Newalta Corporation
TSX : NAL

Newalta Corporation

November 05, 2008 06:04 ET

Newalta Income Fund Announces Conversion To Corporation, 2009 Growth Capital Spending Program And Extension Of Its Credit Facility


CALGARY, ALBERTA--(Marketwire – November 5, 2008) - Newalta Income Fund ("Newalta") (TSX:NAL.UN)
today announced that its Board of Trustees has approved the conversion of
Newalta from an income trust into a dividend-paying corporation (the
"Conversion") to be positioned to take advantage of the various internal
growth opportunities available to Newalta.
"Newalta has delivered consistent profitable growth for 15 years," said
Al Cadotte, President and CEO of Newalta. "We are uniquely positioned with a
broad range of internal growth opportunities to continue our dynamic growth
for many years. The conversion to a corporation provides the best structure to
execute this growth strategy."

Growth Capital Spending

Newalta has outstanding investment opportunities in all areas of its
operations across Canada and the U.S. As a result of the uncertain economic
outlook for 2009, management has established an initial growth capital budget
in 2009 of $75 million. Newalta will continue to develop additional
opportunities for execution next year if market conditions improve. Growth
capital expenditures are expected to be funded mainly from funds from
operations, with the balance from Newalta's credit facility. Maintenance
capital for 2009 is budgeted at $28 million, slightly above our $25 million
budget for 2008.
Newalta's $75 million in growth capital investments will be allocated
among the following growth areas:

Fixed Facilities $28 million

Heavy Oil $22 million

U.S. Drill Site $10 million

Industrial Onsite & Corporate $15 million

The 2009 growth capital budget is $35 million less than the budgeted
investments for 2008. For 2008, we will have invested approximately
$32 million in our Eastern Fixed Facilities including projects to activate the
second lead-recycling kiln, expand capacities in Atlantic Canada, expand
services at Chateauguay, as well as increase capacities and services at
Barrie, Toronto and Brantford. These investments represent post-acquisition
improvements to enhance our services in existing markets. For 2009,
investments in eastern Canada facilities will be reduced by $25 million
compared to 2008 as we focus on driving returns from the investments that we
have made over the past two years. Corporate investments will be down
approximately $10 million in 2009 compared to 2008 as the construction of the
Calgary Corporate office is now complete. The total investment in Western
Fixed Facilities, Heavy Oil, Drill Site and Industrial Onsite in the 2009
budget is substantially unchanged from the 2008 budget as we continue to
invest in key areas of future growth.

Fixed Facilities

Newalta's fixed facility network is integral to its operations, providing
the operational expertise and management capacity to support key growth
initiatives.
Investments in fixed facilities represent the lowest-risk, highest-return
investment opportunities for Newalta. These investments are primarily focused
on productivity and efficiency improvements on Newalta's existing operations
and services.
Approximately $21 million in Newalta's Western operating division and
$7 million in Newalta's Eastern operating division is expected to be allocated
to fixed facility expenditures in 2009. These capital projects are expected to
include:

- adding satellite facilities, new disposal wells and landfills in
western Canada;

- investing in numerous productivity improvements, including adding
centrifugation capacity, across the facility network; and

- enhancing services in Atlantic Canada to capitalize on increased oil
and gas activity in the region.

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 these facilities, in 2005 Newalta launched a new onsite service for
oil recovery working in tandem with companies that use steam assisted gravity
drainage ("SAGD") techniques for production. This business has evolved from
managing heavy oil in Newalta's facility network, to operating equipment on
customers' sites, offering a broad range of processing solutions.
Based on industry outlook, a substantial amount of the future growth in
the oil and gas industry is expected to be in connection with the use of SAGD
techniques and other in-situ oil sands-related projects. To support this
potential growth opportunity, Newalta has leveraged its Hughenden and Elk
Point facilities in this region to act as a staging area, offering integrated
services from which equipment and experienced people can be mobilized to
customers' sites to process wastewater and recover crude from slop oil.
Newalta has the ability to utilize its facility network from which to draw
skilled people to support such onsite growth.
Customer response to Newalta's heavy oil services has been encouraging.
Newalta has delivered specialized services to numerous customer sites under
short and long-term arrangements.
Newalta expects to continue to be the industry leader in this market and
as such, is uniquely positioned to keep pace with customer demand as
production is expected to significantly increase over the next 10 years.
To enhance capabilities with these services, the 2009 investment plan
includes:

- increasing capacity at the Hughenden and Elk Point facilities;

- adding new mobile centrifuges and related equipment; and

- developing a new facility in the Fort McMurray area.

