Newalta Corporation

TSX : NAL


Newalta Corporation

February 20, 2014 21:02 ET

Newalta Reports Fourth Quarter and Year End 2013 Results

CALGARY, ALBERTA--(Marketwired - Feb. 20, 2014) - Newalta Corporation ("Newalta") (TSX:NAL) today reported results for the three months and year ended December 31, 2013.

FINANCIAL HIGHLIGHTS(1)

Three months ended
December 31,
Year ended
December 31,
($000s except per share data)
(unaudited)
2013 2012 % Increase (Decrease) 2013 2012 % Increase
(Decrease)
Revenue 203,799 198,445 3 783,396 726,209 8
Gross profit 46,095 39,037 18 188,538 169,758 11
- % of revenue 23 % 20 % 15 24 % 23 % 4
Net (loss) earnings(2) (10,322 ) 4,124 (350 ) 21,940 42,804 (49 )
- per share ($) - basic (0.19 ) 0.08 (338 ) 0.40 0.86 (53 )
- per share ($) - diluted (0.19 ) 0.08 (338 ) 0.40 0.85 (53 )
Adjusted net earnings(3) 11,532 8,947 29 49,596 41,623 19
- per share ($) - basic(3) 0.21 0.17 24 0.90 0.84 7
Adjusted EBITDA(3) 32,795 33,290 (1 ) 150,064 142,136 6
- per share ($)(3) 0.59 0.63 (7 ) 2.73 2.86 (5 )
Cash from operating activities 45,616 47,462 (4 ) 123,574 97,443 27
- per share ($) 0.83 0.90 (8 ) 2.25 1.96 15
Funds from operations(3) 19,846 22,303 (11 ) 120,528 116,616 3
- per share ($)(3) 0.36 0.42 (14 ) 2.19 2.35 (7 )
Maintenance capital expenditures(3) 14,432 12,089 19 29,679 34,952 (15 )
Growth capital expenditures(3) 57,786 45,311 28 141,461 137,388 3
Dividends declared 6,087 5,424 12 23,671 18,918 25
- per share ($)(3) 0.11 0.10 10 0.43 0.38 13
Dividends paid 4,862 4,870 - 17,799 17,382 2
Book value per share, December 31, 12.20 11.82 3
Weighted average shares outstanding 55,205 52,741 5 54,938 49,690 11
Shares outstanding, December 31,(4) 55,336 54,263 2 55,336 54,263 2
  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 and references to unaudited Consolidated Financial Statements are synonymous with Financial Statements.
  2. Recognized approximately $21.2 million in non-cash restructuring related impairment in Q4 2013 and 2013 as a result of the rationalization initiatives announced in December 2013.
  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 55,452,192 shares outstanding as at February 20, 2014.

Management Commentary

"Our start to the year was weak, weighed down by reduced market demand and lower prices for our products, however, performance improved as the year progressed," said Al Cadotte, President and CEO of Newalta. "In the final three quarters of 2013, before non-recurring items Adjusted EBITDA grew by 20 percent over the prior year. The last three quarters are indicative of the results we expect from our business plan.

"In the fourth quarter, improved performance across all of our operations was offset by non-recurring charges of about $4.5 million. For the year, Adjusted EBITDA excluding non-recurring charges, was $156.0 million, up 10 percent compared to 2012.

We continued to advance our growth plans in 2013 with several notable achievements:

  • We increased our long-term onsite contract revenue base to 14 percent of revenue in 2013, up from 10 percent in 2012.

  • We commissioned our first U.S. satellite facility mid-year and we constructed two more that will be operational in Q1 of 2014.

  • Our mature fine tailings ("MFT") project with Syncrude Canada Ltd. exceeded expectations with operations starting up in May 2013 and continuing through to the end of the year. We also constructed and commissioned our Shell Canada Ltd. MFT contract on budget and on schedule.

  • We commissioned one satellite facility at mid-year in our Oilfield Division and constructed two more for commissioning in Q1 of 2014.

  • We signed a development agreement with DuPont Canada to demonstrate a new wastewater process. Construction is now complete and the unit will be operational in early 2014.

  • We increased our quarterly dividend 10 percent compared to last year.

  • Late in the year, we began a comprehensive review of our Industrial Division with actions planned predominately in the first quarter of 2014 to drive improved profitability and higher investment returns.

"The improvements we are making to the profitability of the Industrial Division, and the reductions we will achieve in SG&A costs combined with the contributions from our 2013 growth capital investments will all contribute to much improved results in 2014. We expect a strong start to the year with first quarter performance well ahead of last year. This will set the stage for a strong year of growth, profitability and attractive shareholder returns."

Consolidated Overview

Fourth quarter revenue and Adjusted EBITDA were relatively flat compared to prior year. Contributions from all divisions increased; however, gains were offset by non-recurring charges of approximately $4.5 million. Net loss in the quarter was $10.3 million, compared to net earnings of $4.1 million in the prior year. Higher Divisional EBITDA and lower net finance charges were more than offset by non-cash restructuring related impairment charges. In Q4 2013, we recognized $21.2 million for impairment of certain assets related to the planned facility closures and divestitures in the Industrial division.

2013 revenue increased 8% to $783.4 million compared to prior year while Adjusted EBITDA was $150.1 million. Adjusted EBITDA before non-recurring charges was $156.0 million, up 10% over 2012. Improved performance was primarily driven by contributions from New Markets and Oilfield. 2013 net earnings was $21.9 million, down 49% from 2012 due primarily to the non-cash restructuring related impairment.

The non-recurring charges in the quarter and 2013 were $4.5 million and $5.9 million, respectively. Non-recurring charges included: charges for positions eliminated during the year; the settlement of an out of period disputed account; and U.S. employee compensation for previous periods as a result of a U.S. Federal Department of Labor ("DOL") settlement.

In 2013, the DOL reviewed our compensation structure for a misclassification of certain operating employees under the applicable labour standards. Our compensation package for U.S. employees was consistent with our Canadian pay structure. As a result of the DOL review, in Q4 2013, we entered into a settlement agreement and recognized $4.2 million for U.S. employee compensation:

  • $2.2 million was charged to SG&A for compensation related to prior years; and

  • $2.0 million was charged to New Markets for compensation related to 2013, including $0.5 million related to Q4 2013.

Other Highlights

Newalta's Board of Directors declared a fourth quarter dividend of $0.11 per share ($0.44 per share annualized) paid January 15, 2014 to shareholders of record on December 31, 2013.

Capital expenditures for the three months and year ended December 31, 2013, were $72.2 million and $171.1 million, respectively, focused primarily on growth capital projects in New Markets and Oilfield.

Reflecting the ongoing strength of our pipeline of capital projects and organic growth opportunities, particularly in New Markets and Oilfield, our 2014 capital budget is $180 million, with growth capital and maintenance expenditures of $145 million and $35 million, respectively. We will continue to invest in New Markets and Oilfield to drive strong returns and growth in our core growth areas. The capital program will be funded primarily by funds from operations. We expect to spend approximately 40% of the capital budget in the first half of 2014.

In early 2014, we formed an alliance with Halliburton Canada to offer tailored onsite services, specializing in drilling fluids and waste management services.

Recent Developments

In December, we announced a comprehensive review to improve productivity and profitability, particularly in the Industrial Division and in SG&A expenses across the organization.

We have developed a plan focused on rationalizing our Eastern Industrial operations and related overhead. The plan includes redirecting lines of business, consolidations, closures and divestitures of certain facilities, as well as overhead reductions related to supporting impacted operations. We will execute the plan throughout 2014, and expect to implement the bulk of the plan in the first half of the year. Once implemented, we expect approximately $10 million in annualized ongoing cash savings and approximately $5 million in one-time cash restructuring costs. To date, we have taken actions that will deliver 60 percent of the identified savings, including closure of three facilities in eastern Canada and overhead reductions in associated support functions.

With respect to SG&A, we are assessing our current cost structure to align resources with business needs, anticipating incremental cost savings to those identified under the industrial plan above.

We continue to assess our cost structure across all business lines and further actions may be implemented. We will assess and update savings and cost estimates throughout the year.

Amendment to By-laws

In addition, today the Board of Directors approved an amendment to the by-laws of Newalta that requires shareholders to give advanced notice to Newalta of any proposal to nominate directors for election to the Board of Directors in circumstances where nominations are made other than by requisitioning a meeting or making a shareholder proposal, each pursuant to the provisions of the Business Corporations Act (Alberta). The amendment to the by-laws is effective immediately. Shareholders will be asked to confirm and ratify the amended by-laws at the next annual and special meeting of shareholders to be held on May 7, 2014. A copy of the amended by-laws is available on SEDAR at www.sedar.com.

Quarterly Conference Call

Management will hold a conference call on Friday, February 21, 2014 at 11:00 a.m. (ET) to discuss Newalta's performance for the quarter and year ended December 31, 2013. To participate in the teleconference, please call 416-340-8530, or 800-766-6630. To access the simultaneous webcast, please visit www.newalta.com. For those unable to listen to the live call, a taped broadcast will be available at www.newalta.com and, until midnight on Friday, February 28, 2014 by dialing 800-408-3053 and entering passcode 4008419 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 locations 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 2,200 people, two decade track record of profitable expansion and 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.

The press release contains certain statements that constitute forward-looking information. Please refer to the attached Management's Discussion and Analysis for further discussion of assumptions and risks relating to this forward looking information.

NEWALTA CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Three months and year ended December 31, 2013 and 2012

Certain statements contained in this document constitute "forward-looking information". When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", "potential", "strategy", "target", and similar expressions, as they relate to Newalta Corporation and the subsidiaries of Newalta Corporation, or their management, are intended to identify forward-looking information. In particular, forward-looking information included or incorporated by reference in this document include statements with respect to:

  • future operating and financial results;
  • business prospects and strategy including related timelines;
  • capital expenditure programs and other expenditures;
  • realization of anticipated benefits of growth capital investments, acquisitions and our technical development initiatives;
  • anticipated industry activity levels;
  • expected demand for our services;
  • the amount of dividends declared or payable in the future;
  • our projected cost structure; and
  • expectations and implications of changes in legislation.

Our strategic objectives for the Business Plan period 2014 to 2017, including anticipated growth capital investments and our action plan for 2014 and 2015, are set out under "Strategy". Expected future financial and operating performance based on the results of our strategy, and related assumptions, are set out under "Outlook". Restructuring plans and impacts of implementation are set out under "Recent Developments. Capital budget and divisional allocation is set out under "Capital Expenditures".

Such information reflects 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 the price we received for our recovered oil;
  • fluctuations in commodity prices for lead including the price differential we pay for lead feedstock and the price we receive for our lead products;
  • fluctuations in base oil prices including the price differential we pay for used oil and the price we receive for our finished lube oil products;
  • 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, obtaining insurance for such risks and hazards on reasonable financial terms, and potential failure of meeting customer safety standards;
  • 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;
  • risk to our reputation;
  • our ability to attract, retain, and integrate 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 information 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 information 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 information 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 information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Furthermore, the forward-looking information 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 this forward-looking information.

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 impaired, 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 and comprehensive income. 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
December 31,
Year ended
December 31,
($000s) 2013 2012 2013 2012
Net (loss) earnings (10,322 ) 4,124 21,940 42,804
Add back:
Income taxes (2,690 ) 706 5,954 11,208
Net finance expense 3,863 5,238 24,481 13,357
Amortization 16,684 17,797 66,997 62,509
Restructuring related impairment 21,198 - 21,198 -
EBITDA 28,733 27,865 140,570 129,878
Add back:
Stock-based compensation expense 4,062 5,425 9,494 12,258
Adjusted EBITDA 32,795 33,290 150,064 142,136
Weighted average number of shares 55,205 52,741 54,938 49,690
EBITDA per share 0.52 0.53 2.56 2.61
Adjusted EBITDA per share 0.59 0.63 2.73 2.86

"Divisional EBITDA" provides an indication of the results generated by the division's principal business activities prior to how the assets are amortized, and before allocation of Selling, general and administrative costs ("SG&A"). Divisional EBITDA is the sum of gross profit and amortization for the respective division. Divisional EBITDA is derived from Gross Profit as follows:

Three months ended
December 31,
Year ended
December 31,
($000s) 2013 2012 2013 2012
Gross Profit 46,095 39,037 188,538 169,758
Add back:
Amortization included in cost of sales 12,711 14,271 52,259 49,024
Divisional EBITDA 58,806 53,308 240,797 218,782
New Markets 23,321 21,461 93,366 80,015
Oilfield 20,199 17,907 82,122 73,482
Industrial 15,286 13,940 65,309 65,285
Deduct:
SG&A(1) (30,073 ) (25,443 ) (100,227 ) (88,904 )
EBITDA 28,733 27,865 140,570 129,878
  1. SG&A excludes amortization of $3,973 and $14,738 for Q4 2013 and 2013, respectively, and $3,526 and $13,485 for Q4 2012 and 2012, respectively.

"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 recovery or expense, the gain or loss on embedded derivatives and restructuring related charges. Stock-based compensation expense, a component of employee remuneration, can vary significantly with changes in the price of our common shares. The gain on the embedded derivative is a result of the change in the trading price of the debentures and the volatility of the applicable bond market. Restructuring related charges are related to initiatives outside of our normal course of business. 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
December 31,
Year ended
December 31,
($000s) 2013 2012 2013 2012
Net (loss) earnings (10,322 ) 4,124 21,940 42,804
Add back (deduct):
Stock-based compensation expense 4,062 5,425 9,494 12,258
Embedded derivative (gain) (3,406 ) (602 ) (3,036 ) (13,439 )
Restructuring related impairment 21,198 - 21,198 -
Adjusted net earnings 11,532 8,947 49,596 41,623
Weighted average number of shares 55,205 52,741 54,938 49,690
Adjusted net earnings per share 0.21 0.17 0.90 0.84

"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) 2013 2012
Total Equity 675,162 641,440
Shares outstanding, December 31, 55,336 54,263
Book value per share 12.20 11.82

"Cash Basis Return on Capital" ("ROC - Cash") is used to assist management and investors in measuring the returns realized at the consolidated level from capital employed. ROC - Cash is derived from Adjusted EBITDA less cash stock-based compensation, cash taxes and maintenance capital divided by Net Assets. Net Assets is an average of the beginning and ending balances of our total assets less current liabilities for the period.

"Divisional Return on Capital" is used to assist management and investors in measuring the returns realized at the Divisional level from capital employed. It is derived from Divisional EBITDA divided by the average of the beginning and ending balances of assets employed for the period.

"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
December 31,
Year ended
December 31,
($000s) 2013 2012 2013 2012
Cash from Operating Activities 45,616 47,462 123,574 97,443
Add back (deduct) :
(Decrease) increase in non-cash working capital (27,078 ) (26,842 ) (8,333 ) 15,619
Decommissioning obligations incurred 1,308 1,683 5,287 3,554
Funds from operations 19,846 22,303 120,528 116,616
Weighted average number of shares 55,205 52,741 54,938 49,690
Funds from operations per share 0.36 0.42 2.19 2.35

References to EBITDA, EBITDA per share, Adjusted EBITDA, Adjusted EBITDA per share, Divisional EBITDA, Adjusted net earnings, Adjusted net earnings per share, ROC - Cash, Divisional Return on Capital, Funds from operations and Funds from operations per share throughout this document have the meanings set out above. Adjusted SG&A has the meaning described in the section titled "Corporate and Other".

The following discussion and analysis should be read in conjunction with (i) the unaudited consolidated financial statements of Newalta, and the notes thereto ("Financial Statements"), for the three months and year ended December 31, 2012 and 2013, (ii) the Financial Statements of Newalta and notes thereto and MD&A of Newalta for the year ended December 31, 2012 and 2011, (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, 2013, June 30, 2013, and September 30, 2013. This information is available at SEDAR (www.sedar.com). Information for the three months and year ended December 31, 2013 along with comparative information for 2012, is provided.

This MD&A is dated February 20, 2014, 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)

($000s except per share data) 2013 2012 2011
Revenue 783,396 726,209 682,828
Gross Profit 188,538 169,758 165,509
- % of revenue 24 % 23 % 24 %
Net earnings(2) 21,940 42,804 33,562
- per share ($) - basic 0.40 0.86 0.69
- per share ($) - diluted 0.40 0.85 0.68
Adjusted net earnings(3) 49,596 41,623 41,241
- per share ($) - basic adjusted(3) 0.90 0.84 0.85
Adjusted EBITDA(3) 150,064 142,136 146,475
- per share ($)(3) 2.73 2.86 3.02
Cash from operating activities 123,574 97,443 104,563
- per share ($) 2.25 1.96 2.15
Funds from operations(3) 120,528 116,616 122,775
- per share ($)(3) 2.19 2.35 2.53
Dividends declared 23,671 18,918 14,818
- per share ($)(3) 0.43 0.38 0.31
Dividends paid 17,799 17,382 14,082
Total Assets 1,408,241 1,318,758 1,165,021
Maintenance capital expenditures(3) 29,679 34,952 31,051
Growth capital expenditures(3) 141,461 137,388 86,629
Senior long-term debt - net of issue costs 117,136 76,500 68,493
Senior unsecured debentures(4) - principal amount 250,000 250,000 250,000
Weighted average shares outstanding 54,938 49,690 48,569
Shares outstanding, December 31, (5) 55,336 54,263 48,607
  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 and references to unaudited Consolidated Financial Statements and notes are synonymous with Financial Statements.
  2. Recognized approximately $21.2 million in non-cash restructuring related impairment in 2013 as a result of the rationalization initiatives announced in December 2013.
  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 55,452,192 shares outstanding as at February 20, 2014.

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 locations 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 2,200 people, a two decade track record of profitable expansion and commitment to commercializing new solutions, Newalta is positioned for sustained future growth and improvement.

The following section contains forward looking information as it outlines our strategic focus for our business plan. Our business plan is based on several key assumptions including growth capital contributions, commodity prices and activity levels of the industries we serve. Changes to these assumptions could cause our actual results to differ materially from the plan outlined below. Please refer to the Sensitivities section for a summary of the key metrics used to derive our plan and the Capital Expenditures section for an understanding of our expected returns from growth capital projects.

STRATEGY:

As we enter 2014, we continue to focus on maximizing shareholder returns through low risk growth investments that provide the highest returns and stable cash flows and on improving operational fitness to maximize the profitability of our core operations. In line with this focus and as part of our business planning process, we have revised our growth capital plan over the plan period and expect to spend approximately $150 to $200 million in growth capital each year. Our growth capital investments will drive strong performance and attractive returns in the years ahead. Over the plan period to 2017, we expect a 15% and 20% compound annual growth rate ("CAGR") for revenue and Adjusted EBITDA, respectively. We will continue to increase contracts as a percentage of revenue to be in excess of 20% by the end of the plan. Adjusted SG&A will improve towards 8% of annual revenue by the end of 2017 and we will continue to work towards a debt leverage ratio of 2.0.

