Newalta Announces Second Quarter 2009 Results



    TSX Trading Symbol: NAL

    CALGARY, Aug. 6 /CNW/ - Newalta Inc. ("Newalta") (TSX:NAL) today
announced financial results for the three and six months ended June 30, 2009.
    "We made excellent progress in the second quarter on managing our
business in these challenging times as well as preparing for improved
conditions in the quarters ahead," said Al Cadotte, President and CEO of
Newalta.
    "Compared to last year, EBITDA was down $8.6 million of which $7.5
million, or 86%, was due to sharply reduced prices for the products that we
recover from waste. Excluding the impact of commodity prices, revenue in Q2
was down $21.1 million compared to last year while EBITDA declined only $1.1
million. Similarly, compared to the first quarter of this year, revenue was
down $1.2 million but EBITDA was up $5.9 million, or 50%. We have reduced our
cost base and improved the profitability of the business consistent with the
weak market conditions that we have faced over the past six months.
    "We enter the third quarter, which is typically our strongest, with
higher commodity prices, particularly for lead and crude oil, and with a much
improved cost base from which we can leverage strong bottom-line performance
from increased revenue. While we continue to tightly manage costs, our focus
in the quarters ahead is on revenue generation to maximize returns from our
existing assets."

    
    Financial results and highlights for the three and six months ended
    June 30, 2009

    -   Revenue, net earnings, and EBITDA in Q2 2009 were down from Q2 2008
        by 22%, 102%, and 32%, respectively. A steep drop in commodity prices
        in Q2 2009 compared to last year resulted in a drop in revenue of
        $10.5 million and a decline in EBITDA of $7.5 million. Additionally,
        we incurred a $1.2 million foreign exchange loss in Q2 2009, as
        compared to last year's loss of $0.1 million. Excluding the impact of
        commodity prices and foreign exchange, revenue was down $21.1 million
        and EBITDA was flat, compared to Q2 last year. On a year-to-date
        basis, revenue, net earnings, and EBITDA fell by 24%, 115%, and 51%,
        respectively.

    -   Western's revenue and net margin(1) declined by 33% and 39%
        year-over-year, respectively, due primarily to the 47% decline in
        crude oil prices and as well as weak North American drilling
        activity, caused by a steep decline in natural gas prices. Two-thirds
        of the net margin decline was driven by lower crude oil pricing
        alone. Excluding commodity price impacts, revenue was down
        approximately 26% while net margin was down 14%. Compared to Q1 2009,
        revenue was down $10.1 million and net margin was flat due to the
        impact of cost reductions as well as improved commodity prices.

    -   Eastern's performance in Q2 declined year-over-year with revenue and
        net margin down 6% and 23%, respectively, largely due to the 49%
        decline in lead pricing. Compared to Q1 2009, revenue was up
        $9.0 million and net margin was up $5.9 million.

    -   SG&A costs were reduced by 19%, compared to last year.

    -   Maintenance capital expenditures(1) for the quarter were $1.4 million
        compared to $4.1 million in 2008. Growth capital expenditures(1) were
        $4.5 million compared to $19.3 million in 2008.

    Other highlights

    -   Total capital investment in the first half was $14.1 million,
        consistent with guidance of $15.0 million.

    -   Capital expenditures for 2009 are anticipated to be approximately
        $40 million, comprised of $25 million for growth capital and
        $15 million for maintenance capital.

    -   We continue to be successful in securing new onsite project work
        across Canada, including heavy oil/SAGD. As such, we expect that a
        portion of the remaining growth capital expenditures may be used to
        fund these projects in the second half of the year. Excess cash will
        be used to pay down debt.

    -   At the end of Q2 2009, senior long-term debt decreased $4.6 million
        to $258.7 million, as compared to December 31, 2008.

    -   Newalta's Board of Directors declared a dividend of $0.05 per share
        to holders of record as at June 30, 2009 which was paid July 15,
        2009. Newalta expects to pay a dividend of $0.05 per share to holders
        of record on each of September 30, 2009 and December 31, 2009.

    Financial Results and Highlights

    -------------------------------------------------------------------------
    ($000s except per                         %                            %
     share/unit data)                  Increase       YTD      YTD  Increase
    (unaudited)      Q2 2009  Q2 2008 (Decrease)     2009     2008 (Decrease)
    -------------------------------------------------------------------------
    Revenue          111,386  142,939       (22)  223,924  293,115       (24)
    Net (loss)
     earnings           (179)  11,776      (102)   (4,560)  31,080      (115)
      - per share/
        unit ($)
        - basic         0.00     0.28      (100)    (0.11)    0.75      (115)
      - per share/
        unit ($)
        - diluted       0.00     0.28      (100)    (0.11)    0.75      (115)
    EBITDA(1)         17,940   26,573       (32)   29,970   60,712       (51)
      - per share/
        unit($)(1)      0.42     0.64       (34)     0.71     1.46       (51)
    Cash from
     operations       11,808   23,421       (50)   41,850   32,166        30
      - per share/
        unit ($)        0.28     0.56       (50)     0.99     0.77        29
    Funds from
     operations(1)    13,776   21,306       (32)   20,586   48,777       (58)
      - per share/
        unit ($)(1)     0.32     0.49       (35)     0.49     1.17       (58)
    Maintenance
     capital
     expenditures(1)   1,429    4,161       (65)    3,475    5,410       (36)
    Dividends/
     Distributions
     declared(1)       2,121   23,249       (91)    4,247   46,326       (91)
      - per share/
        unit - ($)(1)   0.05     0.56       (91)     0.05     1.11       (95)
    Cash
     distributed(1)    2,125   20,614       (90)    9,685   39,750       (76)
    Growth capital
     expenditures(1)   4,566   19,301       (76)   10,635   36,025       (70)
    Weighted average
     share/units
     outstanding      42,450   41,822         2    42,405   41,683         2
    Shares/units
     outstanding,
     June 30,(2)      42,438   42,002         1    42,438   42,022         1
    -------------------------------------------------------------------------
    (1) These financial measures do not have any standardized meaning
        prescribed by Canadian generally accepted accounting principles
        ("GAAP") and are therefore unlikely to be comparable to similar
        measures presented by other issuers. Non-GAAP financial measures are
        identified and defined throughout the attached Management's
        Discussion and Analysis.
    (2) Newalta has 42,438,377 shares outstanding as of August 6, 2009.
    

    Management's Discussion and Analysis and Newalta's unaudited consolidated
financial statements and notes thereto are attached.

    Management will hold a conference call on Friday, August 7, 2009 at 11:00
a.m. (ET) to discuss Newalta's performance for the three and six months ended
June 30, 2009. To participate in the teleconference, please call 416-644-3421
or 1-800-814-3911. 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,
August 14, 2009, by dialling 416-640-1917 or 1-877-289-8525 using the pass
code 21311841 followed by the pound sign.

    Newalta Inc. is Canada's largest industrial waste management and
environmental services provider and focuses on maximizing the value inherent
in industrial waste through the recovery of saleable products and recycling.
It also provides environmentally sound disposal of solid, non-hazardous
industrial waste. With talented people and a national network of facilities,
Newalta serves customers in the automotive, construction, forestry, lead,
manufacturing, mining, oil and gas, petrochemical, pulp and paper, refining,
steel and transportation service industries. Providing solid investor returns,
exceptional customer service, safe operations and environmental stewardship
has enabled Newalta to expand into new service sectors and geographic markets.
Newalta Inc. trades on the TSX as NAL. For more information, visit
www.newalta.com.

    
    NEWALTA INC.
    MANAGEMENT'S DISCUSSION AND ANALYSIS
    Three and six months ended June 30, 2009 and 2008
    

    Certain statements contained in this document constitute "forward-looking
statements". When used in this document, the words "may", "would", "could",
"will", "intend", "plan", "anticipate", "believe", "estimate", "expect", and
similar expressions, as they relate to Newalta Inc., Newalta Income Fund (the
"Fund"), and Newalta Corporation (the "Corporation" and together with Newalta
Inc., the Fund, and other subsidiaries, "Newalta"), or their management, are
intended to identify forward-looking statements. Such statements reflect the
current views of Newalta with respect to future events and are subject to
certain risks, uncertainties and assumptions, including, without limitation,
general market conditions, oil and gas industry, commodity prices for oil and
lead, battery manufacturing industry, debt service, future capital needs,
exchange rates, dependence on senior management, seasonality of operations,
growth, acquisition strategy, integration of businesses into Newalta's
operations, potential liabilities from acquisitions, regulation, landfill
operations, competition, risk of pending and future legal proceedings,
employees, labour unions, fuel costs, access to industry and technology,
possible volatility of the common share price, insurance, debt service, sales
of additional shares, dependence on the Corporation, nature of the debentures
issued by Newalta, Canadian federal income tax, redemption of shares, and such
other risks or factors described from time to time in the reports filed with
securities regulatory authorities by Newalta.
    By their nature, forward-looking statements involve numerous assumptions,
known and unknown risks and uncertainties, both general and specific, that
contribute to the possibility that the predictions, forecasts, projections and
other forward-looking statements will not occur. Many other factors could also
cause actual results, performance or achievements to be materially different
from any future results, performance or achievements that may be expressed or
implied by such forward-looking statements and readers are cautioned that the
foregoing list of factors is not exhaustive. Should one or more of these risks
or uncertainties materialize, or should assumptions underlying the
forward-looking statements prove incorrect, actual results may vary materially
from those described herein as intended, planned, anticipated, believed,
estimated or expected. Furthermore, the forward-looking statements contained
in this document are made as of the date of this document and the
forward-looking statements in this document are expressly qualified by this
cautionary statement. Unless otherwise required by law, Newalta does not
intend, or assume any obligation, to update these forward-looking statements.

    RECONCILIATION OF NON-GAAP MEASURES

    This Management's Discussion and Analysis contains references to certain
financial measures, including some that do not have any standardized meaning
prescribed by Canadian generally accepted accounting principles ("GAAP") and
may not be comparable to similar measures presented by other corporations or
entities. These financial measures are identified and defined below:
    "EBITDA" and "EBITDA per share" is a measure of Newalta's operating
profitability. EBITDA provides an indication of the results generated by
Newalta's principal business activities prior to how these activities are
financed, assets are amortized or how the results are taxed in various
jurisdictions. EBITDA is derived from the consolidated statements of
operations, comprehensive income and retained earnings. EBITDA per share is
derived by dividing EBITDA by the basic weighted average number of shares.
They are calculated as follows:

    
    -------------------------------------------------------------------------
    ($000s)                            Q2 2009   Q2 2008  YTD 2009  YTD 2008
    -------------------------------------------------------------------------
    Net earnings (loss)                   (179)   11,776    (4,560)   31,080
    Add back (deduct):
      Current income taxes                 172       339       367       575
      Future income taxes                 (286)   (2,822)   (2,462)   (5,820)
      Finance charges                    6,137     5,648    11,717    11,914
      Interest revenue                       -       (39)        -       (80)
      Amortization and accretion        12,096    11,671    24,908    23,043
    -------------------------------------------------------------------------
    EBITDA                              17,940    26,573    29,970    60,712
    -------------------------------------------------------------------------
    Weighted average number of
     shares/units                       42,450    41,822    42,405    41,683
    -------------------------------------------------------------------------
    EBITDA per share                      0.42      0.64      0.71      1.46
    -------------------------------------------------------------------------

    "Funds from operations" is used to assist management and investors in
analyzing cash flow and leverage. Funds from operations as presented is not
intended to represent operating funds from continuing operations or operating
profits for the period nor should it be viewed as an alternative to cash flow
from operating activities, net earnings or other measures of financial
performance calculated in accordance with GAAP. Funds from operations is
derived from the consolidated statements of cash flows and is calculated as
follows:

    -------------------------------------------------------------------------
    ($000s)                            Q2 2009   Q2 2008  YTD 2009  YTD 2008
    -------------------------------------------------------------------------
    Cash from operations                11,808    23,421    41,850    32,166
    Add back (deduct):
    Changes in non-cash working
     capital                             1,715    (3,069)  (21,760)   15,045
    Asset retirement costs
     incurred                              253       954       496     1,566
    -------------------------------------------------------------------------
    Funds from operations               13,776    21,306    20,586    48,777
    -------------------------------------------------------------------------
    Weighted average number
     of shares/units                    42,450    41,822    42,405    41,863
    -------------------------------------------------------------------------
    Funds from operations per share       0.32      0.49      0.49      1.17
    -------------------------------------------------------------------------

    "Net margin" and "Combined divisional net margin" are used by management
to analyze divisional operating performance. Net margin and combined
divisional net margin as presented are not intended to represent earnings
before taxes nor should it be viewed as an alternative to net earnings or
other measures of financial performance calculated in accordance with GAAP.
Net margin is calculated from the segmented information contained in the notes
to the consolidated financial statements and is defined as revenue less
operating and amortization and accretion expenses. Combined divisional net
margin is calculated from the segmented information contained in the notes to
the consolidated financial statements and is defined as revenue less operating
and amortization and accretion expenses for both the Western division
("Western") and Eastern division ("Eastern"). Combined divisional net margin
excludes inter-segment eliminations and unallocated revenue and expenses.

