Newalta Reports Fourth Quarter and Year End 2014 Results
(firmenpresse) - CALGARY, ALBERTA -- (Marketwired) -- 02/19/15 -- Print version:
Newalta Corporation (Newalta) (TSX: NAL) today reported financial results for the three and twelve months ended December 31, 2014 for its Continuing Operations, and its Combined Operations which include its Industrial Division, treated for accounting purposes as "Discontinued Operations" as a result of an agreement to divest it for $300 million in cash proceeds.
FINANCIAL HIGHLIGHTS(1)
Management Commentary
"Financial results for both 2014 and the final quarter of the year were strong," said John Barkhouse, President and CEO. "Even though the decline in the price of oil began to affect us at year end, Continuing Operations generated Adjusted EBITDA growth of 35% on a year-over-year basis in the fourth quarter and 25% for the year, reflecting excellent returns from recent growth investments in Heavy Oil contracts, U.S. expansion and Oilfield operations.
"While there is no question that the external environment poses a significant challenge to near-term profitability for our customers and Newalta," said Mr. Barkhouse, "our broadly positive financial performance in 2014, combined with cash proceeds from the divestiture of our Industrial Division this quarter, serve to enhance our strength at a time in the energy market cycle when unique opportunities will be presented."
Under Mr. Barkhouse''s leadership, Newalta is developing a new strategic plan for implementation this spring that will allow Newalta to capitalize on targeted opportunities for value creation in a systematic and accelerated fashion. "Our strategy will include detailed plans for organic growth complemented by accretive acquisitions in the energy services sector to drive performance at a rapid pace now and over the longer haul. For 2015, we will look aggressively at accretive acquisitions that will provide greater access to oil and gas waste streams where we can apply our technologies, people and processes."
Newalta has a resilient business model, strong balance sheet, a broad spectrum of energy service solutions for both exploration and production applications and strong customer relationships with many of the world''s leading energy companies. "These strengths are important at all times but especially in current market conditions. Now, as a pure energy services company, we are ready for the challenges ahead."
2014 Highlights
During the year, Newalta made significant strategic progress. Notably we:
Combined Operations Financial Highlights
Results of Combined Operations
Q4 2014 Combined Adjusted EBITDA was $39.8 million, up 21% over prior year. Net loss from Combined Operations increased from $10.3 million in 2013 to $157.6 million due largely to impairment and restructuring and other related costs.
2014 Combined Adjusted EBITDA grew 18% to $177.0 million, over prior year. Net loss from Combined Operations decreased from earnings of $21.9 million in 2013 to a net loss of $142.7 million due primarily to the net loss from Discontinued Operations of $130.3 million.
Results of Continuing Operations
Fourth quarter Adjusted EBITDA from Continuing Operations grew 35% to $30.2 million over prior year. Net loss from continuing operations for the quarter was $17.9 million, down from net earnings of $2.3 million in prior year. The decrease reflected higher Adjusted EBITDA offset by higher net finance charges, restructuring and other related charges, and non-cash impairment.
2014 Adjusted EBITDA was $128.9 million, up 25% over prior year. 2014 results reflect growth in both our New Markets and Oilfield divisions, partially offset by higher Adjusted SG&A. Net loss from continuing operations for the year was $12.4 million compared to net earnings of $24.3 million in prior year, with the change year over year due largely to the same factors as the quarter. 2014 Adjusted net earnings, which exclude stock-based compensation, embedded derivative loss, impairment and restructuring and other related costs, was up 21% over prior year.
Capital Budget Update
In light of current market conditions, we have reduced our 2015 capital budget from $190.0 million as previously reported to $105.0 million with $90.0 million allocated directly to growth projects. We will however continue to monitor market opportunities and will leverage our financial flexibility to invest in additional opportunities as they arise. In the near term, we will focus on completing our 2014 carryover projects, including our new full scale Heavy Oil facility in Fort McMurray, Alberta and satellite facilities in both Canada and the U.S., on supporting contract opportunities, and on securing permits for satellite expansion. We are developing an inventory of locations and permits for expansion in the U.S. and in western Canada. We have refined our satellite execution model and have a pool of equipment ready to be deployed as conditions improve. Once permits are secured for a location, a satellite can be fully operational within 90 to 120 days. By building an inventory of permits, we can capitalize on our modular processing model and drive returns into 2016. All carryover projects are expected to be commissioned and contributing cash flow in 2015. The 2015 capital program will be funded from both funds from operations and net proceeds from the sale of the Industrial Division.