Our key priorities for 2014 and 2015 are:

  • Invest in low-risk, high-return organic growth opportunities to grow the business;

    • Drive expansion in New Markets and Oilfield;

  • Improve returns on existing assets through streamlining and consolidation initiatives;

    • Drive cost alignment particularly in the Industrial division and in SG&A expenses;

  • Continue to develop and attract people in line with our talent retention focus;

    • Leverage the organizational structure put in place in 2013 to optimize execution of the business plan.

The table below sets out our strategic objectives through to 2017, our tactics, progress in 2013 and action plan for 2014 and 2015.


Strategic Objectives Through 2017
Tactics Progress in 2013 Action Plan
(2014 - 2015)
New Markets

Invest approximately 60% of annual growth capital in Canada and U.S. and average 20% revenue growth per year, while maintaining pacesetter Divisional ROC.
Transition onsite project work to longer term contract arrangements, to grow stable revenue base, with no impact from commodities.

Extend and grow existing contracts.
Total contract revenue across all three divisions grew to 14% of Newalta revenue from 10% in 2012.

New Markets contracts represented 46% of total New Markets revenue, up from 37% in 2012.

Awarded $20 million contract with Shell Canada Limited ("Shell") to process mature fine tailings ("MFT") at Shell's Jackpine Mine.

Successfully constructed and commissioned Shell MFT site.
With 10 to 15 potential contracts in the scoping and proposal stage at any given time, we will continue to grow total contracts as a percentage of Newalta revenue to be in excess of 20% by the end of the plan.

Introduce innovative proven technologies including the collaboration with DuPont for water processing.
Apply our successful western Canadian model to expand our presence in U.S. markets. Established three new satellite facilities.

Restructured Drill site late in the year to position U.S. for growth in 2014.

Opened new U.S. headquarters in Denver, Colorado.
Establish three additional U.S. operating locations each year in oil rich plays.

Leverage drill site service capabilities and customer relationships to drive longer term contract work.

Expand water recycling services consistent with demand in active plays.
Oilfield

Invest approximately 30% of annual growth capital in organic growth projects and average 15% revenue growth per year.
Expand facility network to take advantage of growth in existing markets and new opportunities. Established three new satellite facilities.

Commissioned new thermal solids management technology at an Oilfield facility.
Establish two additional Oilfield satellites each year to expand market presence in western Canada.

Introduce proven technologies within operations.
Focus on productivity improvements to drive incremental cash flow from existing assets. Oilfield Divisional EBITDA as a percent of revenue improved from 41% in 2012 to 44% driven by growth capital investments. Develop new products and services at existing facilities to meet changing market demands.
Increase market share in onsite services. Developed strategy to offer onsite services for waste management.

Developed strategy and identified strategic partner to recover market share after experiencing a decline in drill site equipment utilization.
Leverage experience gained in Heavy Oil to implement strategy to expand onsite services for both oil and natural gas basins.

Execute strategy to recover drill site market share. Leverage newly formed strategic alliance with Halliburton Canada to offer integrated onsite solution for fluids and waste management in WCSB.
Industrial

Invest approximately 10% of annual growth capital in organic growth projects and drive improved returns.
Focus on productivity improvements to drive incremental cash flow from existing assets. Initiated a comprehensive review with a focus on improving returns with plans to streamline, realign resources, and rationalize business lines and facilities.

Implemented several initiatives that improved production output and reduced costs.

Expanded services in Atlantic region to process offshore drilling waste.

Deferred expansion of the North Vancouver facility until economics improve.
Execute rationalization plan to improve returns.

Introduce proven technologies within operations.
Increase market share in onsite services in multiple industry segments. Industrial onsite profit contributions doubled from 2012.

Established new operating location in western Canada as a base for onsite operations.
Leverage our onsite model and facility network to gain market share and increased contributions.
Process Commercialization

Invest growth capital in new processes.
Evaluate technologies for commercial application. Announced development agreement with DuPont Canada to test an innovative water processing technology in the Alberta oil and gas industry. Integrate initiatives within divisions so as to expedite processes and returns.


Leverage facility network to expedite commercialization. Transitioned thermal solids management technology and waste water oxidation process from demonstration phase to commercial operations.

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 the Risk Management section 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.

Risk Mitigation
Market activity is lower than anticipated

Lower market activity can translate into reduced waste volumes and weaker commodity prices, impacting returns on existing assets and our capacity to invest in organic growth capital.
• Improve productivity.

• Develop new technologies that make our processes more effective and cost efficient.

• Grow onsite contract revenue to mitigate exposure to commodity prices.

• Maintain debt leverage to provide adequate financial flexibility.

• Utilize, as needed, proven defensive toolkit to manage costs and capital expenditures.
Safety record

Failure to meet customer safety standards while working on customer sites or at our facilities could result in limitations in our ability to maintain and secure new contracts.
• Since 1993, safety has been established as one of our core values.

• Long standing history of safety excellence.

• Our Environmental, Health and Safety ("EH&S") team works with operators, customers and regulators to ensure that we foster a culture of safety and prevention to ensure we maintain our strong record.

• Designs for facilities and onsite equipment are subject to strict hazards and operability studies and engineering practices.
Competition

Competition can come from generators of waste processing streams internally or new third party waste processors entering the market.
• We are well established in the industry with an excellent safety record and employee training.

• We have a strong customer focused approach and service differentiation to secure Newalta brand loyalty across all business lines.

• Barriers to entry include facility network and infrastructure as well as regulatory permits.

• Our facilities are optimally located near the point of waste generation and our network provides our customers with a backstop for process guarantees to better serve their needs.

• Our onsite services are targeted to facilitate customers managing their waste onsite.
Changes in environmental regulations

Changes in environmental regulations also impact our business.
• Generally, we have a positive bias to changes in environmental regulations as they provide opportunities for service expansion.

• We are actively engaged in the review of forthcoming legislation to ensure that our operations can adapt as needed and to ensure that we are prepared to capitalize on opportunities as they arise.
Failure to commercialize identified technologies into our processes

Failure to commercialize new technologies could reduce our competitiveness.
• We have a staged approach for developing technologies, which differentiates between proven and unproven technologies and ensures resources can be redeployed efficiently to other initiatives.

• Other initiatives include expansion of services and business development.

• Performance from our current assets employed is not contingent on the commercialization of the identified technologies.
Organizational capabilities

Failure to effectively recruit, retain and integrate top talent in period of growth could negatively impact our ability to meet our long-term targets.
• Develop our people through talent development programs which include customized leadership training and comprehensive on-boarding.

• Engage new employees in EH&S training programs and Safety Leadership programs.

• Use of cross-functional training and teams to promote integration.

CORPORATE OVERVIEW

Strong contributions from all divisions in the fourth quarter were partially offset by non-recurring charges of approximately $4.5 million. Fourth quarter revenue was $203.8 million and Adjusted EBITDA was $32.8 million, relatively flat compared to prior year. Net loss in the quarter was $10.3 million, compared to net earnings of $4.1 million in the prior year. Higher Divisional EBITDA and lower net finance charges were more than offset by non-cash restructuring related impairment charges. In Q4 2013, we recognized $21.2 million for impairment of certain assets related to planned facility closures and divestitures in the Industrial division.

We expected Adjusted EBITDA in the second half of 2013 to be approximately 20% higher than for the same period last year, based on commodity prices and drilling activity remaining at Q3 levels. Commodity prices were significantly lower in Q4 than in Q3 and results were also impacted by non-recurring charges. Adjusting for these factors, Adjusted EBITDA for the second half of 2013 was up in excess of 20% over prior year, in line with management expectations.

2013 revenue increased 8% to $783.4 million compared to prior year while Adjusted EBITDA was $150.1 million. Adjusted EBITDA, before non-recurring charges, was $156.0 million, up 10%, over 2012. This improvement was primarily driven by contributions from New Markets and Oilfield. Revenue from contracts (fee for service solutions with terms longer than one year and no direct commodity price exposure) generated 14% of annual consolidated revenue, compared to 10% in 2012. This improvement was largely driven by our Heavy Oil contracts. 2013 net earnings was $21.9 million, down 49% from 2012 due primarily to the non-cash restructuring related impairment.

The non-recurring charges in the quarter and 2013 were $4.5 million and $5.9 million, respectively. Non-recurring charges included: charges for positions eliminated during the year; the settlement of an out of period disputed account; and U.S. employee compensation for previous periods as a result of a U.S. Federal Department of Labor ("DOL") settlement.
In 2013, the DOL reviewed our compensation structure for a misclassification of certain operating employees under the applicable labour standards. Our compensation package for U.S. employees was consistent with our Canadian pay structure. As a result of the DOL review, in Q4 2013, we entered into a settlement agreement and recognized $4.2 million for U.S. employee compensation:

  • $2.2 million was charged to SG&A for compensation related to prior years; and

  • $2.0 million was charged to New Markets for compensation related to 2013, including $0.5 million related to Q4 2013.

New Markets revenue and gross profit in the quarter increased 19% and 4%, respectively, to $62.5 million and $17.7 million compared to prior year. Improved performance in the quarter was driven by growth in Heavy Oil. For the year, revenue and gross profit from New Markets increased 21% and 11%, respectively, to $227.6 million and $75.2 million compared to 2012. Strong returns from our growth capital investments, primarily our MFT contracts, drove improved performance in 2013.

Oilfield revenue and gross profit in the quarter increased by 7% and 14%, respectively, to $47.5 million and $16.9 million compared to prior year. This improvement was driven by increased activity and growth capital contributions at our facilities. For the year, revenue and gross profit increased 2% and 13%, respectively, to $184.6 million and $69.7 million compared to 2012. Positive results at our facilities were driven by contributions from growth capital investments, increased volumes and improved commodity prices. This improvement was partially offset by a decline in drill site.

Industrial revenue in the quarter decreased by 8% to $93.8 million while gross profit increased by 62% to $11.6 million, compared to prior year. The improvement in gross profit was primarily driven by lower amortization at the Stoney Creek Landfill ("SCL") and contributions from Eastern Industrial. 2013 revenue and gross profit was $371.2 million and $43.7 million, respectively, relatively flat to prior year. Improved results from our processing facilities and onsite services were offset by lower contributions from our oil recycling services.

Revenue & Adjusted EBITDA ($Millions): http://media3.marketwire.com/docs/NewaltaGraphs.pdf

Capital expenditures for the three months and year ended December 31, 2013, were $72.2 million and $171.1 million, respectively, focused primarily on growth capital projects in New Markets and Oilfield.

OUTLOOK

As we enter 2014, we are poised for growth, supported by our growth capital program and the comprehensive review to improve productivity and profitability. We have initiated several actions related to this review and expect to see some benefits from these actions as early as Q1 2014.

Compared to Q1 2013, we are expecting Q1 2014 (excluding the impact of restructuring costs) to be significantly stronger across all three divisions. Commodity prices and drilling activity are expected to improve while volumes at SCL and Ville Ste-Catherine ("VSC") will be in line with our historical quarterly average. In Q1 2014, we expect Total Debt to Adjusted EBITDA to increase, as it did in Q1 2013, due to timing of cash outflows related to our 2013 capital program; and then to steadily improve through the year to end 2014 at approximately 2.50.

In 2014, growth capital investments combined with profitability initiatives focused primarily on the Industrial Division and reductions in SG&A, will drive strong returns and improved results over prior year. Our 2013 growth capital investments in satellites will deliver returns from six new satellites operational for most of the year, three in Canada and three in the US. In addition, our 2014 capital program includes the construction of five new satellites in Oilfield and the U.S. Improved market conditions and management initiatives are expected to drive improvements in both our oil recycling and drill site businesses. Activity levels at VSC, SCL and in the oil and gas sector are expected to be in line with 2013. Total Adjusted SG&A will be approximately 10% of annualized revenue. We continue to focus on growing our portfolio of longer term contracts, strengthening our foundation of stable cash flow, and maximizing returns from our existing assets.

RECENT DEVELOPMENTS

In December, we announced a comprehensive review to improve productivity and profitability, particularly in the Industrial Division and in SG&A expenses across the organization.

We have developed a plan focused on rationalizing our Eastern Industrial operations and related overhead. The plan includes redirecting lines of business, consolidations, closures and divestitures of certain facilities, as well as overhead reductions related to supporting impacted operations. We will execute the plan throughout 2014, though expect to implement the bulk of the plan in the first half of the year. Once implemented, we expect approximately $10 million in annualized ongoing cash savings and approximately $5 million in one-time cash restructuring costs. To date in Q1, we have taken actions that will deliver 60% of the identified savings, including closure of three facilities in eastern Canada and overhead reductions in associated support functions.

With respect to SG&A, we are assessing our current cost structure to align resources with business needs, and anticipate additional cost savings to those identified under the Industrial plan above.

We continue to assess our cost structure across all business lines and further actions may be implemented. Management will assess and update savings and cost estimates throughout the year.

RESULTS OF OPERATIONS - NEW MARKETS

OVERVIEW

New Markets includes a network of more than 10 locations with over 400 employees in western Canada and the U.S. New Markets' services involve the mobilization of equipment and our people to manage waste on our customers' sites; the processing of oilfield-generated wastes and the sale of recovered crude oil to our account at our locations. New Markets is organized into the Heavy Oil and U.S. business units.

We operate onsite services in both Heavy Oil and U.S. Onsite services include: site remediation, dredging and dewatering and drill site processing equipment, including solids control and drill cuttings management. In Heavy Oil, we provide specialized onsite services using centrifugation for heavy oil producers involved in heavy oil mining and Steam-assisted gravity drainage ("SAGD") production. 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: generally are year round arrangements based on fee for service solutions with terms longer than one year, no direct commodity price exposure and may evolve from projects.

The business units contributed the following to division revenue:

Three months ended
December 31,
Year ended
December 31,
2013 2012 2013 2012
Heavy Oil 77 % 70 % 74 % 69 %
U.S. 23 % 30 % 26 % 31 %

New Markets Revenue ($Millions) & New Markets Gross Profit ($Millions): http://media3.marketwire.com/docs/NewaltaGraphs.pdf

The following table compares New Market's results for the periods indicated:

Three months ended
December 31,
Year ended
December 31,
($000s) 2013 2012 %
change
2013 2012 %
change
Revenue 62,531 52,520 19 227,572 188,837 21
Cost of Sales 44,839 35,452 26 152,406 121,085 26
Gross Profit 17,692 17,068 4 75,166 67,752 11
Gross Profit as % of revenue 28 % 32 % (13 ) 33 % 36 % (8 )
Amortization (included in Cost of sales) 5,629 4,393 28 18,200 12,263 48
Divisional EBITDA(1) 23,321 21,461 9 93,366 80,015 17
Divisional EBITDA as % of revenue 37 % 41 % (10 ) 41 % 42 % (2 )
Maintenance capital 7,735 2,089 270 10,312 6,620 56
Growth capital 29,173 15,394 90 68,390 66,584 3
Assets employed(2) 286,913 221,502 30
Assets contributing(3) 230,313 200,702 15
  1. "Divisional EBITDA" is a measure of the division's profitability and an indication of the results generated by the division's principal business activities prior to how the assets are amortized. Divisional EBITDA is the sum of gross profit and amortization.
  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. Assets employed as defined does not include capital assets held by corporate. Corporate assets include information technology, leasehold improvements and technical development. 2012 information has been restated to conform to current presentation.
  3. "Assets contributing" is provided to assist management and investors to understand how our capital spending contributes to our growth. It excludes assets related to growth capital projects not yet operational.

Q4 2013 revenue and gross profit from New Markets increased 19% and 4%, respectively, to $62.5 million and $17.7 million compared to prior year. Improved performance was driven by growth in Heavy Oil partially offset by non-recurring charges of $1.5 million related to the DOL settlement. Excluding the DOL settlement, Divisional EBITDA as a percentage of revenue was approximately 40%, in line with Q4 2012.

2013 revenue and gross profit increased 21% and 11%, respectively, to $227.6 million and $75.2 million compared to prior year. Strong returns from our growth capital investments in Heavy Oil drove improved performance. Revenue from contracts (fee for service solutions with terms longer than one year and no direct commodity price exposure) generated 46% of annual divisional revenue, compared to 37% in 2012.

In 2013, we made significant progress on our New Market growth plans, specifically:

  • invested over $68 million in growth capital to support our Heavy oil contracts and U.S. satellite expansion;

  • signed contract with Shell to process MFT; built, commissioned and began operations in the fall;

  • successfully extended winter operations through to the end of the year at the Syncrude MFT site; and

  • established three new satellites in the U.S., one in Eagle Ford and two in the Bakken.

HEAVY OIL

Heavy Oil is dedicated to serving both the oil sands in Alberta and the heavy oil region in Alberta and Saskatchewan. We began working in the heavy oil industry 18 years ago when we introduced centrifugation as a solution to treat waste oil emulsions. This business has expanded from processing heavy oil waste at facilities in our network to long-term contracts to process waste on our customers' site. Leveraging our facilities as staging areas, we deliver a broad range of specialized services at numerous customer sites.

Heavy Oil revenue is primarily generated from:

Revenue Stream Description Factors Impacting Results % of Annual Revenue
Onsite Provides specialized onsite services using centrifugation for heavy oil producers involved in heavy oil mining and SAGD production. • Number and scope of projects and contracts directly impacted by our ability to attract and retain customers as new heavy oil operations come on stream.

• Timing of project and contracts since the onsite services we provide typically cannot be performed during the winter months.
55 to 65
Facilities Processes oilfield-generated wastes including treatment, water disposal and landfilling, as well as the sale of recovered crude oil to our account. • Production activity drives the amount and make up of waste generated by customers.

• Crude oil prices impact the price we receive for the crude oil recovered to our account from waste volumes and can impact future production activity.
35 to 45

Over the past five years we have worked with customers to develop specialized onsite services where revenue is generally based on processed volumes, with no 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 this business will come from further development of onsite services.

Q4 2013 revenue increased 32% compared to prior year due to increased volumes at our facilities and returns from growth capital invested in onsite. For the year, revenue increased 29% primarily driven by returns from growth capital invested, including our two contracts to process MFT.

Three months ended
December 31,
Year ended
December 31,
2013 2012 %
change
2013 2012 %
change
Recovered crude oil ('000 bbl)(1) 65 55 18 269 216 25
Average crude oil price received (CDN$/bbl) 60.13 60.42 - 67.06 65.51 2
Recovered crude oil sales ($ millions) 3.9 3.3 18 18.0 14.1 28
Western Canadian Select (CDN$/bbl)(2) 68.44 69.46 (1 ) 74.98 73.12 3
  1. Represents the total crude oil recovered and sold for our account.
  2. Western Canadian Select ("WCS") is a readily available industry benchmark for heavy crude oil.

