Newalta's Third Quarter Results Demonstrate Continued Momentum



    TSX Trading Symbol: NAL.UN

    CALGARY, Nov. 7 /CNW/ -Newalta Income Fund ("Newalta" or the "Fund")
today announced financial results for the three and nine months ended
September 30, 2007.
    "Results for the third quarter were consistent with our expectations
given market conditions in the areas in which we operate across Canada," said
Al Cadotte, President and CEO of Newalta. "Overall, our operations showed
strengthened performance over both the first and second quarters of this year.
Compared to the first quarter, revenue increased 13% and net margin was up by
11%. We expect this momentum of improvement to continue through the fourth
quarter.
    "The outlook for the remainder of 2007 and for 2008 is positive in spite
of the challenging environment for our drill site services in western Canada.
By the end of 2007, we will have invested approximately $200 million to grow
our existing operations and acquire complementary businesses. We expect these
investments to drive growth in the months ahead.
    "We will continue to grow our business, strengthen our organization and
diversify our cash flow through balanced investments in organic growth and
acquisitions."

    Financial Results and Highlights for the three and nine months ended
    September 30, 2007:

    

    -  For the three and nine months ended September 30, 2007, revenue
       improved 11% and 14% to $133.4 million and $362.8 million
       respectively, compared to 2006.

    -  Net earnings of $17.9 million and EBITDA(1) of $29.0 million decreased
       11% and 17%, respectively for the third quarter, compared to 2006.
       Year-to-date, net earnings and EBITDA, were down 38% and 24%,
       respectively, to $37.6 million and $69.8 million. Compared to Q2 of
       2007, EBITDA increased 87%, and when compared to Q1 2007, EBITDA
       improved by 15%.

    -  In the Western division ("Western"), compared to the third quarter of
       last year, revenue was flat and net margin(1) was down 19%. Revenue
       increased over the first quarter of 2007 by 5% while net margin
       remained flat. Drilling rig and service rig utilization rates for the
       third quarter of 2007 remained at 10 year lows at 38% and 55%,
       respectively. Management has carried out a cost reduction program in
       the Drill Site business consistent with expected lower activity levels
       in western Canada into 2008.

    -  The performance of the Eastern division ("Eastern") in the third
       quarter continued to be consistent with management's expectations.
       Revenue was up 61% and net margin increased 34% compared to the same
       period in 2006. For the first nine months of 2007, revenue and net
       margin increased 78% and 47%, respectively. The increase in Eastern's
       year-over-year revenue and net margin for both the quarter and the
       first nine months of 2007 came from the contributions of acquisitions
       completed in the second half of 2006 in Québec and Atlantic Canada.
       The outlook for Eastern is positive as internal growth projects of
       $20.0 million that have been initiated in 2007 should begin to
       contribute in the fourth quarter of 2007 and 2008.

    -  SG&A expenses in the third quarter were 10.2% of revenue at
       $13.5 million, compared to 9.3% last year. The increase is
       attributable to strengthening the organization for future growth and
       acquisitions completed. Management's objective for SG&A remains to
       maintain these expenses at 10%, or less, of revenue for the year.

    -  Funds from operations(1) decreased 26% in the third quarter and 31% on
       a year-to-date basis to $24.9 million and $59.6 million. The decline
       was mainly attributable to the continued reduced natural gas drilling
       activity levels in Western.

    -  Cash distributed(1) to unitholders in the third quarter was consistent
       with the same period in 2006 at $19.2 million. On a year-to-date
       basis, cash distributed increased by 22% to $67.2 million driven by
       the increase in the number of trust units outstanding and higher
       monthly distributions from January to April compared to 2006.
       Distributions were increased in May of 2006 to $0.185 per unit per
       month. In 2007, investments of almost $200.0 million will have been
       made with the anticipated effect of driving increased cash flow in
       2008. In spite of reduced performance in 2007, distributions have been
       maintained.

    -  Maintenance capital expenditures(1) in the quarter were $5.3 million
       or 34% lower than the third quarter in 2006. Growth capital
       expenditures in the quarter were $22.5 million compared to
       $16.6 million in 2006. For the year, maintenance capital expenditures
       are expected to total approximately $20.0 million, while growth
       capital expenditures are expected to be approximately $100.0 million.

    -  On October 16, 2007, Eastern acquired the operating assets of
       Montréal, Québec-based Nova Pb Inc. ("Nova Pb") for a total purchase
       price of $55.5 million, comprised of $45.5 million in cash with the
       balance paid through the issuance of 510,690 Trust Units. Although the
       effective date of the transaction is November 1, 2007, since certain
       inventory relating to the operation of the business prior to
       November 1, 2007 will be sold for the account of Nova Pb after
       November 1, 2007, Newalta does not anticipate receiving any revenue
       related to this operation prior to December 1, 2007 at the earliest.
       Nova Pb operates Canada's largest integrated lead battery recycling
       facility located on a 20 hectare (50 acre) site just outside Montréal.
       The Nova Pb facility has two kilns which are used to produce recycled
       lead, one of which is currently idle creating a future growth
       opportunity for Newalta. This facility, if operating at full capacity,
       has the ability to process up to 200,000 tonnes of used batteries and
       produce up to 100,000 tonnes of recycled lead per year. Nova Pb
       employs 115 full-time people and is a leading supplier of custom lead
       alloys to manufacturers of automotive and industrial batteries.

    -  In 2007, Newalta continued an aggressive acquisition program to
       establish a greater presence its core markets. Including the
       acquisition of Nova Pb, the combined investment in acquisitions was
       $93.1 million. Acquisitions and growth capital
       investments completed in 2007 were funded through debt. In early
       October, management took steps to diversify its debt composition and
       maturities to include an amended two-year credit facility with
       borrowing capacity of up to $425.0 million (previously $280.0 million)
       and an offering to issue $100.0 million in 7.0% convertible unsecured
       subordinated debentures.

    -  Newalta's balance sheet remains strong with a funded debt to EBITDA
       ratio of 2.57:1 and working capital of 1.92:1.

    -  On a trailing twelve-month basis at September 30, 2007, the return on
       capital, excluding SG&A allocations, was 28% for Western and 16% for
       Eastern. Newalta's corporate three-year average return on capital at
       September 30, 2007 was 23%.

    -  Newalta entered into an amended credit agreement on October 12, 2007
       which provides for a $425.0 million extendible revolving credit
       facility which will be used to fund growth capital expenditures, for
       general corporate purposes and for the issuance of financial security
       to third parties. As at September 30, 2007, Newalta's unused capacity
       on its credit facility was approximately $204.7 million, net of
       outstanding letters of credit in the amount of $40.1 million, and
       after giving effect to the Nova Pb acquisition and applying the net
       proceeds of the convertible debenture issue.

    -  On October 22, 2007, Newalta announced the offering of $100.0 million
       of convertible unsecured subordinated debentures on a bought deal
       basis. The offering is expected to close on or about November 16,
       2007. The debentures have a maturity date of November 30, 2012 and
       will 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 trust units (or a
       conversion price of $23.00 per trust unit) at any time at the option
       of the holders of the debentures. The net proceeds of the offering
       will be used to repay outstanding indebtedness borrowed to fund
       acquisitions and growth capital and will not reduce the total amount
       of funds available under the new amended credit facility. In addition,
       the underwriters of the debentures have the option to purchase up to
       an additional $15.0 million in debentures within thirty days of the
       closing.

    -  Newalta completed an equity financing on January 26, 2007 through the
       issuance of 3.0 million trust units at $26.10 per unit for total gross
       proceeds of $78.3 million ($74.1 million net) the proceeds of which
       were used to repay outstanding indebtedness incurred to fund
       acquisitions and growth capital completed in 2006.

    -  In the third quarter of 2007, the implementation of the new SAP
       information system in the Western division was successfully completed.
       The implementation of the system in eastern Canada is expected to be
       completed by the end of the first half of 2008. The implementation of
       the SAP system across Canada will provide Newalta with a solid
       platform for the future growth of the business.

    -  The specified investment flow-through ("SIFT") legislation, first
       announced on October 31, 2006, has been enacted. These rules will
       impose a tax at the trust level on distributions of certain income
       from a SIFT trust at a rate of tax comparable to the combined federal
       and provincial corporate tax rate. Such distributions will be treated
       as dividends to holders of trust units of a SIFT. The new distribution
       tax will apply to Newalta commencing in 2011 assuming Newalta does not
       exceed "normal growth" prior to that date and distributions that have
       been subject to the new distribution tax will be characterized as
       dividends received from a taxable Canadian corporation for holders of
       trust units of a SIFT. There was no immediate impact on the Fund's
       interim consolidated financial statements.

    -  On October 25, 2007, the Alberta government announced a plan to
       restructure the royalty regime in Alberta. While Newalta is not
       directly affected by this plan, management believes that Western will
       be impacted by the effect such royalty regime has on its oil and gas
       producing customers in Alberta. Many customer projects were put on
       hold in September and October until guidance was provided by the
       government on the royalty review program. Management is currently
       reviewing the anticipated effects that the new royalty regime may have
       on its customers and reviewing new information as it becomes
       available.


     FINANCIAL RESULTS AND HIGHLIGHTS
    -------------------------------------------------------------------------
    ($000s except                            %                          %
     per unit data)       Q3       Q3    Increase    YTD      YTD   Increase
     (unaudited)         2007     2006  (Decrease)  2007     2006  (Decrease)
    -------------------------------------------------------------------------
    Revenue             133,358  120,297       11  362,789  318,543       14
    Net earnings         17,893   20,136      (11)  37,576   60,209      (38)
      per unit ($),
       basic               0.44     0.55      (20)    0.94     1.73      (46)
      per unit ($),
       diluted             0.43     0.54      (20)    0.93     1.71      (46)
      per unit ($) -
       continuing
       operations          0.44     0.55      (20)    0.94     1.68      (44)
      per unit ($) -
       discontinued
       operations             -        -        -        -     0.05     (100)
    EBITDA(1)            28,980   35,099      (17)  69,771   91,922      (24)
    Trailing 12 month
     EBITDA                 n/a      n/a      n/a   98,209  117,318      (16)
    Trailing 12 month
     EBITDA -
     continuing ops.        n/a      n/a      n/a   98,209  115,662      (15)
    Funds from
     operations(1)       24,873   33,758      (26)  59,560   86,023      (31)
      per unit ($)         0.61     0.92      (34)    1.49     2.47      (40)
      per unit ($) -
       continuing
       operations          0.61     0.92      (34)    1.49     2.45      (40)
      per unit ($) -
       discontinued
       operations             -        -        -        -     0.02     (100)
    Maintenance
     capital
     expenditures         5,257    7,970      (34)  11,008   16,142      (32)
    Distributions
     declared            22,526   20,405       10   67,188   55,463       21
      per unit - ($)       0.56     0.56        -     1.67     1.59        5
    Cash
     distributed(1)      19,211   19,080        1   56,918   46,809       22
    Growth and
     acquisition
     capital
     expenditures        34,080   33,681        1   93,567  202,380      (54)
    Weighted average
     units outstanding
     (000s)              40,579   36,734       10   40,056   34,774       15
    Total units
     outstanding (000s)  40,643   36,799       10   40,643   36,799       10
    Trading price
     - high               25.92    33.65      (23)   28.25    33.80      (16)
    Trading price
     - low                18.57    33.08      (44)   18.57    26.25      (29)
    Average daily
     trading volume     125,262   79,298       58  144,667   98,268       47
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1)  These financial measures do not have any standardized meaning
         prescribed by Canadian generally accepted accounting principles
         ("GAAP"). Non-GAAP financial measures are identified and defined
         in the attached Management's Discussion and Analysis.
    


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

    Management will hold a conference call on Thursday, November 8, 2007 at
11:00 a.m. (EST) to discuss the Fund's performance for the three and nine
months ended September 30, 2007. To participate in the teleconference, please
call 1-800-733-7560 or 416-644-3426. To access the simultaneous webcast,
please visit www.newalta.com. For those unable to listen to the live call, a
taped broadcast will be available at www.newalta.com and, until midnight on
Thursday, November 15, 2007, by dialing 1-877-289-8525 and using the pass code
21252636 followed by the number sign.