Other Highlights
Newalta''s Board of Directors declared a fourth quarter dividend of $0.125 per share ($0.50 per share annualized), paid January 15, 2015, to shareholders of record as at December 31, 2014.
In the fourth quarter, we secured an operating contract with Shell to extend operations at the first MFT plant and to operate the second MFT plant at its Jackpine Mine. This follows the construction contract for Shell''s second MFT plant that we were awarded in the second quarter.
The Total Debt to EBITDA ratio was 2.78 in Q4 2014, down from 2.85 in Q3 2014 (2.54 in Q4 2013). Upon closing, the proceeds from the sale of the Industrial Division will immediately be used to pay down debt. Our Net Debt leverage will be under 2.0 at the close of the transaction. Net Debt is defined as the sum of the amount drawn on the Credit Facility, Letters of Credit and Senior Unsecured Debentures less Cash on hand.
Capital expenditures for Continuing Operations for the three months and year ended December 31, 2014, were $78.0 million and $171.8 million, respectively, with growth capital of $146.2 million. Growth capital expenditures primarily related to satellite facilities, onsite contracts, onsite equipment pool, and expansion at our facilities. Total capital expenditures from Combined Operations were $192.4 million, with growth capital expenditures of $154.9 million. Capital expenditures were funded from funds from operations and our Credit Facility.
Recent Developments
During the fourth quarter, we entered into an agreement with Revolution to sell our Industrial Division for cash proceeds of $300 million. This agreement is the result of the rationalization plan associated with the comprehensive review of the Industrial Division announced in December 2013 and the strategic review initiated in April 2014. The transaction is expected to close in the first quarter of 2015.
In February 2015, we announced a number of cost reduction and rationalization initiatives to maximize business efficiencies and drive improved margins. These actions are the result of a comprehensive review of our organization post the planned divestiture of our Industrial Division and current market conditions. Actions taken included the elimination of 180 positions, office space consolidation, and general reductions in all expense categories including discretionary items. In addition to the overhead reductions, we announced the suspension of company-matching payments to the employee savings plans and implemented hiring and salary freezes.
As a result of these actions, we expect to realize in excess of $25 million in annualized ongoing savings and more than $20 million in 2015. Approximately 70% of the savings will be realized in corporate overhead, with the balance in operations. We expect to incur approximately $10 million in one-time restructuring and other related costs associated with these initiatives in the first quarter of 2015, excluding any non-cash charges associated with office space consolidation. We continue to review initiatives for cost reduction and margin efficiencies across the organization.
Quarterly Conference Call
Management will hold a conference call on Friday, February 20, 2015 at 11:00 a.m. (ET) to discuss Newalta''s performance for the quarter and year ended December 31, 2014. To participate in the teleconference, please call 416-340-2218 or 866-223-7781. To access the simultaneous webcast, please visit . For those unable to listen to the live call, a taped broadcast will be available at and, until midnight on Friday, February 27, 2015 by dialing 800-408-3053 and entering passcode 6333073 followed by the pound sign.
About Newalta
Newalta is North America''s leading provider of innovative, engineered environmental solutions that enable customers to reduce disposal, enhance recycling and recover valuable resources from industrial residues. We serve customers onsite directly at their operations and through a network of locations in Canada and the U.S. Our proven processes and excellent record of safety make us the first choice provider of sustainability enhancing services to oil, natural gas, petrochemical, refining, lead, manufacturing and mining markets. With a skilled team of people, two decade track record of profitable expansion and commitment to commercializing new solutions, Newalta is positioned for sustained future growth and improvement. Newalta trades on the TSX as NAL. For more information, visit .