Recovered Crude Oil ('000 BBL) & Average WTI and Heavy Oil Price Received ($CAD): http://media3.marketwire.com/docs/NewaltaGraphs.pdf

U.S.

We entered the U.S. market in 2006 with our drill site services and expanded our offering to include onsite work for our customers.

U.S. revenue is primarily generated from:

Revenue Stream Description Factors Impacting Results % of Annual Revenue
Drill site Provides the supply and operation of drill site processing equipment, including equipment for solids control and drill cuttings management. •Drill site utilization is impacted by the number of active drilling rigs in the markets we serve. 75 to 85
Onsite, satellites and partnerships Provides site remediation, centrifugation and water management solutions. • Price of crude oil impacts the oil and gas industry and the type of drilling activity.

• Drilling activity will impact the volume of waste received, with the makeup of that waste being affected by specific drilling techniques employed.

• Competition in the areas we service. U.S. onsite remains in the early stage of development and we are engaged primarily in short-term or project based work, which will vary from quarter-to-quarter.
15 to 25

Revenue in Q4 2013 decreased 11% compared to prior year, due to lower drill site utilization. 2013 revenue increased 2% compared to 2012. Increased revenue from our growth capital investments, primarily our Eagle Ford satellite, was offset by the decrease in drill site utilization.

Three months ended
December 31,
Year ended
December 31,
2013 2012 % change 2013 2012 % change
Equipment Utilization(1) 48 % 62 % (23 ) 55 % 61 % (10 )
Average equipment available 123 122 1 123 124 (1 )
  1. Billable days as a percentage of potential rental days.

U.S. Drill Site Equipment Utilization: http://media3.marketwire.com/docs/NewaltaGraphs.pdf

RESULTS OF OPERATIONS - OILFIELD DIVISION

OVERVIEW

Oilfield includes an integrated network of over 30 locations with more than 450 employees to service key markets in British Columbia, Alberta, Saskatchewan and Manitoba.

Oilfield generates revenue from:

Revenue Stream Description Factors Impacting Results % of Annual Revenue
Facilities including our satellite and mobile processing locations Processes oilfield-generated wastes, including: treatment, water disposal, clean oil terminalling, custom treating and landfilling, as well as the sale of recovered crude oil to our account. • Crude oil prices impact the price we receive for the crude oil recovered to our account from waste volumes.

• Drilling activity, including metres drilled, and drilling techniques will impact the volume and make up of waste received. Ongoing production accounts for approximately 55% of our waste volume.
75 to 85
Onsite and drill site Provides the supply and operation of drill site processing equipment, including: equipment for solids control and drill cuttings management, site remediation and centrifugation. • Drill site utilization is impacted by the number of active drilling rigs in the markets we serve in the Western Canadian Sedimentary Basin ("WCSB"). 15 to 25

This segment is also impacted by seasonality due to road bans which restrict drilling activity in the second quarter.

Oilfield Revenue ($Millions) & Oilfield Gross Profit ($Millions): http://media3.marketwire.com/docs/NewaltaGraphs.pdf

The following table compares Oilfield's results for the periods indicated:

Three months ended
December 31,
Year ended
December 31,
($000s) 2013 2012 % change 2013 2012 % change
Revenue 47,480 44,486 7 184,607 181,067 2
Cost of Sales 30,625 29,665 3 114,894 119,535 (4 )
Gross Profit 16,855 14,821 14 69,713 61,532 13
Gross Profit as % of revenue 36 % 33 % 9 38 % 34 % 12
Amortization (included in Cost of sales) 3,344 3,086 8 12,409 11,950 4
Divisional EBITDA(1) 20,199 17,907 13 82,122 73,482 12
Divisional EBITDA as % of revenue 43 % 40 % 8 44 % 41 % 7
Maintenance capital 2,389 1,541 55 8,297 8,366 (1 )
Growth capital 19,303 12,624 53 38,255 26,818 43
Assets employed(2) 384,673 350,688 10
Assets contributing(3) 357,873 321,288 11
  1. "Divisional EBITDA" is a measure of the division's profitability and an indication of the results generated by the division's principal business activities prior to how the assets are amortized. Divisional EBITDA is the sum of gross profit and amortization.
  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. Assets employed as defined does not include capital assets held by corporate. Corporate assets include information technology, leasehold improvements and technical development. 2012 information has been restated to conform to current presentation.
  3. "Assets contributing" is provided to assist management and investors to understand how our capital spending contributes to our growth. It excludes assets related to growth capital projects not yet operational.

Q4 2013 Oilfield revenue increased 7% while gross profit and divisional EBITDA increased 14% and 13%, respectively, compared to prior year. Results were positively impacted by strong contributions from growth capital investments and increased waste volumes. 2013 revenue was flat while gross profit increased 13% compared to the prior year. Strong contributions at our oilfield facilities from growth capital investments, increased waste volumes and improved commodity prices drove improved performance throughout the year. These gains were partially offset by a decline in drill site utilization. Drill site utilization was 24%, down from 41% in 2012.

In 2013, we made the following progress on our Oilfield growth plans, specifically:

  • invested over $38 million in growth capital primarily focused on our satellite expansion and productivity improvements;

  • constructed three new satellites, one in Kindersley, SK which began operations mid-year, and another two in Shaunavon, SK and Waskada, MB which will begin operations in early 2014;

  • successfully commissioned a thermal solids processing technology at one our facilities expanding our service offerings; and

  • secured a strategic partner as part of our plan to recover our drill site business. Our alliance with Baroid, a Halliburton Product Service Line, will offer integrated onsite solutions for fluids and waste management in western Canada.

OILFIELD FACILITIES METRICS AND INDUSTRY DRIVERS

Three months ended
December 31,
Year ended
December 31,
2013 2012 % change 2013 2012 % change
Recovered crude oil ('000 bbl)(1) 72 76 (5 ) 289 267 8
Average crude oil price received (CDN$/bbl) 78.41 76.84 2 85.19 79.70 7
Recovered crude oil sales ($ millions) 5.6 5.9 (5 ) 24.6 21.3 15
Edmonton par price (CDN$/bbl)(2) 85.89 84.05 2 92.90 86.16 8
  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 Oil ('000 BBL) & Average WTI and Oilfield Price Received ($CAD) & Metres Drilled in WCSB: http://media3.marketwire.com/docs/NewaltaGraphs.pdf

RESULTS OF OPERATIONS - INDUSTRIAL DIVISION

OVERVIEW

Industrial includes an integrated network of more than 35 locations with over 900 employees to service key market areas across Canada. This division features Canada's largest lead-acid battery recycling facility located at Ville Ste-Catherine, Québec, an engineered non-hazardous solid waste landfill located at Stoney Creek, Ontario, and a used oil re-refining facility in North Vancouver. We also provide onsite services which 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. We are striving to develop a strong customer partnership approach and service differentiation to secure Newalta brand loyalty and further develop this business.

Industrial is organized into Western Industrial and Eastern Industrial business units.

The business units contributed the following to division revenue:

Three months ended
December 31
,
Year ended
December 31,
2013 2012 2013 2012
Western Industrial 24 % 22 % 24 % 26 %
Eastern Industrial 76 % 78 % 76 % 74 %
VSC as a % of Industrial Division 31 % 36 % 32 % 30 %

Industrial Revenue ($Millions) & Industrial Gross Profit ($Millions): http://media3.marketwire.com/docs/NewaltaGraphs.pdf

The following table compares Industrial's results for the periods indicated:

Three months ended
December 31,
Year ended
December 31,
($000s) 2013 2012 % change 2013 2012 % change
Revenue 93,788 101,439 (8 ) 371,217 356,305 4
Cost of Sales 82,240 94,291 (13 ) 327,558 315,831 4
Gross Profit 11,548 7,148 62 43,659 40,474 8
Gross Profit as % of revenue 12 % 7 % 71 12 % 11 % 9
Amortization (included in Cost of sales) 3,738 6,792 (45 ) 21,650 24,811 (13 )
Divisional EBITDA(1) 15,286 13,940 10 65,309 65,285 -
Divisional EBITDA as % of revenue 16 % 14 % 14 18 % 18 % -
Maintenance capital 3,494 6,639 (47 ) 7,980 14,792 (46 )
Growth capital 3,784 6,654 (43 ) 15,301 18,241 (16 )
Assets employed(2) 407,779 428,394 (5 )
Assets contributing(3) 395,479 406,794 (3 )
  1. "Divisional EBITDA" is a measure of the division's profitability and an indication of the results generated by the division's principal business activities prior to how the assets are amortized. Divisional EBITDA is the sum of gross profit and amortization.
  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. Assets employed as defined does not include capital assets held by corporate. Corporate assets include information technology, leasehold improvements and technical development. 2012 information has been restated to conform to current presentation.
  3. "Assets contributing" is provided to assist management and investors to understand how our capital spending contributes to our growth. It excludes assets related to growth capital projects not yet operational.

Compared to Q4 2012, Q4 revenue decreased by 8% while Divisional EBITDA increased 10%. Results were primarily driven by contributions from Eastern Industrial, particularly VSC, which benefited from productivity initiatives and improved market conditions.

Gross profit increased by 62% compared to Q4 2012, primarily due to lower amortization at SCL and contributions from Eastern Industrial. The decrease in amortization was primarily driven by an amendment to our landfill permit.

2013 Industrial revenue and Divisional EBITDA was relatively flat to prior year. Results were weighed down by lower contributions in Q1 2013 due to reduced commodity prices and lower event-based business at SCL. Performance throughout the remainder of 2013 improved, with Divisional EBITDA for the last three quarters of 2013 up 8% over the same period in 2012. Results from our industrial processing facilities and onsite services drove this improvement and were tempered by lower contributions from our oil recycling services.

Assets employed and assets contributing declined by 5% and 3%, respectively, due largely to a $21.2 million restructuring related impairment charge recognized in Q4. This charge related to certain Eastern Industrial facilities planned for closure or sale in 2014 as part of the rationalization plan announced in December 2013.

In 2013, we made the following progress in Industrial, specifically:

  • initiated a comprehensive review with a focus on improving returns with plans to streamline, realign resources, and rationalize business lines and facilities;

  • invested over $15 million in growth capital related to waste water management and service expansion, including: expanded services in Atlantic region to process offshore drilling waste and established new operating location in western Canada for onsite operations.

WESTERN INDUSTRIAL

Western Industrial draws its revenue from the following industries in western Canada: construction, forestry, manufacturing, mining, oil and gas, petrochemical, pulp and paper, refining, and transportation service. Western Industrial generates revenue from:

Revenue Stream Description Factors Impacting Results % of Annual Revenue
Oil Recycling Services Includes the collection of waste lube oils, re-refining and processing to produce virgin quality base oil and the sale of finished products as well as industrial fuels and fuel distillates. • Base oil prices impact the price we receive for our finished products.

• The availability of waste lube oil.
50 to 60
Facilities Processes industrial wastes including their collection, treatment and disposal. • The state of the economy impacts activity levels in the industries we serve. 35 to 45
Onsite Provides site remediation, centrifugation and water management solutions. • The state of the economy impacts activity levels in the industries we serve.

• Our ability to attract and retain customers.
up to 10

Western Industrial revenue in Q4 2013 and 2013 was flat to prior year. Improved performance from our industrial processing facilities and onsite services was offset by weaker results from our oil recycling services.

Three months ended
December 31,
Year ended
December 31,
2013 2012 % change 2013 2012 % change
Base oil sales ('000 litres) 4,600 4,700 (2 ) 18,500 18,200 2
Motiva (CDN$/litre) 1.07 1.07 - 1.02 1.18 (14 )

EASTERN INDUSTRIAL

Eastern Industrial is comprised of locations in Ontario, Québec and Atlantic Canada and 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.

Revenue is primarily derived from:

Revenue Stream Description Factors Impacting Revenue: % of Annual Revenue
Ville Ste. Catherine Recycles lead-acid batteries and produces refined lead products for a tolling fee or for sale to battery manufacturers. • The ratio of direct lead sales and tolling fees received for processing batteries.

• Price of lead affects our direct sales revenue and waste battery procurement costs. The cost to acquire waste batteries is generally related to production capacity in the industry.

• Tolling fees are generally fixed, reducing our exposure to lead prices.

• U.S./Canadian dollar exchange rate impacts revenue and procurement costs.
40 to 50
Facilities Processes industrial wastes, including their collection, treatment and disposal. • The state of the economy impacts activity levels in the industries we serve. 25 to 35
Onsite Provides dredging, centrifugation and a fleet of specialized vehicles and equipment for emergency response. • The state of the economy impacts activity levels in the industries we serve.

• Our ability to attract and retain customers.
10 to 20
SCL Receives non-hazardous solid waste with an annual permitted capacity of 750,000 MT of waste per year. • The state of the economy impacts activity levels in the industries we serve.

• Fluctuations in event-based waste receipts.
5 to 15

Q4 2013 Eastern Industrial revenue decreased 10% from Q4 2012. Growth at our processing facilities was more than offset by lower VSC revenue and SCL volumes due to timing. Q4 2013 VSC revenue decreased 21% due primarily to a shift in our tolling/direct mix towards tolling sales.

2013 Eastern Industrial revenue increased 6%. Strong results at industrial processing facilities and VSC were partially offset by somewhat lower volumes at SCL. VSC revenue increased 11% due to higher volumes and improved commodity pricing. Our tolling/direct mix was approximately 50/50 for 2013, consistent with 2012.

Three months ended
December 31,
Year ended
December 31,
2013 2012 % change 2013 2012 % change
Lead Volume (MT) 19,200 17,600 9 68,600 64,700 6
LME Lead (US$/MT) 2,097 2,167 (3 ) 2,151 2,041 5
Three months ended
December 31,
Year ended
December 31,
2013 2012 % change 2013 2012 % change
SCL Volume Collected ('000 MT) 113 228 (50 ) 732 750 (2 )

CORPORATE AND OTHER

Three months ended
December 31,
Year ended
December 31,
($000s) 2013 2012 % change 2013 2012 % change
Selling, general and administrative expenses ("SG&A") 34,046 28,969 18 114,965 102,389 12
Adjusted for:
Stock-based compensation 4,062 5,425 (25 ) 9,494 12,258 (23 )
Amortization 3,973 3,526 13 14,738 13,485 9
Adjusted SG&A 26,011 20,018 30 90,733 76,646 18
Adjusted SG&A as a % of revenue 12.8 % 10.1 % 26 11.6 % 10.6 % 9
Adjusted for:
Non-recurring items(1) 2,814 - 100 5,661 - 100
Adjusted SG&A before non-recurring items 23,197 20,018 16 85,072 76,646 11
Adjusted SG&A before non-recurring as a % of revenue 11.4 % 10.1 % 13 10.9 % 10.6 % 3
  1. Non-recurring items include prior year charges related to the DOL settlement, charges for positions eliminated during the period, and the settlement of an out of period disputed account.

The above table removes stock-based compensation, amortization and non-recurring items from SG&A to provide improved transparency with respect to the comparison of our results. In addition, SG&A includes research and development expenses related to our Technical Development group.

Q4 2013 and 2013, Adjusted selling general and administrative ("Adjusted SG&A") was up 30% and 18%, respectively, from the prior year. This increase was driven by non-recurring items and investments in people and people development to support our growth initiatives. Adjusted SG&A before non-recurring items was 10.9% of our annual revenue.

Stock-based compensation fluctuates based on the effects of vesting, volatility in our share price and dividend rate changes. Approximately 55% of stock-based compensation expense is estimated to be settled with equity, with the balance to be settled in cash.

Three months ended
December 31,
Year ended
December 31,
($000s) 2013 2012 % change 2013 2012 % change
Bank fees and interest 1,603 228 603 4,940 4,336 14
Debenture interest, accretion of issue costs, and other 4,995 4,996 - 19,978 19,978 -
Finance charges before unwinding of the discount(1) 6,598 5,224 26 24,918 24,314 2
Unwinding of the discount(2) 671 616 9 2,599 2,482 5
Finance charges 7,269 5,840 24 27,517 26,796 3
Non-cash loss (gain) on embedded derivatives(3) (3,406 ) (602 ) (466 ) (3,036 ) (13,439 ) (77 )
Net financing charges 3,863 5,238 (26 ) 24,481 13,357 83
  1. Reflects capitalized interest of $520 and $2,798 in Q4 2013 and 2013, respectively, and $1,595 and $4,664 in Q4 2012 and 2012, respectively.
  2. Relates to decommissioning liability.
  3. Relates to the early redemption feature for the Series 1 and 2 Senior Unsecured Debentures.

For the quarter, the increase in finance charges before the gain on the embedded derivatives and the unwinding of the discount was primarily attributable to lower capitalized interest on growth investments and higher average debt levels. Compared to 2012, 2013 finance charges before the gain on the embedded derivatives and the unwinding of the discount were flat.

The non-cash gain on the embedded derivatives is associated with the early redemption feature for the Series 1 and Series 2 Senior Unsecured Debentures (collectively the "Senior Unsecured Debentures") recognized during the quarter. This has no impact on current or future cash flows. The gain is an estimate of the fair value of the embedded derivatives and is primarily impacted by the risk-free rate, market volatility, and our credit spread. See Note 18 to the Financial Statements for further information.

Finance charges associated with the Senior Unsecured Debentures include annual coupon rates of 7.625% and 7.75% as well as the accretion of issue costs and gains or losses on the embedded derivatives for both series.

Three months ended
December 31,
Year ended
December 31,
($000s) 2013 2012 % change 2013 2012 % change
Deferred taxes (recovery) (2,690 ) 706 (481 ) 5,954 11,208 (47 )
Effective tax rate 20.7 % 14.6 % 42 21.4 % 20.8 % 3

In Q4, deferred tax recovery was $2.7 million compared to deferred tax expense of $0.7 million in the prior year. The decrease was driven primarily by lower pre-tax income as a result of restructuring related impairment. Deferred taxes were also impacted by several items including: changes in statutory and other rates; non-deductible items including stock-based compensation and the gain on embedded derivatives; and changes in estimates in respect of prior year tax pools.

2013 deferred taxes decreased to $6.0 million from $11.2 million in 2012, impacted by the same factors as the quarter. The effective tax rate was relatively flat to prior year. Our statutory tax rate in Canada was 25.75% for 2013 and was 25.72% in 2012. Loss carry forwards were approximately $145 million at December 31, 2013. We do not anticipate paying significant income tax until 2017.

LIQUIDITY AND CAPITAL RESOURCES

The term liquidity refers to the speed with which a company's assets can be converted into cash, or its ability to do so, as well as cash on hand. Liquidity risk refers to the risk that we will encounter difficulty in meeting obligations associated with financial obligations that are settled by cash or another financial asset. Our liquidity risk may arise due to general day-to-day cash requirements and in the management of our assets, liabilities and capital resources. Liquidity risk is managed against our financial leverage to meet obligations and commitments in a balanced manner. For further information on our liquidity risk management, refer to Note 18 to the Financial Statements.

