009 Q1 2008 % change
-------------------------------------------------------------------------
Lead sold ('000 MT)(1) 13.9 10.7 30
% of lead by weight
Direct 71 67 6
Tolling 29 33 (12)
-------------------------------------------------------------------------
Average price - direct sales ($/MT)(2) 1,515 3,014 (50)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average lagged LME price (U.S.$/MT)(3) 1,157 2,899 (60)
-------------------------------------------------------------------------
(1) Q1 2009 includes 2,600 MT sold to the LME that relates to production
during the commissioning phase of Kiln 2.
(2) Average price received means all direct sales of finished products,
including finished products that are alloyed to customer
specifications.
(3) Average LME price is based on a one-month lag consistent with our
pricing structure.
We continue to aggressively pursue onsite project work and have been
successful at securing new business. Onsite projects secured to date for 2009
are equal to the work completed in all of 2008.
Ontario
The Ontario business unit revenue is derived from:
- SCL, an engineered non-hazardous solid waste landfill
- waste treatment and transfer fixed facilities that process,
consolidate, and bulk hazardous waste
- onsite services, including a fleet of specialized vehicles and
equipment for emergency response, waste transport, and onsite
processing
>>
Ontario activity fell along with the Ontario economy. While pricing remained flat in Q1 2009, revenue dropped 28% due to declining volumes. Tonnage at SCL fell 35% in Q1 2009. However, tonnage received in March recovered significantly, with more than half of the quarter's tonnage landfilled during the month. Tonnage at Ontario facilities was down only 13%.
We are continuing to aggressively pursue a number of event-based projects for SCL as well as a number of onsite projects that are anticipated to contribute to performance in Q2.
<<
-------------------------------------------------------------------------
Q1 2009 Q1 2008 % change
-------------------------------------------------------------------------
Landfill waste ('000 MT) 77.0 119.2 (35)
-------------------------------------------------------------------------
Table 9: Ontario - Volume of waste collected
http://files.newswire.ca/788/2009_Q1_Graphs.pdf
CORPORATE AND OTHER
-------------------------------------------------------------------------
($000s) Q1 2009 Q1 2008 % Change
-------------------------------------------------------------------------
Selling, general and
administrative expenses 13,607 14,835 (8)
as a % of revenue 12.1% 9.9% 22
Amortization and accretion 12,812 11,372 13
as a % of revenue 11.4% 7.6% 50
-------------------------------------------------------------------------
>>
Selling, general and administrative expenses were down 8%, to $13.6 million, due primarily to the cost containment program. We eliminated over 50 positions from SG&A to balance resources with current business activity and growth capital investments. As a result of these actions, normalized quarterly SG&A expense run rate is anticipated to be approximately $13.0 million for the remainder of the year, netting a 15% reduction in our full year SG&A from 2008.
Amortization and accretion in Q1 2009 increased primarily due to the growth in our capital asset base from our 2008 capital expenditure program. The net loss on the disposal of assets for the quarter was $0.7 million and was netted against amortization and accretion.
<<
-------------------------------------------------------------------------
($000s) Q1 2009 Q1 2008 % Change
-------------------------------------------------------------------------
Bank fees and interest 3,264 3,948 (17)
Convertible debentures interest and
accretion of issue costs 2,316 2,318 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Finance charges 5,580 6,266 (11)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The decrease in finance charges was primarily driven by lower interest
rates. Finance charges associated with the Debentures include an annual coupon
rate of 7%, the accretion of issue costs and discount on the debt portion of
the debentures. See "Liquidity and Capital Resources" in this MD&A for
discussion of our long-term borrowings.
-------------------------------------------------------------------------
($000s) Q1 2009 Q1 2008 % Change
-------------------------------------------------------------------------
Current tax 195 236 (17)
Future income tax (2,176) (2,998) 27
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Provision for (recovery of) income taxes (1,981) (2,762) 28
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Current tax expense for Q1 2009 was $0.2 million, similar to Q1 2008. We had a future income tax recovery of $2.2 million, compared to a future income tax recovery of $3.0 million in 2008. While the trust structure was in place, Newalta generated approximately $150 million of tax loss carryforwards. Other than provincial capital taxes and U.S. state and federal income taxes, we do not anticipate paying any cash taxes for at least three years.
See "Critical Accounting Estimates - Income Taxes" in this MD&A for further discussion on the impact of the Conversion.
LIQUIDITY AND CAPITAL RESOURCES
The term liquidity refers to the speed with which a company's assets can be converted into cash, as well as cash on hand. Our liquidity risk may arise from general day-to-day cash requirements, and in the management of our assets, liabilities and capital resources. Liquidity risk is managed against our financial leverage to meet obligations and commitments in a balanced manner.