The press release contains certain statements that constitute forward-looking information. Please refer to the attached Management''s Discussion and Analysis for further discussion of assumptions and risks related to this forward looking information.
NEWALTA CORPORATION
MANAGEMENT''S DISCUSSION AND ANALYSIS
Three months and year ended December 31, 2014 and 2013
Industrial Sale
On December 23, 2014, we entered into an agreement with Revolution Acquisition LP (Revolution), a Birch Hill Equity Partners company, to sell our Industrial Division for cash proceeds of $300 million plus the assumption of certain decommissioning liabilities. The sale proceeds are subject to customary purchase price adjustments related to closing balance sheet working capital and capital expenditure targets. The transaction is expected to close in the first quarter of 2015, upon satisfaction of customary closing conditions and receipt of regulatory approvals. As a result of this agreement, we have defined our Industrial Division as "Discontinued Operations", the remaining operations as "Continuing Operations" and the total Discontinued Operations and Continuing Operations as "Combined Operations". In accordance with the requirements of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, income and expenses and cash flow provided and used associated with the business to be sold have been classified as Discontinued Operations in our Consolidated Statements of Operations and Consolidated Statements of Cash Flows. Associated assets and liabilities have been classified as held for sale in our Consolidated Statements of Financial Position as at December 31, 2014 and the comparative information has not restated. Unless otherwise noted, commentary and the financial results will refer to Continuing Operations.
FORWARD LOOKING STATEMENTS
Certain statements contained in this document constitute "forward-looking information" as defined under applicable securities laws. When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", "potential", "strategy", "target", and similar expressions, as they relate to Newalta Corporation and the subsidiaries of Newalta Corporation, or their management, are intended to identify forward-looking information. In particular, forward-looking information included or incorporated by reference in this document include statements with respect to:
Expected future financial and operating performance and related assumptions are set out under the "Outlook" section. Our Capital budget and divisional allocation is set out under the "Capital Expenditures" section. Such information reflects our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation:
During the fourth quarter, we reached an agreement to sell our Industrial Division. This agreement was the result of the comprehensive review of the Industrial Division announced in December 2013 (Rationalization Plan) and the strategic review initiated in the second quarter of 2014 (Strategic Review). As such, forward-looking information in this document is made subject to any changes upon closing of the transaction.
By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking information will not occur. Many other factors could also cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking information and readers are cautioned that the foregoing list of factors is not exhaustive. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Furthermore, the forward-looking information contained in this document is made as of the date of this document and, in each case, is expressly qualified by this cautionary statement. Unless otherwise required by law, we do not intend, or assume any obligation, to update any such forward-looking information.
RECONCILIATION OF NON-GAAP MEASURES
This Management''s Discussion and Analysis (MD&A) contains references to certain financial measures, including some that do not have any standardized meaning prescribed by International Financial Reporting Standards (IFRS or GAAP) and may not be comparable to similar measures presented by other corporations or entities. These financial measures are identified and defined below.
"EBITDA", "EBITDA per share", "Adjusted EBITDA", and "Adjusted EBITDA per share" are measures of our operating profitability. EBITDA provides an indication of the results generated by our principal business activities prior to how these activities are financed, assets are amortized or impaired, or how the results are taxed in various jurisdictions. In addition, Adjusted EBITDA provides an indication of the results generated by our principal business activities prior to recognizing stock-based compensation and restructuring and other related costs. Adjusted EBITDA provides improved continuity with respect to the comparison of our operating results over a period of time. Stock-based compensation, a component of employee remuneration, can vary significantly with changes in the price of our Shares while restructuring and other related costs are outside of our normal course of business. Restructuring and other related costs are charges primarily attributable to the Rationalization Plan associated with the comprehensive review announced in December 2013 and the Strategic Review. EBITDA and Adjusted EBITDA are derived from the consolidated statements of operations and comprehensive income. EBITDA per share and Adjusted EBITDA per share are derived by dividing EBITDA and Adjusted EBITDA by the basic weighted average number of Shares.