    -------------------------------------------------------------------------
    ($000s)                            Q2 2009   Q2 2008  YTD 2009  YTD 2008
    -------------------------------------------------------------------------
    Earnings (loss) before taxes          (293)    9,293    (6,655)   25,835
    Add back (deduct):
    Selling,general, and
     administrative(1)                  12,870    15,979    26,477    30,814
    Finance charges(1)                   6,137     5,648    11,717    11,914
    -------------------------------------------------------------------------
    Consolidated net margin             18,714    30,920    31,539    68,563
    -------------------------------------------------------------------------
    Unallocated net margin(1)           (3,345)   (2,175)   (6,549)   (4,035)
    -------------------------------------------------------------------------
    Combined divisional net margin      22,059    33,095    38,088    72,598
    -------------------------------------------------------------------------

    (1) Management does not allocate interest income; selling, general and
        administrative; taxes; finance charges; and corporate amortization
        and accretion expense in the segmented analysis (see Note 14 to the
        consolidated financial statements).
    

    References to EBITDA, EBITDA per share, funds from operations, net margin
and combined divisional net margin, throughout this document have the meanings
set out above.
    Throughout this document, unless otherwise stated, all currency is stated
in Canadian dollars and MT is defined as "tonnes" or "metric tons".
    The following discussion and analysis should be read in conjunction with
(i) the consolidated financial statements of Newalta Inc. and the notes
thereto for the three and six months ended June 30, 2009, (ii) the
consolidated financial statements of Newalta Inc. and notes thereto and
Management's Discussion and Analysis of Newalta Inc. for the year ended
December 31, 2008, (iii) the most recently filed Annual Information Form of
Newalta Inc., (iv) the consolidated financial statements of the Fund and the
notes thereto and Management's Discussion and Analysis for the three and six
months ended June 30, 2008, and (v) the consolidated financial statements of
Newalta Inc. and the notes thereto and Management's Discussion and Analysis
for the three months ended March 31, 2009. Information for the three and six
months ended June 30, 2009 along with comparative information for 2008, is
provided.
    This Management's Discussion and Analysis is dated August 6, 2009 and
takes into consideration information available up to that date.

    CORPORATE OVERVIEW

    Improvement in demand for services and commodity prices that started late
in Q1 continued in Q2. Profitability improved from Q1 2009 due to improved
commodity prices and reduced operating and administrative costs. This was the
first time that any year's Q2 performance exceeded that of the first quarter,
underscoring the extreme market conditions in Q1 2009 and the impact of
actions taken by management to improve the profitability of the business.
After adjusting for the impact of commodity prices, financial performance in
Q2 2009 was equivalent to Q2 2008 in the face of a 20% decline in revenue
year-over-year. In addition, in excess of $8 million in cost savings were
realized in Q2 2009, as compared to last year.

    
    -------------------------------------------------------------------------
                                                           Impact
                                             Impact of  of market
                                             change in    changes
                                             commodity   and cost
                                    Q2 2008   prices(1) reductions   Q2 2009
    -------------------------------------------------------------------------
    Revenue                         142,939    (10,456)   (21,097)   111,386
    Expenses
      Operating                     100,348     (2,947)   (16,825)    80,576
      Selling, general and
       administrative                15,979                (3,109)    12,870
      Finance charges                 5,648                   489      6,137
      Amortization and accretion     11,671                   425     12,096
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Net earnings (loss)              11,776     (7,509)    (4,446)      (179)
    -------------------------------------------------------------------------
    EBITDA                           26,573     (7,509)    (1,124)    17,940
    -------------------------------------------------------------------------
    (1) The change in commodity prices is defined as the change in the price
        received for recovered crude oil and the change in the price of lead,
        in each instance, in Canadian dollars.

    In Q2 2009, Eastern's contribution to revenue and net margin partially
compensated for the decline in activity levels in Western. Revenue
diversification changed significantly in Q2 2009, with Eastern's share of
revenue and divisional net margin growing to be 50% and 39%, respectively, as
compared to 42% and 34% in Q2 2008.

    Table 1: Consolidated Revenue and EBITDA
    http://files.newswire.ca/788/Tables_for_2009_Q2.doc
    

    Revenue, net earnings, and EBITDA in Q2 2009 were down from Q2 2008 by
22%, 102%, and 32%, respectively. Q2 2009 combined divisional net margin was
down 33%, or $11.0 million, with the Western Division accounting for $8.5
million of the decline, and Eastern Division down $2.5 million. A steep drop
in commodity prices in Q2 2009 compared to last year resulted in a drop in
revenue of $10.5 million and a decline in EBITDA of $7.5 million.
Additionally, we incurred a $1.2 million foreign exchange loss in Q2 2009, as
compared to last year's loss of $0.1 million. Excluding the impact of
commodity prices and foreign exchange, revenue was down $21.1 million and
EBITDA was flat, compared to Q2 last year. On a year-to-date basis, revenue,
net earnings, and EBITDA fell by 24%, 115%, and 51%, respectively.
    Our planned capital spending for 2009 continues to be $40 million.
Maintenance capital is projected to be $15 million, and growth capital
spending is projected to be $25 million. As we continue to be successful in
securing new onsite project work across Canada, including heavy oil/SAGD, a
portion of the $25 million in growth capital expenditures may be used to fund
these projects in the second half of the year. Excess cash will be used to pay
down debt.

    OUTLOOK

    During Q2, commodity prices improved and our performance strengthened
through the quarter, and particularly in June, setting a solid foundation for
the third quarter, which is the seasonally strongest of the year. The impact
of our cost reduction program is anticipated to continue to yield cost savings
of approximately $8 million per quarter for the remainder of the year. Ongoing
pursuit of onsite projects are anticipated to contribute to Q3 performance.
Several capital projects which were being commissioned in Q2 (including Kiln 2
at Ville Ste. Catherine) are now fully operational and will positively
contribute in the second half of 2009.
    We enter the third quarter with improving commodity prices and an
improved cost base from which we can leverage strong bottom-line performance
from increased revenue. While we continue to tightly manage costs, our focus
in the quarters ahead is on revenue generation to maximize returns from our
existing assets.

    RESULTS OF OPERATIONS - WESTERN DIVISION

    Overview

    Western operates more than 55 facilities with more than 750 people in
British Columbia, Alberta, Saskatchewan, Texas and Wyoming. We have
reorganized our business units within the Western Division to Facilities,
Heavy Oil and Drill Site to better align our structure with our key strategic
growth areas. Western is operated and managed as an integrated set of assets
to provide a broad range of seamless waste management and recycling services
to customers.

    
    Western's performance is affected by the following factors:

    -   fluctuation in the price of crude oil
    -   state of the oil and gas industry in western Canada
    -   natural gas drilling activity
    -   the amount of waste generated by producers
    -   fluctuation in the U.S./Canadian dollar exchange rate
    -   the strength of other industries in western Canada, including:
        construction, forestry, mining, petrochemical, pulp and paper,
        refining, and transportation service industries

    Table 2: Western Revenue and Net Margin
    http://files.newswire.ca/788/Tables_for_2009_Q2.doc

    The business units contributed the following to division revenue:

    -------------------------------------------------------------------------
                                                          Q2 2009    Q2 2008
    -------------------------------------------------------------------------
    Facilities                                                 71%        73%
    Heavy Oil                                                  26%        20%
    Drill Site                                                  3%         7%
    -------------------------------------------------------------------------


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

    -------------------------------------------------------------------------
                                                       YTD      YTD
    ($000s)             Q2 2009  Q2 2008 % Change     2009     2008 % Change
    -------------------------------------------------------------------------
    Revenue - external   55,863   83,528      (33) 121,833  177,501      (31)
    Revenue - internal      341      240       42      497      541       (8)
    Operating costs      37,780   55,990      (33)  84,156  114,926      (27)
    Amortization and
     accretion            4,899    5,699      (14)  11,218   11,360       (1)
    -------------------------------------------------------------------------
    Net margin           13,525   22,079      (39)  26,956   51,756      (48)
    -------------------------------------------------------------------------
    Net margin as %
     of revenue              24%      26%      (8)      22%      29%     (24)
    -------------------------------------------------------------------------
    Maintenance capital     446    1,665      (73)   1,776    2,725      (35)
    -------------------------------------------------------------------------
    Growth capital(1)     1,426    8,169      (83)   2,690   14,532      (81)
    -------------------------------------------------------------------------
    Assets employed(2)                             400,247  379,097        6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Growth capital does not include acquisitions.
    (2) "Assets employed" is provided to assist management and investors in
        determining the effectiveness of the use of the assets at a
        divisional level. Assets employed is the sum of capital assets,
        intangible assets, and goodwill allocated to each division.
    

    In Q2 2009, net margin fell by 39%, or $8.5 million compared to last
year. Two-thirds of the net margin decline was driven by lower crude oil
pricing alone. Net margin as a percent of revenue remained relatively flat at
24% in Q2 2009, compared to last year, despite a $27.6 million decline in
revenue. Excluding commodity price impacts, Q2 revenue was down approximately
$22 million while net margin was down only $3 million as our cost reduction
program gained traction in the quarter. Compared to Q1 2009, net margin was
maintained despite a $10.1 million drop in revenue.

    Facilities

    The Facilities business unit is integral to our operations, providing the
operational expertise and management capacity to support key business 
initiatives. Facilities revenue is primarily generated from:

    
    -   the processing and disposal of industrial and oilfield-generated
        wastes, including collection, treatment, water disposal, clean oil
        terminalling, custom treating, and landfilling
    -   sale of recovered crude oil for our account
    -   oil recycling, including the collection and processing of waste lube
        oils and the sale of finished products
    -   onsite service in western Canada, excluding services provided by
        Heavy Oil
    -   environmental services comprised of environmental projects and
        drilling waste management services

    Revenue fell 35% from Q2 2008 driven primarily by the 46% year-over-year
decrease in recovered crude oil prices, and reduced waste processing and water
disposal volumes, down 43% and 39%, respectively.
    Oil recycling product sales remained flat with normal volumes throughout
Q2 2009. Revenue declined as a result of the lower commodity prices. The
remainder of the business unit revenue was also down over the quarter, in line
with demand.

    -------------------------------------------------------------------------
                                                       YTD      YTD
                        Q2 2009  Q2 2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Waste processing
     volumes ('000 m(3))     55       96      (43)     155      231      (33)
    Recovered crude oil
     ('000 bbl)(1)           50       53       (6)     105      118      (11)
    Average crude oil
     price received
     (CDN$/bbl)              60      111      (46)      52       99      (47)
    Recovered oil sales
     ($ millions)           3.0      5.9      (49)     5.5     11.7      (53)
    Edmonton par
     price (CDN$/bbl)(2)     65      125      (48)      57      111      (49)
    -------------------------------------------------------------------------
    (1) Represents the total crude oil recovered and sold for our account.
    (2) Edmonton par is an industry benchmark for conventional crude oil.


    Table 3: Waste processing volumes - Facilities
    http://files.newswire.ca/788/Tables_for_2009_Q2.doc


    Table 4: Recovered crude oil - Facilities
    http://files.newswire.ca/788/Tables_for_2009_Q2.doc
    


    Heavy Oil

    Newalta's heavy oil services business began 15 years ago with facilities
at Hughenden and Elk Point, Alberta. Using the centrifugation experience
gained at processing heavy oil waste streams, Newalta launched a new onsite
service for customers in the heavy oil market. This business has evolved from
managing heavy oil in Newalta's facility network to operating equipment on
customers' sites. Leveraging our facilities as staging areas, Newalta delivers
a broad range of specialized services at numerous customer sites under short
and long-term arrangements.