Our debt capital structure is as follows:

($000s) December 31, 2013 December 31, 2012
Use of Credit Facility:
Amount drawn on Credit Facility 117,136 76,500
Letters of credit 16,230 16,046
Cash on hand (449 ) (310 )
132,917 92,236
Senior Unsecured Debentures 250,000 250,000
Total Debt 382,917 342,236
Unused Credit Facility capacity 117,083 132,764

We continue to focus on managing our working capital accounts while supporting our growth. Working capital at December 31, 2013, was negative $1.8 million (December 31, 2012: $10.6 million). The change was primarily driven by an increase in accounts payable and accrued liabilities due to the timing of payments at year end. At current activity levels, working capital is expected to be sufficient to meet our ongoing commitments and operational requirements of the business. We continue to manage working capital well within our prescribed targets, commensurate with activity levels. For further information on credit risk management, please refer to Note 18 to the Financial Statements.

DEBT RATINGS

DBRS Limited ("DBRS") and Moody's Investor Service, Inc. ("Moody's") provide a corporate and Senior Unsecured Debentures credit rating. During the fourth quarter, DBRS and Moody's reconfirmed the ratings outlined below.

Category DBRS Moody's
Corporate Rating BB Ba3
Senior Unsecured Debentures BB B1

SOURCES OF CASH

Our liquidity needs can be sourced in several ways including: Funds from operations, borrowings against or increases in our Credit Facility, new debt instruments, the issuance of securities from treasury, return of letters of credit or replacement of letters of credit with other types of financial security and proceeds from the sale of assets.

CREDIT FACILITY

At December 31, 2013, $117.1 million was available and undrawn to fund growth capital expenditures and for general corporate purposes, as well as to provide letters of credit to third parties for financial security up to a maximum amount of $60 million. The aggregate dollar amount of outstanding letters of credit is not categorized in the financial statements as long-term debt; however, the issued letters of credit reduce the amount available under the Credit Facility and are included in the definition of Total Debt for covenant purposes. Under the Credit Facility, surety bonds (including performance and bid bonds) to a maximum of $125 million are excluded from the definition of Total Debt. As at December 31, 2013, surety bonds issued and outstanding totalled $40.5 million. The principal borrowing amount within our credit facility is $250 million.

We renewed and extended our Credit Facility effective July 12, 2013. Key changes to the Credit Facility included extending it by one year, to July 12, 2016, increasing the amount available from $225 million to $250 million and improved pricing. Management may, at its option, request an extension of the Credit Facility on an annual basis. If no request to extend the Credit Facility is made by us, the entire amount of the outstanding indebtedness would be due in full on July 12, 2016.

Financial performance relative to the financial ratio covenants(1) under the Credit Facility is reflected in the table below.

December 31,
2013
September 30,
2013
June 30,
2013
March 31,
2013
December 31,
2012
Threshold
Senior Secured Debt(2) to EBITDA(3) 0.88:1 0.87:1 0.99:1 1.09:1 0.66:1 2.75:1 maximum
Total Debt(4) to EBITDA(3) 2.54:1 2.54:1 2.78:1 2.99:1 2.46:1 4.00:1 maximum
Interest Coverage 5.44:1 5.46:1 5.01:1 4.73:1 5.09:1 2.25:1 minimum
  1. We are restricted from declaring dividends if we are in breach of any covenants under our Credit Facility.
  2. Senior Secured Debt means the Total Debt less the Senior Unsecured Debentures.
  3. EBITDA is a non-IFRS measure, the closest measure of which is net earnings. For the purpose of calculating the covenant, EBITDA is defined as the trailing twelve-months consolidated net income for Newalta before the deduction of interest, taxes, depreciation and amortization, and non-cash items (such as non-cash stock-based compensation and gains or losses on asset dispositions and any extraordinary items). Additionally, EBITDA is normalized for any acquisitions or dispositions as if they had occurred at the beginning of the period.
  4. Total Debt comprises outstanding indebtedness under the Credit Facility, including bank overdraft balance and the Senior Unsecured Debentures.

Our Total Debt was $382.9 million as at December 31, 2013, which reflected a $40.7 million increase over December 31, 2012. The Total Debt to EBITDA ratio of 2.54 is in line with Q3 2013 and slightly above Q4 2012 of 2.46. Our covenant ratios under the Credit Facility remained well within their thresholds. We will manage within our covenants throughout 2014 while our business plan target for Total Debt to Adjusted EBITDA ratio remains at approximately 2.0.

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 (in arrears) May 23 and November 23 each year May 14 and November 14 each year
Debentures are redeemable at the option of Newalta : After November 23, 2013
In whole or in part, at redemption prices expressed as percentages of the principal(3) if redeemed during the twelve month period beginning on November 23 of the years as follows:

• 2013 - 103.813%;
• 2014 - 102.542%;
• 2015 - 101.906%;
2016 and thereafter - 100%.
Prior to November 14, 2015
• Redemption price equal to 107.75% of the principal amount(2,3)

or

• 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 Senior Unsecured Debentures redeemed(3)

After November 14, 2015
In whole or in part, at redemption prices expressed as percentages of the principal(3) if redeemed during the twelve month period beginning on November 14 of the years as follows:

• 2015 - 103.875%;
• 2016 - 101.938%;
• 2017 and thereafter - 100%.
  1. If a change of control occurs, Newalta will be required to offer to purchase all or a portion of each debenture holder's Senior Unsecured Debentures, at a purchase price in cash equal to 101% of the principal amount of the Senior Unsecured Debentures offered for repurchase plus accrued interest to the date of purchase.
  2. Up to 35% of the aggregate principal amount with the net cash proceeds of one or more public equity offerings.
  3. Plus interest to the date of redemption.

The Senior Unsecured Debentures are unsecured senior obligations and rank equally with all other existing and future unsecured senior debt and are senior to any subordinated debt that may be issued by Newalta or any of its subsidiaries. The Senior Unsecured Debentures are effectively subordinated to all secured debt to the extent of collateral on such debt.

The trust indenture, under which the Senior Unsecured Debentures have been issued, contains certain annual restrictions and covenants that, subject to certain exceptions, limit our ability to incur additional indebtedness, pay dividends, make certain loans or investments and sell or otherwise dispose of certain assets subject to certain conditions, among other limitations.

Covenants under our trust indenture include:

Ratio December 31, 2013 December 31, 2012 Threshold
Senior Secured Debt including Letters of Credit 133,366 92,546 $25,000 + the greater of $220,000 and 1.75x EBITDA
Cumulative finance lease obligations nil nil $25,000 maximum
Consolidated Fixed Charge Coverage 5.20:1 5.09:1 2.00:1 minimum
Period end surplus for restricted payments(1) 121,385 110,739 Restricted payments cannot 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.

We will manage within our covenants throughout 2014.

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. On an annual basis, maintenance capital, combined with repair and maintenance expense, (included in cost of sales), is approximately 8% of the value of property, plant and equipment. Maintenance capital and repair and maintenance expense combined, approximate amortization expense.

Capital expenditures for the periods indicated are as follows:

Three months ended
December 31,
Year ended
December 31,
($000s) 2013 2012 2013 2012
Growth capital expenditures 57,786 45,311 141,461 137,388
Maintenance capital expenditures 14,432 12,089 29,679 34,952
Total capital expenditures(1) 72,218 57,400 171,140 172,340
  1. The numbers in this table differ from Consolidated Statements of Cash Flows because the numbers above do not reflect the net change in working capital related to capital asset accruals.

Capital expenditures for the three months and year ended December 31, 2013, were $72.2 million and $171.1 million, respectively. Growth capital expenditures in the quarter and year primarily relate to equipment for our MFT contracts, satellite facilities, expansion at our Oilfield facilities and Technical Development. Maintenance capital expenditures relate primarily to process equipment improvements at our facilities. Capital expenditures in the quarter and year were funded from funds from operations and our credit facility.

Reflecting the ongoing strength of our pipeline of capital projects and organic growth opportunities, particularly in New Markets and Oilfield, our 2014 capital budget is $180 million, with growth capital and maintenance expenditures of $145 million and $35 million, respectively. We will continue to invest in New Markets and Oilfield to drive strong returns and growth in our core growth areas. The capital program will be funded primarily by funds from operations. We expect to spend approximately 40% of the capital budget in the first half of 2014.

Growth expenditures will comprise of approximately $70 million for New Markets, $40 million for Oilfield, $8 million for Industrial and $12 million for onsite equipment, available to all divisions. The remaining $15 million in growth capital expenditures are for Technical Development and corporate investments.

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. Management evaluates capital projects based on their internal rate of return, timing of payback, fit with our corporate strategy, and the risk associated with the projects, among other factors. Capital spending is prioritized towards projects that provide stable cash flows and where there is a high degree of certainty of completing the project on time and on budget. Of the total divisional growth capital expenditures over the last three years, 50% has been allocated to New Markets, 30% to Oilfield and 20% to Industrial. Going forward, we anticipate annual Industrial growth capital expenditures to be approximately 10% of the total divisional growth capital spend.

Management targets a three to four year cash flow payback on growth capital investments at the branch or project level, once capital is contributing. After allocation of supporting overheads, management targets a blended return of between four and five years on all growth capital.

Management and the Board also review corporate and division return on capital metrics, applying traditional definitions of Return on Capital Employed ("ROCE"), (where we apply Net earnings plus tax adjusted interest as the numerator and Net Assets as the denominator), as well as a ROC - Cash and Divisional ROC as one of the means to evaluate overall effectiveness of our growth capital program.

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 $6.1 million in dividends or $0.11 per share, paid January 15, 2014, to shareholders on record as at December 30, 2013.

As at February 20, 2014, Newalta had 55,452,192 shares outstanding, and outstanding options to purchase up to 4,018,334 shares.

CONTRACTUAL OBLIGATIONS

Our contractual obligations, as at December 31, 2013 were:

($000s) Total Less than one year 1-3 years 4-5 years Thereafter
Office leases 68,643 10,224 31,281 9,296 17,842
Operating leases(1) 11,570 5,811 5,608 151 -
Surface leases 2,385 447 1,341 447 150
Senior long-term debt(2) 117,136 - 117,136 - -
Senior unsecured debentures 344,011 19,219 181,664 9,688 133,440
Other obligations(3) 223,370 223,370 - - -
Total commitments 767,115 259,071 337,030 19,582 151,432
  1. Operating leases relate to our vehicle fleet with terms ranging between 1 and 5 years.
  2. Senior long-term debt is gross of transaction costs. Interest payments are not included.
  3. Other obligations is comprised primarily of accounts payable and accrued liability balances.

In 2013, Newalta contributed $1.2 million to the Enertech Partnership Agreement. Newalta is contingently committed to capital contributions up to a maximum of $7.0 million over the 10 year investment period. The investment is classified as held-for-trading and is recorded in other long-term assets.

SUMMARY OF QUARTERLY RESULTS

($000s except per share data) 2013 2012
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Revenue 203,799 212,112 196,138 171,348 198,445 190,136 171,130 166,498
(Loss) earnings before taxes (13,012 ) 19,064 6,697 15,145 4,830 19,048 22,992 7,143
Net (loss) earnings (10,322 ) 13,158 4,944 14,160 4,124 15,236 18,626 4,819
Earnings per share ($) (0.19 ) 0.24 0.09 0.26 0.08 0.31 0.38 0.10
Diluted earnings per share ($) (0.19 ) 0.24 0.09 0.26 0.08 0.31 0.38 0.10
Adjusted net earnings 11,532 20,417 11,894 5,753 8,947 15,430 4,994 12,253
Earnings per share ($) - adjusted 0.21 0.37 0.22 0.11 0.17 0.32 0.10 0.28
Weighted average shares - basic 55,205 55,077 54,928 54,512 52,741 48,698 48,682 48,579
Weighted average shares - diluted 55,756 55,700 55,400 55,246 53,473 49,497 49,613 49,519
EBITDA 28,733 44,447 38,331 29,060 27,865 37,544 37,200 27,269
Adjusted EBITDA 32,795 51,199 38,350 27,721 33,290 42,526 30,248 36,073

Quarterly performance is affected by, among other things, weather conditions, timing of onsite projects, the value of our products, foreign exchange rates, market demand and the timing of our growth capital investments as well as acquisitions and the contributions from those investments. 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 Industrial onsite business due to the aqueous nature of work performed, as well as potentially by fluctuations in the value of our products or event-based waste receipts at SCL.

Quarterly results over the last two years were impacted by fluctuations in the share price, which impacts the stock-based compensation expense, non-cash gains or losses on the embedded derivatives and by commodity prices, with weaker commodity prices having a larger impact on Q2 2012, Q4 2012, Q1 2013 and Q4 2013. The timing of our Heavy Oil contracts also impacted quarterly results, with lower contributions in the winter months as experienced in Q1 2013.

Quarterly revenue in 2012 grew, reflecting strong demand for our services. Compared to Q1, Q2 2012 net earnings increased significantly due to lower stock-based compensation expense and net finance charges. In Q2, Adjusted EBITDA was down due to the weaker commodity prices in the quarter and higher SG&A expenses. Q3 2012 revenue and Adjusted EBITDA increased from growth in New Markets. Adjusted EBITDA in Q4 decreased from Q3 2012 due to changes in commodity prices, reduced oilfield activity and higher stock-based compensation expense. Net earnings for the second half of 2012 decreased due to higher stock-based compensation expense.

Revenue and Adjusted EBITDA in Q1 2013 declined from Q4 2012 due to the impact of lower commodity pricing, timing of contracts and projects in New Markets, higher Adjusted SG&A expenses, offset by improved performance in Oilfield and VSC. Net earnings increased as a result of lower stock-based compensation expense, net finance charges and deferred income taxes. Revenue and Adjusted EBITDA in Q2 2013 increased from Q1 2013 primarily due to timing of contracts and projects in New Markets and improved performance in Oilfield. Net earnings decreased due to higher stock-based compensation expense, net finance charges related to a non-cash loss on embedded derivatives and deferred income taxes. Strong year-over-year performance continued in Q3 2013. Revenue and Adjusted EBITDA in Q3 increased from Q2 driven primarily by contributions from our growth capital investments in New Markets and higher event-based business at SCL. Net earnings increased due to improved performance, lower net finance charges related to a non-cash loss on embedded derivatives, partially offset by higher stock-based compensation and deferred income taxes. Q4 results were impacted by restructuring related impairment, non-recurring charges, weaker commodity prices, and the timing of Heavy Oil contracts.

SUMMARY OF SEGMENTED QUARTERLY FINANCIAL INFORMATION

2013 2012
($ millions) Year Q4 Q3 Q2 Q1 Year Q4 Q3 Q2 Q1
New Markets
Revenue 227.6 62.5 68.1 56.1 40.9 188.8 52.5 61.6 38.6 36.1
Gross profit 75.2 17.7 25.1 19.3 13.0 67.8 17.1 22.5 14.0 14.2
Amortization (included in Cost of sales) 18.2 5.6 5.9 4.2 2.5 12.3 4.4 3.4 2.3 2.1
Divisional EBITDA(1) 93.4 23.3 31.0 23.5 15.5 80.1 21.5 26.0 16.3 16.3
Assets employed(2) 286.9 286.9 251.9 239.3 225.7 221.5 221.5 204.0 201.6 174.5
Recovered crude oil ('000 bbl) 268.9 64.5 69.5 71.5 63.6 215.9 55.0 51.1 56.1 53.6
Oilfield
Revenue 184.6 47.5 49.0 39.5 48.6 181.1 44.5 47.2 39.0 50.5
Gross profit 69.7 16.9 19.9 13.8 19.2 61.5 14.8 16.7 10.5 19.5
Amortization (included in Cost of sales) 12.4 3.3 3.1 3.0 3.0 12.0 3.1 3.0 2.7 3.2
Divisional EBITDA(1) 82.1 20.2 23.0 16.8 22.2 73.5 17.9 19.7 13.2 22.7
Assets employed(2) 384.7 384.7 364.0 360.1 354.8 350.7 350.7 344.2 338.0 333.8
Recovered crude oil ('000 bbl) 289.3 71.5 69.4 70.2 78.2 266.9 76.3 61.8 57.8 71.0
Industrial
Revenue 371.2 93.8 95.1 100.5 81.9 356.3 101.4 81.4 93.6 79.9
Gross profit 43.7 11.5 14.2 12.3 5.6 40.5 7.1 9.7 14.4 9.2
Amortization (included in Cost of sales) 21.7 3.7 5.5 6.9 5.6 24.8 6.8 5.9 6.0 6.1
Divisional EBITDA(1) 65.3 15.3 19.6 19.2 11.2 65.3 13.9 15.6 20.4 15.3
Assets employed(2) 407.8 407.8 429.2 427.0 428.8 428.4 428.4 425.0 422.1 421.4
VSC Volume ('000s MT) 68.7 19.2 15.6 17.4 16.5 64.7 17.6 12.1 17.6 17.4
SCL Volume Collected ('000s MT) 731.8 113.4 273.6 226.6 118.2 750.0 228.3 155.3 170.5 195.9
Base Oil (millions of litres) 18.5 4.6 4.9 5.1 3.9 17.8 4.2 4.7 4.4 4.5
  1. "Divisional EBITDA" is a measure of the division's profitability and an indication of the results generated by the division's principal business activities prior to how the assets are amortized. Divisional EBITDA is the sum of gross profit and amortization.
  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. 2012 and 2013 information has been restated to conform to current presentation.

SUPPLEMENTARY INFORMATION - NON-RECURRING CHARGES

Three months ended
December 31,
Year ended
December 31,
($millions) 2013 2013
Charges for positions eliminated during the year 0.2 1.6
Settlement of an out of period disputed account 0.6 2.1
DOL settlement(1)
DOL settlement charged to New Markets 1.5 -
DOL settlement charged to SG&A 2.2 2.2
Total non-recurring charges 4.5 5.9
  1. In Q4 2013, we recognized $4.2 million as a result of the DOL settlement. $2.2 million related to prior years and was charged to SG&A. $2.0 million was charged to New Markets for 2013 compensation, of which $1.5 million related to the first 9 months of 2013.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any material off-balance sheet arrangements.

SENSITIVITIES

Our revenue is sensitive to changes in commodity prices for crude oil, base oils and lead. 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. Approximately 20% of our revenue is sensitive to direct impact of commodity prices.

Our results are also impacted by drilling activity. Drilling sensitivities are impacted by the area in which drilling occurs compared to areas which we operate and the drilling techniques employed. Where possible, we actively manage these impacts by strategically geographically balancing mobile assets to meet demand and shifts in activity levels where necessary.