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



    MANAGEMENT'S DISCUSSION AND ANALYSIS

    FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007

    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 Income Fund (the "Fund") and
Newalta Corporation (the "Corporation" and together with the Fund and its
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, commodity prices, interest rates, exchange rates, seasonality of
operations, growth, acquisition strategy, integration of businesses into
Newalta's operations, potential liabilities from acquisitions, dependence on
senior management, regulation, landfill operations, competition, risk of
pending and future legal proceedings, employees, labour unions, fuel costs,
access to industry and technology, possible volatility of trust unit price,
insurance, future capital needs, debt service, sales of additional trust
units, dependence on the Corporation, the nature of the trust units, unlimited
liability of unitholders, Canadian federal income tax, redemption of trust
units, loss of mutual fund trust status, the effect of Canadian federal
government proposals regarding non-resident ownership, 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.
    This Management's Discussion and Analysis contains references to certain
financial measures 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 funds or entities. These
financial measures are identified and defined below:

    "EBITDA" is a measure of the Fund's operating profitability. EBITDA
provides an indication of the results generated by the Fund'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, accumulated other
comprehensive income and retained earnings and is calculated as follows:

    
                                    Three months ended     Nine months ended
                                          September 30,         September 30,
    -------------------------------------------------------------------------
    ($000s)                            2007       2006       2007       2006
    -------------------------------------------------------------------------
    Net earnings(1)                  17,893     20,136     37,576     60,209
    Add back (deduct):
      Current income taxes              209        103        872        319
      Future income taxes(1)         (3,578)     4,607     (6,470)     1,811
      Interest expense                3,632      1,378      8,570      5,241
      Interest revenue                  (42)         -       (656)         -
      Amortization and accretion(1)  10,866      8,875     29,879     24,342
    -------------------------------------------------------------------------
      EBITDA                         28,980     35,099     69,771     91,922
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Includes related amounts from discontinued operations for the 2006
        periods. See note 4 to the consolidated interim financial statements
        for the breakdown for the three and nine months ended September 30,
        2006.
    

    "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 Canadian GAAP. Funds from operations
is derived from the consolidated statements of cash flows and is calculated as
follows:

    
                                    Three months ended     Nine months ended
                                          September 30,         September 30,
    -------------------------------------------------------------------------
    ($000s)                            2007       2006       2007       2006
    -------------------------------------------------------------------------
    Cash from operating activities   20,446     24,604     32,501     82,136
    Add back (deduct):
      Changes in working capital      4,094      8,961     26,229      3,128
      Asset retirement costs incurred   333        193        830        759
    -------------------------------------------------------------------------
    Funds from operations            24,873     33,758     59,560     86,023
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    "Cash distributed" is provided to assist management and investors in
determining the actual cash outflow to unitholders in each period and is used
to assist in analyzing liquidity. Cash distributed is calculated as follows:

    
                                    Three months ended     Nine months ended
                                          September 30,         September 30,
    -------------------------------------------------------------------------
    ($000s)                            2007       2006       2007       2006
    -------------------------------------------------------------------------
    Distributions declared           22,526     20,405     67,188     55,463
    Add:
      Opening distributions payable   7,490      6,779      6,835      4,794
    Less:
      Ending distributions payable   (7,519)    (6,808)    (7,519)    (6,808)
        Distributions reinvested
         through DRIP                (3,286)    (1,296)    (9,586)    (6,640)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cash distributed                 19,211     19,080     56,918     46,809
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    "Maintenance capital expenditures" are capital expenditures to replace
and maintain depreciable assets at current service levels.
    "Net margin" is used by management to analyze divisional operating
performance. Net margin as presented is not intended to represent operating
income nor should it be viewed as an alternative to net earnings or other
measures of financial performance calculated in accordance with Canadian 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.
    "Return on capital" is used by management to analyze the operating
performance of investments in capital assets, intangibles and goodwill. Return
on capital is calculated by dividing EBITDA, excluding reorganization costs,
by the average net book value of capital assets, intangibles and goodwill.
    References to EBITDA, funds from operations, cash distributed, net
margin, return on capital and maintenance capital throughout this document
have the meanings set out above.
    The Fund historically used cash available for growth and distributions, a
non-GAAP measure and often also referred to by other issuers and regulators as
distributable cash, to calculate the amount of funds which is available for
distribution to unitholders. Cash available for growth and distributions was
used by management to supplement funds from operations as a measure of cash
flow and leverage and was defined as funds from operations less maintenance
capital expenditures, principal repayments, asset retirement costs and
deferred costs incurred plus net proceeds on sales of fixed assets. In July
2007, the Canadian Securities Administrators provided guidance to standardize
the calculation of distributable cash which would require the inclusion of any
decrease (increase) in non-cash working capital and a different definition of
maintenance capital than that used by Newalta. Management is of the view that
calculating cash available for growth and distributions consistent with the
guidance provided by the CSA would not provide an accurate reflection of
available cash due to the variability in short term cash management.
Accordingly, the Fund has determined to cease calculating and reporting on
cash available for growth and distributions in its disclosure documents.
    The following discussion and analysis should be read in conjunction with
(i) the consolidated financial statements of the Fund and the notes thereto
for the three and nine months ended September 30, 2007, (ii) the consolidated
financial statements of the Fund and notes thereto and Management's Discussion
and Analysis of the Fund for the year ended December 31, 2006, (iii) the most
recently filed Annual Information Form of the Fund, and (iv) the consolidated
interim financial statements of the Fund and the notes thereto and
Management's Discussion and Analysis for the three and nine months ended
September 30, 2006.
    Information for the three and nine months ended September 30, 2007, along
with comparative information for 2006, is provided.
    In December 2006, Newalta reorganized its operations into the Western
division ("Western") and the Eastern division ("Eastern"). In western Canada,
Newalta combined the previously reported Industrial and Oilfield divisions to
form Western. Services offered to customers in Western are similar and are
sold to a similar customer base. Newalta has merged or eliminated some senior
management and sales positions, resulting in improved efficiencies as well as
reductions to overhead costs. Western now comprises three business units:
Oilfield, Drill Site and Industrial; while Eastern comprises two business
units: Ontario and Québec/Atlantic Canada. The business units within Western
share a common customer base and Drill Site utilizes both Oilfield and
Industrial facilities for residual waste processing and disposal. Acquisition
and growth initiatives in the last year increased overlap between the three
business units. This overlap necessitated the integration of services into one
operating division to provide a seamless service package to customers and
enhance both productivity and consistency of operations. The following
Management's Discussion and Analysis provides management's interpretation of
the results of the business the Western and Eastern divisions and overall.
    This Management's Discussion and Analysis is dated November 7, 2007 and
takes into consideration information available up to that date.

    OVERALL PERFORMANCE

    Newalta's third quarter results were consistent with market conditions
across Canada. Management's strategy to diversify earnings through
acquisitions completed in eastern Canada helped to counter the continued
weakness in western Canada's natural gas drilling. The eastern operations have
diversified Newalta's revenue base lessening the Fund's dependence on oil and
gas related services. The anticipated return on capital for the eastern
operations is consistent with management's expectation of approximately four
years after integration is complete. Overall, revenue increased 11% and net
margin was down 15% compared to the same period in 2006, while revenue and net
margin in the third quarter were up 13% and 11%, respectively over the first
quarter of 2007. The diversification of Newalta's services contributed to the
gains and the change in the business mix impacted the overall net margin as a
percentage of revenue.
    Compared to the third quarter of last year, Western's revenue was flat
and net margin was down by 19%, however, revenue increased over the first
quarter of 2007 by 5% while net margin remained flat. Drilling rig and service
rig activity levels for the third quarter remained at 10 year low levels at
38% and 55%, respectively in 2007. Management has completed a cost reduction
program in the Drill Site business unit early in the fourth quarter of 2007 as
lower activity levels in western Canada are anticipated to continue into 2008.
The full benefits of this program are anticipated to be seen in the first
quarter of 2008.
    The performance of Eastern in the third quarter continued to be positive,
delivering strong revenue and net margin growth. Revenue was up 61% and net
margin increased 34% compared to the same period in 2006. For the first nine
months of 2007 revenue and net margin increased 78% and 47%, respectively. The
increase in Eastern's year-over-year revenue and net margin for both the
quarter and the first nine months of 2007 came from the contributions of
acquisitions completed in the second half of 2006 in Québec and Atlantic
Canada. Subsequent to the end of the third quarter, Newalta acquired the lead
battery recycling facility of Nova Pb Inc. ("Nova Pb") located just outside
Montréal, Québec for a total purchase price of $55.5 million comprised of
$45.0 million paid in cash at closing and $0.5 million cash payable in 2008,
with the balance funded through the issuance of 510,690 trust units. This
acquisition complements Eastern's asset base and will provide processing
capability to expand services in the eastern Canadian market.
    In 2007, Newalta continued an aggressive acquisition program to establish
a greater presence in its core markets. Including the recent acquisition of
Nova Pb, the combined acquisition investments totalled $93.1 million. As at
September 30, 2007, Western's trailing twelve-month return on capital,
excluding any corporate SG&A allocation, was 28% while Eastern's return on
capital was 16%. Newalta's corporate three year average return on capital at
September 30, 2007 was 23%.
    To finance these acquisitions and growth capital for 2007, Newalta
entered into an amended credit facility agreement subsequent to the end of the
third quarter which increased the credit facility from $280.0 million to
$425.0 million. The amended credit facility has a two-year term with some
minor changes to the financial covenants (see LIQUIDITY AND CAPITAL
RE