U.S. Drill Site

Newalta's 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. Two
years ago, Newalta introduced drill site equipment to the western U.S. market
and has established a solid base business and reputation for superior
services.
Newalta has already experienced acceptance from its major customers for
its advanced drill site services. Management believes the potential market for
these services in shale gas and conventional deep gas and oil exploration is
substantial and that no local competitor in the U.S. market currently provides
a similar service as cost effectively and environmentally secure.
Newalta expects to continue to develop the drill site business to provide
a solid foundation for future growth in the U.S market as well as a base for
gathering market intelligence. Although Newalta's current market share is very
small, management expects that it will be able to continue to expand services
and establish operations in these markets through steady organic development.
To continue growing this business, the 2009 investment plan includes:

- adding solids control centrifugation equipment; and

- exploring and capitalizing on new market opportunities in shale gas
areas throughout North America.

Industrial Onsite

Newalta has demonstrated cost-effective as well as environmentally
superior operating practices for major customers in its industrial onsite
business. By delivering services at customer sites, Newalta is able to reduce
costs, increase efficiencies and minimize its customers' exposure to
transportation or disposal risks.
Newalta has built an organization and national network of facilities and
developed processing technology. Newalta anticipates leveraging this technical
and operating expertise and capitalizing on its national facility network as a
platform of staging points from which it can provide innovative solutions to
the complex waste challenges on customers' sites. A group of our sales and
technical people are focused on our largest customers. Newalta is able to
offer services on customers' sites that are more cost-effective and
environmentally secure than traditional disposal methods.
Newalta has earned the confidence of its large customers through a track
record of success with these types of onsite projects as well as a superior
safety and environmental record. We anticipate growing demand for our
industrial onsite activities will evolve over the next few years into
long-term arrangements.
Mobile centrifuges and related equipment will be added across the country
to meet increasing demand and drive innovative solutions on customer sites.

Conversion Rationale

Since the October 31, 2006 announcement by the federal government and
subsequent legislation to impose income taxes on publicly traded income trusts
and limited partnerships (the "Trust Rules"), Newalta's management and Board
of Trustees have been continuously reviewing Newalta's strategic objectives
and available options to ensure that Newalta's capital structure is efficient
and that unitholder value is being maximized. Over the past year, management
has carried out a more detailed analysis in relation to the growth
opportunities and strategic direction for Newalta.
As a result of this analysis, the Board of Trustees and management
believe that the proposed corporate structure best enables Newalta to execute
its 2009 budget and its strategic plan and to deliver strong growth and
capital appreciation for our Unitholders. Given the diminished value of the
income fund structure, management and the Board believe that the best
opportunity for creating value is to reinvest a significant portion of overall
funds from operations into the business and to focus on increasing overall
earnings per share. At the same time, management and the Board recognize that
many investors require or prefer an element of cash yield from their
investment. By converting to a growth-oriented, dividend-paying corporation,
management and the Board believe that Newalta will be best positioned to
aggressively invest in attractive growth opportunities while at the same time
providing income-oriented investors with an attractive cash yield.
Newalta intends to continue monthly distributions of $0.185 per Trust
Unit for the remainder of 2008. Upon completion of the Conversion, Newalta
plans to pay a quarterly dividend of $0.20 per common share ($0.80 on an
annualized basis). The dividend payment represents a current yield of 8.9%
based on the closing price on November 4, 2008. It is expected that the
dividends will be "eligible dividends" for income tax purposes and thus
qualify for the enhanced gross-up and tax credit regime for certain
shareholders.
Management and the Board of Trustees believe that the Conversion provides
a number of compelling and strategic benefits, including, without limitation,
the expectation that a conversion to a public corporation would:

- position Newalta to invest in attractive internal opportunities for
growth and expansion;

- result in paying a dividend to its shareholders with a view to
sustainability while at the same time delivering strong returns
through capital appreciation;

- enable more self-funding of its growth capital on a non-dilutive
basis while prudently managing its balance sheet;

- permit its financial and operational performance to be more easily
valued relative to its corporate peers;

- attract new investors and provide a more liquid market for Newalta's
common shares;

- remove Newalta from the uncertainty that exists in the income trust
marketplace today; and

- remove the federal government's "normal growth" and "undue
expansion" limitations.

Over the last five years, Newalta has made $316.4 million in growth
capital investments, resulting in the accumulation of a significant dollar
amount of tax pools. After conversion, based on current performance and
investment, Newalta does not anticipate paying any Canadian cash taxes until
2012 at the earliest. This tax horizon is dependent on a number of factors
including, but not limited to, the amount of tax loss carryforwards and total
undepreciated capital cost ("UCC") and eligible cumulative expense ("ECE")
pools accumulated. As at December 31, 2007, Newalta had $80.0 million in tax
loss carryforwards and $423.0 million in UCC and ECE pools. Due to the tax
efficiencies created by Newalta's tax pools, the need to create tax shelter
through Newalta's income trust structure has been substantially mitigated.
Furthermore, under a corporate structure wherein a larger percentage of cash
flow will be reinvested in growth capital investments, tax pool balances will
be further enhanced, thereby providing additional shelter against taxable
income.