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 benchmark Impact on Annual Revenue ($)(1)
LME lead price ($U.S./MT)(2) 110 3.5 million
Edmonton Par crude oil price ($/bbl) 1.00 0.4 million
WCS ($/bbl) 1.00 0.3 million
Metres drilled (million metres) 1.00 1.8 million
Active rigs in WCSB 10 rigs 0.3 million
Motiva Base oil ($/litre) 0.01 0.2 million
  1. Based on 2013 performance and volumes and are approximations and used to support our strategy outlined in the Strategy section.
  2. Excludes impact of LME on feedstock which offsets the impact of LME on revenue.

Our stock-based compensation expense is sensitive to changes in our share price. At December 31, 2013, a $1 change in our share price between $15 per share and $20 per share has a $1.2 - $1.5 million direct impact on annual stock-based compensation reflected in SG&A. We anticipate that approximately 45% of stock-based compensation will be settled in cash in future periods.

RISK MANAGEMENT

To effectively manage the risk associated with our business and strategic objectives, our risk management approach continues to evolve. Our approach provides the framework to understand and address risks faced by our organization. Risk categories identified include:

  • Strategic - risk to earnings, capital, and strategic objectives arising due to changes in the business environment

  • Operational - risk of loss due to failed internal processes and systems, human and technical errors, or external events

  • Financial - risk associated with financial processes, obligations, and assets

  • People - risk to Business Plan due to recruiting, training, labour availability, union relations, and managerial structure

  • Legal/Regulatory - risk of loss due to compliance with laws, ethical standards, and contractual obligations

  • Technology and Data - risk that IT systems are not adequate to support strategic and business objectives

CRITICAL ACCOUNTING ESTIMATES

The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Such estimates relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts as transactions are settled in the future. Amounts recorded for amortization, accretion, future decommissioning obligations, embedded derivatives, deferred income taxes, valuation of warrants and impairment calculations are based on estimates. By their nature, these estimates are subject to measurement uncertainty, and the impact of the difference between the actual and the estimated costs on the financial statements of future periods could be material.

RECOVERABILITY OF ASSET CARRYING VALUES

Newalta assesses its property, plant and equipment, intangibles and goodwill for impairment at the asset level and the cash generating unit ("CGU") level by comparing the carrying values of the assets or CGUs being tested with their recoverable amounts. The recoverable amounts are the greater of the assets' or CGUs' values in use or their fair values less costs to sell.

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. Events or changes in circumstances include items such as: significant changes in the manner in which an asset is used, including plans to restructure the operation to which an asset belongs, or plans to dispose of an asset before the previously expected date. The carrying values of our CGUs are tested annually for impairment. Judgment is required in the aggregation of assets into CGU's.

The determination of the recoverable amount involves estimating the assets or CGU's fair value less costs to sell or its value-in-use, which is based on its discounted future cash flows using an applicable discount rate. Future cash flows are calculated based on management's best estimate of future inflation and are discounted based on management's current assessment of market conditions.

In December 2013, we announced our intention to streamline resources in the Industrial division through a rationalization of business lines and facilities in 2014. As a result of this initiative, we assessed the recoverable amount for certain assets directly impacted by this initiative to be lower than their carrying value and recognized $21.2 million for restructuring related impairment in Q4 2013.

The pre-tax asset impairment charge recognized in the Industrial division was allocated as follows:

December 31, 2013(1)
Property, plant and equipment 7,599
Intangible assets 5,849
Goodwill 7,750
21,198
  1. The total asset impairment charge contains $5.5 million which relates to assets which have been classified as held for sale at December 31, 2013.

As at December 31, 2012, there was no impairment.

DECOMMISSIONING LIABILITY

Newalta recognizes a provision for future remediation and post abandonment activities in the consolidated financial statements as the net present value of the estimated future expenditures required to settle the estimated future obligation at the balance sheet date. The recorded liability increases over time to its future amount through unwinding of the discount. The measurement of the decommissioning liability involves the use of estimates and assumptions including the discount rate, the expected timing of future expenditures and the amount of future abandonment costs. Decommissioning estimates are reviewed annually and estimated by management, in consultation with Newalta's engineers and environmental, health and safety staff, on the basis of current regulations, costs, technology and industry standards.

Revisions to the estimated amount or timing of the obligations are reflected prospectively as increases or decreases to the recorded liability and the related asset. Actual decommissioning expenditures, up to the recorded liability at the time, are drawn against the liability as the costs are incurred. Amounts capitalized to the related assets are amortized to income in line with the depreciation of the underlying asset.

FAIR VALUE CALCULATION ON SHARE-BASED PAYMENTS AND SHARE APPRECIATION RIGHTS

We have one share-based compensation plan (the "Option Plan"). Under the Option Plan, 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 of Newalta.

The fair value of share-based payments is calculated using a Black-Scholes option pricing model, depending on the characteristics of the share-based payment. There are a number of estimates used in the calculation such as the future forfeiture rate, expected option life and the future price volatility of the underlying security which can vary from actual future events. The factors applied in the calculation are management's best estimates based on historical information and future forecasts.

We may also grant share appreciation rights ("SARs") to directors, officers, employees and consultants of Newalta or any of its affiliates. SARs entitle the holder thereof to receive cash from Newalta in an amount equal to the positive difference between the grant price and the trading price of our common shares on the exercise date. The grant price is calculated based on the five-day volume weighted average trading price of our common shares on the TSX.

The fair value at the date of grant is calculated using the Black-Scholes option pricing model method with the share-based compensation expense recognized over the vesting period of the options. There are a number of estimates used in the calculation such as the future forfeiture rate, expected option life and the future price volatility of the underlying security which can vary from actual future events. The factors applied in the calculation are management's best estimates based on historical information and future forecasts.

TAXATION

The calculation of deferred income taxes is based on a number of assumptions including estimating the future periods in which temporary differences, tax losses and other tax credits will reverse. Tax interpretations, regulations and legislation in the various jurisdictions in which we operate are subject to change.

DERIVATIVE INSTRUMENTS

The estimated fair value of derivative instruments resulting in financial assets and liabilities, by their very nature, are subject to measurement uncertainty.

LEASES

Newalta makes judgments in determining whether certain leases, in particular those with long contractual terms where the lessee is the sole user and Newalta is the lessor, are operating or finance leases.

REVENUE

Newalta may enter into arrangements with customers which contain multiple elements in which revenue is recognized for each unit of accounting when earned based on the relative fair value of each unit of accounting as determined by internal or third party analyses of market-based prices. Significant judgment is required to allocate contract consideration to each unit of accounting and determine whether the arrangement is a single unit of accounting or a multiple element arrangement. Depending upon how such judgment is exercised, the timing and amount of revenue recognized could differ significantly.

ACCOUNTING POLICY CHANGES

We adopted the following standards for the first time in the financial year beginning January 1, 2013. There have been no material impacts upon adoption:

  • IFRS 10, "Consolidated Financial Statements"
  • IFRS 11, "Joint Arrangements"
  • IFRS 12, "Disclosure of Interests in Other Entities"
  • IFRS 13, "Fair Value Measurement"

BUSINESS RISKS AND RISK MANAGEMENT

Our business is subject to certain risks and uncertainties. Prior to making any investment decision regarding Newalta, investors should carefully consider, among other things, the risks described herein (including the risks and uncertainties listed on the front page of this MD&A and throughout this MD&A) and the risk factors set forth in the most recently filed Annual Information Form of Newalta which are incorporated by reference herein. For further information on our risk management framework, please refer to the section on Risk Management.

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 45% of our total revenue, with 10% of these customers having a credit rating of A or higher and 55% 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, 2013. Management assesses our working capital foreign exchange exposure regularly and may draw U.S. denominated long-term debt as required, which serves as a natural hedge, to mitigate our balance sheet exposure. The floating interest rate profile of our long-term debt exposes us to interest rate risk. We do not use hedging instruments to mitigate this risk. The carrying value of the senior secured long-term debt approximates fair value due to its floating interest rates. For further information regarding our financial and other instruments, please refer to Note 18 to the Financial Statements in our Annual Report for the year ended December 31, 2013.

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 and our internal controls over financial reporting using the Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As of December 31, 2013, the Certifying Officers have concluded that such disclosure controls and procedures and internal controls over financial reporting were effective. There have not been any changes in the internal control over financial reporting in Q4 of 2013 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 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
(Unaudited - expressed in thousands of Canadian Dollars)
December 31, 2013 December 31, 2012
Assets
Current assets
Cash - 409
Accounts and other receivables (Note 17) 148,998 150,347
Inventories (Note 3) 57,037 43,123
Prepaid expenses and other assets (Note 4) 16,891 10,468
222,926 204,347
Non-current assets
Property, plant and equipment (Note 4) 1,011,921 929,580
Permits and other intangible assets (Note 5) 52,595 58,614
Other long-term assets (Note 6) 24,632 23,602
Goodwill (Note 5) 96,167 102,615
TOTAL ASSETS 1,408,241 1,318,758
Liabilities
Current liabilities
Bank indebtedness 1,321 -
Accounts payable and accrued liabilities 217,283 188,370
Dividends payable (Note 15) 6,087 5,426
224,691 193,796
Non-current liabilities
Senior secured debt (Note 7) 117,136 76,500
Senior unsecured debentures (Note 8) 246,970 246,334
Other liabilities (Note 9) 2,537 4,228
Deferred tax liability (Note 10) 80,646 77,519
Decommissioning liability (Note 11) 61,099 78,941
TOTAL LIABILITIES 733,079 677,318
Shareholders' Equity
Shareholders' capital (Note 12) 409,894 394,048
Contributed surplus 15,251 2,881
Retained earnings 245,834 247,565
Accumulated other comprehensive income (loss) 4,183 (3,054 )
TOTAL EQUITY 675,162 641,440
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,408,241 1,318,758
The accompanying notes to the financial statements are an integral component of the financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - expressed in thousands of Canadian Dollars)
(Except per share data)
For the three months ended December 31, For the year
ended December 31,
2013 2012 2013 2012
Revenue 203,799 198,445 783,396 726,209
Cost of sales 157,704 159,408 594,858 556,451
Gross profit 46,095 39,037 188,538 169,758
Selling, general and administrative 34,046 28,969 114,965 102,389
Restructuring related impairment (Note 4) 21,198 - 21,198 -
(Loss) earnings before finance charges and income taxes (9,149 ) 10,068 52,375 67,369
Finance charges (Note 18) 7,269 5,840 27,517 26,796
Embedded derivative gain (Note 17) (3,406 ) (602 ) (3,036 ) (13,439 )
Net financing charges expense 3,863 5,238 24,481 13,357
(Loss) earnings before income taxes (13,012 ) 4,830 27,894 54,012
Income tax (recovery) expense (Note 10) (2,690 ) 706 5,954 11,208
Net (loss) earnings (10,322 ) 4,124 21,940 42,804
Net (loss) earnings per share (Note 14) (0.19 ) 0.08 0.40 0.86
Diluted (loss) earnings per share (Note 14) (0.19 ) 0.08 0.40 0.85
Supplementary information:
Amortization included in cost of sales 12,711 14,271 52,259 49,024
Amortization included in selling, general and administrative 3,973 3,526 14,738 13,485
Total amortization 16,684 17,797 66,997 62,509
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - expressed in thousands of Canadian Dollars)
For the three months ended December 31, For the year
ended December 31,
2013 2012 2013 2012
Net (loss) earnings (10,322 ) 4,124 21,940 42,804
Other comprehensive income (loss):
Exchange difference on translating foreign operations 3,810 1,340 7,523 (2,678 )
Unrealized loss on available for sale financial assets (127 ) (64 ) (286 ) (159 )
Transfer of available for sale financial assets to financing charges - 70 - 1,627
Other comprehensive income (loss) 3,683 1,346 7,237 (1,210 )
Comprehensive income (6,639 ) 5,470 29,177 41,594
The accompanying notes to the financial statements are an integral component of the financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited - expressed in thousands of Canadian Dollars)
Shareholders'
capital
(Note 12)
Contributed
surplus
Retained
earnings
Accumulated
other
comprehensive
income
(loss)
Total
Balance, December 31, 2011 317,386 2,700 223,679 (1,844 ) 541,921
Changes in equity for year ended December 31, 2012
Exercise of options 2,443 - - - 2,443
Issuance of shares 74,400 - - - 74,400
Cancellation of shares (181 ) 181 - - -
Dividends declared - - (18,918 ) - (18,918 )
Other comprehensive loss - - - (1,210 ) (1,210 )
Net earnings for the year - - 42,804 - 42,804
Balance, December 31, 2012 394,048 2,881 247,565 (3,054 ) 641,440
Changes in equity for year ended December 31, 2013
Expense related to vesting of options - 235 - - 235
Reclassification of equity settled options (Note 9) - 12,598 - - 12,598
Exercise of options 10,634 (463 ) - - 10,171
Issuance of shares 5,212 - - - 5,212
Dividends declared - - (23,671 ) - (23,671 )
Other comprehensive income - - - 7,237 7,237
Net earnings for the year - - 21,940 - 21,940
Balance, December 31, 2013 409,894 15,251 245,834 4,183 675,162
The accompanying notes to the financial statements are an integral component of the financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - expressed in thousands of Canadian Dollars)
For the three months ended December 31, For the year
ended December 31,
2013 2012 2013 2012
Cash provided by (used for):
Operating Activities
Net (loss) earnings (10,322 ) 4,124 21,940 42,804
Adjustments for:
Amortization 16,684 17,797 66,997 62,509
Restructuring related impairment (Note 4) 21,198 - 21,198 -
Income taxes expense (Note 10) (2,690 ) 706 5,954 11,208
Income taxes (paid) recovered (110 ) (188 ) 11 (231 )
Non-cash stock-based compensation expense (Note 9) 2,032 4,455 3,149 8,955
Net financing charges 3,863 5,238 24,481 13,357
Finance charges paid (11,158 ) (10,343 ) (24,095 ) (22,075 )
Other 349 514 893 89
Funds from Operations 19,846 22,303 120,528 116,616
Decrease (increase) in non-cash working capital (Note 21) 27,078 26,842 8,333 (15,619 )
Decommissioning costs incurred (Note 11) (1,308 ) (1,683 ) (5,287 ) (3,554 )
Cash from Operating Activities 45,616 47,462 123,574 97,443
Investing Activities
Additions to property, plant and equipment (Note 21) (38,191 ) (48,616 ) (151,860 ) (157,669 )
Proceeds on sale of property, plant, and equipment 361 1,925 2,424 2,573
Other 37 - (3,540 ) 100
Cash used in Investing Activities (37,793 ) (46,691 ) (152,976 ) (154,996 )
Financing Activities
Issuance of shares 1,400 73,920 3,761 74,562
(Decrease) increase in senior secured debt (2,364 ) (71,000 ) 40,636 7,496
(Decrease) increase in bank indebtedness (2,355 ) - 1,321 (6,168 )
Dividends paid (4,862 ) (4,870 ) (17,799 ) (17,382 )
Cash (used in) from Financing Activities (8,181 ) (1,950 ) 27,919 58,508
Effect of foreign exchange on cash 358 311 1,074 (546 )
Change in cash - (868 ) (409 ) 409
Cash, beginning of period - 1,277 409 -
Cash, end of period - 409 - 409
The accompanying notes to the financial statements are an integral component of the financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the three months and years ended December 31, 2013 and 2012.

(Unaudited - all tabular data in thousands of Canadian Dollars except per share and ratio data)

NOTE 1. CORPORATE STRUCTURE

Newalta Corporation (the "Corporation" or "Newalta") was incorporated on October 29, 2008, pursuant to the laws of the Province of Alberta. Newalta completed an internal reorganization resulting in a name change from Newalta Inc. to Newalta Corporation effective January 1, 2010. Newalta provides cost-effective solutions to industrial customers to improve their environmental performance with a focus on recycling and recovery of products from industrial residues. These services are provided both through our network of facilities across Canada and at our customers' facilities where we mobilize our equipment and people to process material directly onsite. Our customers operate in a broad range of industries including oil and gas, petrochemical, refining, lead, manufacturing and mining industries.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

STATEMENT OF COMPLIANCE

These consolidated financial statements ("Financial Statements") were prepared in accordance with International Financial Reporting Standards ("IFRS") and include the accounts of Newalta and its wholly-owned subsidiaries. All intercompany balances and transactions including revenue and expenses were eliminated.

These financial statements were approved by the Board of Directors on February 20, 2014.

Critical judgments and estimate uncertainties in applying accounting policies

The preparation of the financial statements in conformity with IFRS requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue and expense 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. Estimates and assumptions are reviewed on an ongoing basis. Revisions to estimates are applied prospectively.

(i) The following are the critical judgments that management made in applying Newalta's accounting policies and that have the most significant effect on the amounts recognized in the financial statements.

  • Determining components under multiple element revenue agreements;
  • Determining whether agreements not in the legal form of a lease, contain a lease;
  • Determining whether certain leases, are operating or finance leases;
  • Determining the aggregation of assets into cash generating units ("CGUs");
  • Determining key assumptions for impairment testing;
  • Determining the existence of contingent liabilities or whether an outflow of resources is probable and this needs to be accounted for as a provision;

(ii) The following sections contain critical estimates and assumptions with the most significant effect on amounts recognized in the financial statements. They are discussed further in the accounting policies that follow.

  • Revenue (Note 2k)
  • Recoverability of asset carrying values for impairment testing purposes (Note 2i and 5)
  • Fair value determination of stock-based payments (Note 2o and 9)
  • Income Tax (Note 2m and 10)
  • Decommissioning liability (Note 2j and 11)
  • Derivative instruments (Note 2p and 17)

BASIS OF PREPARATION

The financial statements were prepared on the historical cost basis except for certain financial instruments that are measured at fair value, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

The principal accounting policies are set out below.

a) Cash

Cash is defined as cash and short-term deposits with maturities of three months or less, when purchased.

b) Offsetting Financial Instruments

Financial assets and liabilities are offset and the net amount is reported on the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously.

c) Inventories

Inventories are comprised of oil, lead and other recycled products, spare parts and supplies, and are recorded at the lower of cost and net realizable value. Inventories are valued using the weighted average costing method. Cost of finished goods includes the laid down cost of materials plus the cost of direct labour applied to the product and the applicable share of overhead expense. Cost of other items of inventories comprise the laid down cost.

d) 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 onsite equipment. These residual values are not depreciated. The estimated useful lives, residual values and amortization methods are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

Landfill assets represent the costs of landfill available space, including original acquisition cost, incurred landfill construction and development costs, including leachate 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 plus unpermitted capacity that management believes is probable of ultimately being permitted, is amortized on a per-unit basis as landfill space is consumed. The impact on annual amortization expense of changes in estimated capacity and construction costs is accounted for prospectively. Management annually updates landfill capacity estimates which include permitted and unpermitted but probable capacities. Estimates are based on survey information provided by independent engineers, and projected landfill construction and development costs.