SOURCES). In addition, on October 22, 2007, the Fund announced the offering of $100.0 million of convertible unsecured subordinated debentures (the "Debentures") on a bought deal basis. The offering is expected to close on or about November 16, 2007. The Debentures have a maturity date of November 30, 2012 and will 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 trust units (or a conversion price of $23.00 per trust unit) at any time at the option of the holders of the Debentures. The net proceeds of the offering will be used to repay outstanding indebtedness of Newalta and will not reduce the total amount of funds available under the new amended credit facility. As at September 30, 2007, Newalta's unused capacity on its credit facility was approximately $204.7 million, net of outstanding letters of credit in the amount of $40.1 million, and after giving effect to the Nova Pb acquisition and applying the net proceeds of the convertible debenture issue. RESULTS OF OPERATIONS Third quarter revenue increased $13.1 million, or 11%, to $133.4 million compared to $120.3 million in 2006. On a year-to-date basis revenue increased $44.2 million, or 14%, to $362.8 million compared to $318.5 million for the same period in 2006. The majority of both the current quarter and year-to-date revenue growth relates to acquisitions completed in Québec and Atlantic Canada in the second half of 2006. Operating expenses, as a percentage of revenue, increased to 68% in the three months ended September 30, 2007 and averaged 70% of year-to-date revenue. These ratios increased compared to the third quarter and nine months ended September 30, 2006, in which operating expenses were 62% of each period's revenue. Funds from operations decreased 26% to $24.9 million for the three months ended September 30, 2007 and 31% to $59.6 million for the nine months ended September 30, 2007. For the three months ended September 30, 2007, cash distributed was consistent with the same period in 2006 at $19.2 million despite an increase of 3.8 million trust units year-over-year due to an increased participation in the Distribution Reinvestment Plan (the "DRIP") of Newalta. Cash distributed for the first nine months of the year in 2007 increased 22% over the first nine months of 2006 to $56.9 million, due to an increase in monthly distributions effective in May of 2006 and a higher number of trust units outstanding. Declared distributions and cash distributed levels are monitored and assessed through internal forecasts which incorporate the most recent operating and financial results, maintenance and growth capital requirements as well as market activity and conditions. The Board of Trustees has maintained the monthly distribution of $0.185 per unit in anticipation that investments made in 2007 will contribute to stronger results in 2008. WESTERN Western operates over 50 facilities with over 900 people in British Columbia, Alberta and Saskatchewan and comprises three business units: Oilfield, Drill Site and Industrial. The division is operated and managed as an integrated set of assets to provide a broad range of seamless waste management and recycling services to customers. In 2006, Newalta began investing in eastern Canada with the goal of diversifying the Fund's sources of revenue and reducing its reliance on crude oil and natural gas commodity price driven services. In the third quarter, Western accounted for 62% of Newalta's total assets, generated 70% of Newalta's revenue and 78% of Newalta's combined net margin in the third quarter of 2007 compared with 69%, 79% and 87% respectively for the same period in 2006. Below is a chart of key services provided by each business unit within Western: ------------------------------------------------------------------------- Oilfield Drill Site Industrial ------------------------------------------------------------------------- Waste processing at Operates 2 facilities Waste processing at over 30 facilities Pre-drilling 17 facilities Crude oil recovery assessments Mobile onsite services Water recycling Drilling waste Product recovery from Custom treating management wastes Clean oil terminalling Solids control unit Sale of recovered Water disposal rentals products as: Landfills Cuttings management - base oils Onsite services unit rentals - refinery feedstock Drilling fluid sales - industrial fuels and service - carrier fluids Post-drilling (e.g. drilling oil) remediation Well abandonment ------------------------------------------------------------------------- ------------------------------------------------------------------------- Western's performance is affected by the state of the economy in western Canada, the amount of waste generated by crude oil producers, natural gas drilling activity as well as the strength of the oil and gas, mining, forestry and transportation industries. In addition, seasonality and the contributions from investments in growth capital and acquisitions can cause fluctuations in quarter-to-quarter results. The Oilfield business unit contributed approximately 51% of Western's total year-to-date revenue with Drill Site and Industrial each contributing approximately 18% and 31%, respectively. The following table compares the third quarter of 2007 and year-to-date 2007 results to third quarter of 2006 and year-to-date 2006: ------------------------------------------------------------------------- % YTD YTD % ($000s) Q3 2007 Q3 2006 Change 2007 2006 Change ------------------------------------------------------------------------- Revenue - external 93,493 95,502 (2) 257,399 259,608 (1) Revenue - internal 105 - n/a 538 - n/a Operating costs 61,618 57,998 6 174,397 155,670 12 Amortization and accretion 5,604 5,077 10 15,029 15,186 (1) ------------------------------------------------------------------------- Net margin 26,376 32,427 (19) 68,511 88,752 (23) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net margin as % of revenue 28% 34% (18) 27% 34% (21) ------------------------------------------------------------------------- Maintenance capital 3,802 4,787 (21) 7,464 10,465 (29) ------------------------------------------------------------------------- Growth capital 6,150 7,393 (17) 19,649 23,305 (16) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weak drilling rig and service rig utilization, which were both at 10 year lows for the third quarter, continued to impact Western's net margin. The low service rig activity contributed to lower waste volumes received at Newalta's fixed facility network in the third quarter 2007 compared to the same period in 2006. With a high fixed component to the facilities' operating costs, a decrease in revenue has a direct impact on net margin. Current natural gas pricing is expected to result in drilling rig utilization and market activity being at depressed levels for the remainder of 2007 and well into 2008. The Oilfield business unit's waste processing volumes and crude oil recovery volumes returned to seasonal levels in the third quarter but were still lower than the record year in 2006. In the quarter, Oilfield waste volumes decreased approximately 9% from the same period in 2006 and prices decreased by 6% due to the overall mix of waste received in the third quarter. On a year-to-date basis Oilfield's volumes have decreased by 5%. The mix of waste products resulted in an overall increase of 7% in crude oil volumes recovered to Newalta's account in the third quarter. The average price of oil sold in the quarter was down 8% due to a heavier mix of crude sold and the effect of the rising Canadian dollar relative to the U.S. dollar. Crude oil sales compared to last year increased $1.9 million for the quarter mainly due to the recognition of deferred revenue of $1.8 million related to previously recovered crude oil that was released from storage. On a year-to-date basis, compared to last year, recovered crude oil volumes were down 11% and the average oil price was down 7%. On a year-to-date basis sales decreased 17%. The table below reflects the changes in the Drill Site business unit's utilization rates of its rental equipment, Drill Site's core services, for the current quarter and the first nine months of 2007 compared to their respective prior year periods: ------------------------------------------------------------------------- Q3 Q2 % Q3 Q3 % YTD YTD % 2007 2007 Change 2007 2006 Change 2007 2006 Change ------------------------------------------------------------------------- Utilization rates (%) Equipment in Canada 20 10 100 20 33 (39) 21 51 (59) Equipment in the U.S. 56 75 (25) 56 74 (24) 68 87 (22) ------------------------------------------------------------------------- Total Drill Site rental equipment 25 16 56 25 35 (29) 24 45 (47) ------------------------------------------------------------------------- The performance of the Drill Site business unit was down compared to last year but increased significantly compared to the second quarter of 2007. Year-over-year, equipment utilization rates declined consistent with the drop in drilling rig utilization rates which were down from 63% in Q3 2006 to 38% in Q3 2007. In 2007, management redeployed equipment to the U.S. where demand has been stronger, increasing overall asset utilization with 21 units in the U.S. during the third quarter of 2007 compared to 4 units in the same period in 2006 (19 units in the second quarter of 2007). Current natural gas pricing is expected to result in drilling rig utilization and market activity in western Canada being at depressed levels for the remainder of 2007 and well into 2008. Management initiated cost reduction measures early in the fourth quarter which consisted mainly of downsizing the Drill Site group and a continued focus on optimizing the utilization of Drill Site's rental equipment fleet. Activity levels and performance in the Industrial business unit were consistent year-over-year for both the quarter and nine months ended September 30, 2007. Revenue was up compared to last year which was offset by increased fixed costs resulting in flat performance compared to 2006. During the year, Western added to its filtration services through the acquisition of the operating assets of Panaco Fluid Filtration Systems Ltd. effective April 1, 2007. Effective July 5, 2007, the operating assets of New West Fluid Management Inc. were acquired which extended Newalta's ability to provide abandonment and site restoration services to its drilling waste customers. The details of these acquisitions are outlined below: ------------------------------------------------------------------------- Acquisition Business Location Purchase Description of Date Assets Price ($) Acquired Assets Acquired ------------------------------------------------------------------------- April 1, Panaco Fluid Rocky 5.9 million - 15 people 2007 Filtration Mountain - Onsite fluid Systems Ltd. House, filtration services Alberta to refineries and gas plants as well as oil and gas exploration drilling locations July 5, New West Medicine 9.8 million - 30 people and 2007 Fluid Hat, 12 technical field Management Inc. Alberta consultants - Site remediation and abandonment - Fleet of 15 vacuum trucks ------------------------------------------------------------------------- Total Western Acquisitions 15.7 million ------------------------------------------------------------------------- Maintenance capital expenditures decreased by $1.0 million when compared with the third quarter of 2006 and by $3.0 million for the first nine months of 2007. The lower maintenance capital required is a reflection of the lower utilization of the drill site assets in 2007 compared to record rates in 2006. Growth capital expenditures of $8.0 million in the quarter consisted primarily of productivity improvements at Oilfield facilities. The outlook for the Oilfield and Industrial business units is positive heading into the historically seasonally strong fourth quarter, while the Drill Site business unit will continue to be impacted by the weak natural gas drilling market. Newalta's management will continue to exploit opportunities to improve the utilization of assets by moving idle units into areas with the highest demand levels. EASTERN Eastern was created in January 2006 through an acquisition with operations in Ontario and the subsequent expansion into Québec and Atlantic Canada in the second half of 2006. Eastern provides industrial waste management and other environmental services to markets located in eastern Canada through its integrated network of over 30 facilities. This network features an engineered non-hazardous solid waste landfill that handles approximately 650,000 metric tonnes of waste per year and, based on current volumes, has an estimated remaining life of 13 years. The division's network also includes industrial solid waste pre-treatment facilities; industrial waste transfer and processing facilities; a fleet of specialized vehicles and equipment for waste transport and onsite processing; and an emergency response service. Eastern's performance is impacted by the general state of the economy in eastern Canada, and the bordering U.S. states, fluctuations in the U.S./Canadian dollar exchange rate, and specific market conditions in the automotive, forestry, manufacturing, mining, oil and gas, petrochemical, pulp and paper, steel and transportation service industries. Several favourable industry trends provide potential growth opportunities for Eastern including enhanced government regulations with respect to the treatment of industrial waste, the Land Disposal Regulations ("LDR"), scarce landfill capacity in the Province of Ontario and the growing trend towards outsourcing of waste management activities. The addition of Eastern has diversified Newalta's services and reduced exposure to crude oil and natural gas prices and natural gas drilling activity, thereby promoting greater stability of funds from operations and, therefore distributions to unitholders. In the third quarter, Eastern accounted for approximately 34% of Newalta's total assets, generated 30% of Newalta's total revenue and 22% of Newalta's combined net margin compared with 27%, 21% and 15% respectively, in the same period in 2006. The table below compares the third quarter and first nine months of 2007 results to the same periods in 2006: ------------------------------------------------------------------------- % YTD YTD % ($000s) Q3 2007 Q3 2006 Change 2007 2006 Change ------------------------------------------------------------------------- Revenue - external 39,823 24,795 61 104,735 58,935 78 Revenue - internal - - - - - - Operating costs 29,278 16,018 83 79,433 41,228 93 Amortization and accretion 3,184 3,274 (3) 10,647 7,721 38 ------------------------------------------------------------------------- Net margin - continuing operations 7,361 5,503 34 14,655 9,986 47 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net margin as % of revenue 18% 22% (18) 14% 17% (18) ------------------------------------------------------------------------- Net margin - discontinued operations - - - - 1,657 (100) ------------------------------------------------------------------------- Maintenance capital 1,357 3,077 (56) 3,142 5,160 (39) ------------------------------------------------------------------------- Growth capital 8,395 5,880 43 19,409 8,450 130 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The performance of Eastern in the third quarter was consistent with market conditions. For the quarter revenue was up 61% and net margin increased 34%. Acquisitions completed in the second half of 2006 in the Québec/Atlantic Canada business unit contributed to all of Eastern's revenue increase year-over-year for both the quarter and year-to-date. The Québec/Atlantic Canada business unit was established in the second half of 2006 through five acquisitions. The integration has proceeded smoothly and operating results are consistent with management's expectations for the trailing twelve-months. The 2007 capital program is underway with the expectation of delivering growth in 2008. The Ontario business unit delivered lower revenue for the quarter and revenue was flat for the nine months ended September 30, 2007. In the third quarter, landfill volumes decreased 19% due to project delays and the timing of waste receipts as the market adjusted to the first phase of the new LDR regulations which were implemented on August 31, 2007. Newalta anticipates that customers will resume normal waste shipping schedules in the fourth quarter as the market adjusts to these new regulations. Pricing was consistent with the prior year. The performance of the service centers reflected lower waste receipts which were mostly offset by higher average