Fairness Opinion

The Board of Trustees retained CIBC World Markets Inc. ("CIBC World
Markets") as financial advisor to address the fairness, from a financial point
of view, of the consideration to be received by unitholders under the
Conversion. In connection with this mandate, CIBC World Markets has provided
the Board of Trustees with a verbal opinion that the consideration to be
received by unitholders under the Conversion is fair, from a financial point
of view, to such unitholders.

Board Recommendation

The Board of Trustees, based upon its own review, including consideration
of the fairness opinion provided by CIBC World Markets, has unanimously
determined that the Conversion is fair to unitholders and that it is in the
best interests of Newalta and its unitholders, and unanimously recommends that
unitholders vote in favour of the Conversion.

Mechanics of the Conversion

If approved, the Conversion would result in the reorganization of Newalta
into a publicly-listed corporation that would own all of the units of Newalta.
Pursuant to the Conversion, unitholders would receive, for each unit held, one
common share of the corporation on December 31, 2008. In order to receive the
common shares on a tax-deferred basis, eligible unitholders will be required
to file a tax election under Section 85 of the Income Tax Act (Canada).
Further, pursuant to the Conversion, the resulting public corporation
will assume all obligations of Newalta including the outstanding convertible
debentures.
The Conversion is subject to unitholder and other approvals and will be
undertaken pursuant to a statutory plan of arrangement under the Business
Corporations Act (Alberta) at a special meeting to be held on or about
December 17, 2008. Following the Conversion, the composition of the Board of
Directors of the resulting public corporation would be the same as the current
Board of Trustees.
A management information circular will be mailed to unitholders on or
about November 13, 2008, in connection with the Conversion and other matters
to be considered at the special meeting. Newalta expects, subject to receipt
of required approvals, that the Conversion will be effective on December 31,
2008.
Application will be made to list the public corporation's common shares
and convertible debentures on the Toronto Stock Exchange on a substitutional
basis.

Extension and Amendment of Credit Facility

Newalta extended the maturity of its $425.0 million credit facility to
October 12, 2010. As part of this process, $40 million was assigned by a
former member of the lending syndicate to two existing and one new member of
the syndicate. The funded debt to EBITDA covenant for the balance of 2008 was
amended by maintaining the existing 3.00:1 ratio. Commencing in 2009, this
covenant will be 2.50:1. Upon conversion to a corporation, the covenant will
be 3.00:1 for the term of the facility.

Newalta Income Fund 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, 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 Income Fund's units trade on the TSX as NAL.UN. For more information,
visit www.newalta.com.

This news release contains statements that may constitute
"forward-looking information" or "forward-looking statements" (collectively,
"forward-looking information") within the meaning of applicable Canadian
securities legislation. This forward-looking information includes, among
others, statements regarding business strategy, plans and other expectations,
beliefs, goals, objectives, information and statements about possible future
events. Specific forward-looking information contained in this press release
include statements regarding the Conversion, Newalta's 2009 growth capital
spending program, demand for our services and growth strategy and the results
of such program, services and strategy, including expected financial and
operating results. Readers are cautioned not to place undue reliance on such
forward-looking information. Forward-looking information is based on current
expectations, estimates and assumptions that involve a number of risks, which
could cause actual results to vary and in some instances to differ materially
from those anticipated by Newalta and described in the forward-looking
information contained in this news release. Among the various factors that
could cause results to vary materially from those indicated in the
forward-looking information include failure to receive approval of the
Conversion from unitholders or relevant regulatory authorities, failure to
realize growth anticipated by the proposed capital spending, a reduction in
funds from operations, limitations on bank borrowing, fluctuations in
commodity prices, currency value and interest rates, increased costs for
equipment purchases and facility construction and delays in obtaining
equipment and in the construction of facilities. In addition, Newalta
regularly assesses the allocation of growth capital expenditures and, as such,
the aggregate dollar amount to be expended and the amounts allocated to each
growth area and operating division may be reallocated between the divisions
and specific projects. Readers should also be aware that the forward-looking
information is also affected by the risk factors described in Newalta's Annual
Information Form and those set forth from time to time in Newalta's continuous
disclosure filings with Canadian securities regulatory authorities, which are
available through Newalta's website at www.newalta.com and on the SEDAR
website at www.sedar.com. No assurance can be given that any of the events
anticipated by the forward-looking information will transpire or occur or, if
any of them do so, what benefits Newalta will derive therefrom.

Management will hold a conference call on November 5, 2008 at 2:00 PM
(ET). To access the call, participants should dial 416-644-3430 or
1-800-587-1893. The conference call will also be webcast live at
www.newalta.com and subsequently archived on the Newalta website.
A rebroadcast of the call will be available until midnight on
November 12, 2008. To access the rebroadcast, dial 416-640-1917 or
1-877-289-8525 and quote the reservation number 21288003 followed by the
number sign.

Contact Information

  • Ronald L. Sifton
    Executive Vice President
    Phone: (403) 806-7020;

    Anne M. MacMicken
    Executive Director, Investor Relations
    Phone: (403) 806-7019