    
    Heavy Oil business unit revenue is generated from three main areas:

    -   specialized onsite services under short and long-term arrangements
    -   processing and disposal of oilfield-generated wastes, including water
        disposal, and landfilling
    -   sale of recovered crude oil for our account
    

    Heavy Oil delivered reasonably strong performance, with Q2 2009 revenue
improving 23% over Q1. Waste processing volumes strengthened 9% year over
year. Recovered crude oil volumes increased 14%. Offsetting the solid
performance was a 45% year-over-year decline in Q2 crude oil prices, which
resulted in a decline in revenue and divisional net margin of $1.8 million.
    Our focus to secure and develop long-term contracts with our customers
has been a key factor in the success in strengthening Heavy Oil volumes and
reducing the volatility due to crude oil price changes. We continue to be
successful in securing new onsite projects, improving stability in the
segment. Fees received for onsite services are generally based on processing
volumes and are not directly susceptible to fluctuations in crude oil pricing.


    
    -------------------------------------------------------------------------
                                                       YTD      YTD
                        Q2 2009  Q2 2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Waste processing
     volumes ('000 m(3))    124      114        9      251      244        3
    Recovered crude oil
     ('000 bbl)(1)           56       49       14       74       56       32
    Average crude oil
     price received
     (CDN$/bbl)              54       98      (45)      46       84      (45)
    Recovered oil sales
     ($ millions)           3.0      4.8      (38)     4.9      7.8      (37)
    Bow River Hardisty
     (CDN$/bbl)(2)           62      102      (59)      54       89      (39)
    -------------------------------------------------------------------------
    (1) Represents the total crude oil recovered and sold for our account.
    (2) Bow River Hardisty is an industry benchmark for heavy crude oil.


    Table 5: Waste processing volumes - Heavy Oil
    http://files.newswire.ca/788/Tables_for_2009_Q2.doc


    Table 6: Recovered crude oil - Heavy Oil
    http://files.newswire.ca/788/Tables_for_2009_Q2.doc
    


    Drill Site

    Our Drill Site strategy is to develop a fully integrated service offering
in the U.S. including fixed facility waste processing as well as onsite and
drill site services that are similar to Newalta's western Canadian business.
Although Newalta's current market share is very small, we expect to continue
to expand services and establish operations in these markets through steady
organic development.
    Drill Site business unit revenue is presently generated primarily from
the supply and operation of drill site processing equipment, including
equipment for solids control and drill cuttings management. Currently, Drill
Site delivers 3% of divisional revenue or less than 2% of consolidated
revenue.
    In both the U.S. and Canada, drilling remained weak due primarily to
reduced activity from low natural gas prices and normal seasonal impacts.
Revenue in Q2 2009 fell by 70% as compared to the prior year. Our
equipment-in-use fell from 36 to 13 units in Q2 2009, with the U.S. operations
representing 78% of the decline.
    The table below reflects the changes in average drill site
equipment-in-use and utilization:

    
    -------------------------------------------------------------------------
                                                       YTD      YTD
                        Q2 2009  Q2 2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Average
     equipment-in-use(1)
      Canada                  2        7      (71)      16       21      (24)
      U.S.                   11       29      (62)      16       31      (46)
    -------------------------------------------------------------------------
                             13       36      (64)      32       52      (38)
    -------------------------------------------------------------------------
    Average equipment
     available              177      142       25      173      142       21
    -------------------------------------------------------------------------
    Utilization               7%      25%     (72)     18%       37%     (51)
    -------------------------------------------------------------------------
    (1) "Average equipment in use" is calculated by taking the product of the
        total amount of average processing equipment and the utilization rate
        for the period. Average equipment available is adjusted by 10% for
        maintenance and transportation. Maximum utilization of 100%
        represents 90% of the total number of processing days.


    Table 7 Average Equipment-in-Use and Utilization - Drill Site
    http://files.newswire.ca/788/Tables_for_2009_Q2.doc
    


    RESULTS OF OPERATIONS - EASTERN DIVISION

    Overview

    Eastern provides industrial waste management, recycling and other
environmental services to markets located in eastern Canada through its
integrated network of over 30 facilities with more than 750 employees. This
network has two business units, Québec/Atlantic and Ontario, and features
Canada's largest lead-acid battery recycling facility with two long body
kilns, located in Ville Ste-Catherine, Québec ("VSC") with a combined annual
capacity of approximately 80,000MT. The network also includes an engineered
non-hazardous solid waste landfill located in Stoney Creek, Ontario ("SCL")
with an annual permitted capacity of 750,000MT of waste per year and, based on
current volumes, has an estimated remaining life of 10 years. The business
units contributed the following to division revenue:

    
    -------------------------------------------------------------------------
                                                            Q2 2009  Q2 2008
    -------------------------------------------------------------------------
    Québec/Atlantic                                              72%      69%
    Ontario                                                      28%      31%
    -------------------------------------------------------------------------


    Table 8: Eastern Revenue and Net Margin
    http://files.newswire.ca/788/Tables_for_2009_Q2.doc


    Eastern's performance is affected by the following factors:

    -   fluctuations in the LME trading price of lead
    -   supply and demand in the North American battery manufacturing
        industry
    -   fluctuation in the U.S./Canadian dollar exchange rate
    -   market conditions in eastern Canada and bordering U.S. states,
        including: automotive, construction, forestry, manufacturing, mining,
        oil and gas, petrochemical, pulp and paper, refining, steel, and
        transportation service industries


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

    -------------------------------------------------------------------------
                                                       YTD      YTD
    ($000s)             Q2 2009  Q2 2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Revenue - external   55,523   59,372       (6) 102,091  115,534      (12)
    Operating costs      43,137   44,598       (3)  83,818   87,124       (4)
    Amortization and
     accretion            3,852    3,758       (3)   7,141    7,568       (6)
    -------------------------------------------------------------------------
    Net margin            8,534   11,016      (23)  11,132   20,842      (47)
    -------------------------------------------------------------------------
    Net margin as %
     of revenue              15%      19%     (21)      11%      18%     (38)
    -------------------------------------------------------------------------
    Maintenance capital     981    2,464      (60)   1,698    2,625      (35)
    -------------------------------------------------------------------------
    Growth capital(1)     2,087    7,604      (73)   5,485   13,709      (60)
    -------------------------------------------------------------------------
    Assets employed(2)                             310,332  293,472        6
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Growth capital does not include acquisitions.
    (2) "Assets employed" is provided to assist management and investors in
        determining the effectiveness of the use of the assets at a
        divisional level. Assets employed is the sum of capital assets,
        intangible assets, and goodwill allocated to each division.
    

    Eastern's weaker performance in Q2 2009 compared to Q2 2008 was largely
attributable to the 49% decline in LME lead prices. Strong performance in
Québec/Atlantic, excluding VSC, continued to offset the decline in Ontario.
The impact of lower lead prices represented approximately 75% of the margin
decline in Eastern. On a year-to-date basis, signs of recovery in our business
observed late in Q1 2009 were evidenced throughout Q2 2009, with improvements
realized in both business units. Compared to Q1 2009, net margin was up
dramatically, driven by a combination of the impact of our cost savings
initiatives, improved lead pricing, and continued strong performance by
Québec/Atlantic onsite and fixed facilities.
    Due to our cost containment program, we were able to improve our
divisional net margin from Q1 2009, offsetting the weakness in the market. Had
lead prices been maintained at Q2 2008 levels, we would have experienced only
a 5% decline in net margin.

    Québec/Atlantic

    
    The Québec/Atlantic Canada business unit revenue is derived from:

    -   VSC, a lead-acid battery recycling facility in Québec
    -   waste treatment and transfer fixed facilities that process,
        consolidate, and bulk hazardous waste
    -   onsite services, including a fleet of specialized vehicles and
        equipment for waste transport and onsite processing
    

    Overall, lower revenue was due to the decline in the average LME price
for lead from Q2 2008. Excluding VSC, and as in the first quarter, the
Québec/Atlantic facilities and onsite services continued to deliver improved
performance in Q2 compared to the same period in 2008 despite a weaker
economic environment.
    Average LME lead pricing in Q2 2009 was 49% lower than in Q2 2008.
Offsetting the price decline, lead tonnage increased 10% year-over-year to
13,300 MT due to the operation of Kiln 2, which is now fully operational. The
split between direct sales and tolling was 48% direct sales and 52% tolling in
Q2 2009. Kiln 1 operated at full capacity or 91 days during Q2 2009.
    The table below highlights the lead sold in 2009 and the percentage by
weight of direct sales and tolling.

    
    -------------------------------------------------------------------------
                                                       YTD      YTD
                        Q2 2009  Q2 2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Lead sold
     ('000 MT)(1)          13.3     12.1       10     28.4     22.8       25
    % of lead by weight
      Direct                 48       58      (17)      59       62       (5)
      Tolling                52       42       23       41       38        8
    -------------------------------------------------------------------------
    Average price -
     direct sales
     ($/MT)(2)            1,704    2,717      (37)   1,631    2,866      (43)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Average lagged LME
     price (U.S.$/MT)(3)  1,354    2,653      (49)   1,256    2,728      (54)
    -------------------------------------------------------------------------
    (1) YTD 2009 includes 2,600 MT sold to the LME in Q1 2009 that relates to
        production during the commissioning phase of Kiln 2.
    (2) Average price received means all direct sales of finished products,
        including finished products that are alloyed to customer
        specifications.
    (3) Average LME price is based on a one-month lag consistent with our
        pricing structure.

    Onsite project work and fixed facility performance continued to show
growth over the prior year. We continue to aggressively pursue onsite project
work and have been successful at securing new business. Onsite projects
secured to date for 2009 are in excess of the work completed in all of 2008.

    Ontario

    The Ontario business unit revenue is derived from:

    -   SCL, an engineered non-hazardous solid waste landfill
    -   waste treatment and transfer fixed facilities that process,
        consolidate, and bulk hazardous waste
    -   onsite services, including a fleet of specialized vehicles and
        equipment for emergency response, waste transport, and onsite
        processing
    

    Ontario performance continued to be impacted by the steep decline in the
regional economy; however, Q2 2009 showed significant improvement compared to
Q1 2009. Cost savings in Ontario played a key role in driving net margin
improvement for Eastern over the first quarter. Revenue dropped 15% in Q2 2009
as compared to Q2 2008 due to declining volumes. SCL tonnage improved by 43%
over Q1, and were only 12% below Q2 2008. Volumes at other Ontario facilities
were down 16% compared to last year, and relatively flat compared to the first
quarter.
    We are continuing to aggressively pursue a number of event-based projects
for SCL as well as a number of onsite projects that are anticipated to
contribute to performance in the second half of 2009.

    
    -------------------------------------------------------------------------
                                                       YTD      YTD
                        Q2 2009  Q2 2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Landfill waste
     ('000 MT)            109.9    124.4      (12)   186.9    244.0      (23)
    -------------------------------------------------------------------------


    Table 9: Volume of Waste Collected - Stoney Creek Landfill
    http://files.newswire.ca/788/Tables_for_2009_Q2.doc


    CORPORATE AND OTHER

    -------------------------------------------------------------------------
                                                       YTD      YTD
    ($000s)             Q2 2009  Q2 2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Selling, general
     and administrative
     expenses            12,870   15,979      (19)  26,477   30,814      (14)
      as a % of revenue    11.6%    11.2%       4     11.8%    10.5%      12
    Amortization and
     accretion           12,096   11,671        4   24,908   23,043        8
      as a % of revenue    10.9%     8.2%      33     11.1%     7.9%      41
    -------------------------------------------------------------------------
    

    Selling, general and administrative expenses ("SG&A") were down 19% in Q2
compared to last year. We remain confident that our SG&A expense will remain
at or about $13.0 million per quarter for the remainder of the year.
    Amortization and accretion in Q2 2009 and on a year-to-date basis
increased primarily due to the growth in our capital asset base from our 2008
capital expenditure program. The net loss on the disposal of assets for the
quarter was $0.3 million and year-to-date was $1.0 million. These losses were
netted against amortization and accretion.