prices. Newalta has invested $19.4 million in growth capital for Eastern on a year-to-date basis. Most of this capital has been directed at either new facilities or preparing existing facilities to treat waste streams in accordance with the new LDR regulations. These investments will position Eastern to capitalize on new waste management opportunities presented by the evolving regulatory environment in Ontario. In the first nine months of 2007, management executed four asset acquisitions to increase geographic reach and market penetration in Ontario, Québec and New Brunswick. Subsequent to the end of the third quarter Newalta announced the acquisition of the lead battery recycling assets of Nova Pb which operates Canada's largest integrated lead battery recycling facility located on a 20 hectare (50 acre) site just outside Montréal. The Nova Pb facility has two kilns which are used to produce recycled lead, one of which is currently idle creating a future growth opportunity for Newalta. Although the effective date of the transaction is November 1, 2007, since certain inventory relating to the operation of the business prior to November 1, 2007 will be sold for the account of Nova Pb after November 1, 2007, Newalta does not anticipate receiving any revenue related to this operation prior to December 1, 2007 at the earliest. The results of operations of the acquisitions outlined in the table below have only been reflected in Newalta's results from the acquisition dates. Management anticipates improved results from these operations for the remainder of 2007 and 2008 as these assets are integrated into operations: ------------------------------------------------------------------------- Acquisition Business Location Purchase Description of Date Assets Price ($) Acquired Assets Acquired ------------------------------------------------------------------------- May 1, 3 private firms Québec 8.1 million - Four centrifuges 2007 collectively servicing the Québec referred to as refinery and Groupe Envirex petrochemical market - Eight vacuum trucks and pressure washers - Household waste, small industrial waste generator and soil treatment business May 1, 2007 EcoloSite Inc. Ontario 3.1 million - One facility - 13 people - Mobile onsite treatment services June 1, Eastern New 9.3 million - Transfer station and 2007 Environmental Brunswick processing facility Services Ltd. in Sussex, New Brunswick - 30 people - Satellite office in Bedford, Nova Scotia July 6, Bucke Ontario 1.4 million - 4 vacuum trucks and 2007 Environmental related assets Services & Transportation Inc. November Nova Pb Inc. Québec 55.5 million - Canada's largest 1, 2007 integrated lead battery recycling facility in Ville Ste-Catherine, Québec - Capacity to process up to 200,000 tonnes of lead batteries and produce up to 100,000 tonnes of recycled lead - 115 full-time people ------------------------------------------------------------------------- Total Eastern Acquisitions 77.4 million ------------------------------------------------------------------------- The outlook for the remainder of the year for Eastern is positive. Management's priorities are to capture growth through market penetration and to improve returns through pricing improvements at all facilities as well as the timely execution of capital projects for internal growth. CORPORATE AND OTHER ------------------------------------------------------------------------- % YTD YTD % ($000s) Q3 2007 Q3 2006 Change 2007 2006 Change ------------------------------------------------------------------------- Selling, general and administrative expenses 13,545 11,182 21 39,070 31,380 25 as a % of revenue 10.2 9.3 10 10.8 9.9 9 ------------------------------------------------------------------------- Amortization and accretion 10,866 8,875 22 29,879 24,342 23 as a % of revenue 8.1 7.4 10 8.2 7.6 8 ------------------------------------------------------------------------- Interest expense 3,632 1,378 164 8,570 5,241 64 ------------------------------------------------------------------------- The increase in selling, general and administrative ("SG&A") expense is attributable to strengthening the organization for future growth as well as SG&A costs associated with acquisitions completed during the year. SG&A is also affected by operating costs associated with the maintenance of the new financial information system implemented in 2007 which was phased into Eastern's accounting system in the third quarter. Management has been able to use its experience in implementing the new system in the west to create a smooth transition in the eastern Canadian operations. It is anticipated that both operations and accounting will be fully integrated and using the new system by the end of the second quarter of 2008. Management's objective for SG&A is to maintain these expenses at 10%, or less, of revenue for the year. Compared to the first and second quarters of 2007, SG&A is trending lower as a percentage of revenue. The increase in amortization was attributable to recent acquisitions and growth capital expenditures. As a percentage of revenue, amortization and accretion have increased less than 1% year-over-year, consistent with expectations. The increase in interest expense for both the three and nine months ended September 30, 2007 compared to the same periods in 2006 is due to an increase in the average debt level. At September 30, 2007, long-term debt was $230.8 million compared with $166.3 million at December 31, 2006. The average debt level increase is the result of current year acquisitions totalling $37.6 million, growth capital initiatives totalling $57.8 million year-to-date as well as the funding of working capital outstanding at year end and distributions in excess of current period cash flow. These were offset in part by the proceeds from the equity financing that was completed in January 2007 pursuant to which the Fund issued 3.0 million trust units at $26.10 per unit for net proceeds of $74.1 million. Newalta's working capital ratio was 1.92:1 at September 30, 2007 compared with 2.04:1 at June 30, 2007 and 1.37:1 at December 31, 2006. A current tax expense of $0.2 million was recorded in the quarter compared to current income tax expense of $0.1 million in 2006. The increased expense is due to Newalta's higher capitalization in 2007 compared to 2006 and increased size of operations in eastern Canada, resulting in higher provincial capital taxes. Based on projected levels of capital spending and anticipated earnings, Newalta is not expected to pay cash taxes until 2010 at the earliest, with the exception of U.S. federal, state and Canadian provincial capital taxes. Future income tax recoveries year-to-date increased by $8.3 million from an expense of $1.8 million in 2006 to a recovery of $6.5 million in 2007. The increase in future income tax recoveries for the three and nine months ended September 30, 2007 is due to lower taxable earnings. The specified investment flow-through ("SIFT") legislation, first announced on October 31, 2006, has been enacted. These rules will impose a tax at the trust level on distributions of certain income from a SIFT trust at a rate of tax comparable to the combined federal and provincial corporate tax rate. Such distributions will be treated as dividends to holders of trust units of a SIFT. The new distribution tax will apply to Newalta commencing in 2011 assuming Newalta does not exceed "normal growth" prior to that date and distributions that have been subject to the new distribution tax will be characterized as dividends received from a taxable Canadian corporation for holders of trust units of a SIFT. There was no immediate impact on the Fund's interim consolidated financial statements. For further information about the impact on future income taxes please refer to CRITICAL ACCOUNTING ESTIMATES - FUTURE INCOME TAXES in this MD&A. As at November 7, 2007, the Fund had 41,215,628 trust units outstanding and outstanding rights to acquire up to 2,366,425 trust units. On October 22, 2007, Newalta announced the offering of $100.0 million of Debentures. The offering is expected to close on or about November 16, 2007. Each $1,000 Debenture is convertible into 43.4783 trust units (or a conversion price of $23.00 per trust unit (the "Conversion Price")) at any time at the option of the holders of the Debentures. In addition, the underwriters of the Debentures have the option to purchase up to an additional $15.0 million in Debentures within thirty days of the closing. The Debentures are redeemable by the Fund at a price of $1,000 per Debenture after November 30, 2010 and on or before November 30, 2011 (provided that the current market price of the trust units of the Fund on the date on which the notice of redemption is given is not less than 125% of the Conversion Price) and at a price equal to $1,000 per Debenture after November 30, 2011 and before maturity, in each case, plus accrued and unpaid interest thereon, if any. Upon the maturity or redemption of the Debentures, the Fund may pay the outstanding principal of the Debentures in cash or may, elect to satisfy its obligations to repay all or a portion of the principal amount of the Debentures which have matured or been redeemed by issuing and delivering that number of trust units obtained by dividing the aggregate amount of principal of the Debentures which have matured or redeemed by 95% of the weighted average trading price of the trust units on the Toronto Stock Exchange for the 20 consecutive trading days ending five trading days preceding the date fixed for redemption or the maturity date, as the case may be. The Fund may also elect, subject to regulatory approval, from time to time, to satisfy its obligation to pay all or any part of the interest on the Debentures (the "Interest Obligation"), on the date it is payable under the Debenture Indenture, by delivering a sufficient number of trust units to the debenture trustee to satisfy all or any part, as the case may be, of the Interest Obligation. SUMMARY OF QUARTERLY RESULTS (unaudited) 2007 2006 ------------------------------------------------------------------------- ($000s except per Q3 Q2 Q1 Q4 unit data) ------------------------------------------------------------------------- Revenue 133,358 111,594 117,837 122,498 ------------------------------------------------------------------------- Operating income 14,524 3,799 13,665 16,209 ------------------------------------------------------------------------- Net earnings 17,893 6,716 12,966 15,356 Continuing Operations 17,893 6,716 12,966 15,528 Discontinued Operations - - - (172) ------------------------------------------------------------------------- Earnings per unit ($) 0.44 0.17 0.33 0.42 Continuing Operations 0.44 0.17 0.33 0.42 Discontinued Operations - - - (0.00) ------------------------------------------------------------------------- Diluted earnings per unit ($) 0.43 0.16 0.33 0.41 Continuing Operations 0.43 0.16 0.33 0.41 Discontinued Operations - - - (0.00) ------------------------------------------------------------------------- Weighted average units - basic 40,579 40,361 39,209 36,860 ------------------------------------------------------------------------- Weighted average units - diluted 40,725 40,562 39,445 37,282 ------------------------------------------------------------------------- (unaudited) 2006 2005 ------------------------------------------------------------------------- ($000s except per Q3 Q2 Q1(1) Q4 unit data) ------------------------------------------------------------------------- Revenue 120,297 96,082 102,162 86,663 ------------------------------------------------------------------------- Operating income 24,846 14,363 21,445 18,862 ------------------------------------------------------------------------- Net earnings 20,136 22,685 17,388 14,445 Continuing Operations 20,136 21,213 17,175 14,445 Discontinued Operations - 1,472 213 - ------------------------------------------------------------------------- Earnings per unit ($) 0.55 0.62 0.56 0.51 Continuing Operations 0.55 0.58 0.55 0.51 Discontinued Operations - 0.04 0.01 - ------------------------------------------------------------------------- Diluted earnings per unit ($) 0.54 0.61 0.54 0.50 Continuing Operations 0.54 0.57 0.54 0.50 Discontinued Operations - 0.04 0.00 - ------------------------------------------------------------------------- Weighted average units - basic 36,734 36,381 31,291 28,597 ------------------------------------------------------------------------- Weighted average units - diluted 37,279 37,000 31,917 29,066 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The Q1 2006 results have been restated from the disclosure in the first quarter 2006 report to reflect the reclassification of the in- plant industrial cleaning service operation as discontinued operations. Quarterly performance is affected by seasonal variation as described below. However, in the past eight quarters this is difficult to assess due to the aggressive acquisition and internal growth capital program pursued by Newalta during that time. The increases in revenue, operating income and net earnings in Q4 of 2005 were driven primarily by growth in the Western division. Two-thirds of the revenue growth in Western was attributable to Drill Site related acquisitions and growth in onsite services, satellites and partnerships consistent with the investments in these services in 2004 and 2005. Additional revenue growth was attributable to strong activity levels and demand for services which led to increases in waste processing volumes and higher crude oil sales. In the latter portion of 2005, operating income declined as a percentage of revenue mostly due to changes in the business mix from the expansion of Drill Site services. In 2006, the first and second quarter performance increased mainly as a result of continued high demand in the Western division as well as the establishment of the Eastern division by way of acquisition. The Eastern division added approximately $20.0 million in revenue each quarter in 2006. The net decrease in revenue and operating income from Q1 to Q2 in 2006 predominantly reflects the seasonality of the natural gas drilling services market and industry activity levels. Net earnings in Q2 of 2006 were positively impacted by an $8.7 million recovery of future income taxes due to the reduction in future federal and provincial income tax rates. Revenue in the third and fourth quarters of 2006 increased as a result of acquisitions completed in Québec and Atlantic Canada in both quarters. Net earnings for the third quarter were improved over the second quarter once the effect of the future income tax recovery is removed from the second quarter results. The fourth quarter saw a decrease in net earnings due to the decrease in the demand for Drill Site services consistent with the 40% drop in overall drilling activity when compared to the same period in 2005. The increase in the weighted average number of trust units in the second quarter was mainly attributable to the 7.0 million trust units issued as a result of the equity financing completed in March 2006. 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. Western endured a weak natural gas drilling environment during the first quarter which was followed by continued weakness in the second quarter further compounded by the spring breakup road bans and an extended wet season preventing the transportation of waste from well workovers and therefore reducing processing volumes. This resulted in lower revenue, earnings and operating income. In the third quarter operations returned to seasonal levels but operating income remained lower when compared to the same period in 2006, consistent with the continued weakness in the western Canadian natural gas drilling market. In January of 2007, the Fund issued 3.0 million trust units for net proceeds of $74.1 million, which accounts for the majority of the increase in trust units outstanding from Q4 2006 to Q1 2007. The proceeds from this issuance were used to repay indebtedness incurred to fund the acquisitions and growth capital completed in the second half of 2006. Seasonality of Operations Quarterly performance is affected by, among other things, weather conditions, commodity prices, market demand and capital investments as well as acquisitions. Each of the Western and Eastern division is affected differently based on the types of services that are provided. The following seasonality descriptions provide the typical quarterly fluctuations in operational results in the absence of growth and acquisition capital. For Western, the frozen ground during the winter months 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 they 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. Acquisitions and growth capital investments completed in the first half of the year will tend to strengthen second half financial performance. For Western, first quarter revenue has ranged from 17% to 25% of annual revenue, second quarter revenue has ranged from 19% to 25%, revenue from the third quarter has ranged from 26% to 30% and finally fourth quarter revenue has ranged from 26% to 35%. Eastern's services are 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. Similar to Western, growth capital investments made in the first half will tend to strengthen the second half performance. Based on historical information that management obtained for the recent acquisitions, it is estimated that first quarter revenue is typically 16 to 18% of annual revenue, second quarter revenue is estimated to be approximately 20 to 25%, the revenue for the third quarter is estimated to be between 28% to 32% and, finally, fourth quarter revenue is estimated to be approximately 24% to 29% of annual revenue. Quarterly financial results have been prepared by management in accordance with Canadian GAAP as set out in the notes to the annual audited consolidated financial statements of the Fund for the year ended December 31, 2006. 