Newalta applies the following criteria for evaluating the probability of obtaining a permit for additional capacity, which provides management with a basis to evaluate the likelihood of success of unpermitted expansions:

  • Management has submitted the application and expects to receive all necessary approvals to accept waste.
  • At the time the expansion is included in Newalta's estimate of the landfill's useful economic life, it is probable that the required approvals will be received within the normal application and processing time periods for approvals in the jurisdiction in which the landfill is located.
  • Additional capacity and related additional costs, including permitting, final closure and post-closure costs, were estimated based on the conceptual design of the proposed expansion.

e) 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 30 years on a straight line basis. Certain permits are deemed to have indefinite lives and therefore are not amortized. There are nominal fees to renew these permits provided that Newalta remains in good standing with regulatory authorities.

f) Assets held for sale

Non-current assets are classified as assets held for sale, and are reported in prepaid and other assets on the balance sheet, when their carrying amount is to be recovered principally through a sale transaction rather than through continuing use, and a sale is considered highly probable. Assets held for sale are stated at the lower of net book value and fair value less costs to sell. Once classified as held for sale, amortization is no longer recorded on the assets.

g) Leases

Lessee

All of Newalta's leases are classified as operating leases therefore the leased assets are not recognized in Newalta's consolidated balance sheets. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease unless another systematic basis is representative of the time pattern of Newalta's benefit, including any rent-free periods. Lease incentives are recognized as an integral part of the total lease expense, over the term of the lease.

Leases may include additional payments for real estate taxes, maintenance and insurance. These amounts are expensed in the period to which they relate.

Lessor

Assets subject to operating leases are recognized and classified according to the nature of the leased asset. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and expensed over the lease term on the same basis as the lease income. The depreciation policy for leased assets is consistent with the depreciation policy for similar owned assets.

h) Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets of acquired businesses.

i) Impairment

Impairment testing compares the carrying values of the assets or CGUs being tested with their recoverable amounts (recoverable amounts being the greater of the assets' or CGUs' values in use or their fair values less costs to sell). Value in use is assessed using the present value of the expected future cash flows of the relevant asset. When it is not possible to estimate the recoverable amount of an individual asset, the asset is tested as part of a CGU, which is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The key assumptions for the value in use calculation include discount and growth rate estimates of the risks associated with the projected cash flows based on the best information available as of the date of the impairment test. The weighted average growth rates reflect a nominal inflationary rate as required by IFRS that is calculated over the remaining useful life of each asset or CGU. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGUs.

Impairment losses are immediately recognized to the extent that the asset or CGU carrying values exceed their recoverable amounts. Should the recoverable amounts for previously impaired assets or CGUs subsequently increase, the impairment losses previously recognized (other than in respect of goodwill) may be reversed to the extent that the reversal is not a result of "unwinding of discount" and that the resulting carrying value does not exceed the carrying value that would have been the result if no impairment losses had been previously recognized.

Asset impairment

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. Events or changes in circumstances include items such as: significant changes in the manner in which an asset is used, including plans to restructure the operation to which an asset belongs, or plans to dispose of an asset before the previously expected date.

CGU impairment

The carrying values of Newalta's CGUs are tested annually for impairment. For the purpose of impairment testing, goodwill is allocated to CGUs expected to benefit from the business combination in which the goodwill arose. To the extent that the carrying amount of a CGU exceeds its recoverable amount, the excess would first reduce the carrying value of goodwill and any remainder would reduce the carrying values of the long-term assets of the CGUs on a pro-rated basis.

Management has determined that Newalta's CGUs are: Industrial West business unit, Industrial East business unit, Ville Ste-Catherine ("VSC") business unit, Oilfield division, Heavy Oil business unit and United States ("U.S.") business unit.

j) Provisions

Provisions are recognized when Newalta has a present obligation (legal or constructive) as a result of a past event, it is probable that Newalta will be required to settle the obligation, and a reliable estimate can be made of the amount of that obligation.

Decommissioning liabilities

Newalta provides for estimated future decommissioning costs for all its facilities based on the useful lives of the assets and the long-term commitments of certain sites. Over this period, Newalta recognizes the liability for the future decommissioning liabilities associated with property, plant and equipment. These obligations are initially measured at the discounted future value of the liability. This value is capitalized as part of the cost of the related asset and amortized over the asset's useful life. The balance of the liability is adjusted each period for the unwinding of the discount, with the associated expense included within finance charges. Decommissioning costs and timing are estimated by management, in consultation with Newalta's engineers and environmental, health and safety staff, on the basis of current regulations, costs, technology and industry standards. Other key estimates include discount and inflation rates. Actual decommissioning costs are charged against the provision as incurred.

k) Revenue recognition

Revenue is recognized when the significant risks and rewards of ownership of the goods and/or delivery of services have transferred to the buyer, recoverability of consideration is probable, the amount of revenue can be measured reliably, Newalta retains no continuing managerial involvement with the goods, and the costs required to complete the contract can be estimated reliably. Revenue is measured net of returns and trade discounts.

Newalta offers individual services, products and integrated solutions to meet customer needs. Integrated solutions may involve the delivery of multiple services and products occurring in different reporting periods. As appropriate, these multiple element arrangements are separated into components and consideration is allocated based upon their relative fair values.

Individual and integrated solutions may include one or more of the following:

(i) Sale of Services

Newalta's waste processing services are generally sold based upon service orders or contracts with a customer that include fixed or determinable prices based upon hourly, daily, or throughput rates. Revenue is recognized when services are rendered.

(ii) Sale of Products

Revenue from Newalta's sale of recycled and recovered waste products is recognized when products are delivered to customers or pipelines.

(iii) Construction Contracts

Construction contract revenue results from some of Newalta's onsite projects. Construction revenue includes the initial amount negotiated in the contract plus any change in terms of scope of work performed. If costs can be measured reliably, revenue is recognized based on the stage of completion of the contract, determined by the physical portion of work performed. Otherwise, construction revenue will be recognized to the extent contract costs are likely to be recovered.

(iv) Operating Leases

Operating lease revenue is derived from some of Newalta's onsite projects. Lease accounting is applied to a component of a contract if it conveys the right of use of a specific asset to a customer but does not convey the risks and/or benefits of ownership. Revenue from operating leases is recognized over the processing period.

l) 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 were deferred is modified or cancelled, Newalta will assess the recoverability of the deferred costs and if considered unrecoverable, will expense the costs in the period the assessment is made.

m) Income Tax

Tax expense 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. Current income tax is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date. Deferred income tax assets and liabilities are measured based upon temporary differences between the carrying values of assets and liabilities and their tax base. 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 probable to be realized. Deferred income tax assets and liabilities are determined based on the tax laws and rates that are anticipated to apply in the period of estimated realization.

n) 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.

o) Stock-based incentive plans

The Corporation's stock-based incentive plans consist of stock options, stock appreciation rights and share units, and are granted to executives, employees and non-employee directors.

Stock options

Newalta has one active stock-based option incentive plan (the "Option Plan"). Under the Option Plan, 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").

In December 2013, the Board of Directors modified the Option Plan to eliminate the ability for option holders to settle options for cash. As a result of this change, the stock based compensation liability relating to stock options was reclassified to contributed surplus.

The Option Plan is equity settled. The fair value of options at the date of grant is calculated using the Black-Scholes option pricing model method with the stock-based compensation expense recorded as a selling, general and administrative expense ("SG&A") that is recognized over the vesting period of the options, with a corresponding increase to contributed surplus. When options are exercised, the proceeds, together with the amount recorded in contributed surplus, are transferred to shareholders' capital. Forfeitures are estimated and accounted for at the grant date and adjusted, if necessary, in subsequent periods.

Stock appreciation rights ("SARs")

SARs entitle the holder to receive cash from Newalta in an amount equal to the positive difference between the grant price and the trading price of the Shares on the exercise date. The grant price is calculated based on the five-day volume weighted average trading price of the Shares on the Toronto Stock Exchange. SARs generally expire five years after they are granted and the vesting period is determined by the Board of Directors of Newalta. The fair value at the date of grant is calculated using the Black-Scholes option pricing model method with the stock-based compensation expense recognized over the vesting period of the options and recorded as SG&A with a corresponding entry to accrued liabilities or other liabilities. The fair value is subsequently re-measured at the end of each reporting period. Forfeitures are estimated and accounted for at the grant date and adjusted, if necessary, in subsequent periods.

Share units

Newalta has a cash-settled Deferred Share Unit ("DSU") plan that exists for non-executive directors. Under this plan, notional DSUs are granted annually and vest immediately. The measurement of the compensation expense and corresponding liability for these awards is based on the fair value of the award, and is recognized as a stock-based compensation expense which is recorded as a SG&A with a corresponding increase in accrued liabilities. Dividend equivalent grants, if any, are recorded as stock-based compensation expense in the period the dividend is paid. The liability is re-measured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognized in earnings. Each DSU entitles the holder to receive a cash payment equal to the five-day volume weighted average trading price of the Shares preceding the date of redemption. The DSUs may only be redeemed within the period beginning on the date a holder ceases to be a participant under the plan and ending on December 31 of the following calendar year.

A cash-settled Performance Share Unit ("PSU") plan has been established for officers and other eligible employees. Under this plan, notional PSUs are granted based on corporate performance criterion and vest no later than December 31 of the third year after the year to which the relevant PSU was granted. Each vested PSU 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 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 PSU. The stock-based compensation expense of the PSUs is recorded as SG&A on a straight-line basis over the vesting period with a corresponding entry to either accrued liabilities or other liabilities. This estimated value is adjusted each period based on the period-end trading price of the 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.

p) Financial instruments Classification

Newalta's financial instruments are classified into one of four categories and are initially recognized at fair value and subsequently measured as noted in the table below.

Category Subsequent Measurement
Financial assets at fair value through profit and loss ("FVTPL") and held-for-trading investments ("HFT") Fair value and changes in fair value are recognized in net earnings
Loans and receivables Amortized cost, using the effective interest method
Available-for-sale financial assets ("AFS") Fair value and changes in fair value are recorded in other comprehensive income until the instrument is derecognized or impaired
Financial liabilities Amortized cost, using the effective interest method

Cash and accounts and other receivables are classified as loans and receivables. Senior secured debt, senior unsecured debentures, bank indebtedness, accounts payable and accrued liabilities, dividends payable and other liabilities are classified as financial liabilities.

Newalta categorizes its financial instruments carried at fair value into one of three different levels, depending on the significance of inputs employed in their measurement.

Level 1 includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and liabilities in active markets that are accessible at the measurement date. An active market for an asset or liability is considered to be a market where transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Newalta's cash, "AFS" investments, and senior unsecured debentures are classified as level 1 financial instruments.

Level 2 includes valuations determined using directly or indirectly observable inputs other than quoted prices included within Level 1. Financial instruments in this category are valued using models or other industry standard valuation techniques derived from observable market data. Such valuation techniques include inputs such as quoted forward prices, time value, volatility factors and broker quotes that can be observed or corroborated in the market for the entire duration of the derivative instrument. Instruments valued using Level 2 inputs include the embedded derivative within the senior unsecured debentures, held-for-trading investments, and senior secured debt.

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, 2013 and 2012, Newalta did not have any Level 3 assets or liabilities.

Embedded derivatives

The embedded derivatives are classified at fair value through profit and loss ("FVTPL"). They were valued using the option adjusted spread ("OAS") model, which requires management to make judgments, estimates and assumptions. They are valued at fair value upon initial recognition and at the end of each reporting period with gains and losses recognized through finance charges in the consolidated statement of operations.

Transaction costs

Transaction costs incurred with respect to the credit facility are deferred and amortized using the straight-line method over the term of the facility. The asset is recognized in prepaid expenses and other assets on the balance sheet while the amortization is included in financing charges within net income. Transaction costs associated with other financial liabilities are netted against the related liability.

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment were affected.

Category Impairment methodology Indicators of Impairment
Available for sale equity investments Cumulative gains or losses previously recognized on other comprehensive income are reclassified to profit or loss in the period Significant or prolonged decline in the fair value of the security below its cost
Financial assets carried at amortized cost Difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate The following indicators apply to the remaining two categories:

• Significant financial difficulty of the issuer or counterparty

• Breach of contract, such as default or delinquency in interest of principal payments

• It becomes probable that the borrower will enter bankruptcy or financial reorganization

• Disappearance of an active market for that asset because of financial difficulties
Other financial assets Carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account

q) 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 financial statements are presented in Canadian dollars, which is the Corporation's functional currency.

Upon consolidation, the financial statements of the subsidiary that have a functional currency different from that of the Corporation are translated into Canadian dollars whereby assets and liabilities are translated at the rate of exchange at the balance sheet date, revenues and expenses are translated at average monthly exchange rates (as this is considered a reasonable approximation of actual rates), and gains and losses in translation are recognized in the shareholders' equity section as accumulated other comprehensive income.

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.

r) 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 requires a period of six months or greater to be prepared for its intended use or sale.

s) Recent pronouncements issued

The following standards were adopted by Newalta for the first time in the financial year beginning January 1, 2013. There have been no material impacts upon adoption:

  • IFRS 10, "Consolidated Financial Statements"
  • IFRS 11, "Joint Arrangements"
  • IFRS 12, "Disclosure of Interests in Other Entities"
  • IFRS 13, "Fair Value Measurement"

A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2014, and have not been applied in preparing these financial statements. None of these are expected to have a material impact on Newalta's financial statements.

NOTE 3. INVENTORIES

Inventories consist of the following:

December 31, 2013 December 31, 2012
Lead 34,106 23,165
Recycled and processed products 7,678 6,828
Recovered crude oil 6,526 5,928
Parts and supplies 8,727 7,202
Total inventories 57,037 43,123

The cost of inventories expensed in cost of sales for the three months and year ended December 31, 2013, was $23.1 million and $103.1 million respectively (for the three months and year ended December 31, 2012 - $32.5 million and $88.0 million respectively). Inventories are pledged as general security under the credit facility.

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:


Land
Plant and equipment Landfill(1)

Total
Cost
Balance, December 31, 2011 14,696 1,031,756 135,719 1,182,171
Additions during the year - 167,548 8,349 175,897
Disposals during the year (3 ) (7,011 ) - (7,014 )
Effect of change in decommissioning estimate - (2,366 ) - (2,366 )
Effect of foreign currency exchange differences - (1,339 ) - (1,339 )
Balance, December 31, 2012 14,693 1,188,588 144,068 1,347,349
Additions during the year 218 167,143 3,779 171,140
Disposals during the year (139 ) (6,285 ) - (6,424 )
Transfers to assets held for sale (915 ) (1,355 ) - (2,270 )
Effect of change in decommissioning estimate - (14,600 ) - (14,600 )
Effect of foreign currency exchange differences - 5,619 - 5,619
Balance, December 31, 2013 13,857 1,339,110 147,847 1,500,814
Accumulated Amortization
Balance, December 31, 2011 - (300,003 ) (62,066 ) (362,069 )
Amortization for the year - (49,927 ) (10,385 ) (60,312 )
Disposals during the year - 4,414 - 4,414
Effect of foreign currency exchange differences - 198 - 198
Balance, December 31, 2012 - (345,318 ) (72,451 ) (417,769 )
Amortization for the year - (58,359 ) (7,906 ) (66,265 )
Disposals during the year - 3,277 - 3,277
Transfers to assets held for sale - (250 ) - (250 )
Restructuring related impairment (481 ) (6,868 ) - (7,349 )
Effect of foreign currency exchange differences - (537 ) - (537 )
Balance, December 31, 2013 (481 ) (408,055 ) (80,357 ) (488,893 )
Carrying amounts
As at December 31, 2012 14,693 843,270 71,617 929,580
As at December 31, 2013 13,376 931,055 67,490 1,011,921
  1. Due to increased capacity and decreased future estimated costs realized in July 2013, the amortization rate per metric tonne (MT) for Stoney Creek landfill has decreased from approximately $13/MT to $6/MT.

a) Borrowing costs

For the three months and year ended December 31, 2013, Newalta capitalized $0.8 million and $2.8 million respectively, (for the three months and year ended December 31, 2012 - $1.6 million and $4.7 million respectively) of borrowing costs to qualifying assets using a capitalization rate of 5.86% and 5.96% respectively (December 31, 2012 - 6.25% and 6.3% respectively).

b) Assets held for sale

Assets held for sale of $2.5 million as at December 31, 2013 includes land and buildings of $0.9 million and equipment of $1.4 million relating to planned sales of facilities and assets in the Industrial division. It was determined at December 31, 2013 that the sale of these facilities assets and/or their operations was highly probable, therefore the carrying amount of the assets has been reclassified to current assets, within prepaid expenses and other assets on the balance sheet. The fair value measurement for the disposal group has been categorized as a Level 2 fair value based on market inputs that are observable for the assets.

c) Restructuring related impairment

In December 2013, Newalta announced their intention to streamline resources in the Industrial division through a rationalization of business lines and facilities in 2014. This initiative resulted in Newalta recording a non-cash impairment loss of $21.2 million. The recoverable amount of $10.3 million was based on fair value less costs to sell. The company used an expected future cash flow approach with a risk adjusted discount rate of 11.6% on a pre-tax basis. The fair value measurement for the asset impairment charge has been categorized as a Level 3 fair value.

The pre-tax asset impairment charge was allocated as follows:

December 31, 2013(1)
Property, plant and equipment 7,599
Intangible assets (Note 5) 5,849
Goodwill (Note 5) 7,750
21,198
  1. The total asset impairment charge contains $5.5 million which relates to assets classified as held for sale at December 31, 2013.

NOTE 5. PERMITS, INTANGIBLE ASSETS AND GOODWILL

Indefinite permits Definite life permits/ rights Total Intangibles Goodwill
Cost
Balance, December 31, 2011 53,037 14,506 67,543 102,897
Change during the year - (2,850 ) (2,850 ) (282 )
Balance, December 31, 2012 53,037 11,656 64,693 102,615
Change during the year 741 (514 ) 227 1,362
Transfers to assets held for sale (120 ) - (120 ) (60 )
Balance, December 31, 2013 53,658 11,142 64,800 103,917
Accumulated Amortization (1)
Balance, December 31, 2011 - (7,950 ) (7,950 ) -
Amortization for the year - (979 ) (979 ) -
Expired intangibles - 2,850 2,850 -
Balance, December 31, 2012 - (6,079 ) (6,079 ) -
Amortization for the year - (732 ) (732 ) -
Amortization related to disposals - 455 455 -
Transfers to assets held for sale - - - (5,468 )
Restructuring related impairment (5,849 ) - (5,849 ) (2,282 )
Balance, December 31, 2013 (5,849 ) (6,356 ) (12,205 ) (7,750 )
Carrying amounts
As at December 31, 2012 53,037 5,577 58,614 102,615
As at December 31, 2013 47,809 4,786 52,595 96,167
  1. Amortization is included in cost of sales and SG&A in the Consolidated Statements of Operations.