    
    -------------------------------------------------------------------------
                                                       YTD      YTD
    ($000s)             Q2 2009  Q2 2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Bank fees and
     interest             3,814    3,376       13    7,078    7,323       (3)
    Convertible
     debentures interest
     and accretion of
     issue costs          2,323    2,272        2    4,639    4,591        1
    -------------------------------------------------------------------------
    Finance charges       6,137    5,648        9   11,717   11,914       (2)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Finance charges increased in Q2 2009 primarily due to higher interest
rates on the amended Credit Facility. Finance charges associated with the
Debentures include an annual coupon rate of 7%, the accretion of issue costs
and discount on the debt portion of the debentures. See "Liquidity and Capital
Resources" in this MD&A for discussion of our long-term borrowings.

    -------------------------------------------------------------------------
                                                       YTD      YTD
    ($000s)             Q2 2009  Q2 2008 % change     2009     2008 % change
    -------------------------------------------------------------------------
    Current tax             172      339      (49)     367      575      (36)
    Future income tax      (286)  (2,822)      90   (2,462)  (5,820)      58
    -------------------------------------------------------------------------
    Provision for
     (recovery of)
     income taxes          (114)  (2,483)      95   (2,095)  (5,245)      60
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Current tax expense for Q2 2009 was $0.2 million, similar to Q2 2008. On
a year-to-date basis, we had a future income tax recovery of $2.5 million,
compared to a future income tax recovery of $5.8 million in 2008. To date,
Newalta has generated approximately $175 million of tax loss carryforwards.
Other than provincial capital taxes and U.S. state and federal income taxes,
we do not anticipate paying significant income tax for at least three years.
    See "Critical Accounting Estimates - Income Taxes" in this MD&A for
further discussion.

    LIQUIDITY AND CAPITAL RE

SOURCES The term liquidity refers to the speed with which a company's assets can be converted into cash, as well as cash on hand. Our liquidity risk may arise from general day-to-day cash requirements, and in the management of our assets, liabilities and capital resources. Liquidity risk is managed against our financial leverage to meet obligations and commitments in a balanced manner. Our debt capital structure is as follows: ------------------------------------------------------------------------- June 30, December 31, ($000s) 2009 2008 ------------------------------------------------------------------------- Use of credit facility: Amount drawn on credit facility(1) 261,220 264,687 Letters of credit 48,933 49,249 ------------------------------------------------------------------------- Funded senior debt A 310,153 313,936 Unused credit facility capacity 64,846 111,064 ------------------------------------------------------------------------- Debentures B 115,000 115,000 ------------------------------------------------------------------------- Total Debt equals A+B 425,153 428,936 ------------------------------------------------------------------------- (1) Issue costs were $2.5 million in the first half of 2009 and $0.4 million in the first half of 2008. See Note 3 of the Notes to the Financial Statements. The impact of improved working capital, reduced cash distributions, and reduced capital expenditures resulted in a $4.6 million decrease in our senior long-term debt as compared to December 31, 2008, despite the year-over-year decline in EBITDA. Our working capital at June 30, 2009 was $37.4 million compared with $40.0 million at December 31, 2008 and $98.1 million at June 30, 2008. This improvement highlights the degree of progress over the last 12 months by addressing the following key areas: - business process initiatives to improve the timeliness and accuracy of invoices - improved collection processes - strengthened credit risk management As a result of these initiatives, notwithstanding a more challenging economic environment, days' sales outstanding in receivables were reduced by an additional 7 days since year end, building upon a 10 day improvement at December 31, 2008 over the previous year. In addition, over 90 day accounts were reduced to $1.2 million as compared to $6.5 million as at December 31, 2008. At current activity levels, working capital of $37.4 million is expected to be sufficient to meet our ongoing commitments and operational requirements of the business. Management will continue to aggressively manage working capital in order to protect and build upon improvements made over the last 12 months. The Current Ratio is defined as the ratio of total current assets to total current liabilities. As a result of the ongoing process improvements in the management and collection of receivables, and management and payment of payables, this ratio remained relatively flat at 1.46 times at June 30, 2009 as compared to 1.34 times at December 31, 2008. The current ratio was 2.13 times at June 30, 2008, again highlighting the magnitude of the improvement between periods. This ratio, at June 30, 2009, exceeds our bank covenant minimum requirement of 1.10:1.