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. Liquidity risk for the Fund may arise from its general day-to-day cash requirements, and in the management of its assets, liabilities and capital resources. Liquidity risk is managed against Newalta's financial leverage to meet its obligations and commitments in a balanced manner. The Fund's net working capital was $78.3 million at September 30, 2007 compared with $78.8 at June 30, 2007 and $36.1 million at December 31, 2006. At current activity levels, working capital of $78.3 million is expected to be sufficient to meet the ongoing commitments and operational requirements of the business. The credit risks associated with accounts receivable are viewed as normal for the industry. Despite the current natural gas drilling industry conditions, management views the credit risk to be normal. A measure used by the Fund as an indication of liquidity is the Current Ratio, which is defined as the ratio of total current assets to total current liabilities. The Current Ratio at September 30, 2007 reflected that Newalta has sufficient assets to cover its current liabilities by 1.92 times (at December 31, 2006 and June 30, 2007 the ratio was 1.37 times and 2.04 times respectively). This ratio exceeds Newalta's bank covenant minimum requirement of 1.20:1. The Fund's liquidity needs can be sourced in several ways including: funds from operations, short and long-term borrowings against Newalta's credit facilities and the issuance of securities from treasury. Subsequent to the quarter, Newalta announced an offering of $100.0 million of Debentures. The proceeds from the sale of the Debentures will be used to repay outstanding indebtedness on Newalta's credit facility. Newalta's primary uses of funds are operational and administrative expenses, distributions, maintenance and growth capital spending, and acquisitions. On a per unit basis Newalta declared monthly distributions of $0.185 to unitholders from January through September 2007 or $2.22 annually. In 2006, monthly distributions declared were $0.165 per month from January to April and $0.185 for the remainder of the year. The Board of Trustees has maintained the monthly distribution of $0.185 per unit in anticipation that investments made in 2007 will contribute to stronger results in 2008. The following table is recommended by the Canadian Securities Administrators as additional information to users of income fund and mutual fund trust financial statements. It provides another perspective on the sourcing of cash to fund distributions: ------------------------------------------------------------------------- ($000s) Q3 YTD Fiscal Fiscal Fiscal 2007 2007 2006 2005 2004 ------------------------------------------------------------------------- Cash flow generated from operating activities 20,446 32,501 111,963 71,732 49,718 Distributions declared (22,526) (67,188) (75,923) (49,602) (39,659) ------------------------------------------------------------------------- Cash excess (shortfall) (2,080) (34,687) 36,040 22,130 10,059 ------------------------------------------------------------------------- Net earnings 17,893 37,576 75,565 46,978 36,205 Distributions declared (22,526) (67,188) (75,923) (49,602) (39,659) ------------------------------------------------------------------------- Net earnings (shortfall) excess (4,633) (29,612) (358) (2,624) (3,454) ------------------------------------------------------------------------- ------------------------------------------------------------------------- For both the third quarter and year-to-date, cash flow generated from operating activities and net earnings were less than distributions declared. Declared distributions and cash distributed levels are monitored and assessed through internal forecasts which incorporate the most recent operating and financial results, maintenance and growth capital requirements as well as market activity and conditions. Based on this analysis, management does not believe that the shortfalls in the table above have resulted in an economic return of capital. Distributions declared in excess of cash flow generated from operating activities in the short term have been funded by drawing on the Corporation's credit facility, the Fund's DRIP program which produced $9.6 million in distributions that have been reinvested by unitholders year to date and cash received through the exercise of rights by employees and directors of $3.2 million. The net earnings shortfall is mainly attributable to amortization and accretion expense of $29.9 million. The majority of the assets related to this expense are funded by drawing on the fund's credit facility in the absence of excess cash from operations. Therefore, management expects that there will continue to be a net earnings shortfall which will decrease as cash flow generated from operating activities increases. For a discussion of the annual trends please refer to page 14 of the Fund's Management's Discussion and Analysis for the year ended December 31, 2006. Total capital expenditures for the current year and comparative periods are summarized as follows: ------------------------------------------------------------------------- ($000s) Q3 2007 Q3 2006 YTD 2007 YTD 2006 ------------------------------------------------------------------------- Growth capital 22,484 17,041 55,974 41,843 Acquisitions 11,596 16,640 37,593 160,537 ------------------------------------------------------------------------- Total growth capital and acquisitions 34,080 33,681 93,567 202,380 Maintenance capital 5,257 7,970 11,008 16,142 ------------------------------------------------------------------------- Total acquisitions and capital expenditures 39,337 41,651 104,575 218,522 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Growth capital and acquisitions to date in 2007 have been funded by drawing on the Corporation's credit facility. Growth capital expenditures consisted primarily of productivity improvements at several facilities, additional centrifuges and investments in information technology and infrastructure. A total of $120.0 million in growth capital investments was originally budgeted for 2007. Management revised this amount to $100.0 million, eliminating additional Drill Site growth capital investments at this time. The 2007 growth capital program includes $26.0 million in corporate investments that primarily relate to the implementation of a new information technology system throughout Canada and approximately $12.0 million in leasehold improvements (before $5.7 million in tenant improvement recoveries) for the new corporate head office which is expected to be completed in the fourth quarter of 2007. The remaining $62.0 million is being invested in facilities and equipment to expand services, improve productivity and enhance market coverage in Western and Eastern. Maintenance capital expenditures are capital expenditures to replace and maintain depreciable assets at current service levels. Management estimates that the total maintenance capital expenditures for the year will be approximately $20.0 million. These expenditures will vary from quarter-to-quarter and year-to-year depending on the utilization of the assets. For fixed facilities maintenance capital expenditures tend to be relatively consistent year-over-year, while equipment that is rented out to customers will fluctuated based on its usage. Maintenance capital expenditures are budgeted annually and revised throughout the year to reflect the impact of actual utilization rates. These expenditures are funded out of cash flow generated from operating activities. It is not anticipated that the short term deficit of cash flow generated from operating activities will impact future distributions as the Board of Trustees has maintained the monthly distribution of $0.185 per unit in anticipation that investments made in 2007 will contribute to stronger results in 2008. On October 12, 2007, Newalta's management took steps to diversify its capital resources and maturity of its capital resources and arranged a new amended credit facility with a two-year term. Newalta replaced its previous credit facilities (comprised of a $35.0 million dollar operating facility and a $245.0 million extendible term credit facility) with a $425.0 million extendible revolving credit facility (the "Credit Facility"). The Credit Facility is used to fund growth capital expenditures and for general corporate purposes as well as to issue letters of credit to third parties up to a maximum amount of $60.0 million. The aggregate dollar amount of letters of credit that have been issued and are outstanding under the Credit Facility are not categorized in the financial statements as long term debt of Newalta; however, the amount of funds that can be drawn on the Credit Facility by Newalta is reduced by the amount of the outstanding letters of credit. Newalta is required to issue either letters of credit or a bond with various environmental regulatory authorities to ensure that the eventual asset retirement obligations for facilities are fulfilled. These letters of credit or bonds will not be utilized unless Newalta defaults on its obligation to restore the lands to a condition acceptable by these authorities. At September 30, 2007, letters of credit and bonds issued as financial security to third parties totalled $53.9 million. Of this amount, $40.1 million is committed on the Corporation's credit facility which provides for $60.0 million in letters of credit. Bonds are not required to be offset against the borrowing amount available under the credit facility. The second part of the diversification strategy included the issuance of the Debentures announced on October 22, 2007. The offering is expected to close on or about November 16, 2007. The Debentures have a maturity date of November 30, 2012 and will 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 trust units (or a conversion price of $23.00 per trust unit) at any time at the option of the holders of the Debentures. The net proceeds of the offering will be used to repay outstanding indebtedness borrowed to fund acquisitions and growth capital and will not reduce the total amount available under the Credit Facility. The Debentures are not included in the definition of funded debt for the purposes of calculating financial covenants in the Credit Facility. The Corporation has entered into a letter agreement with J.P. Morgan Securities Inc. and CIBC World Markets Inc. (collectively, the "Agents") pursuant to which the Agents have agreed to act as placement agents, on a best efforts basis, in connection with a possible offering by the Corporation of approximately $150.0 million of debt securities (the "Debt Securities") on a private placement basis. There can be no assurance that all or any portion of such private placement will be completed. Upon each issuance of Debt Securities, if any, the Corporation is required under the Credit Facility to repay and cancel a portion of the total commitment under the Credit Facility equal to the net proceeds thereof up to a maximum of $200.0 million. As at September 30, 2007, the Fund had drawn $230.8 million on its credit facility compared to $166.3 million outstanding at December 31, 2006, an increase of $64.5 million. The increase was due to recent acquisitions completed for a total of $37.6 million, growth capital to date of $57.8 million and distributions in excess of cash flow generated from operating activities of $34.8 million (which includes net changes in working capital). These were offset by an equity financing completed in January 2007 pursuant to which the Fund issued 3.0 million trust units for net proceeds of $74.1 million. As at September 30, 2007, after giving effect to the Nova Pb acquisition and applying the net proceeds of the convertible debenture issue, Newalta's unused capacity on its credit facility was approximately $204.7 million (net of outstanding letters of credit in the amount of $40.1 million). Newalta is restricted from declaring distributions and distributing cash if the Corporation is in breach of the covenants under its credit facility. Financial performance relative to the financial ratio covenants under the current Credit Facility is reflected in the table below: ------------------------------------------------------------------------- Ratio September 30, 2007 Threshold ------------------------------------------------------------------------- Current Ratio(1) 1.92:1 1.20:1 minimum Funded Debt to EBITDA(2) 2.57:1 3.00:1 maximum(3) Fixed Charge Coverage Ratio(4) 2.02:1 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 to EBITDA means the ratio of consolidated Funded Debt to the aggregate EBITDA for the trailing twelve-months. Funded Debt is defined as long-term debt and capital leases including any current portion thereof but excluding future income taxes and future site restoration costs. EBITDA is defined as the trailing twelve-months of EBITDA for the Fund which is normalized for any acquisitions completed during that time frame and excluding any dispositions incurred as if they had occurred at the beginning of the trailing twelve-months. (3) In the third quarter of 2008, the threshold amount will decrease to 2.75:1.00 and in the fourth quarter of 2008 this threshold will decrease to 2.50:1.00. (4) Fixed Charge Coverage Ratio means, based on the trailing 12-month EBITDA less unfinanced capital expenditures and cash taxes to the sum of the aggregate of principal payments (include amounts under capital leases), interest, dividends and cash distribution paid by the Fund for such period, other than cash payments in respect of the DRIP program of the Fund. During the three and nine months ended September 30, 2007, there have been no material changes to the specified contractual obligations as set forth in the Management's Discussion and Analysis for the year ended December 31, 2006. OFF-BALANCE SHEET ARRANGEMENTS Newalta currently has no off-balance sheet arrangements. TRANSACTIONS WITH RELATED PARTIES Bennett Jones LLP provides legal services to Newalta. Mr. Vance Milligan, a Trustee of the Fund, is a partner in the law firm of Bennett Jones LLP and is involved in providing and managing the legal services provided by Bennett Jones LLP to Newalta. The total cost of these legal services during the three and nine months ended September 30, 2007 was $0.1 million and $0.4 million, respectively ($0.1 million and $0.7 million for the same periods in 2006). Newalta provides oilfield services to Paramount Resources Ltd., an oil and gas company. Mr. Clayton Riddell, a Trustee and Chairman of the Board of the Fund, is Chairman and Chief Executive Officer of Paramount Resources Ltd. The total revenue for services provided by Newalta to this entity for the quarter and nine months ended September 30, 2007 was $0.2 million and $1.2 million, respectively ($0.2 million and $1.1 million for the same periods in 2006). These transactions were in the normal course of operations on similar terms and conditions to those entered into with unrelated parties. These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. CRITICAL ACCOUNTING ESTIMATES The preparation of the financial statements in accordance with Canadian 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. 