<<
Our debt capital structure is as follows:
-------------------------------------------------------------------------
($000s) March 31, December 31,
2009 2008
-------------------------------------------------------------------------
Use of credit facility:
Senior long-term debt(1) 260,039 264,687
Letters of credit 48,439 49,249
-------------------------------------------------------------------------
Funded senior debt A 308,478 313,936
Unused credit facility capacity 66,522 111,064
-------------------------------------------------------------------------
Debentures B 115,000 115,000
-------------------------------------------------------------------------
Total Debt equals A+B 423,478 428,936
-------------------------------------------------------------------------
(1) Senior long-term debt is presented in this table gross of issue
costs. Issue costs were $1.1 million in Q1 2009 and $1.4 million
in Q4 2008.
>>
Despite the year over year decline in EBITDA, the impact of improved working capital, reduced cash distributions, and reduced capital expenditures resulted in a $4.3 million decrease in our senior long-term debt as compared to December 31, 2008.
Our working capital at March 31, 2009 was $32.4 million compared with $40.0 million at December 31, 2008 and $100.4 million at March 31, 2008. This improvement highlights the degree of progress over the last 12 months by addressing the following key areas:
<<
- business process initiatives to improve the timeliness and
accuracy of invoices
- improved collection processes
- strengthened credit risk management
>>
As a result of these initiatives, notwithstanding a more challenging economic environment, days' sales outstanding in receivables were reduced by an additional 4 days since year end, building upon a 10 day improvement at December 31, 2008 over the previous year. In addition, over 90 day accounts were reduced by $2.4 million. Days' sales outstanding in payables were also managed in order to better align payment terms with the market.
At current activity levels, working capital of $32.4 million is expected to be sufficient to meet our ongoing commitments and operational requirements of the business. Management will continue to aggressively manage working capital in order to protect and build upon improvements made over the last 12 months.
The Current Ratio is defined as the ratio of total current assets to total current liabilities. As a result of the ongoing process improvements in the management and collection of receivables, and management and payment of payables, this ratio remained relatively flat to the end of the prior year, 1.36 times at March 31, 2009 as compared to 1.34 times at December 31, 2008. The current ratio was 2.09 times at March 31, 2008, again highlighting the magnitude of the improvement between periods. This ratio, at March 31, 2009, exceeds our bank covenant minimum requirement of 1.10:1.
SOURCES OF CASH
Our liquidity needs can be sourced in several ways including: funds from operations, borrowings against our credit facility, proceeds from the sale of assets, and the issuance of securities from treasury.
Credit Facility
The Credit Facility is available 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 $60.0 million. The aggregate dollar amount of outstanding letters of credit is not categorized in the financial statements as long-term debt; however, the issued letters of credit reduce the amount available under the Credit Facility and are included in the definition of funded debt for covenant purposes.
On April 22, 2009, in order to provide additional flexibility to manage our business during these difficult market conditions, we amended the terms of our Credit Facility with our Canadian lending syndicate. The primary change was an increase of the funded debt to EBITDA covenant restriction from 3.00:1 to 3.50:1 for all of 2009. Other amendments negotiated will provide greater flexibility to manage working capital, issue performance bonds, and absorb restructuring costs without impacting EBITDA within the definition of funded debt. Additional detail on the changes made to the current ratio and treatment of performance bonds is noted below:
<<
- Our current ratio covenant restriction has been reduced from
1.20:1 to 1.10:1. This change acknowledges the gains management
has made to date in managing its cash processes. Because there is
no current portion to the revolving credit line, reductions to
bank debt do not improve the current ratio but rather will reduce
the ratio. The revised covenant will enable management more room
to optimize its current ratio through ongoing process
improvements.
- Surety bonds (including performance and bid bonds) under the
credit facility are excluded from the definition of funded debt.
The aggregate amount of surety bonds is limited to $125 million.
Management has identified new business opportunities from the
various infrastructure spending programs that may arise from
government stimulus spending. Such programs will typically require
performance bonds and, as a result, the new amendment will allow
management greater flexibility to participate in such new
projects.
>>
Management elected to reduce the principal amount of the Credit Facility from $425 million to $375 million, leaving unused capacity of $66.5 million at the end of the first quarter. Consistent with our cost containment program, this reduction in capacity will reduce our bank fees. The maturity date remains October 12, 2010.
Included within our funded senior debt are letters of credit in the amount of $48.4 million ($49.2 million at December 31, 2008, and $40.1 million at March 31, 2008) which have been provided as security to third parties, including environmental regulatory authorities to satisfy asset retirement obligations.
<<
Financial performance relative to the financial ratio covenants(1) under
the Credit Facility is reflected in the table below:
-------------------------------------------------------------------------
March 31, 2009 Threshold
-------------------------------------------------------------------------
Current Ratio(2) 1.36 1.10:1 minimum
Funded Debt(3) to EBITDA(4) 2.88 3.50:1 maximum
Fixed Charge C For full details on Newalliance Bancshares Inc (NAL) click here. Newalliance Bancshares Inc (NAL) has Short Term PowerRatings of 5. Details on Newalliance Bancshares Inc (NAL) Short Term PowerRatings is available at This Link.
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