SOURCES OF CASH Our liquidity needs can be sourced in several ways including: funds from operations, borrowings against our credit facility, proceeds from the sale of assets, and the issuance of securities from treasury. Credit Facility The $375 million Credit Facility has a maturity date of October 12, 2010 and is available to fund growth capital expenditures and for general corporate purposes as well as to provide letters of credit to third parties for financial security up to a maximum amount of $60.0 million. The aggregate dollar amount of outstanding letters of credit is not categorized in the financial statements as long-term debt; however, the issued letters of credit reduce the amount available under the Credit Facility and are included in the definition of funded debt for covenant purposes. Included within our funded senior debt are letters of credit in the amount of $48.9 million ($49.2 million at December 31, 2008, and $49.7 million at June 30, 2008) which have been provided as security to third parties, including environmental regulatory authorities to satisfy asset retirement obligations. At June 30, 2009, of the $48.9 million of outstanding letters of credit issued to various environmental regulatory authorities, $34.1 million have been issued in connection with our operations in Alberta. The approval of amendments to the Alberta Energy Statutes Amendment Act came into force on June 4, 2009. The Alberta Energy Resources Conservation Board (ERCB) is currently implementing the Oilfield Waste Liability (OWL) Program, replacing the fully funded liability management program for oilfield waste facilities with a facility specific asset to liability risk based assessment that is backed by the existing upstream oil and gas industry liability management program. As a result of this legislation, management anticipates that outstanding letters of credit totalling up to $27 million will be returned to Newalta during the third quarter of 2009 for reporting purposes under our Credit Facility, with no additional security required to be posted. There can be no assurance as to the timing of the release of our letters of credit. Financial performance relative to the financial ratio covenants(1) under the Credit Facility is reflected in the table below: ------------------------------------------------------------------------- June 30, 2009 Threshold ------------------------------------------------------------------------- Current Ratio(2) 1.46:1 1.10:1 minimum Funded Debt(3) to EBITDA(4)(5) 3.19:1 3.50:1 maximum Fixed Charge Coverage(6) 1.29:1 1.00:1 minimum ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) We are restricted from declaring dividends if we are in breach of the covenants under our Credit Facility. (2) Current Ratio means, the ratio of consolidated current assets to consolidated net current liabilities (excluding the current portion of long-term debt and capital leases outstanding, if any). (3) Funded debt is a non-GAAP measure, the closest measure of which is long-term debt. Funded Debt is generally defined as long-term debt and capital leases including any current portion thereof but excluding future income taxes and future site restoration costs. Funded debt is calculated by adding the senior long-term debt to the amount of letters of credit outstanding at the reporting date. In calculating Funded Debt, Letters of Credit returned after the end of a fiscal quarter but prior to the date that is 45 days following the end of the first, second or third interim period (90 days following the end of the annual period) are excluded. (4) EBITDA is a non-GAAP measure, the closest measure of which is net earnings. For the purpose of calculating the covenant, EBITDA is defined as the trailing twelve-months consolidated net income for Newalta Inc. before the deduction of interest, taxes, depreciation and amortization, and non-cash items (such as non-cash stock-based compensation and gains or losses on asset dispositions) Additionally, EBITDA is normalized for any acquisitions completed during that time frame and excludes any dispositions incurred as if they had occurred at the beginning of the trailing twelve-months. (5) Funded Debt to EBITDA means the ratio of consolidated Funded Debt to the aggregate EBITDA for the trailing twelve-months. Funded debt to EBITDA covenant will remain at 3.50:1 for the remainder of 2009. The ratio be 3.00:1 in 2010. (6) Fixed Charge Coverage Ratio means, based on the trailing twelve month period, EBITDA less unfinanced capital expenditures and cash taxes to the sum of the aggregate of principal payments (including amounts under capital leases, if any), interest (excluding accretion for the convertible debentures), dividends paid for such period, other than cash payments in respect of a dividend reinvestment plan, if any. Unlike the Funded Debt to EBITDA ratio, the Fixed Charge Coverage ratio trailing twelve month EBITDA is not normalized for acquisitions or dispositions. As at June 30, 2009, our funded senior debt was $310.2 million resulting in unused capacity of $64.8 million on our Credit Facility and a funded debt to EBITDA ratio of 3.19:1. Management continues to focus on reducing funded senior debt through the following initiatives: - reduction in the amount of outstanding letters of credit - continued improvement in the management of working capital - restricted capital spending in 2009 - reduced expenses with the implementation of our cost control program, including: staff reductions, hiring restrictions, postponement of salary increases and restrictions on travel and discretionary expenses, and the suspension of our matching contributions to the our Employee Savings Plan. - sale of redundant, idle, or non-core assets The actions we have undertaken in the first half of 2009 have stabilized our funded senior debt position. Our actions will continue to have a positive impact on our debt position and will continue to strengthen our balance sheet as the economy recovers. Management remains confident that we will be able to manage within our covenants for 2009 and 2010. Debentures The Debentures have a maturity date of November 30, 2012 and bear interest at a rate of 7.0% payable semi-annually in arrears on May 31 and November 30 each year beginning May 31, 2008. Each $1,000 debenture is convertible into 43.4783 shares, at a conversion price of $23.00 per share, at any time at the option of the holders of the Debentures. The Debentures are not included in calculating financial covenants in the Credit Facility. There were no redemptions of the Debentures in Q2 2009. USES OF CASH Our primary uses of funds include maintenance and growth capital expenditures as well as acquisitions, payment of distributions, 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 Newalta's efficiency and productivity, allow Newalta to access new markets, and diversify its business. Growth capital or growth and acquisition capital are reported separately from maintenance capital by management 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 by management because these types of expenditures are not discretionary and are required to maintain current operating levels. Capital expenditures for Q2 2009 and Q2 2008 were: ------------------------------------------------------------------------- ($000s) Q2 2009 Q2 2008 YTD 2009 YTD 2008 ------------------------------------------------------------------------- Growth capital expenditures(1) 4,566 19,301 10,635 36,025 Maintenance capital expenditures 1,429 4,161 3,475 5,410 ------------------------------------------------------------------------- Total capital expenditures(2) 5,995 23,462 14,110 41,435 ------------------------------------------------------------------------- (1) Acquisitions in Q2 2008 and Q2 2009 were nil. (2) The numbers in this table differ from the consolidated statement of cash flows because the numbers above do not reflect the net change in working capital related to capital asset accruals. Total capital expenditures for the quarter were $6.0 million. Growth capital expenditures of $4.6 million were primarily used to complete projects that were underway at the end of 2008. Growth capital expenditures in Q1 2009 were funded by funds from operations and working capital. Maintenance capital decreased $2.0 million, to $1.4 million. Management has restricted capital expenditures in 2009 to $40 million, comprised of $25 million for growth capital and $15 million for maintenance capital. As we continue to be successful in securing new onsite project work across Canada, including heavy oil/SAGD, a portion of the $25 million in growth capital expenditures may be used to fund these projects in the second half of the year. This compares to an initial 2009 capital budget of $75 million for growth capital and $28 million for maintenance capital and to a total capital spend in 2008 of $127 million. These investments will be funded entirely from funds from operations. 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 review of all factors, the Board declared a dividend of $0.05 per share, paid July 15 to shareholders of record as at June 30, 2009. Newalta expects to pay a dividend of $0.05 per share to holders of record on each of September 30, 2009 and December 31, 2009. The Board will continue to review future dividends, taking into account all factors noted above. The terms of the Plan of Arrangement effective March 1, 2003 whereby Newalta Corporation (a predecessor entity) converted from a corporate structure to a trust structure, as Newalta Income Fund provided that certificates formerly representing common shares of Newalta Corporation that were not deposited with the required documentation on or before March 1, 2009 ceased to represent a right or claim of any kind or nature and the right of the holder of such common shares to receive certificates representing trust units of the Fund or cash payments pursuant to the Plan of Arrangement, as the case may be, was deemed to be surrendered together with all dividends or distributions thereon held for such holder. Accordingly, on June 29, 2009, an aggregate of 60,483 common shares and approximately $0.7 million were returned to Newalta Inc. with the shares being cancelled. As at August 6, 2009, Newalta had 42,438,377 shares outstanding, outstanding options to purchase up to 1,950,200 shares and a number of shares that may be issuable pursuant to the $115.0 million in Debentures (see Sources of Cash - Debentures). Contractual Obligations For the three and six months ended June 30, 2009, there have been no significant changes in our contractual obligations. For a summary of our contractual obligations, see page 28 of the MD&A for the year ended December 31, 2008. SUMMARY OF QUARTERLY RESULTS 2009 2008 ($000s except per ------------------------------------------------------ share/unit data) Q2 Q1 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Revenue 111,386 112,538 145,341 158,579 142,939 150,176 Earnings (loss) before taxes (293) (6,362) 5,616 19,041 9,293 16,542 Net earnings (loss) (179) (4,381) 9,085 18,717 11,776 19,304 Earnings (loss) per share/unit ($) 0.00 (0.10) 0.21 0.44 0.28 0.47 Diluted earnings (loss) per share/ unit ($) 0.00 (0.10) 0.21 0.44 0.28 0.46 Weighted average share/units - basic 42,450 42,402 42,266 42,102 41,822 41,543 Weighted average share/units - diluted 42,450 42,402 42,266 42,111 41,950 41,635 EBITDA 17,940 12,030 27,600 37,441 26,573 34,139 ------------------------------------------------------------------------- 2007 ($000s except per ------------------ share/unit data) Q4 Q3 ------------------------------------- Revenue 137,075 133,358 Earnings (loss) before taxes 7,784 14,524 Net earnings (loss) 23,613 17,893 Earnings (loss) per share/unit ($) 0.57 0.44 Diluted earnings (loss) per share/ unit ($) 0.54 0.43 Weighted average share/units - basic 41,191 40,579 Weighted average share/units - diluted 43,779 40,725 EBITDA 26,457 28,980 ------------------------------------- Quarterly performance is affected by seasonal variation as described below. In 2007, acquisitions completed in eastern Canada in the second half of 2006 helped to partially offset the weak natural gas drilling environment in western Canada. In Q3 2007, operations returned to seasonal levels but earnings before taxes remained lower when compared to the same period in 2006, as a result of the continued weakness in the western Canadian natural gas drilling market. Earnings before taxes in Q4 2007 were lower than Q3 2007 due to a $2 million loss on the disposal of leasehold improvements associated with the early termination of office space leases as well as increased SG&A and interest expense incurred in anticipation of growth. Net earnings in Q4 2007 improved over Q3 2007 attributable to a future income tax recovery due to a reduction in the estimated future income tax rate. In 2008, the increase in revenue, earnings before taxes, and net earnings compared to the first three quarters of 2007 were mainly due to full quarter contributions from acquisitions in each quarter as well as higher crude oil and lead revenue, driven both by increases in volume and commodity prices. Natural gas drilling remained at near 2007 levels in 2008. In Q4 2008, commodity prices declined significantly, negatively impacting revenue and margin in both divisions. In 2009, the decrease in revenue, earnings before taxes, and net earnings as compared to the prior period was mainly due to weakening economic conditions experienced in Q1 2009. Lead and crude oil prices fell from historic highs achieved in 2008, continuing the negative impact on revenue and margin from Q4 2008. The improvement in Q2 2009 was driven by a combination of stronger commodity prices, management's cost containment program, and a strengthening of the economy as compared to Q1 2009. From Q2 2007 to Q4 2008, the increase in the weighted average number of shares/trust units is related to the former DRIP program of the Newalta Income Fund. As a part of the conversion to a corporation on December 31, 2008, Newalta eliminated the DRIP program in January 2009. Seasonality of Operations Quarterly performance is affected by, among other things, weather conditions, commodity prices, foreign exchange, market demand and the timing of our growth capital investments as well as acquisitions and the contributions from those investments. Acquisitions and growth capital investments completed in the first half of the year will tend to strengthen the second half financial performance. In 2009, the volatility of commodity prices combined with the impact of management's cost cutting initiatives may have an effect on the seasonality of our combined divisional net margin and EBITDA. For Western, the frozen ground during the winter months in western Canada provides an optimal environment for drilling activities and consequently, the first quarter is typically strong. As warm weather returns in the spring, the winter's frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until the roads have thoroughly dried out. Road bans, which are generally imposed in the spring, restrict waste transportation which reduces demand for the Western Division's services and therefore, the second quarter is generally the weakest quarter of the year for Western. The third quarter is typically the strongest quarter for Western due to favourable weather conditions and market cyclicality. The expansion into the U.S. is anticipated to somewhat reduce the impact that weather conditions have on drilling related activities as the areas in the U.S. in which we operate are not affected by frozen ground requirements for winter drilling nor are they impacted by the spring thaw. Normal seasonality for quarterly revenue as a percentage of annual Western revenue is approximately: 26% for the first quarter, 23% for the second quarter, 27% for the third quarter, and 24% in the fourth quarter. Eastern's services are generally curtailed by colder weather in the first quarter, which is typically its weakest quarter as aqueous wastes and onsite work are restricted by colder temperatures. The third quarter is typically the strongest for Eastern due to the more favourable weather conditions and market cyclicality. The addition of VSC to Eastern has reduced the significance of this variability, as the demand for recycled lead is not generally affected by seasonality. Eastern's quarterly revenue as a percentage of annual Eastern revenue has not been affected by the trends discussed above due to the effect of acquisitions. Normal seasonality for quarterly revenue as a percentage of annual revenue for Eastern is approximately: 23% in the first quarter, 25% in the second quarter, 25% in the third quarter, and 27% in the fourth quarter. WESTERN DIVISION ADDITIONAL HISTORICAL INFORMATION The tables below restate the 2008 Oilfield business unit's operational information from the 2008 Annual Report into the new business units, Facilities and Heavy Oil. Facilities ------------------------------------------------------------------------- Q1/08 Q2/08 Q3/08 Q4/08 2008 ------------------------------------------------------------------------- Waste processing volumes ('000 m3) 135 96 137 121 489 Recovered crude oil ('000 bbl) 65 53 55 60 233 Average crude oil price received (CDN$/bbl) 90 111 113 55 91 Recovered oil sales ($ millions) 5.8 5.9 6.2 3.4 21.3 Edmonton par price (CDN$/bbl) 97 125 123 66 103 ------------------------------------------------------------------------- Heavy Oil ------------------------------------------------------------------------- Q1/08 Q2/08 Q3/08 Q4/08 2008 ------------------------------------------------------------------------- Waste processing volumes ('000 m3) 130 114 134 132 509 Recovered crude oil ('000 bbl) 43 49 47 35 174 Average crude oil price received (CDN$/bbl) 69 98 97 44 80 Recovered oil sales ($ millions) 3.0 4.8 4.5 1.5 13.8 Bow River Hardisty price (CND$/bbl) 77 102 106 52 84 ------------------------------------------------------------------------- OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements. SENSITIVITIES Our revenue is sensitive to changes in commodity prices for crude oil, base oils, and lead. These factors have both a direct and indirect impact on our business. The direct impact of these commodity prices is reflected in the revenue received from the sale of products such as crude oil, base oils and lead. The indirect impact is the effect that the variation of these factors, including natural gas, has on activity levels of our customers and, therefore, demand for our services. The indirect impact of these fluctuations previously discussed are not quantifiable. We do not see any significant variation to the sensitivities provided in the MD&A for the year ended December 31, 2008. CRITICAL ACCOUNTING ESTIMATES The preparation of the financial statements in accordance with GAAP requires management to make estimates with regard to the reported amounts of revenue and expenses and the carrying values of assets and liabilities. These estimates are based on historical experience and other factors determined by management. Because this involves varying degrees of judgment and uncertainty, the amounts currently reported in the financial statements could, in the future, prove to be inaccurate. Amortization and Accretion Amortization of capital assets and intangible assets incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change impacting the operation of plant and equipment. Accretion expense is the increase in the asset retirement obligation over time. The asset retirement obligation is based on estimates that may change as more experience is obtained or as general market conditions change impacting the future cost of abandoning Newalta's facilities. Amortization of capital assets and intangible assets incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change impacting the operating of plant and equipment. Estimates for the three and six months ended June 30, 2009 are consistent with those disclosed in the MD&A for the year ended December 31, 2008. Asset Retirement Obligations Asset retirement obligations are estimated by management based on the anticipated costs to abandon and reclaim all Newalta facilities, landfills and the projected timing of the costs to be incurred in future periods. Management, in consultation with Newalta's engineers, estimates these costs based on current regulations, costs, technology, and industry standards. The fair value estimate is capitalized as part of the cost of the related asset and amortized to expense over the asset's useful life. There were no significant changes in the estimates used to prepare the asset retirement obligation for the three and six months ended June 30, 2009, as compared to those provided in Newalta's annual consolidated financial statements for the year ended December 31, 2008. Goodwill Management performs a test for goodwill impairment annually and whenever events or circumstances make it possible that impairment may have occurred. Determining whether impairment has occurred requires a valuation of the respective reporting unit, based on its future discounted cash flows. In applying this methodology, management relies on a number of factors, including actual operating results, future business plans, economic projections and market data. Management tests the valuation of goodwill as at September 30 to determine whether or not any impairment in the goodwill balance recorded exists. In addition, on a quarterly basis, management assesses the reasonableness of assumptions used for the valuation to determine if further impairment testing is required. Based on our review of the assumptions as at June 30, 2009, we determined that no further impairment testing was necessary. However, in light of the current economic conditions, we undertook an additional review of assumptions used for the test of the valuation of goodwill and reconfirmed our September 30, 2008 assessment that there were no indicators of impairment. Income Taxes Current income tax expense predominantly represents capital taxes paid in Central and Eastern Canada, federal and provincial income taxes, and U.S. taxation imposed on the U.S. subsidiary. Future income taxes are estimated based on temporary differences between the book value and tax value of assets and liabilities using the applicable future income tax rates under current law. The change in these temporary differences results in a future income tax expense or recovery. The most significant risk in this estimate is the future income tax rate used for each entity based on provincial allocation calculations and the timing of reversal of temporary differences. Estimates for the three and six months ended June 30, 2009 are consistent with those disclosed in the MD&A for the year ended December 31, 2008. Stock-Based Compensation Newalta has three stock-based compensation plans: the incentive plan adopted on March 1, 2003 (the "2003 Plan"); the incentive plan adopted on May 18, 2006 (the "2006 Plan" and together with the 2003 Plan, the "Converted Incentive Plans"); and the incentive option plan adopted on December 31, 2008 (the "Option Plan" and together with the Converted Incentive Plans, the "Incentive Plans"). In connection with the Conversion, the Converted Incentive Plans were amended such that the holders of such rights now have the right to receive, upon vesting and the payment of the exercise price related thereto, common shares of Newalta Inc. instead of trust units of the Fund, on a one-for-one basis. No further option based awards will be granted under the Converted Incentive Plans. Under the Incentive Plans, we may grant options to acquire up to 10% of the issued and outstanding shares to directors, officers, employees and consultants of Newalta or any its affiliates. The 2003 Plan differs from the 2006 Plan and the Option Plan in the manner in which they may be settled by the grantee. The options under the 2003 Plan may only be settled in common shares, while the options under the 2006 Plan and Option Plan may be settled net in cash by the grantee. As such, options under the 2003 Plan are accounted for in accordance with the fair value recognition provisions of GAAP. Accordingly, stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as an expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of the options (including the number of stock-based awards that are expected to be forfeited), the expected volatility of the underlying security and the expected dividends. The options granted under the 2006 Plan and the Option Plan are accounted for as stock appreciation rights since they may be subject to a net cash settlement provision. Accordingly, they are re-measured at each balance sheet date to reflect the net cash liability at that date. In the first half of 2009, an aggregate of 905,000 options to acquire common shares pursuant to the Converted Incentive Plans were surrendered by the holder's to Newalta Inc. for cancellation for no consideration. New Accounting Standards in 2010 and Onward Our assessment of new accounting standards for 2010 and onward are consistent with those disclosed in the MD&A for the year ended December 31, 2008. 2011 Changeover to IFRS On March 11, 2008, the Accounting Standards Board of Canada ("AcSB") confirmed that effective January 1, 2011, International Financial Reporting Standards ("IFRS") will become Canadian GAAP for publicly accountable enterprises such as Newalta. At this time, the impact on our future consolidated balance sheets and statements of operations, comprehensive income and retained earnings are not reasonably determinable or estimable. We have commenced our IFRS project and have established a formal project governance structure with a target implementation date of January 1, 2011. The following table summarizes our key activities, related milestones, and our accomplishments to date. ------------------------------------------------------------------------- Key Activity Milestones Status Status (as at March (as at June 31, 2009) 30, 2009) ------------------------------------------------------------------------- Accounting Complete new Assessment Assessment policies: financial policies processes are processes are and procedures ongoing, with ongoing. We Identification manual addressing significant are completing of differences IFRS requirements. progress in the our final between Canadian Key milestones areas identified review of GAAP/IFRS include: in our high- processes in - Accounting - Opening balances level scoping the areas policy choices estimates review. identified in under IFRS - Q3 2009 our high-level - Financial - Testing phase scoping statement impact - Q3/Q4 2009 review. For - Opening balances - SAP parallel run all other - Final - Q4 2009 areas, we implementation - Finalize opening have made decisions balances significant - Financial policies - Q4 2009/Q1 2010 progress in and procedures our assessment processes. ------------------------------------------------------------------------- Detailed policy Develop working Training in the Working groups assessment: groups and training key impact areas continue to be to implement is complete. involved in Identification of changes for Working groups the assessment areas that may significant impact continue to be of significant have a significant items. involved in the impact items. impact. Key milestones assessment of We are include: significant finalizing our - Develop and impact items. recommend- implement training ations for the programs for systemic working groups process - Q1 2009 changes - Identify and required by recommend systemic IFRS. process changes - Q2/Q3 2009 ------------------------------------------------------------------------- IT Infrastructure: Ensure readiness for Analysis of Analysis of parallel processing issues is issues is Identify key of 2010 financial ongoing. ongoing. changes in the results and IFRS- Testing of the Testing of the following areas: compliant reporting dual reporting dual reporting - IT system changes in 2011 - Q4 2009 system has system is and upgrades begun. ongoing. - Systemic process changes for data collection for G/L, disclosures, and consolidation - One-time processes due to IFRS 1 ------------------------------------------------------------------------- Control environment: Complete final Assessment is Assessment is signoff and review ongoing. ongoing. Internal control of accounting policy over financial changes by Q4 2010 reporting Update certification - Accounting policy process by Q4 2010 changes and approval - Changes to certification process ------------------------------------------------------------------------- Control environment: Publish material Early assessment Assessment is changes in policies is ongoing. Key ongoing. Key Disclosure controls and known impacts stakeholder stakeholder and procedures of IFRS throughout communications communications - MD&A communi- 2009 & 2010 MD&A's will begin late will continue cations package - starting Q2 - 2009 Q2 2009. into the - IFRS adjustments Publish impact of balance of to Canadian GAAP conversion (with 2009. statements (2010) reconciliation to - 2011 financial GAAP) on key measures statement by Q1 2011. presentation Publish disclosure of 2010 comparative information (with reconciliation to GAAP) in the interim and annual financial statements - Q1 2011 ------------------------------------------------------------------------- Other Issues: Develop investor Early assessment Assessment is relations is ongoing. ongoing. Address impacts to communication plan operations due to by Q3 2009 IFRS: Renegotiation of: - Investor relations - Financial covenants - Financial - by Q2 - 2010 covenants - Compensation - Compensation packages - by Q3 packages - 2010 ------------------------------------------------------------------------- BUSINESS RISKS The business of Newalta 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 in the first paragraph of this Management's Discussion and Analysis) and the risk factors set forth in the most recently filed Annual Information Form of Newalta which are incorporated by reference herein. 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. Newalta's credit risk from its customers is mitigated by its broad customer base and diverse product lines. In the normal course of operations, Newalta is exposed to movements in U.S. dollar exchange rates relative to the Canadian dollar. Newalta sells and purchases some products in U.S. dollars. Newalta does not utilize hedging instruments but rather chooses to be exposed to current U.S. exchange rates as increases or decreases in exchange rates are not considered to be significant over the period of the outstanding receivables and payables. The floating interest rate profile of Newalta's long-term debt exposes Newalta to interest rate risk. Newalta does not use hedging instruments to mitigate this risk. The carrying value of the long-term debt approximates fair value due to its floating interest rates. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING During the three months ended June 30, 2009, Newalta did not make any changes in the internal controls and procedures relating to disclosure and financial reporting that have materially affected, or are reasonably likely to materially affect, Newalta's internal control over financial reporting. ADDITIONAL INFORMATION Additional information relating to Newalta, including the Annual Information Form, is available through the internet on the Canadian SEDAR which can be accessed at www.sedar.com. Copies of the Annual Information Form of Newalta may be obtained from Newalta Inc. 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 June 30, December 31, ($000s) (unaudited) 2009 2008 ------------------------------------------------------------------------- Assets Current assets Accounts receivable 81,624 120,884 Inventories 28,269 29,781 Prepaid expenses and other 9,568 6,546 ------------------------------------------------------------------------- 119,461 157,211 Note receivable 1,019 1,160 Capital assets 714,489 724,788 Intangible assets 62,957 64,003 Goodwill 103,597 103,597 Future tax asset 1,992 1,151 ------------------------------------------------------------------------- 1,003,515 1,051,910 ------------------------------------------------------------------------- Liabilities Current liabilities Accounts payable and accrued liabilities 79,902 109,698 Dividends/distributions payable 2,122 7,560 ------------------------------------------------------------------------- 82,024 117,258 Senior long-term debt (Note 3) 258,700 263,251 Convertible debentures - debt portion 110,068 109,419 Future income taxes 38,315 40,039 Asset retirement obligations (Note 4) 21,511 21,094 ------------------------------------------------------------------------- 510,618 551,061 ------------------------------------------------------------------------- Shareholders' Equity Shareholders' capital (Note 5) 508,896 509,369 Convertible debentures - equity portion 1,850 1,850 Contributed surplus 1,665 988 Retained earnings (deficit) (19,514) (11,358) ------------------------------------------------------------------------- 492,897 500,849 ------------------------------------------------------------------------- 1,003,515 1,051,910 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Operations, Comprehensive Income (Loss) and Retained Earnings (Deficit) For the For the Three Months Six Months ($000s except per share/unit data) Ended June 30, Ended June 30, (unaudited) 2009 2008 2009 2008 ------------------------------------------------------------------------- Revenue 111,386 142,939 223,924 293,115 Expenses Operating (Note 13) 80,576 100,348 167,477 201,509 Selling, general and administrative (Note 13) 12,870 15,979 26,477 30,814 Finance charges 6,137 5,648 11,717 11,914 Amortization and accretion (Note 2) 12,096 11,671 24,908 23,043 ------------------------------------------------------------------------- 111,679 133,646 230,579 267,280 ------------------------------------------------------------------------- Earnings (loss) before taxes (293) 9,293 (6,655) 25,835 Provision for (recovery of) income taxes Current 172 339 367 575 Future (286) (2,822) (2,462) (5,820) ------------------------------------------------------------------------- (114) (2,483) (2,095) (5,245) ------------------------------------------------------------------------- Net earnings (loss) and comprehensive income (loss) (179) 11,776 (4,560) 31,080 Retained earnings (deficit), beginning of period (17,865) 19,167 (11,358) 22,940 Dividends/distributions (Note 9) (1,470) (23,249) (3,596) (46,326) ------------------------------------------------------------------------- Retained earnings (deficit), end of period (19,514) 7,694 (19,514) 7,694 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net earnings (loss) per share/unit (Note 8) - 0.28 (0.11) 0.75 ------------------------------------------------------------------------- Diluted earnings (loss) per share/unit (Note 8) - 0.28 (0.11) 0.75 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated Statements of Cash Flows For the For the Three Months Six Months Ended June 30, Ended June 30, ($000s) (unaudited) 2009 2008 2009 2008 ------------------------------------------------------------------------- Net inflow (outflow) of cash related to the following activities: Operating Activities Net earnings (loss) (179) 11,776 (4,560) 31,080 Items not requiring cash: Amortization and accretion (Note 2) 12,096 11,671 24,908 23,043 Future income tax recovery (286) (2,822) (2,462) (5,820) Other 2,145 681 2,700 474 ------------------------------------------------------------------------- Funds from Operations 