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 have been no significant changes in the estimates used to prepare the asset retirement obligation in the first half of 2007 compared to those provided in the Fund's annual consolidated financial statements for the year ended December 31, 2006. GOODWILL Management performs a test for goodwill impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. Determining whether an impairment has occurred requires a valuation of the respective reporting unit, which is estimated using a discounted cash flow method. In applying this methodology, management relies on a number of factors, including actual operating results, future business plans, economic projections and market data. The increase of $13.6 million since December 31, 2007 relates entirely to acquisitions completed in 2007. Management tests the valuation of goodwill at each September 30 period end and did not see any impairment in the goodwill balance recorded. FUTURE INCOME TAXES Future income taxes are estimated based upon temporary differences between the book value and the 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 rates used for each entity. On June 22, 2007, new tax legislation modifying the taxation of certain flow-through entities including mutual fund trusts such as Newalta and its unitholders was enacted (the "New Tax Legislation"). The New Tax legislation will apply a tax at the trust level on distributions of certain income from the Fund at a rate of tax of 31.5%. Such distributions will be treated as dividends to the unitholders. There was no impact on the Fund at September 30, 2007 as a result of the enactment of the New Tax Legislation. It is expected that the new distribution tax (subject to any undue expansion) will apply to the Fund commencing in 2011. The New Tax Legislation permits "normal growth" for Newalta through the transitional period between October 31, 2006 and December 31, 2010. However, "undue expansion" could cause the transitional relief to be revisited, and the New Tax Legislation to be effective at a date earlier than January 1, 2011. On December 15, 2006, the Department of Finance released guidelines on normal growth for income trusts and other flow-through entities (the "Guidelines"). Under the Guidelines, a trust will be able to increase its equity capital each year during the transitional period by an amount equal to the greater of $50 million and a safe harbour amount. The safe harbour amount will be measured by reference to the trust's market capitalization as of the end of trading on October 31, 2006. Newalta's market capitalization at the close of trading on October 31, 2006 was $1.218 billion. The safe harbour for the intervening years up to 2011 will be as follows: ------------------------------------------------------------------------- Safe Harbour Limit (% of October 31, Newalta's 2006 Market Newalta's Market Safe Harbour Time Period Capitalization) Capitalization ($) Limit ($) ------------------------------------------------------------------------- November 1, 2006 to December 31, 2007 40% 1.218 billion 487.2 million 2008 20% 1.218 billion 243.6 million 2009 20% 1.218 billion 243.6 million 2010 20% 1.218 billion 243.6 million ------------------------------------------------------------------------- Total 1.218 billion ------------------------------------------------------------------------- ------------------------------------------------------------------------- The safe harbour limits reflected above are subject to some restrictions: - The annual safe harbour amounts are cumulative. - New equity for these purposes includes units and debt that is convertible into units. - Replacing debt of the Fund itself that was outstanding as of October 31, 2006 with new equity whether through a debenture conversion or otherwise, will not be considered growth for these purposes. New, non-convertible debt can also be issued without affecting the safe harbour; however, the replacement of that new debt with equity will be counted as growth. As of October 31, 2006, the Fund had no outstanding debt. - An issuance by a trust of new equity will not be considered growth to the extent that the issuance is made in satisfaction of the exercise by another person or partnership of a right in place on October 31, 2006 to exchange an interest in a partnership, or a share of a corporation, into that new equity. - The merger of two or more trusts each of which was publicly-traded on October 31, 2006, or a reorganization of such a trust, will not be considered growth to the extent that there is no net addition to equity as a result of the merger or reorganization. In addition, the 2006 Proposed Changes indicate states that the New Tax Legislation may be modified at any time with immediate effect to counter any structures which frustrate the policy objectives of the New Tax Legislation. AMORTIZATION AND ACCRETION Amortization of the Fund's 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 the Fund's 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 the Fund's facilities. Estimates for the first nine months of 2007 are consistent with those disclosed in the Management Discussion and Analysis for the year ended December 31, 2006. ADOPTION OF NEW ACCOUNTING STANDARDS IN 2007 Effective January 1, 2007, the Fund adopted the new accounting recommendation of the Canadian Institute of Chartered Accountants ("CICA") under CICA Handbook section 1506, Accounting Changes. The impact of this section is to provide disclosure of when an entity has not applied a new source of GAAP that has been issued but is not yet effective. This is the case with CICA Handbook section 3862, Financial Instruments Disclosures and section 3863, Financial Instruments Presentations which are required to be adopted for fiscal years beginning on or after October 1, 2007. The Fund will adopt these standards on January 1, 2008 and it is expected the only effect on the Fund will be incremental disclosures regarding the significance of financial instruments for the entity's financial position and performance; and the nature, extent and management of risks arising from financial instruments to which the entity is exposed. Other sections that will be effective January 1, 2008 for the Fund are: CICA Handbook Section 1535, Capital Disclosures, will require the disclosure of both qualitative and quantitative information that provides users of financial statements with information to evaluate the entity's objectives, policies and processes for managing capital. CICA Handbook Section 3031, Inventories, which replaces the existing standard for inventories, Section 3030. The main features of the new section are as follows and are not expected to have an effect on the Fund: - Measurement of inventories at the lower of cost and net realizable value - Consistent use of either first-in, first-out or a weighted average cost formula to measure cost - Reversal of previous write-downs to net realizable value when a subsequent increase to the value of inventories occurs Effective January 1, 2007, the Fund also adopted the new recommendations under CICA Handbook section 1530, Comprehensive Income, section 3251, Equity, section 3855, Financial Instruments - Recognition and Measurement, section 3861, Financial Instruments - Disclosure and Presentation and section 3865 Hedges. These new Handbook sections provide requirements for the recognition and measurement of financial instruments and on the use of hedge accounting. Section 1530 establishes standards for reporting and presenting comprehensive income which is defined as the change in equity from transactions and other events from non-owners sources. Other comprehensive income refers to items recognized in comprehensive income but that are excluded from net earnings calculated in accordance with generally accepted accounting principles. Section 1530 requires the Fund to present a new statement entitled Comprehensive Income. The new statement is included in the Fund's accompanying interim consolidated financial statements for the three and nine months ended September 30, 2007 and 2006. 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 the Fund. These risk factors are incorporated by reference herein and are supplemented by those described below. As a result of its recent acquisition of the assets of Nova Pb, Newalta owns Canada's largest integrated lead battery recycling facility which sells recycled lead alloys to the automotive and industrial battery manufacturing industries. The primary source of raw material for this business is waste lead acid batteries that are purchased from a diversified network of scrap dealers, waste collectors and battery manufacturers. The cost of the waste batteries will fluctuate in relation to lead prices. The business of Newalta is therefore directly affected by fluctuations in the price of lead which are affected by events beyond Newalta's control. Newalta is also subject to foreign currency risks and foreign exchange exposure as an increasing portion of Newalta's operations are being conducted in the United States. Fluctuations in the Canada/U.S. exchange rate increase the risks that Newalta may experience from foreign exchange fluctuations and may have an adverse effect on Newalta's business and results of operations. The Annual Information Form is available through the Internet on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) which can be accessed at www.sedar.com. Copies of the Annual Information Form may be obtained, on request without charge, from Newalta Corporation at Suite 1200, 333 - 11th Avenue S.W., Calgary, Alberta T2R 1L9, or at www.newalta.com, or by facsimile at (403) 806-7348. 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 Canadian customers is minimized by its broad customer base and diverse product lines. In the normal course of operations, Newalta is exposed to movements in the U.S. dollar exchange rates, relative to the Canadian dollar. Newalta sells and purchases some product 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 quarter and nine months ended September 30, 2007, the Fund did not make any changes to its internal controls over financial reporting that would have materially affected, or would likely materially affect, the effectiveness of such controls. ADDITIONAL INFORMATION Additional information relating to the Fund, including the Annual Information Form, is available through the Internet on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) which can be accessed at www.sedar.com. Copies of the Annual Information Form of the Fund may be obtained from Newalta Corporation at Suite 1200, 333 - 11th Avenue S.W., Calgary, Alberta T2R 1L9, or at www.newalta.com, or by facsimile at (403) 806-7348. CONSOLIDATED BALANCE SHEETS ($000s) (unaudited) September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Assets Current assets Accounts receivable 145,327 120,621 Inventories 12,138 9,238 Prepaid expenses and other 5,790 3,729 ------------------------------------------------------------------------- 163,255 133,588 Notes receivable 1,452 1,031 Capital assets 588,191 528,085 Intangible assets (Note 3) 51,674 50,062 Goodwill (Note 3) 103,597 90,078 ------------------------------------------------------------------------- 908,169 802,844 ------------------------------------------------------------------------- Liabilities Current liabilities Accounts payable 77,411 90,650 Distributions payable 7,519 6,834 ------------------------------------------------------------------------- 84,930 97,484 Long-term debt (Note 5) 230,849 166,271 Future income taxes (Note 6) 66,440 72,910 Asset retirement obligations (Note 11) 20,816 18,484 ------------------------------------------------------------------------- 403,035 355,149 ------------------------------------------------------------------------- Unitholders' Equity Unitholders' capital (Note 7) 481,849 394,601 Contributed surplus 1,029 1,226 Retained earnings 22,256 51,868 ------------------------------------------------------------------------- 505,134 447,695 ------------------------------------------------------------------------- 908,169 802,844 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME AND RETAINED EARNINGS For the For the Three Months Ended Nine Months Ended ($000s except per unit data) September 30, September 30, (unaudited) 2007 2006 2007 2006 ------------------------------------------------------------------------- Revenue 133,358 120,297 362,789 318,543 Expenses Operating 90,791 74,016 253,292 196,898 Selling, general and administrative 13,545 11,182 39,070 31,380 Interest 3,632 1,378 8,570 5,241 Amortization and accretion 10,866 8,875 29,879 24,342 ------------------------------------------------------------------------- 118,834 95,451 330,811 257,861 ------------------------------------------------------------------------- Earnings before taxes 14,524 24,846 31,978 60,682 Provision for (recovery of) income taxes Current 209 103 872 319 Future (3,578) 4,607 (6,470) 1,811 ------------------------------------------------------------------------- (3,369) 4,710 (5,598) 2,130 ------------------------------------------------------------------------- Net earnings from continuing operations 17,893 20,136 37,576 58,552 Earnings from discontinued operations (Note 4) - - - 1,657 ------------------------------------------------------------------------- Net earnings and comprehensive income 17,893 20,136 37,576 60,209 Retained earnings, beginning of period, 26,889 57,241 51,868 52,226 Distributions (Note 10) (22,526) (20,405) (67,188) (55,463) ------------------------------------------------------------------------- Retained earnings, end of period 22,256 56,972 22,256 56,972 ------------------------------------------------------------------------- Earnings per unit from continuing operations (Note 9) 0.44 0.55 0.94 1.68 Earnings per unit from discontinued operations (Note 9) - - - 0.05 ------------------------------------------------------------------------- Earnings per unit 0.44 0.55 0.94 1.73 ------------------------------------------------------------------------- Diluted earnings per unit from continuing operations (Note 9) 0.43 0.54 0.93 1.66 Diluted earnings per unit from discontinued operations (Note 9) - - - 0.05 ------------------------------------------------------------------------- Diluted earnings per unit 0.43 0.54 0.93 1.71 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS For the For the Three Months Ended Nine Months Ended September 30, September 30, ($000s) (unaudited) 2007 2006 2007 2006 ------------------------------------------------------------------------- Net inflow (outflow) of cash related to the following activities: OPERATING ACTIVITIES Net earnings from continuing operations 17,893 20,136 37,576 58,552 Items not requiring cash: Amortization and accretion 10,866 8,875 29,879 24,342 Future income taxes (recovery) (3,578) 4,607 (6,470) 1,811 Funds from discontinued operations (Note 4) - - - 811 Other (308) 140 (1,425) 507 ------------------------------------------------------------------------- 24,873 33,758 59,560 86,023 Increase in non-cash working capital (4,094) (8,961) (26,229) (3,128) Asset retirement expenditures incurred (333) (193) (830) (759) ------------------------------------------------------------------------- 20,446 24,604 32,501 82,136 ------------------------------------------------------------------------- INVESTING ACTIVITIES Additions to capital assets (24,656) (24,602) (81,979) (59,470) Net proceeds on sale of capital assets 133 120 1,848 388 Acquisitions (Note 3) (11,548) (14,738) (36,808) (149,373) Proceeds on disposal of discontinued operations - 135 - 2,807 ------------------------------------------------------------------------- (36,071) (39,085) (116,939) (205,648) ------------------------------------------------------------------------- FINANCING ACTIVITIES Issuance of units (3) 474 77,328 189,125 Increase (decrease) in debt 34,779 32,968 64,578 (19,056) Settlement of acquired debt (Note 3) (48) - (785) - Decrease in notes receivable 108 119 235 252 Distributions to unitholders (Note 10) (19,211) (19,080) (56,918) (46,809) ------------------------------------------------------------------------- 15,625 14,481 84,438 123,512 ------------------------------------------------------------------------- Net cash inflow - - - - Cash - beginning of period - - - - ------------------------------------------------------------------------- Cash - end of period - - - - ------------------------------------------------------------------------- Supplementary information: Interest paid 3,361 1,483 8,182 5,053 Income taxes paid 210 299 717 4,400 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 ($000s except per unit data) (unaudited) Newalta Income Fund (the "Fund") is a Canadian mutual fund trust engaged, through its wholly-owned operating subsidiaries Newalta Corporation (the "Corporation") and Newalta Industrial Services Inc. ("NISI" and together with the Fund and the Corporation, "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, forestry, manufacturing, mining, oil and gas, petrochemical, pulp and paper, steel and transportation services. 