EBITDA and Adjusted EBITDA from Continuing Operations are calculated as follows:
"Combined Adjusted EBITDA" provides an indication of the results generated by both our Continuing Operations and Discontinued Operations prior to how these operations are financed, assets are amortized or impaired, stock-based compensation is recognized or how the results are taxed in various jurisdictions. Combined Adjusted EBITDA is derived from the consolidated statements of operations and comprehensive income as follows:
"Divisional EBITDA" provides an indication of the results generated by the division''s principal business activities prior to how the assets are amortized, and before allocation of Selling, general and administrative costs (SG&A). Divisional EBITDA is the sum of gross profit and amortization for the respective division. Divisional EBITDA is derived from gross profit as follows:
"Adjusted net earnings" and "Adjusted net earnings per share" are measures of our profitability from Continuing Operations. Adjusted net earnings from continuing operations (Adjusted Net Earnings) provides an indication of the results generated by our principal business activities prior to recognizing stock-based compensation recovery or expense, the gain or loss on embedded derivatives, impairment and restructuring and other related charges. Stock-based compensation expense, a component of employee remuneration, can vary significantly with changes in the price of our Shares. The loss (gain) on the embedded derivative is a result of the change in the trading price of the debentures and the volatility of the applicable bond market. Impairment and restructuring and other related costs are related to initiatives outside of our normal course of business. As such, Adjusted net earnings provides improved continuity with respect to the comparison of our results over a period of time. Adjusted net earnings per share is derived by dividing Adjusted net earnings by the basic weighted average number of Shares.
"Book value per share" is used to assist management and investors in evaluating the book value compared to the market value.
"Cash Basis Return on Capital" (ROC - Cash) is used to assist management and investors in measuring the returns realized at the consolidated level from capital employed. ROC - Cash is derived from Adjusted EBITDA less cash stock-based compensation, cash taxes and maintenance capital divided by the average of the beginning and ending balances of our total assets less current liabilities for the period (Net Assets).
"Divisional Return on Capital" is used to assist management and investors in measuring the returns realized at the Divisional level from capital employed. It is derived from Divisional EBITDA divided by the average of the beginning and ending balances of assets employed for the period.
"Net Debt" is defined as sum of amount drawn on the Credit Facility, Letters of Credit and Senior Unsecured Debentures less Cash on hand.
"Funds from operations" is used to assist management and investors in analyzing cash flow and leverage from Continuing Operations. Funds from operations as presented is not intended to represent operating funds from operations or operating profits for the period, nor should it be viewed as an alternative to cash flow from operating activities, net earnings or other measures of financial performance calculated in accordance with IFRS. Funds from operations is derived from the consolidated statements of cash flows and is calculated as follows:
References to EBITDA, EBITDA per share, Adjusted EBITDA, Adjusted EBITDA per share, Divisional EBITDA, Adjusted net earnings, Adjusted net earnings per share, ROC - Cash, Divisional Return on Capital, Net Debt, Funds from operations and Funds from operations per share throughout this document have the meanings set out above. Adjusted SG&A has the meaning described in the section titled "Corporate and Other" and in section "Discontinued Operations".
The following discussion and analysis should be read in conjunction with (i) the unaudited consolidated financial statements of Newalta, and the notes thereto (Financial Statements), for the three months and year ended December 31, 2014 and 2013, (ii) the Financial Statements of Newalta and notes thereto and MD&A of Newalta for the year ended December 31, 2013 and 2012, (iii) the most recently filed Annual Information Form of Newalta and (iv) the unaudited condensed consolidated interim financial statements of Newalta and the notes thereto and MD&A for the quarters ended March 31, 2014, June 30, 2014, and September 30, 2014. This information is available at SEDAR (). Information for the three months and year ended December 31, 2014 along with comparative information for 2013, is provided.
This MD&A is dated February 19, 2015, and takes into consideration information available up to that date. All financial figures are unaudited. Throughout this document, unless otherwise stated, all currency is stated in Canadian dollars, MT is defined as "tonnes" or "metric tons", and n/m indicates the percentage change is not meaningful.