13,776 21,306 20,586 48,777 Increase (decrease) in non-cash working capital (Note 12) (1,715) 3,069 21,760 (15,045) Asset retirement expenditures incurred (253) (954) (496) (1,566) ------------------------------------------------------------------------- 11,808 23,421 41,850 32,166 ------------------------------------------------------------------------- Investing Activities Additions to capital assets (Note 12) (9,554) (24,605) (28,281) (49,762) Net proceeds on sale of capital assets 649 2,130 1,255 6,590 ------------------------------------------------------------------------- (8,905) (22,475) (27,026) (43,172) ------------------------------------------------------------------------- Financing Activities Issuance of shares/units 4 1,851 252 1,913 Issuance of convertible debentures - (139) - (205) Increase (decrease) in debt (844) 17,851 (5,532) 48,887 Decrease in note receivable 62 105 141 161 Dividends/distributions to shareholders (Note 9) (2,125) (20,614) (9,685) (39,750) ------------------------------------------------------------------------- (2,903) (946) (14,824) 11,006 ------------------------------------------------------------------------- Net cash flow - - - - Cash - beginning of period - - - - ------------------------------------------------------------------------- Cash - end of period - - - - ------------------------------------------------------------------------- Supplementary information: Interest paid 7,588 7,644 10,125 11,426 Income taxes paid 424 544 424 740 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Notes to the Interim Consolidated Financial Statements For the three and six months ended June 30, 2009 and 2008 (all tabular data in $000s except per share and ratio data) (unaudited) Newalta Inc. was incorporated on October 29, 2008 pursuant to the laws of the Province of Alberta. Newalta Inc. is engaged, through its wholly owned operating subsidiary, Newalta Corporation (the "Corporation", and together with Newalta Inc., collectively "Newalta"), in adapting technologies to maximize the value inherent in industrial waste through the recovery of saleable products and recycling. Newalta also provides environmentally sound disposal of solid, non-hazardous industrial waste. With an integrated network of facilities, Newalta provides waste management solutions to a broad customer base of national and international corporations in a range of industries, including automotive, construction, forestry, lead, manufacturing, mining, oil and gas, petrochemical, pulp and paper, refining, steel and transportation services. Following changes in tax rules for specified investment flow-though entities, Newalta Income Fund (the "Fund") undertook steps to convert the Fund's income trust structure into a corporate structure. On December 17, 2008, unitholders of the Fund voted and approved the reorganization by way of a plan of arrangement under the Business Corporations Act (Alberta), into a corporation pursuant to an arrangement agreement dated November 12, 2008 (as amended) between Newalta Inc., Newalta Income Fund, Newalta Corporation, Newalta Industrial Services Inc. and Newalta Services Holdings Inc. (the "Arrangement"). On January 1, 2009, Newalta Corporation, Newalta Industrial Services Inc. and Newalta Services Holdings Inc. were amalgamated to form Newalta Corporation. Prior to the Arrangement, which was effective on December 31, 2008, the consolidated financial statements included the accounts of the Fund and its subsidiaries. After giving effect to the Arrangement, the consolidated financial statements were prepared on a continuity of interests basis, which recognizes Newalta Inc. as the successor entity to the Fund. NOTE 1. BASIS OF PRESENTATION The interim consolidated financial statements include the accounts of Newalta. The interim consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). Certain information and disclosures normally required to be included in the notes to the audited annual financial statements have been omitted or condensed. These interim financial statements and the notes thereto should be read in conjunction with the consolidated financial statements of Newalta Inc. for the year ended December 31, 2008 as contained in the Annual Report for fiscal 2008. The accounting principles applied are consistent with those as set out in the annual financial statements of Newalta Inc. for the year ended December 31, 2008 except as noted in the following paragraph. Goodwill and Intangible Assets Effective January 1, 2009, Newalta adopted the Canadian Institute of Chartered Accountants ("CICA") new accounting standard, section 3064, Goodwill and Intangible Assets, replacing section 3062, Goodwill and Other Intangible Assets. The new Section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The standards concerning goodwill are unchanged from the standards included in the previous section 3062. The adoption of this new section did not have a material impact on Newalta's interim financial statements. USE OF ESTIMATES AND ASSUMPTIONS Accounting measurements at interim dates inherently involve reliance on estimates and the results of operations for the interim periods shown in these financial statements are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the accompanying unaudited interim consolidated financial statements include all adjustments necessary to present fairly the consolidated results of Newalta Inc.'s operations and cash flows for the periods ended June 30, 2009 and 2008. NOTE 2. DISPOSAL OF CAPITAL ASSETS During the six months ended June 30, 2009, Newalta disposed of certain transport vehicles and building assets with a net book value of $2.3 million for proceeds of $1.3 million. The resulting net loss of $1.0 million is included in amortization and accretion in the consolidated statements of operations, comprehensive income (loss) and retained earnings (deficit). NOTE 3. SENIOR LONG-TERM DEBT ------------------------------------------------------------------------- June 30, December 31, 2009 2008 ------------------------------------------------------------------------- Amount drawn on credit facility 261,220 264,687 Issue costs (2,520) (1,436) ------------------------------------------------------------------------- Senior long-term debt 258,700 263,251 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Credit Facility's maturity date is October 12, 2010. An extension of the Credit Facility may be granted at the option of the lenders. If an extension is not granted, the entire amount of the outstanding indebtedness would be due in full at the maturity date. The facility also requires Newalta to be in compliance with certain covenants. At June 30, 2009, Newalta was in compliance with all covenants. Effective April 22, 2009, Newalta amended the terms of its Credit Facility. The primary changes were an increase of the funded debt to EBITDA covenant restriction from 3.00:1 to 3.50:1 for the remainder of 2009 (3.00:1 for the remaining term thereafter) and a decrease to the current ratio covenant restriction from 1.20:1 to 1.10:1 for the remainder of the term of the Credit Facility. Newalta also elected to reduce the principal amount of the Credit Facility from $425.0 million to $375.0 million. NOTE 4. RECONCILIATION OF ASSET RETIREMENT OBLIGATIONS Total future asset retirement obligations were estimated by management based on the anticipated costs to abandon and reclaim facilities and wells, and the projected timing of these expenditures. The reconciliation of estimated and actual expenditures for the period is provided below: ------------------------------------------------------------------------- Three months Six months ended June 30, ended June 30, 2009 2008 2009 2008 ------------------------------------------------------------------------- Asset retirement obligations, beginning of period 21,299 20,835 21,094 20,985 Expenditures incurred to fulfill obligations (253) (954) (496) (1,566) Accretion 465 462 913 924 ------------------------------------------------------------------------- Asset retirement obligations, end of period 21,511 20,343 21,511 20,343 ------------------------------------------------------------------------- NOTE 5. SHAREHOLDERS' CAPITAL a) Shareholders' capital Authorized capital of Newalta Inc. consists of an unlimited number of common shares and an unlimited number of preferred shares issuable in series. On June 29, 2009, an aggregate of 60,483 common shares were cancelled and returned to Newalta Inc. Under the terms of the March 1, 2003 Plan of Arrangement, Newalta Corporation (a predecessor entity) converted from a corporate structure to Newalta Income Fund (the "Fund"), a trust structure. The Plan of Arrangement provided that certificates formerly representing common shares of Newalta Corporation that were not deposited with the required documentation on or before March 1, 2009 ceased to represent a right or claim of any kind or nature and the right of the holder of such common shares to receive certificates representing trust units of the Fund or cash payments pursuant to the Plan of Arrangement, as the case may be, were deemed to be surrendered together with all dividends or distributions thereon held for such holder. These shares were valued at $11.99 each using the average carrying amount of shares outstanding prior to their return. As a result $0.7 million was transferred from Share Capital to Contributed Surplus. The following table is a summary of the changes in Shareholders' capital during the period: ------------------------------------------------------------------------- Shares (No.) Amount ($) ------------------------------------------------------------------------- Shares outstanding as at October 29, 2008 - - ------------------------------------------------------------------------- Shares issued pursuant to the Arrangement 42,400 509,369 ------------------------------------------------------------------------- Shares outstanding as at December 31, 2008 42,400 509,369 ------------------------------------------------------------------------- Shares issued 98 252 Shares cancelled and returned to treasury (60) (725) ------------------------------------------------------------------------- Shares outstanding as at June 30, 2009 42,438 508,896 ------------------------------------------------------------------------- b) Unitholders' capital ------------------------------------------------------------------------- Units (No.) Amount ($) ------------------------------------------------------------------------- Units outstanding as at December 31, 2007 41,417 496,027 Contributed surplus on rights exercised - 241 Rights exercised 209 1,913 Units issued under the DRIP(1) 774 11,188 Units cancelled under the Arrangement (42,400) (509,369) ------------------------------------------------------------------------- Units outstanding as at December 31, 2008 and June 30, 2009 - - ------------------------------------------------------------------------- (1) Distribution Reinvestment Plan of the Fund NOTE 6. CAPITAL DISCLOSURES Newalta's capital structure consists of: ------------------------------------------------------------------------- June 30, December 31, 2009 2008 ------------------------------------------------------------------------- Senior long-term debt 258,700 263,251 Letters of Credit or bonds issued as financial security to third parties (Note 10) 66,936 64,457 Convertible debentures, debt portion 110,068 109,419 Shareholders' equity 492,897 500,849 ------------------------------------------------------------------------- 928,601 937,976 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The objectives in managing the capital structure are to: - Utilize an appropriate amount of leverage to manage risk and optimize the return on shareholders' equity - Provide borrowing capacity and financial flexibility Management and the Board of Directors review and assess Newalta's capital structure and dividend/distribution 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 - Enter into new agreements establishing new credit facilities - Adjust the amount of dividends paid to shareholders - Sell idle, redundant or non-core assets Management monitors the capital structure based on measures required pursuant to the Credit Facility agreement which restricts Newalta from declaring dividends and distributing cash if the Corporation is in breach of a covenant under the Credit Facility. These measures include: ------------------------------------------------------------------------- June 30, December 31, Ratio 2009 2008 Threshold ------------------------------------------------------------------------- Current(1) 1.46:1 1.34:1 1.10:1 minimum Funded Debt(2) to EBITDA(3)(4) 3.19:1 2.46:1 3.50:1 maximum Fixed Charge Coverage(5) 1.29:1 1.19:1 1.00:1 minimum ------------------------------------------------------------------------- (1) Current Ratio means, the ratio of consolidated current assets to consolidated net current liabilities (excluding the current portion of long-term debt and capital leases outstanding, if any). (2) Funded debt is a non-GAAP measure, the closest measure of which is long-term debt. Funded Debt is generally defined as long-term debt and capital leases including any current portion thereof but excluding future income taxes and future site restoration costs. Funded debt is calculated by adding the senior long-term debt to the amount of letters of credit outstanding at the reporting date. In calculating Funded Debt, Letters of Credit returned after the end of a fiscal quarter but prior to the date that is 45 days following the end of the first, second or third interim period (90 days following the end of the annual period) are excluded. (3) EBITDA is a non-GAAP measure, the closest measure of which is net earnings. For the purpose of calculating the covenant, EBITDA is defined as the trailing twelve-months consolidated net income for Newalta Inc. before the deduction of interest, taxes, depreciation and amortization, and non-cash items (such as non-cash stock-based compensation and gains or losses on asset dispositions) Additionally, EBITDA is normalized for any acquisitions completed during that time frame and excludes any dispositions incurred as if they had occurred at the beginning of the trailing twelve-months. (4) Funded Debt to EBITDA means the ratio of consolidated Funded Debt to the aggregate EBITDA for the trailing twelve-months. Funded debt to EBITDA covenant will remain at 3.50:1 for the remainder of 2009. The ratio will become 3.00:1 in 2010. (5) Fixed Charge Coverage Ratio means, based on the trailing twelve month period, EBITDA less unfinanced capital expenditures and cash taxes to the sum of the aggregate of principal payments (including amounts under capital leases, if any), interest (excluding accretion for the convertible debentures), dividends paid for such period, other than cash payments in respect of a dividend reinvestment plan, if any. Unlike the Funded Debt to EBITDA ratio, the Fixed Charge Coverage ratio trailing twelve month EBITDA is not normalized for acquisitions or dispositions. NOTE 7. LONG-TERM INCENTIVE PLANS a) The 2008 Option Plan On January 2, 2009 a total of 842,500 options were granted to certain directors, officers and employees of the Corporation. The options were granted at the market price of $5.31 per share. A further 12,500 options were granted to a director of the Corporation on May 21, 2009 at an exercise price of $3.81 per share. Each tranche of the options vest over a four year period (with a five year life), and the holder of the option can exercise the option for either a share of Newalta Inc. or an amount of cash equal to the difference between the exercise price and the market price at the time of exercise. The options granted under the 2008 Plan have therefore been accounted for as stock appreciation options and the total compensation expense for these options was $0.1 million for the three and six months ended June 30, 2009 (nil for the same periods in 2008). b) The 2003 and 2006 Option Plans The options granted under the 2006 Plan have been accounted for as stock appreciation options and the total compensation expense for these options was nil for the three and six months ended June 30, 2009 ($0.3 million for the same periods in 2008). During the first six months of 2009, an aggregate of 1,810,050 options to acquire common shares were cancelled. c) Share Appreciation Rights On January 2, 2009, 791,500 share appreciation rights were granted to certain employees and an officer of the Corporation at the market price of $5.31. Each tranche of these rights vests over a four year period (with a five year life). The holder of the right has the option to exercise the right for an amount of cash equal to the difference between the exercise price and the market price at the time of exercise. The rights granted have been accounted for as stock appreciation rights. Total compensation expense for these rights was $0.1 million for the three and six months ended June 30, 2009 ($0.3 million for the same periods in 2008). During the first six months of 2009, an aggregate of 482,500 share appreciation rights were cancelled. NOTE 8. EARNINGS PER SHARE/UNIT Basic earnings per share/unit calculations for the three and six months ended June 30, 2009 and 2008 were based on the weighted average number of shares/units outstanding for the periods. Diluted earnings per share/unit include the potential dilution of the outstanding options to acquire shares and from the conversion of the Debentures. The calculation of dilutive earnings per share does not include anti- dilutive options. These options would not be exercised during the period because their exercise price is higher than the average market price for the period. The inclusion of these options would cause the diluted earnings per share