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 the Fund for the year ended December 31, 2006 as contained in the Annual Report for fiscal 2006. The accounting principles applied are consistent with those as set out in the Fund's annual financial statements for the year ended December 31, 2006 except as noted in the following paragraphs. Accounting Changes Effective January 1, 2007, the Fund adopted the new accounting recommendation of the Canadian Institute of Chartered Accountants ("CICA") under CICA Handbook section 1506, Accounting Changes. The impact of this section is to provide disclosure of when an entity has not applied a new source of GAAP that has been issued but is not yet effective. The CICA issued Handbook section 3862, Financial Instruments - Disclosures and section 3863, Financial Instruments - Presentation which are required to be adopted for fiscal years beginning on or after October 1, 2007. The Fund will adopt these standards on January 1, 2008 and it is expected the only effect on the Fund will be incremental disclosures regarding the significance of financial instruments for the entity's financial position and performance, and the nature, extent and management of risks arising from financial instruments to which the entity is exposed. Effective January 1, 2008, the new accounting standard, CICA Handbook Section 1535, Capital Disclosures, will require the disclosure of both qualitative and quantitative information that provides users of financial statements with information to evaluate the entity's objectives, policies and processes for managing capital. Effective January 1, 2008, Newalta will adopt the new accounting standard, CICA Handbook Section 3031, Inventories, which replaces the existing standard for inventories, Section 3030. The main features of the new section are as follows: - Measurement of inventories at the lower of cost and net realizable value - Consistent use of either first-in, first-out or a weighted average cost formula to measure cost - Reversal of previous write-downs to net realizable value when there is a subsequent increase to the value of inventories Application of the new Section is not expected to have an impact on the financial statements. Financial instruments Effective January 1, 2007, the Fund also adopted the new recommendations under CICA Handbook section 1530, Comprehensive Income, section 3251, Equity, Section 3855, Financial Instruments - Recognition and Measurement, section 3861, Financial Instruments - Disclosure and Presentation and Section 3865, Hedges. These new Handbook sections provide requirements for the recognition and measurement of financial instruments and on the use of hedge accounting. Section 1530 establishes standards for reporting and presenting comprehensive income which is defined as the change in equity from transactions and other events from non-owners' sources. Other comprehensive income refers to items recognized in comprehensive income but that are excluded from net earnings calculated in accordance with generally accepted accounting principles. Under Section 3855, all financial instruments are classified into one of five categories and measured as follows: ------------------------------------------------------------------------- Category Measurement ------------------------------------------------------------------------- Held-for-trading Fair value and changes in fair value are recognized in net earnings Held-to-maturity investments Amortized cost Loans and receivables Amortized cost Available-for-sale financial assets Fair value and changes in fair value are recorded in other comprehensive income until the instrument is derecognized or impaired Other financial liabilities Amortized cost ------------------------------------------------------------------------- As a result of the adoption of these new standards, the Fund has classified its cash and cash equivalents as held-for-trading. Accounts receivable and notes receivable are classified as loans and receivables. Long-term debt, accounts payable and distributions payable are classified as other liabilities, all of which are measured at amortized cost. The Fund does not have any derivatives or embedded derivatives to report. Section 3855 also provides guidance on accounting for transaction costs incurred upon the issuance of debt instruments or modification of a financial liability. Transaction costs associated with Other Liabilities have been expensed as incurred. The adoption of these new standards had no impact on the Fund's retained earnings or accumulated other comprehensive income as at January 1, 2007. The carrying values of financial assets and liabilities approximate their fair values. 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 the Fund's operations and cash flows for the periods ended September 30, 2007 and 2006. Note 2. SEASONALITY OF OPERATIONS Quarterly performance is affected by, among other things, weather conditions, commodity prices, market demand and capital investments as well as acquisitions. Each of the Western and Eastern division is affected differently based on the types of services that are provided. The following seasonality descriptions provide the typical quarterly fluctuations in operational results in the absence of growth and acquisition capital investments. For the Western division ("Western"), the frozen ground during the winter months 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 they have thoroughly dried out. Road bans, which are generally imposed in the spring, restrict waste transportation which reduces demand for Western'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. Acquisitions and growth capital investments completed in the first half of the year will tend to strengthen second half financial performance. For Western, first quarter revenue has ranged from 17% to 25% of annual revenue, second quarter revenue has ranged from 19% to 25%, revenue from the third quarter has ranged from 26% to 30% and finally fourth quarter revenue has ranged from 26% to 35%. The Eastern division's ("Eastern") services are curtailed by colder weather in the first quarter, which is typically its weakest quarter. 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. Similar to Western, growth capital investments made in the first half will tend to strengthen the second half performance. Based on historical information that management obtained for the recent acquisitions, it is estimated that first quarter revenue is typically approximately 16 to 18% of annual revenue, second quarter revenue is approximately 20 to 25%, the revenue for the third quarter is between 28% to 32% and, finally, fourth quarter revenue is approximately 24% to 29% of annual revenue. NOTE 3. ACQUISITIONS (NOTE 14) a) On April 1, 2007, Western acquired all of the assets of Panaco Fluid Filtration Systems Ltd. ("Panaco") for a total purchase price of $5,927 in cash. Panaco and its 15 people based out of Rocky Mountain House, Alberta, deliver onsite fluid filtration services to refineries and gas plants as well as oil and gas exploration drilling locations. Panaco provides services to western Canada and the United States. Effective May 1, 2007, Eastern acquired the operating assets of three private entities (collectively referred to as Groupe Envirex, "Envirex") based out of Québec for a collective purchase price of $8,066 in cash. This acquisition adds four centrifuges to Eastern servicing the Québec refinery and petrochemical market. The acquired operations include a fleet of eight vacuum trucks and pressure washers and a household waste, small industrial waste generator and soil treatment business. Effective May 1, 2007, Eastern acquired a portion of the operating assets of EcoloSite Inc. ("Ecolosite"), based in London, Ontario, for a total purchase price of $3,104, comprised of $2,367 in cash and the assumption of $737 in debt. EcoloSite operates one facility with 13 people servicing customers across Ontario and the Maritimes, in mobile onsite treatment and the management of industrial and municipal waste. The assets of Eastern Environmental Services Ltd. ("Eastern Environmental") were acquired by the Eastern division effective June 1, 2007 for a total purchase price of $9,293 in cash. The acquired operations include 30 experienced people, a fleet of mobile services, a transfer station and processing facility located in Sussex, New Brunswick and a satellite office in Bedford, Nova Scotia. Eastern acquired the assets of Bucke Environmental Services & Transportation Inc. ("BEST") effective July 6, 2007 for a total purchase price of $1,435, comprised of $1,387 in cash and the assumption of $48 in debt. The acquired assets include four vacuum trucks and related assets in the Windsor area. The assets of New West Fluid Management Inc. ("New West") were acquired by the Western division effective July 5, 2007 for a total purchase price of $9,768 in cash. The acquired operations include a fleet of 15 vacuum trucks, 30 people and 12 technical field consultants that provide site remediation and abandonment services. The amount of the consideration paid and the fair value of the assets acquired and liabilities assumed were: Eastern Eco- Environ- New Panaco Envirex losite mental BEST West Total ------------------------------------------------------------------------- Cash consideration 5,927 8,066 2,367 9,293 1,387 9,768 36,808 Debt assumed - - 737 - 48 - 785 ------------------------------------------------------------------------- Total Purchase Price 5,927 8,066 3,104 9,293 1,435 9,768 37,593 ------------------------------------------------------------------------- Net working capital 294 (53) - 226 - 231 698 Capital assets: Land 45 800 - 202 - - 1,047 Plant & equipment 2,270 4,719 2,539 3,886 1,085 4,037 18,536 Intangibles 500 1,000 - 1,000 350 1,000 3,850 Goodwill 2,818 1,600 581 4,020 - 4,500 13,519 Asset retirement obligations - - (16) (40) - - (56) ------------------------------------------------------------------------- 5,927 8,066 3,104 9,293 1,435 9,768 37,593 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The operating results of the businesses acquired are consolidated from the respective closing dates of the transactions. The allocation of the purchase prices are subject to changes, as management obtains further information. b) On January 6, 2006 the Fund, through a wholly-owned subsidiary, acquired all the shares of PSC Industrial Services Canada Inc. ("PSC Canada"). PSC Canada is engaged in the business of collecting and disposing of industrial waste material in southern Ontario. The acquired operations were set up as a separate division of Newalta, as described in Note 15. The amount of the consideration paid and the fair value of the assets acquired and liabilities assumed is shown below. On June 1, 2006, Western acquired all the issued and outstanding shares of Treeline Environmental Projects Corp. and Treeline Well Abandonment and Reclamation Ltd. (collectively "Treeline"). The consideration for this acquisition was comprised of $13,804 in cash and the issuance of 156,260 trust units at a value of $5,000. The two companies manage waste handling and abandonment operations for oil producers and drillers. Results are included from the closing date of June 1, 2006. The operating assets of Québec-based Norama Industries Inc. ("Norama") were acquired on August 1, 2006 for cash consideration of $10,842. Norama added to the Eastern segment, a network of three facilities with 100 people and provides industrial cleaning and environmental services to refinery, petrochemical, industrial and manufacturing companies. On August 31, 2006, Eastern acquired all of the operating assets of Island Waste Management Inc. ("Island Waste") including a 49% partnership interest in the Labrador Innu Waste Management partnership for $5,798. Island Waste and its 17 people operate a waste transfer facility in St. John's, Newfoundland that provides services to various industries in Newfoundland and Labrador, including offshore oil and gas companies. The amount of the consideration paid and the fair value of the assets acquired and liabilities assumed were: PSC Island Canada Treeline Norama Waste Total ------------------------------------------------------------------------- Deferred costs - paid in 2005 7,175 - - - 7,175 Cash paid in 2006 113,230 13,804 10,842 3,898 141,774 Equity issued - 5,000 - 1,900 6,900 ------------------------------------------------------------------------- Total consideration 120,405 18,804 10,842 5,798 155,849 ------------------------------------------------------------------------- Net working capital 9,164 8,239 (50) (20) 17,333 Debt acquired - (8,700) - - (8,700) Capital assets: Land 3,643 - 614 464 4,721 Plant & equipment 22,337 167 3,946 200 26,650 Landfill 71,187 - - - 71,187 Intangibles 34,600 - 720 1,367 36,687 Goodwill 15,239 18,956 5,700 3,825 43,720 Future income tax (23,274) 142 - - (23,132) Asset retirement obligations (12,491) - (88) (38) (12,617) ------------------------------------------------------------------------- 120,405 18,804 10,842 5,798 155,849 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 4. DISCONTINUED OPERATIONS On May 31, 2006, the Corporation disposed of a non-core industrial onsite cleaning services operation that was sold for total proceeds of $3,472 consisting of $2,672 in cash and an $800 non-interest bearing promissory note. The note receivable was valued on the balance sheet at its net present value of $748. The note was repayable in equal quarterly instalments of $135 until May 31, 2007 and the balance of the note was due on June 30, 2007. The full balance of the note receivable outstanding at June 30, 2007 was received in early July. The gain in the table below is reflected net of a disposition of the proportionate goodwill of $1,500. The following table sets forth the results of operations (excluding selling, general and administration costs and divisional administration costs), associated with the operations sold, for the three and nine months ended September 30, 2006 that have been reclassified from the following accounts to earnings from discontinued operations: September 30, 2006 ------------------------------------------------------------------------- Three Months Nine Months Ended Ended ------------------------------------------------------------------------- Revenue - 5,408 Operating expenses - 4,597 ------------------------------------------------------------------------- - 811 Amortization and accretion - 21 Future income tax - 284 Gain on disposition (net of tax) - (1,151) ------------------------------------------------------------------------- Earnings from discontinued operations - 1,657 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 5. LONG-TERM DEBT September 30, December 31, 2007 2006 ------------------------------------------------------------------------- Extendible term facility 230,849 166,271 ------------------------------------------------------------------------- ------------------------------------------------------------------------- On October 12, 2007 Newalta replaced its previous credit facilities (comprised of a $35,000 operating facility and a $245,000 extendible term credit facility) with a $425,000 extendible revolving credit facility (the "Credit Facility"). The Credit Facility is used to fund growth capital expenditures and for general corporate purposes as well as to issue letters of credit to third parties up to a maximum amount of $60,000. The amount of funds that can be drawn on the Credit Facility by Newalta is reduced by the amount of the outstanding letters of credit. The credit facility is secured principally by a general security agreement over the assets of the Corporation and its subsidiary NISI. Interest on the facilities is subject to certain conditions, and may be charged at a prime, U.S. base rate, Bankers' Acceptance ("BA") or LIBOR based rate, at the option of the Corporation. The facility bears interest at a base rate plus an increment (depending on certain criteria) as follows: ----------------------------------------------- Base Rate Type Range of increment ----------------------------------------------- Prime Rate 0.0% to 1.0% U.S. Base Rate 0.0% to 1.0% BA Rate 0.9% to 2.0% LIBOR Rate 0.9% to 2.0% ----------------------------------------------- The facility is secured by a fixed and floating charge debenture to the lenders on the assets of the Corporation and material subsidiaries, an unlimited subsidiary guarantee from each material subsidiary of the Corporation, a limited recourse guarantee from the Fund, an assignment of insurance naming the lenders as first loss payee in relation to business interruption, property and inventory insurance and a subordination agreement. The facility's maturity date is October 11, 2009. 