SELECTED ANNUAL FINANCIAL INFORMATION (1)
NEWALTA - WHO WE ARE
Newalta is North America''s leading provider of innovative, engineered environmental solutions that enable customers to reduce disposal, enhance recycling and recover valuable resources from industrial residues. We serve customers onsite directly at their operations and through a network of locations in Canada and the U.S. Our proven processes and excellent record of safety make us the first choice provider of sustainability enhancing services to oil, natural gas, petrochemical, refining, lead, manufacturing and mining markets. With a skilled team of people, a two decade track record of profitable expansion and commitment to commercializing new solutions, Newalta is positioned for sustained future growth and improvement.
STRATEGY
2014 was a year of change and growth for Newalta.
As we enter 2015, we will continue to assess our current business model and streamline our organizational structure to align with a more cohesive service offering. We will refresh our 5 year strategy for the business and will communicate the complete strategy in May of this year.
2014 IN REVIEW
RISKS TO OUR STRATEGY
While we remain optimistic about our long-term outlook, we are subject to a number of risks and uncertainties in carrying out our activities. For further discussion on our Risk Management program, refer to the "Risk Management" section. A complete list of our risk factors is disclosed in our most recently filed Annual Information Form.
In December 2014, we entered into an agreement to sell our Industrial Division. As a result of this agreement, we have defined the Industrial Division as "Discontinued Operations", the remaining operations as "Continuing Operations" and the total Discontinued Operations and Continuing Operations as "Combined Operations." Unless otherwise noted, commentary and the financial results will refer to Continuing Operations.
CORPORATE OVERVIEW
2014 was a year of change and growth for Newalta. We delivered on our plans to grow our energy services business and to rationalize and divest the Industrial Division. During the fourth quarter, we entered into an agreement with Revolution to sell our Industrial Division for cash proceeds of $300 million. This agreement is the result of the comprehensive review of the Industrial division announced in December 2013 (Rationalization Plan) and the Strategic Review initiated in April 2014. We intend to use the proceeds to capitalize on our strong market position and further strengthen the balance sheet. Proceeds from the sale will immediately be used to pay down debt. We continue to actively pursue acquisitions where we can add meaningful value and further advance our business strategy.
Combined Operations
Combined Revenue and Combined Adjusted EBITDA ($ Millions):
Q4 2014 Combined Adjusted EBITDA was $39.8 million, up 21% over prior year. Growth from Continuing Operations was offset by lower contributions from Discontinued Operations. Net loss from Combined Operations increased from $10.3 million in 2013 to $157.6 million due largely to impairment and restructuring and other related costs.
2014 Combined Adjusted EBITDA grew 18% to $177.0 million, over prior year. Growth in Continuing Operations and savings realized from the Rationalization Plan were offset by weaker performance in Discontinued Operations. Combined results for 2014 were below guidance due to weaker than expected performance from our Discontinued Operations and the sharp decline in crude oil prices in the fourth quarter. Net loss from combined operations decreased from earnings of $21.9 million in 2013 to a net loss of $142.7 million due primarily to the Net loss from Discontinued Operations of $130.3 million. Restructuring and other related costs from Combined Operations for the year were $15.5 million, above guidance due to the recognition of onerous leases for Industrial properties retained by Newalta that will no longer be in use.
Restructuring and other related costs
Combined Operations Adjusted SG&A before non-recurring items was $88.9 million or 10.4% of revenue compared to $85.1 million or 10.9% of revenue in prior year. Increased costs to support U.S. expansion along with executive recruitment and associated charges in Continuing Operations were partially offset by the savings realized from the Rationalization Plan.
Capital expenditures from Combined Operations for the three and twelve months ended December 31, 2014 were $85.3 million and $192.4 million, respectively, focused primarily on growth projects in New Markets and Oilfield.