Intangibles have been allocated to the following CGUs:

December 31, 2013 December 31, 2012(1)
West Industrial 479 487
East Industrial 36,216 42,032
VSC 15,900 15,900
Oilfield - 195
Heavy Oil - -
U.S. - -
52,595 58,614
  1. Prior year information has been restated to conform to current year presentation.

Goodwill has been allocated to the following CGUs:

December 31, 2013 December 31, 2012(1)
West Industrial 1,130 1,130
East Industrial 34,594 41,035
VSC - -
Oilfield 57,624 57,631
Heavy Oil 2,819 2,819
U.S. - -
96,167 102,615
  1. Prior year information has been restated to conform to current year presentation.

CGU impairment

In assessing goodwill and indefinite life intangible assets for impairment at December 31, 2013 and 2012, Newalta compared the aggregate recoverable amount of the assets included in the CGUs to their respective carrying amounts. The recoverable amount was determined based on the value in use of the CGUs, using growth rates reflective of previous years growth, excluding future growth capital spending and associated revenues. There was no impairment at the CGU level as at December 31, 2013 and 2012.

Key assumptions included the following:

Year ended December 31, 2013 Periods West Industrial East Industrial
VSC
Oilfield
Heavy Oil

U.S.
Weighted average growth rate 2018 and beyond 2.9% 2.6% 2.9% 3.6% 3.1% 3.6%
Pre-tax discount rate 2014 and beyond 12.9% 11.6% 13.6% 14.9% 15.8% 12.9%
Year ended December 31, 2012(1)
Periods
West Industrial East Industrial
VSC
Oilfield
Heavy Oil

U.S.
Weighted average growth rate 2017 and beyond 2.9% 2.9% 2.9% 3.6% 3.1% 3.6%
Pre-tax discount rate 2013 and beyond 16.0% 12.7% 16.3% 17.8% 18.4% 16.1%
  1. Prior year information has been restated to conform to current year presentation.

In all CGUs, reasonably possible changes in key assumptions would not cause the recoverable amount of goodwill to fall below the carrying value.

NOTE 6. OTHER LONG-TERM ASSETS

a) Other long-term assets consist of the following:

December 31, 2013 December 31, 2012
Embedded derivative (Note 17) 17,050 14,138
Deferred tax asset (Note 10) - 2,874
Investment in TerraAqua Resource Management LLC ("TARM") 6,123 6,043
Other 1,459 547
24,632 23,602

TerraAqua Resource Management LLC

Newalta owns a 50% interest in TARM. This joint venture is included within other long-term assets. Newalta's interest in TARM is accounted for under the equity method and these financial statements include Newalta's share of net earnings from the date that joint control commenced, based on the present 50% ownership interest in TARM. Newalta's share of earnings for the year ended December 31, 2013, as well as the assets and liabilities as at December 31, 2013, are not significant.

NOTE 7. SENIOR SECURED DEBT

December 31, 2013 December 31, 2012
Senior secured debt 117,136 76,500

On June 17, 2013, Newalta entered into an amended and restated extendible revolving Credit Facility ("Credit Facility"). The maturity of this Credit Facility is July 12, 2016. The principal borrowing amount was increased from $225 million to $250 million. There were no other significant changes to the terms of the Credit Facility. Newalta may, at its option, request an extension of the credit facility on an annual basis. If no request to extend the Credit Facility is made by Newalta, the entire amount of the outstanding indebtedness would be due in full on July 12, 2016. The Credit Facility also requires Newalta to be in compliance with certain covenants. As at December 31, 2013 and 2012, Newalta was in compliance with all covenants (Note 13).

For the three months and year ended December 31, 2013, the weighted average interest rate on senior secured debt was 2.98% and 3.12%, respectively, (for the three months and year ended December 31, 2012 - 3.29% and 3.56% respectively).

NOTE 8. SENIOR UNSECURED DEBENTURES

The trust indenture under which the senior unsecured debentures were issued requires Newalta to be in compliance with certain covenants as at December 31 of each year. As at December 31, 2013 and 2012, Newalta was in compliance with all covenants (Note 15).

December 31, 2013 December 31, 2012
Senior unsecured debentures series 1 (Note 17) 125,299 125,376
Senior unsecured debentures series 2 (Note 17) 125,275 125,322
Unamortized issue costs (3,604 ) (4,364 )
Senior unsecured debentures 246,970 246,334

Series 1

On November 23, 2010, Newalta issued $125.0 million of 7.625% series 1 senior unsecured debentures ("series 1"). The series 1 debentures mature on November 23, 2017. The series 1 debentures bear interest at 7.625% per annum and such interest is payable in equal instalments semi-annually in arrears on May 23 and November 23 in each year. The series 1 debentures are unsecured senior obligations and rank equally with all other existing and future unsecured senior debt and senior to any subordinated debt that may be issued by Newalta or any of its subsidiaries. The series 1 debentures are effectively subordinated to all secured debt to the extent of collateral on such debt.

As of November 23, 2013, the series 1 debentures are redeemable at the option of Newalta, in whole or in part, at redemption prices expressed as percentages of the principal amount, plus in each case accrued interest to the redemption date, if redeemed during the twelve month period beginning on November 23 of the years as follows: Year 2013 - 103.813%; Year 2014 - 102.542%; Year 2015 - 101.906%; Year 2016 and thereafter - 100%.

If a change of control occurs, Newalta will be required to offer to purchase all or a portion of each debenture holder's series 1 debentures, at a purchase price in cash equal to 101% of the principal amount of the series 1 debentures offered for repurchase plus accrued interest to the date of purchase.

Series 2

On November 14, 2011, Newalta issued $125.0 million of 7.75% series 2 senior unsecured debentures ("series 2"). The series 2 debentures mature on November 14, 2019. The series 2 debentures bear interest at 7.75% per annum and such interest is payable in equal instalments semi-annually in arrears on May 14 and November 14 in each year, commencing on May 14, 2012. The series 2 debentures are unsecured senior obligations and rank equally with all other existing and future unsecured senior debt and senior to any subordinated debt that may be issued by Newalta or any of its subsidiaries. The series 2 debentures are effectively subordinated to all secured debt to the extent of collateral on such debt.

Prior to November 14, 2015, Newalta may on one or more occasions:

  • Redeem up to 35% of the aggregate principal amount of the series 2 debentures, with the net cash proceeds of one or more public equity offerings at a redemption price equal to 107.75% of the principal amount, plus accrued and unpaid interest to the date of redemption.

  • Redeem the series 2 debentures, in whole or in part, at a redemption price which is equal to the greater of (a) the Canada Yield Price (as defined in the trust indenture) and (b) 101% of the aggregate principal amount of series 2 debentures redeemed, plus, in each case, accrued and unpaid interest to the redemption date.

After November 14, 2015, the series 2 debentures are redeemable at the option of Newalta, in whole or in part, at redemption prices expressed as percentages of the principal amount, plus in each case accrued interest to the redemption date, if redeemed during the twelve month period beginning on November 14 of the years as follows: Year 2015 - 103.875%; Year 2016 - 101.938%; Year 2017 and thereafter - 100%.

If a change of control occurs, Newalta will be required to offer to purchase all or a portion of each debenture holder's series 2 debentures, at a purchase price in cash equal to 101% of the principal amount of the series 2 debentures offered for repurchase plus accrued interest to the date of purchase.

NOTE 9. INCENTIVE PLANS

a) Option Plans

For the year ended December 31, 2013, the weighted average price of our shares at the date of exercise of the options was $15.02 (for the year ended December 31, 2012 - $14.66).

A summary of the status of Newalta's option plans as of December 31, 2013 and December 31, 2012 and changes during the period are presented as follows:

Option plan (000s) Weighted average exercise price ($/share)
At December 31, 2011 3,359 8.68
Granted 924 12.80
Exercised (241 ) 7.34
Forfeited (346 ) 18.76
At December 31, 2012 3,696 11.30
Granted (1) 965 15.57
Exercised (826 ) 6.95
Forfeited (695 ) 16.62
At December 31, 2013 (2) 3,140 12.58
Exercisable
At December 31, 2012 1,757 11.50
At December 31, 2013 1,351 10.46
  1. Each tranche of the options vest over a three year period (with a five year life).
  2. The fair value was calculated using the Black-Scholes method of valuation, assuming 25.50% volatility (December 31, 2012 - 26.30%), a weighted average expected annual dividend yield of 2.95% (December 31, 2012 - 2.86%), a risk free rate of 1.10% (December 31, 2012 - 1.14%) and a 3% forfeiture rate (December 31, 2012 - 3%) by period.
Range of exercise prices ($/share) Options outstanding December 31, 2013 Weighted average remaining life Weighted average exercise price Options exercisable December 31, 2013 Weighted average exercise price
3.81 - 5.40 25 0.4 4.61 25 4.61
7.65 - 8.07 539 1.0 8.07 539 8.07
11.93 - 14.00 1,558 2.5 12.32 765 12.21
14.01 - 19.46 1,018 4.0 15.56 22 15.13
3,140 2.7 12.58 1,351 10.46

b) Share Appreciation Rights ("SARs")

For the year ended December 31, 2013, the weighted average price of our shares at the date of exercise of the SARs was $15.50 (for the year ended December 31, 2012 - $14.17).

Changes in the number of outstanding SARs were as follows:

SARs
(000s)
Weighted average exercise price ($/right)
At December 31, 2011 2,141 9.69
Granted 812 12.70
Exercised (426 ) 7.23
Forfeited (179 ) 11.37
At December 31, 2012 2,348 11.04
Granted (1) 1,018 15.59
Exercised (697 ) 8.41
Forfeited (365 ) 14.76
At December 31, 2013 (2) 2,304 13.26
Exercisable
At December 31, 2012 733 10.34
At December 31, 2013 722 10.95
  1. Each tranche of the SARs vest over a three year period (with a five year life).
  2. The fair value was calculated using the Black-Scholes method of valuation, assuming 25.50% volatility (December 31, 2012 - 26.30%), a weighted average expected annual dividend yield of 2.95% (December 31, 2012 - 2.86%), a risk free rate of 1.10% (December 31, 2012 - 1.14%) and a 12% forfeiture rate (December 31, 2012 - 8%) by period.
Range of exercise prices ($/share) SARs outstanding December 31, 2013 Weighted average remaining life Weighted average exercise price SARs exercisable December 31, 2013 Weighted average exercise price
5.31 - 8.76 210 0.8 7.42 210 7.42
11.93 - 16.65 2,094 3.7 13.84 512 12.39
2,304 3.4 13.26 722 10.95

c) Share Unit Plans

Changes in the number of outstanding share units under our Deferred Share Unit and Performance Share Unit plans were as follows:

Units
(000s)
At December 31, 2011 145
Granted 112
Exercised (25 )
At December 31, 2012 232
Granted 65
Exercised (111 )
At December 31, 2013 186
Exercisable
At December 31, 2012 -
At December 31, 2013 -

d) Stock-based Compensation Expense

The following table summarizes the stock-based compensation expense recorded for all plans within SG&A on the Consolidated Statements of Operations:

For the three months ended December 31, For the year ended December 31,
2013 2012 2013 2012
Stock option plans - non-cash expense 1,614 3,141 3,975 6,250
SARs and share unit plans - cash expense 2,030 970 6,345 3,303
SARs and share unit plans - non-cash expense 418 1,314 (826 ) 2,705
Total expense - SARs and share unit plans 2,448 2,284 5,519 6,008
Total stock-based compensation expense 4,062 5,425 9,494 12,258

e) Incentive Plan Liabilities

As at December 31, 2013, the total liability related to the Corporation's incentive plans was $10.4 million, with $7.9 million classified as current and $2.5 million classified as non-current (December 31, 2012 total incentive plan liabilities of $27.0 million, with $22.8 million classified as current and $4.2 million classified as non-current). The current liability associated with the Corporation's incentive plans is included in Accounts payable and accrued liabilities on the balance sheet. Non-current liability is recorded in Other liabilities on the balance sheet.

In December 2013, the Board of Directors modified the Option Plan to eliminate the ability for option holders to settle options for cash. As a result of this change, the stock based compensation liability of $12.6 million relating to stock options was reclassified to contributed surplus.

NOTE 10. INCOME TAX

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Newalta's deferred income tax assets and liabilities are as follows:

December 31, 2013 December 31, 2012
Deferred income tax liabilities:
Property, plant and equipment (130,955 ) (121,658 )
Goodwill and intangible assets (16,966 ) (18,652 )
(147,921 ) (140,310 )
Deferred income tax assets:
Non-capital loss carry forwards and other credits 41,714 37,101
Decommissioning liabilities 15,835 20,303
Deferred revenue 3,473 1,670
Deferred expense 4,545 4,857
Other comprehensive income 266 223
Other 1,442 1,511
67,275 65,665
Net deferred income tax liability (80,646 ) (74,645 )
Comprised of:
Deferred income tax assets - 2,874
Deferred income tax liabilities (80,646 ) (77,519 )
(80,646 ) (74,645 )

Non-capital loss carry forwards of $98.2 million relate to Canadian operations and $46.5 million relate to our U.S. operations. The losses relating to Canadian operations begin to expire in 2026 and losses relating to U.S. operations begin to expire in 2029.

The income tax expense differs from the amount computed by applying Canadian statutory rates to operating income for the following reasons:

For the year ended December 31,
2013 2012
Consolidated earnings of Newalta Corporation before taxes and distributions to shareholders 27,894 54,012
Current statutory income tax rate 25.75 % 25.72 %
Computed tax expense at statutory rate 7,183 13,892
Increase (decrease) in taxes resulting from:
Unrealized gain on embedded derivatives (782 ) (3,457 )
Stock-based compensation expense and non-deductible costs 769 893
Tax impact of changes in estimate for prior year tax pools (1,460 ) -
Other 244 (120 )
Reported income tax expense 5,954 11,208

NOTE 11. RECONCILIATION OF DECOMMISSIONING LIABILITY

The 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, $61.1 million (December 31, 2012 - $78.9 million) was accrued and recorded in decommissioning liability on the balance sheet at December 31, 2013. The estimated future cost for decommissioning liability at December 31, 2013, was $327.0 million over an expected range up to 200 years. Effective July 1, 2013, a permit amendment decreased the future obligation at Stoney Creek landfill. Newalta used the Bank of Canada's long term bond rate of 3.20% as at December 31, 2013 (December 31, 2012 - 2.37%) and an inflation rate of 2% (December 31, 2012 - 2%) to calculate the present value of the decommissioning liability with the exception of Stoney Creek landfill for which we used a discount rate of 6% (December 31, 2012 - 6%). The reconciliation of estimated and actual expenditures for the period is provided below:

Decommissioning liability as at January 1, 2012 77,756
Actual expenditures incurred to fulfill obligations (3,554 )
Unwinding of discount 2,482
Change in estimate(1) 2,257
Decommissioning liability as at December 31, 2012 78,941
Actual expenditures incurred to fulfill obligations (5,287 )
Unwinding of discount 2,599
Change in estimate(1) (15,154 )
Decommissioning liability as at December 31, 2013 61,099
  1. Changes in the discount rates and in the estimated costs of abandonment and reclamation are factors resulting in a change in estimate.

NOTE 12. SHAREHOLDERS' CAPITAL

Authorized capital of the Corporation consists of an unlimited number of common shares and an unlimited number of preferred shares issuable in series. The following table is a summary of the changes in shareholders' capital during the periods:

Common Shares Shares (#) Amount ($)
Shares outstanding as at January 1, 2012 48,607 317,386
Shares issued on equity offering(1) 5,500 74,400
Shares issued on exercise of options 168 2,443
Cancellation of shares (12 ) (181 )
Shares outstanding as at December 31, 2012 54,263 394,048
Shares issued on exercise of options 704 10,634
Shares issued under dividend reinvestment plan 369 5,212
Shares outstanding as at December 31, 2013 55,336 409,894
  1. Issue costs are $2.8 million, net of tax of $0.7 million for 2012

Newalta's dividend reinvestment plan ("DRIP") allows eligible shareholders to elect to reinvest their cash dividends in additional common shares at a 5% discount to average market price.

NOTE 13. CAPITAL DISCLOSURES

Newalta's capital structure consists of:

December 31, 2013 December 31, 2012
Senior secured debt 117,136 76,500
Letters of credit issued as financial security to third parties (Note 16) 16,230 16,046
Senior unsecured debentures(1) 250,574 250,698
Shareholders' equity 675,162 641,440
1,059,102 984,684
  1. Excludes issue costs

The objectives in managing the capital structure are to:

  • Align our debt structure with our asset structure;
  • Utilize an appropriate amount of leverage to maximize return on Shareholders' equity; and
  • Provide for borrowing capacity and financial flexibility to support Newalta's operations.

Management and the Board of Directors review and assess Newalta's capital structure and dividend policy at least at each regularly scheduled board meeting which are held at a minimum four times annually. The financial strategy may be adjusted based on the current outlook of the underlying business, the capital requirements to fund growth initiatives and the state of the debt and equity capital markets. In order to maintain or adjust the capital structure, Newalta may:

  • Issue shares from treasury;
  • Issue new debt securities;
  • Cause the return of letters of credit with no additional financial security requirements;
  • Replace outstanding letters of credit with bonds or other types of financial security;
  • Amend, revise, renew or extend the terms of its then existing long-term debt facilities;
  • Draw on existing credit facility and/or enter into new agreements establishing new credit facilities;
  • Adjust the amount of dividends paid to shareholders; and/or
  • Sell idle, redundant or non-core assets.

Management monitors the capital structure based on covenants required pursuant to the Credit Facility.

Covenants under our Credit Facility(1) include:

Ratio December 31, 2013 December 31, 2012 Threshold
Senior secured debt(2) to EBITDA(3) 0.88:1 0.66:1 2.75:1 maximum
Total debt(4) to EBITDA(3) 2.54:1 2.46:1 4.00:1 maximum
Interest coverage 5.44:1 5.09:1 2.25:1 minimum
  1. We are restricted from declaring dividends if we are in breach of any covenants under our credit facility.
  2. Senior secured debt means the total debt less the senior unsecured debentures.
  3. EBITDA is a non-IFRS measure, the closest measure of which is net earnings. For the purpose of calculating the covenant, EBITDA is defined as the trailing twelve months consolidated net income for Newalta before the deduction of interest, taxes, depreciation and amortization, and non-cash items (such as non-cash stock-based compensation and gains or losses on asset dispositions). Additionally, EBITDA is normalized for extraordinary and non-recurring items, and for any acquisitions or dispositions as if they had occurred at the beginning of the period.
  4. Total debt comprises outstanding indebtedness under the credit facility, including our bank surplus or overdraft balance and the senior unsecured debentures.