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 September 30, 2007, Newalta was in compliance with all covenants. NOTE 6. FUTURE INCOME TAXES In June 2007, Bill C-52 Budget Implementation Act, 2007 (the "New Tax Legislation") was enacted. As an existing income trust at the time of the announcement, a new distribution tax of 31.5% will apply to the Fund commencing in 2011 provided the fund does not exceed the "normal growth" restrictions as defined by the Department of Finance. As a result of the New Tax Legislation, Newalta is required to reflect any previously unrecognized temporary differences in the consolidated financial statements of the Fund. Newalta has determined that there are no unrecognized temporary differences resulting from the new tax legislation. NOTE 7. UNITHOLDERS' CAPITAL Authorized capital of the Fund consists of a single class of an unlimited number of trust units. The following table is a summary of the changes in Unitholders' capital during the period: Units (No.) Amount ($) ------------------------------------------------------------------------- Units outstanding as at December 31, 2005 29,055 188,761 Units issued 7,000 185,718 Units issued for acquisitions 215 6,900 Contributed surplus on rights exercised - 500 Rights exercised 365 4,194 Units issued under the DRIP 307 8,528 ------------------------------------------------------------------------ Units outstanding as at December 31, 2006 36,942 394,601 Units issued 3,000 74,105 Contributed surplus on rights exercised - 335 Rights exercised 289 3,222 Units issued under the DRIP 412 9,586 ------------------------------------------------------------------------ Units outstanding as at September 30, 2007 (Note 14) 40,643 481,849 ------------------------------------------------------------------------ ------------------------------------------------------------------------ On January 26, 2007, the Fund issued 3,000,000 units through a bought deal equity financing at a price of $26.10 per unit for net proceeds of $74,105 after share issuance costs of $4,195. On March 3, 2006, the Fund issued 7,000,000 units pursuant to a bought deal equity financing at a price of $28.00 per unit. Proceeds, net of issuance costs, were $185,718. NOTE 8. RIGHTS TO ACQUIRE TRUST UNITS On March 19, 2007, a total of 860,000 rights were granted to certain directors, officers, and employees of the Corporation. The rights were granted at the market price of $25.50 per unit. On May 17, 2007, a total of 110,000 rights were granted to certain officers and employees of the Corporation, at a market price of $25.19 per unit. Each tranche of the rights vest over a four year period (with a five year life), and the holder of the right has the option to exercise the right for either a unit of the Fund or an amount of cash equal to the difference between the exercise price and the market price at the time of exercise. The rights granted under the 2006 Trust Unit Rights Incentive Plan have therefore been accounted for as stock appreciation rights and the total compensation expense for these rights was nil for the three and nine months ended September 30, 2007 (nil for the same periods in 2006). NOTE 9. EARNINGS PER UNIT Basic per unit calculations for the three and nine months ended September 30, 2007 and 2006 were based on the weighted average number of units outstanding for the periods. Diluted earnings per unit include the potential dilution of the outstanding rights to acquire trust units. The calculation of dilutive earnings per unit does not include anti- dilutive rights, if any. These rights 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 rights would cause the diluted earnings per unit to be overstated. The number of excluded rights for the three and nine months ended September 30, 2007 was 1,635 and 1,974 (705,000 for both the three and nine months periods ended September 30, 2006). Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Weighted average number of units 40,579 36,734 40,056 34,774 Net additional units if rights exercised 146 545 168 526 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted weighted average number of units 40,725 37,279 40,224 35,300 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 10. UNITHOLDER DISTRIBUTIONS DECLARED AND PAID The Fund makes monthly distributions to its holders of trust units. Determination of the amount of cash distributions for any period is at the sole discretion of the Board of Trustees of the Fund and is based on certain criteria including financial performance as well as the projected liquidity and capital resource position of the Fund. Distributions are 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 is not a business day, the next following business day). Three Months Ended Nine Months Ended September 30, September 30, ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Unitholder distributions declared 22,526 20,405 67,188 55,463 per unit - $ 0.555 0.555 1.665 1.585 Unitholder distributions - paid in cash 19,211 19,080 56,918 46,809 Unitholder distributions - value paid in units 3,286 1,296 9,586 6,640 paid in cash - per unit $ 0.47 0.520 1.42 1.388 issued units - per unit $ 0.08 0.035 0.24 0.177 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 11. RECONCILIATION OF ASSET RETIREMENT OBLIGATIONS The 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 Ended Nine Months Ended September 30, September 30, ------------------------------------------------------------------------- 2007 2006 2007 2006 ------------------------------------------------------------------------- Asset retirement obligations, beginning of period 20,715 18,147 18,484 5,468 Additional retirement obligations added through acquisitions - 126 56 12,617 Additional retirement obligations added through development activities - - 664 - Additional retirement obligations added through a change of estimate - - 1,182 - Expenditures incurred to fulfill obligations (333) (193) (830) (759) Accretion 434 378 1,260 1,132 ------------------------------------------------------------------------- Asset retirement obligations, end of period 20,816 18,458 20,816 18,458 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 12. TRANSACTIONS WITH RELATED PARTIES Bennett Jones LLP provides legal services to the Fund. Mr. Vance Milligan, a Trustee of the Fund, is a partner in the law firm of Bennett Jones LLP and is involved in providing and managing the legal services provided by Bennett Jones LLP to the Fund. The total cost of these legal services during the three and nine month periods ended September 30, 2007 were $140 and $422 respectively ($112 and $700 for the same periods in 2006). Newalta provides oilfield services to Paramount Resources Ltd., an oil and gas company. Mr. Clayton Riddell, a Trustee and Chairman of the Board of the Fund, is Chairman and Chief Executive Officer of Paramount Resources Ltd. The total revenue for services provided by Newalta to this entity during the three and nine months ended September 30, 2007 were $226 and $1,214 respectively ($200 and $1,100 for the same periods in 2006). These transactions were incurred during the normal course of operations on similar terms and conditions to those entered into with unrelated parties. These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. NOTE 13. COMMITMENTS Letters of Credit and Surety Bonds At September 30, 2007, the Corporation had issued Letters of Credit and Bonds with respect to compliance with environmental licenses and contracts with third parties in the amounts of $40,075 and $13,858 respectively. NOTE 14. SUBSEQUENT EVENTS Subsequent to September 30, 2007, Newalta entered into the following transactions: On October 16, 2007, the Eastern segment completed the acquisition of Nova Pb's lead recycling facility business for total consideration of $55,500 comprised of $45,000 in cash paid at closing, $500 in cash payable in 2008 and the balance was funded through the issuance of 510,690 trust units. Although the effective date of the transaction is November 1, 2007, since certain inventory relating to the operation of the business prior to November 1, 2007 will be sold for the account of Nova Pb after November 1, 2007, Newalta does not anticipate receiving any revenue related to this operation prior to December 1, 2007 at the earliest. On October 22, 2007, the Fund announced the offering of $100,000 of convertible unsecured subordinated debentures (the "Debentures") on a bought deal basis. The offering is expected to close on or about November 16, 2007. The Debentures have a maturity date of November 30, 2012 and will 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 trust units (or a conversion price of $23.00 per trust unit) at any time at the option of the holders of the Debentures. The net proceeds of the offering will be used to repay outstanding indebtedness of the Fund incurred to fund acquisitions and growth capital. In addition, as subordinated debt, the issuance of the Debentures, does not affect the borrowing capacity on the new amended credit facility. In addition, the underwriters of the Debentures have the option to purchase up to an additional $15,000 in debentures within thirty days of the closing. On October 30, 2007, the Corporation entered into a letter agreement with J.P. Morgan Securities Inc. and CIBC World Markets Inc. (collectively, the "Agents") pursuant to which the Agents have agreed to act as placement agents, on a best efforts basis, in connection with a possible offering by the Corporation of approximately $150,000 of debt securities (the "Debt Securities") on a private placement basis. There can be no assurance that all or any portion of such private placement will be completed. Upon each issuance of Debt Securities, if any, the Corporation is required under the Credit Facility to repay and cancel a portion of the total commitment under the Credit Facility equal to the net proceeds thereof up to a maximum of $200,000. NOTE 15. SEGMENTED INFORMATION The Western division's 2006 comparative information in this note has been restated to reflect the organizational change in the Fund's operations. In December 2006, Newalta reorganized its operations into the Western division ("Western") and the Eastern division ("Eastern"). In western Canada, Newalta has combined the previously reported Industrial and Oilfield divisions to form Western as services offered to customers in Oilfield and Industrial are similar and are sold to a similar customer base. Newalta has also merged or eliminated some senior management and sales positions. As such, the 2006 comparative information has been restated to combine the previously reported Oilfield and Industrial reportable segments. The Fund 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 abandonment and remediation services, 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, which was established following the acquisition of PSC Canada in 2006, 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 and an emergency response service in central and eastern Canada. The accounting policies of the segments are the same as those of the Fund. For the Three Months Ended September 30, 2007 Consol- Inter- Unallo- idated Western Eastern segment cated(3) Total ------------------------------------------------------------------------- External revenue 93,493 39,823 - 42 133,358 Inter segment revenue(1) 105 - (105) - - Operating expense 61,618 29,278 (105) - 90,791 Amortization and accretion expense 5,604 3,184 - 2,078 10,866 ------------------------------------------------------------------------- Net margin 26,376 7,361 - (2,036) 31,701 Selling, general and administrative - - - 13,545 13,545 Interest expense - - - 3,632 3,632 ------------------------------------------------------------------------- Operating income 26,376 7,361 - (19,213) 14,524 ------------------------------------------------------------------------- Capital expenditures and acquisitions(2) 19,738 11,560 - 8,039 39,337 ------------------------------------------------------------------------- Goodwill 62,280 41,317 - - 103,597 ------------------------------------------------------------------------- Total assets 561,233 310,799 - 36,137 908,169 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the Three Months Ended September 30, 2006 Consol- Inter- Unallo- idated 2006 Western Eastern segment cated(3) Total ------------------------------------------------------------------------- External revenue 95,502 24,795 - - 120,297 Inter segment revenue(1) - - - - - Operating expense 57,998 16,018 - - 74,016 Amortization and accretion expense 5,077 3,274 - 524 8,875 ------------------------------------------------------------------------- Net margin 32,427 5,503 - (524) 37,406 Selling, general and administrative - - - 11,182 11,182 Interest expense - - - 1,378 1,378 ------------------------------------------------------------------------- Operating income - continuing operations 32,427 5,503 - (13,084) 24,846 ------------------------------------------------------------------------- Operating income - discontinued operations - - - - - ------------------------------------------------------------------------- Capital expenditures and acquisitions(2) 12,180 25,597 - 3,872 41,649 ------------------------------------------------------------------------- Goodwill 53,710 23,273 - - 76,983 ------------------------------------------------------------------------- Total assets 485,401 192,144 - 30,768 708,313 ------------------------------------------------------------------------- (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 Nine Months Ended September 30, 2007 Consol- Inter- Unallo- idated Western Eastern segment cated(3) Total ------------------------------------------------------------------------- External revenue 257,399 104,735 - 655 362,789 Inter segment revenue(1) 538 - (538) - - Operating expense 174,397 79,433 (538) - 253,292 Amortization and accretion expense 15,029 10,647 - 4,203 29,879 ------------------------------------------------------------------------- Net margin 68,511 14,655 - (3,548) 79,618 Selling, general and administrative - - - 39,070 39,070 Interest expense - - - 8,570 8,570 ------------------------------------------------------------------------- Operating income 68,511 14,655 - (51,188) 31,978 ------------------------------------------------------------------------- Capital expenditures and acquisitions(2) 42,810 44,447 - 17,318 104,575 ------------------------------------------------------------------------- Goodwill 62,280 41,317 - - 103,597 ------------------------------------------------------------------------- Total assets 561,233 310,799 - 36,137 908,169 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the Nine Months Ended September 30, 2006 Consol- Inter- Unallo- idated Western Eastern segment cated(3) Total ------------------------------------------------------------------------- External revenue 259,608 58,935 - - 318,543 Inter segment revenue(1) - - - - - Operating expense 155,670 41,228 - - 196,898 Amortization and accretion expense 15,186 7,721 - 1,435 24,342 ------------------------------------------------------------------------- Net margin 88,752 9,986 - (1,435) 97,303 Selling, general and administrative - - - 31,380 31,380 Interest expense - - - 5,241 5,241 ------------------------------------------------------------------------- Operating income - continuing operations 88,752 9,986 - (38,056) 60,682 ------------------------------------------------------------------------- Operating income - discontinued operations - 1,657 - - 1,657 ------------------------------------------------------------------------- Capital expenditures and acquisitions(2) 57,263 150,655 - 10,605 218,523 ------------------------------------------------------------------------- Goodwill 53,710 23,273 - - 76,983 ------------------------------------------------------------------------- Total assets 485,401 192,144 - 30,768 708,313 ------------------------------------------------------------------------- (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 further information:

For further information: Ronald L. Sifton, Executive Vice President &
CFO, Phone: (403) 806-7020; Anne M. MacMicken, Director, Investor Relations,
Phone: (403) 806-7019


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