to be overstated. The number of excluded options for the three and six months ended June 30, 2009 was 1,937,700 (1,848,000 and 1,938,000 respectively in 2008). The dilutive earnings per share calculation do not include the impact of anti-dilutive Debentures. These debentures would not be converted to shares during the period because the current period interest (net of tax) per share obtainable on conversion exceeds basic earnings per share. The inclusion of the Debentures would cause the diluted earnings per share to be overstated. The number of shares issuable on conversion of the Debentures excluded for the three and six months ended June 30, 2009 was 5,000,000 (5,000,000 in 2008). ------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2009 2008 2009 2008 ------------------------------------------------------------------------- Weighted average number of shares/units 42,498 41,822 42,450 41,683 Net additional shares if rights exercised - 128 - 10 Net additional shares if debentures converted - - - - ------------------------------------------------------------------------- Diluted weighted average number of shares/units 42,498 41,950 42,450 41,693 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 9. SHAREHOLDER DIVIDENDS/DISTRIBUTIONS DECLARED AND PAID a) Dividends During the quarter, Newalta declared a dividend of $0.05 per share to holders of record on June 30, 2009. These dividends were paid on July 15, 2009. b) Distributions Prior to conversion to a corporation on December 31, 2008, the Fund made monthly distributions to its holders of trust units. Determination of the amount of cash distributions for any period was at the sole discretion of the Board of Trustees of the Fund and was based on certain criteria including financial performance as well as the projected liquidity and capital resource position of the Fund. Distributions were declared to holders of trust units of record on the last business day of each month, and paid on the 15th day of the month following (or if such day was not a business day, the next following business day). ------------------------------------------------------------------------- Three months ended Six months ended June 30, 2008 June 30, 2008 ------------------------------------------------------------------------- Unitholder distributions declared 23,249 46,326 per unit - $ 0.555 1.110 Unitholder distributions - paid in cash 20,614 39,750 Unitholder distributions - value paid in units 2,572 6,468 paid in cash - per unit $ 0.493 0.954 issued units - per unit $ 0.061 0.155 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 10. COMMITMENTS a) Letters of Credit and Surety Bonds As at June 30, 2009, Newalta had issued letters of credit and surety bonds in respect of compliance with environmental licenses in the amount of $48.9 million and $18.0 million respectively. NOTE 11. FINANCIAL INSTRUMENTS FAIR VALUES Newalta's financial instruments include accounts receivable, note receivable, accounts payable and accrued liabilities, dividends payable, senior long-term debt and convertible debentures. The fair values of Newalta's financial instruments that are included in the consolidated balance sheet, with the exception of the convertible debentures, approximate their recorded amount due to the short term nature of those instruments for accounts receivable, accounts payable and accrued liabilities and for senior long-term debt and the note receivable due to the floating nature of the interest rate. The fair values incorporate an assessment of credit risk. The carrying values of Newalta's financial instruments at June 30, 2009 are as follows: ------------------------------------------------------------------------- Total Held for Loans and Available Other Carrying trading Receivables for sale Liabilities Value ------------------------------------------------------------------------- Accounts receivable - 81,624 - - 81,624 Note receivable - 1,019 - - 1,019 Accounts payable and accrued liabilities - - - 79,902 79,902 Dividends payable - - - 2,122 2,122 Senior long-term debt(1) - - - 258,700 258,700 ------------------------------------------------------------------------- (1) Net of related costs. The fair value of the Debentures is based on the closing trading price on the Toronto Stock Exchange as follows: ------------------------------------------------------------------------- As at June 30, 2009 Quoted Carrying value(1) fair value ------------------------------------------------------------------------- 7% Convertible debentures due November 30, 2012 111,918 103,500 ------------------------------------------------------------------------- (1) Includes both the debt and equity portions. FINANCIAL INSTRUMENT RISK MANAGEMENT Credit risk Newalta is subject to risk from its trade accounts receivable balances. The customer base is large and diverse and no single customer balance exceeds 9% of total accounts receivable. 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. Based on the nature of its 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 120 days. Depending on the nature of the service and/or product, customers may be provided with extended payment terms while Newalta gathers certain processing or disposal data. Included in the Corporation's trade receivable balance, are receivables totalling $1.2 million which are considered to be outstanding beyond normal repayment terms at June 30, 2009. A provision of $1.3 million has been established as an allowance against 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 collectable. Newalta does not hold any collateral over these balances. ------------------------------------------------------------------------- Aging Trade Receivables Allowance for Net Receivables aged by doubtful accounts invoice date June December June December June December 30, 31, 30, 31, 30, 31, 2009 2008 2009 2008 2009 2008 ------------------------------------------------------------------------- Current 56,658 58,049 509 9 56,149 58,040 31-60 days 10,998 28,953 50 7 10,948 28,946 61-90 days 2,891 6,608 65 52 2,826 6,556 91 days + 1,240 6,503 681 1,465 559 5,038 ------------------------------------------------------------------------- Total 71,787 100,113 1,305 1,533 70,482 98,580 ------------------------------------------------------------------------- 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 impaired are provided for in an allowance for doubtful accounts. The changes in this account for the six months ended June 30, 2009 are as follows: ------------------------------------------------------------------------- Allowance for doubtful accounts ------------------------------------------------------------------------- Balance, December 31, 2008 1,533 Additional amounts provided for 922 Amounts written off as uncollectible (1,150) ------------------------------------------------------------------------- Balance, June 30, 2009 1,305 ------------------------------------------------------------------------- Liquidity risk Ultimate responsibility for liquidity risk management rests with the Board of Directors of Newalta Inc., which has built an appropriate liquidity risk management framework for the management of the 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 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 Debentures have a fixed interest rate until November 30, 2012, at which point, any remaining convertible debentures will need to be repaid or refinanced. The table below provides an interest rate sensitivity analysis for the three and six months ended June 30, 2009: ------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, 2009 June 30, 2009 ------------------------------------------------------------------------- Net earnings ------------------------------------------------------------------------- If interest rates increased by 1% with all other values held constant (495) (1,013) ------------------------------------------------------------------------- Market risk Market risk is the risk that the fair value or future cash flows of our 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, recognised asset or liability will fluctuate due to changes in foreign currency exchange rates. The risk arises primarily from firm commitments for receipts and payments settled in U.S. dollars. Management has not entered into any financial instruments to manage the risk for the foreign currency exposure as at June 30, 2009. The table below provides a foreign currency sensitivity analysis on accounts receivable and accounts payable outstanding as at June 30, 2009: ------------------------------------------------------------------------- Net earnings ------------------------------------------------------------------------- If the value of the U.S. dollar increased by $0.01 with all other variables held constant 133 ------------------------------------------------------------------------- NOTE 12. SUPPLEMENTARY CASH FLOW INFORMATION The following tables provide supplemental information. ------------------------------------------------------------------------- Change in non-cash operating Three Months Ended Six Months Ended net assets June 30, June 30, 2009 2008 2009 2008 ------------------------------------------------------------------------- Changes in current assets 2,123 6,748 37,750 4,647 Changes in current liabilities (7,169) (4,557) (35,234) (28,290) Dividends/distributions payable 3 (63) 5,438 (108) Other (345) (317) (569) 199 Changes in capital asset accruals 3,673 1,258 14,375 8,507 ------------------------------------------------------------------------- Decrease (increase) in non-cash working capital (1,715) 3,069 21,760 (15,045) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net additions to capital assets Three Months Ended Six Months Ended June 30, June 30, 2009 2008 2009 2008 ------------------------------------------------------------------------- Capital expenditures during the quarter (5,994) (23,462) (14,109) (41,435) Changes in capital asset accruals (3,673) (1,258) (14,375) (8,507) Other 113 115 203 180 ------------------------------------------------------------------------- Additions to capital assets (9,554) (24,605) (28,281) (49,762) ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 13. COMPARATIVE FIGURES Income Statement 2008 comparative information reflects the reclassification of foreign exchange gains and losses from selling, general and administrative expenses to operating expenses. Prior to the fourth quarter of 2008, gains and losses as a result of fluctuations in the U.S. dollar exchange rate were immaterial, and Newalta tracked and reported the effects of these fluctuations centrally as an administrative cost. The reclassified foreign exchange gain for the three and six months ended June 30, 2008 was $(0.1) million and $0.5 million respectively. Cash Flow Statement 2008 comparative information reflects the reclassification of the change in deferred revenue from other to decrease (increase) in non-cash working capital on the Cash Flow statement. Segmented Information The Western and Eastern Division and Unallocated 2008 comparative information in Note 14 reflects the reclassification of foreign currency exchange gains and losses from selling, general and administrative expenses to operating expenses. NOTE 14. SEGMENTED INFORMATION Newalta has two reportable segments. The reportable segments are distinct strategic business units whose operating results are regularly reviewed by the Corporation's executive officers in order to assess financial performance and make resource allocation decisions. The reportable segments have separate operating management and operate in distinct competitive and regulatory environments. The Western segment recovers and resells crude oil from oilfield waste, rents drill cuttings management and solids control equipment, provides environmental services comprised of environmental projects and drilling waste management, collects liquid and semi-solid industrial wastes as well as automotive wastes, including waste lubricating oil, and provides mobile site services in western Canada. Recovered materials are processed into resalable products. The Eastern segment provides industrial waste collection, pre-treating, transfer, processing and disposal services and operates a fleet of specialized vehicles and equipment for waste transport and onsite processing, a lead recycling facility and an emergency response service in central and eastern Canada. The accounting policies of the segments are the same as those of Newalta. ------------------------------------------------------------------------- For the Three Months Ended June 30, 2009 Consoli- Inter- Unallo- dated Western Eastern segment cated(3) Total ------------------------------------------------------------------------- External revenue 55,863 55,523 - - 111,386 Inter segment revenue(1) 341 - (341) - - Operating expense 37,780 43,137 (341) - 80,576 Amortization and accretion expense 4,899 3,852 - 3,345 12,096 ------------------------------------------------------------------------- Net margin 13,525 8,534 - (3,345) 18,714 Selling, general and administrative - - - 12,870 12,870 Finance charges - - - 6,137 6,137 ------------------------------------------------------------------------- Earnings (loss) before taxes 13,525 8,534 - (22,352) (293) ------------------------------------------------------------------------- Capital expenditures and acquisitions(2) 1,813 3,068 - 1,113 5,994 ------------------------------------------------------------------------- Goodwill 62,280 41,317 - - 103,597 ------------------------------------------------------------------------- Total assets 521,033 403,696 - 78,786 1,003,515 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the Three Months Ended June 30, 2008 Consoli- Inter- Unallo- dated Western Eastern segment cated(3) Total ------------------------------------------------------------------------- External revenue 83,528 59,372 - 39 142,939 Inter segment revenue(1) 240 - (240) - - Operating expense 55,990 44,598 (240) - 100,348 Amortization and accretion expense 5,699 3,758 - 2,214 11,671 ------------------------------------------------------------------------- Net margin 22,079 11,016 - (2,175) 30,920 Selling, general and administrative - - - 15,979 15,979 Finance charges - - - 5,648 5,648 ------------------------------------------------------------------------- Earnings (loss) before taxes 22,079 11,016 - (23,802) 9,293 ------------------------------------------------------------------------- Capital expenditures and acquisitions(2) 9,834 10,068 - 3,560 23,462 ------------------------------------------------------------------------- Goodwill 62,280 41,317 - - 103,597 ------------------------------------------------------------------------- Total assets 552,672 424,167 - 54,462 1,031,301 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Inter-segment revenue is recorded at market, less the costs of serving external customers. (2) Includes capital asset additions and the purchase price of acquisitions. (3) Management does not allocate selling, general and administrative, taxes, and interest costs in the segment analysis. ------------------------------------------------------------------------- For the Six Months Ended June 30, 2009 Consoli- Inter- Unallo- dated Western Eastern segment cated(3) Total ------------------------------------------------------------------------- External revenue 121,833 102,091 - - 223,924 Inter segment revenue(1) 497 - (497) - - Operating expense 84,156 83,818 (497) - 167,477 Amortization and accretion expense 11,218 7,141 - 6,549 24,908 ------------------------------------------------------------------------- Net margin 26,956 11,132 - (6,549) 31,539 Selling, general and administrative - - - 26,477 26,477 Finance charges - - - 11,717 11,717 ------------------------------------------------------------------------- Earnings (loss) before taxes 26,956 11,132 - (44,743) (6,655) ------------------------------------------------------------------------- Capital expenditures and acquisitions(2) 4,467 7,183 - 2,459 14,109 ------------------------------------------------------------------------- Goodwill 62,280 41,317 - - 103,597 ------------------------------------------------------------------------- Total assets 521,033 403,696 - 78,786 1,003,515 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the Six Months Ended June 30, 2008 Consoli- Inter- Unallo- dated Western Eastern segment cated(3) Total ------------------------------------------------------------------------- External revenue 177,501 115,534 - 80 293,115 Inter segment revenue(1) 541 - (541) - - Operating expense 114,926 87,124 (541) - 201,509 Amortization and accretion expense 11,360 7,568 - 4,115 23,043 ------------------------------------------------------------------------- Net margin 51,756 20,842 - (4,035) 68,563 Selling, general and administrative - - - 30,814 30,814 Finance charges - - - 11,914 11,914 ------------------------------------------------------------------------- Earnings (loss) before taxes 51,756 20,842 - (46,763) 25,835 ------------------------------------------------------------------------- Capital expenditures and acquisitions(2) 17,257 16,334 - 7,844 41,435 ------------------------------------------------------------------------- Goodwill 62,280 41,317 - - 103,597 ------------------------------------------------------------------------- Total assets 552,672 424,167 - 54,462 1,031,301 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Inter-segment revenue is recorded at market, less the costs of serving external customers. (2) Includes capital asset additions and the purchase price of acquisitions. (3) Management does not allocate selling, general and administrative, taxes, and interest costs in the segment analysis.

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