The trust indenture under which the senior unsecured debentures were issued also contains certain annual restrictions and covenants that, subject to certain exceptions, limit our ability to incur additional indebtedness, pay dividends, make certain loans or investments and sell or otherwise dispose of certain assets subject to certain conditions, among other limitations.

Covenants under the trust indenture include:

Ratio December 31, 2013 December 31, 2012 Threshold
Senior Secured Debt including Letters of Credit 133,366 92,546 $25,000 + the greater of $220,000 and 1.75x EBITDA
Cumulative Finance Lease Obligations nil nil $25,000 maximum
Consolidated Fixed Charge Coverage 5.20:1 5.09:1 2.00:1 minimum
Period End Surplus for Restricted Payments(1) 121,385 110,739 Restricted payments cannot exceed surplus
  1. We are restricted from declaring dividends, purchasing and redeeming shares or making certain investments if the total of such amounts exceeds the period end surplus for such restricted payments.

NOTE 14. EARNINGS PER SHARE

Basic earnings per share calculations for the year ended December 31, 2013 and 2012 were based on the weighted average number of shares outstanding for the respective years. Diluted earnings per share include the potential dilution of outstanding options under incentive plans to acquire shares.

The calculation of diluted earnings per share does not include anti-dilutive options. These options would not be exercised during the period because their exercise price is higher than the average market price for the period. The inclusion of these options would cause the diluted earnings per share to be overstated. The number of excluded options for the year ended December 31, 2013 was 952,500 (680,000 for the year ended December 31, 2012).

For the three months
ended December 31,
For the year ended December 31,
2013 2012 2013 2012
Weighted average number of shares 55,205 52,741 54,938 49,690
Net additional shares if options exercised 551 732 577 833
Diluted weighted average number of shares 55,756 53,473 55,515 50,523

NOTE 15. DIVIDENDS DECLARED

For the three months ended December 31, For the year ended December 31,
2013 2012 2013 2012
Total dividends declared per share 0.11 0.10 0.43 0.38

On December 16, 2013 Newalta declared a dividend of $0.11 per share to holders of shares on record on December 31, 2013. This dividend was paid on January 15, 2014.

NOTE 16. COMMITMENTS

a) Debt and Lease Commitments

Newalta has annual commitments for senior long-term debt, debentures, and leased property and equipment as follows:

2014 2015 2016 2017 2018 Thereafter Total
Amount drawn on credit facility(1) (Note 7) - - 117,136 - - - 117,136
Senior unsecured debentures 19,219 19,219 19,219 143,226 9,688 133,440 344,011
Total debt commitments 19,219 19,219 136,355 143,226 9,688 133,440 461,147
Office leases 10,224 10,684 10,583 10,014 9,296 17,842 68,643
Operating leases 5,811 3,289 1,735 584 151 - 11,570
Surface leases 447 447 447 447 447 150 2,385
Total debt and other commitments 35,701 33,639 149,120 154,271 19,582 151,432 543,745
  1. Gross of transaction costs. Interest payments are not reflected.

b) Enertech Partnership Agreement

In 2013, Newalta contributed $1.2 million to the Enertech Partnership Agreement. Newalta is contingently committed to capital contributions up to a maximum of $7.0 million over the 10 year investment period. The investment is classified as held-for-trading and is recorded in other long-term assets.

c) Letters of Credit and Surety Bonds

As at December 31, 2013, Newalta had issued letters of credit and surety bonds in respect of compliance with environmental licenses in the amount of $16.2 million and $40.5 million, respectively ($16.0 million and $43.8 million as at December 31, 2012).

NOTE 17. FINANCIAL INSTRUMENTS

Fair Value of Financial Assets and Liabilities

Newalta's financial instruments include cash, bank indebtedness, accounts and other receivables, other assets, accounts payable and accrued liabilities, dividends payable, senior secured debt and senior unsecured debentures. The fair values of Newalta's financial instruments that are included in the consolidated balance sheets, with the exception of the debentures, approximate their recorded amount due to the short-term nature of those instruments for cash, bank indebtedness, accounts and other receivable, accounts payable and accrued liabilities, dividends payable, senior secured debt and the note receivable, due to the floating nature of the interest rate applicable to these instruments. The fair values incorporate an assessment of credit risk. The carrying value of Newalta's financial instruments at December 31, 2013 are as follows:

FVTPL Loans and receivables AFS Other liabilities Total carrying value
Accounts and other receivables - 148,998 - - 148,998
Embedded Derivatives(2) 17,050 - - - 17,050
Held-for-trading investment(2) 1,240 - - - 1,240
Available for sale investment(1) - - 219 - 219
Accounts payable and accrued liabilities - - - 217,283 217,283
Dividends payable - - - 6,087 6,087
Senior secured debt(2) - - - 117,136 117,136
  1. Assessed as Level 1.
  2. Assessed as Level 2.

All carrying values in the above table are equal to fair value, with the exception of embedded derivatives as noted below.

The fair value of the unsecured senior debentures is based on open market quotation as follows:

As at December 31, 2013 Carrying value Quoted fair value
7.625% series 1 senior unsecured debentures due November 23, 2017 125,299 130,150
7.75% series 2 senior unsecured debentures due November 14, 2019 125,275 134,063

Embedded derivatives

The senior unsecured debentures have early redemption features at values based on percentages of the principal amount plus accrued and unpaid interest. Due to the redemption rates being fixed, an embedded derivative exists when compared to current market rates. Newalta estimates the fair value of the embedded derivatives using a valuation model that considers the current bond prices and spreads associated with the senior unsecured debentures. Newalta has recognized gains of $3.4 million and $3.0 million for the three months and year ended December 31, 2013, respectively (for the three months and year ended December 31, 2012 - $1.3 million and $13.4 million) and has determined the fair value of the embedded derivative for the senior unsecured debentures to be $17.1 million as at December 31, 2013. A corresponding embedded derivative asset was included within other long-term assets on the balance sheet. Subsequent changes in fair value will be included in finance charges on the consolidated statements of operations.

Offsetting financial instruments

Certain waste processing revenue sources entitle customers to credits on the sale of recovered products. The following table presents the recognized financial instruments that are offset as at December 31, 2013 and 2012:

December 31, 2013 December 31, 2012
Gross trade receivables 139,088 120,832
Gross liabilities offset (18,538 ) (14,006 )
Net trade receivables 120,550 106,826

Credit risk and economic dependence

Newalta is subject to credit risk on its trade accounts receivable balances. No single customer exceeded 10% of total accounts receivable at December 31, 2013, (one customer balance represented 10% as at December 31, 2012). Newalta views the credit risks on these amounts as normal for the industry. Credit risk is minimized by Newalta's broad customer base and diverse product lines, and is mitigated by the ongoing assessment of the credit worthiness of its customers as well as monitoring the amount and age of balances outstanding. Newalta's assessment of credit risk has remained unchanged from the prior year.

Revenue from Newalta's largest customer represented 11% of revenue for the year ended December 31, 2013 (10% for the year ended December 31, 2012). This revenue is recognized within the Industrial division. No other customer's revenue exceeded 10% for the period presented.

Based on the nature of operations, established collection history and industry norms, receivables are not considered past due until 90 days after invoice date, although standard payment terms require payment within 30 to 90 days. Depending on the nature of the service and/or product, customers may be provided with extended payment terms while Newalta gathers certain processing or disposal data. Included in the Corporation's trade receivable balance, are receivables totaling $5.7 million (December 31, 2012 - $5.0 million), which are considered to be outstanding beyond normal repayment terms at December 31, 2013. A provision of $1.1 million (December 31, 2012 - $0.5 million) has been established as an allowance for doubtful accounts. No additional provision has been made as there has not been a significant change in credit quality and the amounts are still considered collectible. Newalta does not hold any collateral over these balances but may hold credit insurance for specific non-domestic customer accounts. Total accounts receivable of $149.0 million is comprised of $120.6 million of trade receivables, accrued receivables of $20.2 million and other receivables of $8.2 million.


Aging
Trade receivables
aged by invoice date
Allowance for doubtful accounts Net receivables
Dec 31, 2013 Dec 31, 2012 Dec 31, 2013 Dec 31, 2012 Dec 31, 2013 Dec 31, 2012
Current 88,008 69,640 5 12 88,003 69,628
31-60 days 21,301 27,740 2 7 21,299 27,733
61-90 days 5,565 4,481 54 58 5,511 4,423
91 days + 5,676 4,965 1,035 403 4,641 4,562
Total 120,550 106,826 1,096 480 119,454 106,346

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, 2013 and 2012 are as follows:

Allowance for doubtful accounts December 31, 2013 December 31, 2012
Balance, beginning of year 480 285
Net increase in provision 784 154
Net amounts recovered (written off as uncollectible) (168 ) 41
Balance, end of year 1,096 480

Liquidity risk

Ultimate responsibility for liquidity risk management rests with the Board of Directors of Newalta, which has built an appropriate liquidity risk management framework for the management of the Corporation's short, medium and long-term funding and liquidity management requirements. Management mitigates liquidity risk by maintaining adequate reserves, banking facilities and other borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Newalta's assessment of liquidity risk has remained unchanged from the prior year.

Interest rate risk

Newalta is exposed to interest rate risk to the extent that its credit facility has a variable interest rate. Management does not enter into any derivative contracts to manage the exposure to variable interest rates. The senior unsecured debentures have fixed interest rates until their maturity dates, at which point, any remaining amounts owing under these debentures will need to be repaid or refinanced. Newalta's assessment of interest rate risk has remained unchanged from the prior year. The table below provides an interest rate sensitivity analysis to net earnings as at period end:

For the three months ended December 31, For the year ended
December 31,
2013 2012 2013 2012
If interest rates increased by 1% with all other values held constant (280 ) (193 ) (1,081 ) (854 )

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, 2013, Newalta had $13.6 million in net working capital and $10 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, 2013. Newalta's assessment of market risk has remained unchanged from the prior year.

The table below provides a foreign currency sensitivity analysis to net earnings on long-term debt and working capital outstanding as at period end:

December 31, 2013 December 31, 2012
If the value of the U.S. dollar in relation to the CDN dollar increased by $0.01 with all other variables held constant 5 67

NOTE 18. FINANCE CHARGES

For the three months
ended December 31,
For the year
ended December 31,
2013 2012 2013 2012
Interest:
Senior secured debt 1,356 1,260 5,359 5,322
Senior unsecured debentures 4,805 4,805 19,219 19,219
Other 598 349 1,762 1,235
Amortization of issue costs 359 330 1,376 1,502
Unwinding of discount 671 617 2,599 2,482
Capitalized borrowing costs (520 ) (1,595 ) (2,798 ) (4,664 )
Revaluation and transfer of AFS financial assets - 74 - 1,700
Finance charges 7,269 5,840 27,517 26,796

NOTE 19. RELATED PARTIES

Significant subsidiaries

The financial statements include the financial statements of Newalta and our subsidiaries as at December 31, 2013 and 2012. 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, 2013 and 2012. The following is a list of the major subsidiary and related party of our operations:

Ownership interest
Country of Incorporation 2013 2012
Newalta Environmental Services Inc. Subsidiary United States 100% 100%
TerraAqua Resource Management LLC Joint venture United States 50% 50%

Key Management Personnel

Key management personnel are comprised of Newalta's Board of Directors and Executive Committee. The remuneration of key management personnel during the year was as follows:

Year ended December 31,
2013 2012
Short term benefits 4,359 4,276
Stock-based payments 7,613 4,424
Termination benefits 997 -
Total remuneration 12,969 8,700

NOTE 20. INCOME STATEMENT SUPPLEMENTAL INFORMATION

Cost of sales includes $2.0 million, and SG&A includes $2.2 million from a legal settlement related to the misclassification of certain operating employees under the Fair Labour Standards Act (United States).

NOTE 21. CASH FLOW STATEMENT SUPPLEMENTAL INFORMATION

The following tables provide supplemental information:

For the three months ended December 31, For the year ended December 31,
2013 2012 2013 2012
Decrease (increase) in accounts and other receivables 15,224 10,514 1,525 (16,059 )
Increase in inventories (5,622 ) (4,121 ) (13,914 ) (12,170 )
Decrease (increase) in prepaid expenses and other assets 2,369 2,120 (3,901 ) (4,293 )
Increase in accounts payable and accrued liabilities 48,505 26,493 43,136 31,414
Decrease in accounts payable and accrued liabilities related to purchases of property, plant and equipment (33,398 ) (8,164 ) (18,513 ) (14,511 )
Total decrease (increase) in non-cash working capital 27,078 26,842 8,333 (15,619 )
For the three months ended December 31, For the year ended December 31,
2013 2012 2013 2012
Additions to property, plant and equipment during the year (71,589 ) (56,780 ) (170,373 ) (172,180 )
Increase in accounts payable and accrued liabilities related to purchases of property, plant and equipment 33,398 8,164 18,513 14,511
Total cash additions to property, plant and equipment (38,191 ) (48,616 ) (151,860 ) (157,669 )

NOTE 22. SEGMENTED INFORMATION

On January 1, 2013, Newalta reorganized the reporting structure into three divisions - New Markets, Oilfield and Industrial. These divisions constitute Newalta's reportable segments. The reportable segments were reorganized to improve alignment of operations for customers, to create an optimum management structure for expected growth and to provide improved disclosure to investors. 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 New Markets segment includes mobilization of equipment and staff to process waste at our customer sites, the processing of oilfield-generated wastes including treatment, water disposal, landfilling, and the sale of recovered crude oil; site remediation, centrifugation, dredging and dewatering, and the supply and operation of drill site processing equipment, including solids control and drill cuttings management.

  • The Oilfield segment includes the processing of oilfield-generated wastes including treatment and disposal, water disposal, clean oil terminalling, custom treating, the sale of recovered crude oil and the supply and operation of drill site processing equipment, including solids control and drill cuttings management.

  • The Industrial segment includes oil recycling services, lead battery recycling, landfilling of non-hazardous solid waste and the processing of industrial wastes including collection, treatment and disposal.

As at and for the three months ended December 31, 2013
New Markets Oilfield Industrial Corporate and Other Consolidated
Revenue 62,531 47,480 93,788 - 203,799
Cost of sales (1) 44,839 30,625 82,240 - 157,704
Gross profit 17,692 16,855 11,548 - 46,095
Selling, general and administrative(2) - - - 34,046 34,046
Restructuring related impairment - - 21,198 - 21,198
Net financing charges - - - 3,863 3,863
Earnings (loss) before taxes 17,692 16,855 (9,650 ) (37,909 ) (13,012 )
Property, plant and equipment expenditures(3) 36,908 21,692 7,278 6,340 72,218
Goodwill 2,819 57,624 35,724 - 96,167
Total assets 348,817 417,250 551,517 90,657 1,408,241
Total liabilities 123,924 84,030 196,768 328,357 733,079
As at and for the three months ended December 31, 2012(4 )
New Markets Oilfield Industrial Corporate and Other Consolidated
Revenue 52,520 44,486 101,439 - 198,445
Cost of sales (1) 35,452 29,665 94,291 - 159,408
Gross profit 17,068 14,821 7,148 - 39,037
Selling, general and administrative(2) - - - 28,969 28,969
Net financing charges - - - 5,238 5,238
Earnings before taxes 17,068 14,821 7,148 (34,207 ) 4,830
Property, plant and equipment expenditures 17,483 14,165 13,293 12,459 57,400
Goodwill 2,819 57,631 42,165 - 102,615
Total assets 279,296 382,612 554,193 102,657 1,318,758
Total liabilities 73,938 56,958 164,962 381,460 677,318
  1. Cost of sales includes amortization of $12,711 for 2013 (New Markets $5,629, Oilfield $3,344 and Industrial $3,738) and $14,271 for 2012 (New Markets $4,393, Oilfield $3,086 and Industrial $6,792).
  2. Selling, general and administrative includes amortization of $3,973 for 2013 and $3,526 for 2012.
  3. Includes property, plant and equipment expenditures gross of disposals, decommissioning discount rate changes and foreign currency exchange differences.
  4. Prior year information has been restated to conform to current year presentation.
As at and for the year ended December 31, 2013
New Markets Oilfield Industrial Corporate and Other Consolidated
Revenue 227,572 184,607 371,217 - 783,396
Cost of sales (1) 152,406 114,894 327,558 - 594,858
Gross profit 75,166 69,713 43,659 - 188,538
Selling, general and administrative(2) - - - 114,965 114,965
Restructuring related impairment - - 21,198 - 21,198
Net financing charges - - - 24,481 24,481
Earnings before taxes 75,166 69,713 22,461 (139,446 ) 27,894
Property, plant and equipment expenditures(3) 78,702 46,552 23,281 22,605 171,140
Goodwill 2,819 57,624 35,724 - 96,167
Total assets 348,817 417,250 551,517 90,657 1,408,241
Total liabilities 123,924 84,030 196,768 328,357 733,079
As at and for the year ended December 31, 2012(4)
New Markets Oilfield Industrial Corporate and Other Consolidated
Revenue 188,837 181,067 356,305 - 726,209
Cost of sales (1) 121,085 119,535 315,831 - 556,451
Gross profit 67,752 61,532 40,474 - 169,758
Selling, general and administrative(2) - - - 102,389 102,389
Net financing charges - - - 13,357 13,357
Earnings before taxes 67,752 61,532 40,474 (115,746 ) 54,012
Property, plant and equipment expenditures 73,204 35,184 33,033 30,919 172,340
Goodwill 2,819 57,631 42,165 - 102,615
Total assets 279,296 382,612 554,193 102,657 1,318,758
Total liabilities 73,938 56,958 164,962 381,460 677,318
  1. Cost of sales includes amortization of $52,259 for 2013 (New Markets $18,200, Oilfield $12,409 and Industrial $21,650) and $49,024 for 2012 (New Markets $12,263, Oilfield $11,950 and Industrial $24,811).
  2. Selling, general and administrative includes amortization of $14,738 for 2013 and $13,485 for 2012.
  3. Includes property, plant and equipment expenditures gross of disposals, decommissioning discount rate changes and foreign currency exchange differences.
  4. Prior year information has been restated to conform to current year presentation.

NOTE 23. PRIOR YEAR INFORMATION

Certain comparative figures have been reclassified to conform with the financial statement presentation adopted for the current year.

NOTE 24. SUBSEQUENT EVENTS

In the first quarter of 2014, Newalta initiated a restructuring plan which will reduce operating expenses and SG&A going forward. This decision is consistent with Newalta's ongoing strategy to improve productivity and profitability within the Industrial division and SG&A. Total costs related to restructuring operations will be determined as the plan is finalized. The restructuring plan and related costs are anticipated to be substantially realized by December 31, 2014.

Contact Information

  • Newalta Corporation
    Anne M. Plasterer
    Executive Director, Investor Relations
    (403) 806-7019

    Newalta Corporation
    Stephanie MacVicar
    Director, Investor Relations
    (403) 806-7391
    www.newalta.com