Continuing Operations
Fourth quarter Adjusted EBITDA from continuing operations grew 35% to $30.2 million over prior year. Growth was driven primarily by returns from our growth capital investments in New Markets. Net loss from continuing operations for the quarter was $17.9 million, down from net earnings of $2.3 million in prior year. The decrease reflected higher Adjusted EBITDA offset by higher net finance charges, restructuring and other related charges, and impairment. For further information on the impairment charge, see "Critical Accounting Estimates".
2014 Adjusted EBITDA was $128.9 million, up 25% over prior year. 2014 results reflect growth in both our New Markets and Oilfield divisions, partially offset by higher Adjusted SG&A. As a percentage of revenue, Adjusted SG&A before non-recurring items decreased from 16.4% in 2013 to 14.9% in 2014 as a result of cost management. Contracts generated 24% of the revenue from Continuing Operations. Net loss from continuing operations for the year was $12.4 million compared to net earnings of $24.3 million in prior year, with the change year over year due largely to the same factors as the quarter. 2014 Adjusted net earnings, which excludes stock-based compensation, embedded derivative loss, impairment and restructuring and other related costs, was up 21% over prior year.
Continuing Operations Revenue and Continuing Operations Adjusted EBITDA ($ Millions):
Q4 2014 New Markets revenue and gross profit increased 31% and 12%, respectively, to $82.1 million and $19.7 million compared to prior year. Performance was driven primarily by returns from our growth capital investments, specifically our MFT contracts and U.S. expansion, and increased drill site utilization in the U.S. 2014 revenue and gross profit increased by 27% and 14%, respectively, to $289.0 million and $83.5 million compared to prior year. 2014 results reflect similar factors as the quarter and increased activity at our Heavy Oil facilities.
Q4 2014 Oilfield revenue and gross profit increased 7% and 4%, respectively, to $51.0 million and $17.6 million compared to prior year. Performance was driven by increased contributions from our facilities and higher drill site utilization. 2014 revenue and gross profit increased 12% and 10%, respectively, to $206.3 million and $78.7 million compared to prior year. Performance was driven by returns from growth capital investments which resulted in ongoing productivity improvements as well as increased demand at our facilities and for our drill site services.
Capital expenditures from Continuing Operations for the three and twelve months ended December 31, 2014 were $78.0 million and $171.8 million, respectively, focused primarily on growth projects in New Markets and Oilfield.
Discontinued Operations
Q4 2014 Discontinued Operations revenue was $96.0 million, flat to prior year, while gross profit from Discontinued Operations was $8.9 million, down 23%. Gains at Ville Ste-Catherine (VSC) coupled with the savings realized from the Rationalization Plan were offset by lower contributions from our eastern processing facilities and our oil recycling services (ORS). Net loss from Discontinued Operations for the quarter and the year were $139.7 million and $130.3 million, respectively. The net loss was primarily impacted by the $185.8 million impairment loss recognized in the fourth quarter based on the expected sale proceeds and estimated transaction costs (Net Sale Proceeds). 2014 Discontinued Operations revenue and gross profit were flat to prior year.
In 2014, we realized approximately $9.4 million in savings associated with the Rationalization Plan. Including costs associated with the Strategic Review, we incurred approximately $8.6 million in one-time restructuring and other related costs in Discontinued Operations.
RECENT DEVELOPMENTS
Rationalization Initiatives
In February 2015, we announced a number of cost reduction and rationalization initiatives to maximize business efficiencies and drive improved margins. These actions are the result of a comprehensive review of our organization post the planned divestiture of our Industrial Division and current market conditions. The objective of this review was to drive improved bottom line performance, overall speed and agility and to align the business with market conditions in 2015.
We expect to realize in excess of $25 million in annualized ongoing savings and more than $20 million in 2015. Approximately 70% of the savings will be realized in corporate overhead, with the balance in operations. We expect to incur approximately $10 million in one-time restructuring and other related costs associated with these initiatives in the first quarter of 2015, excluding any non-cash charges associated with office space consolidation. We continue to review initiatives for cost reduction and margin efficiencies across the organization.
Capital Budget
In light of current market conditions, we have reduced our capital budget for 2015 to $105 million, with $90.0 million in growth capital. Our priority will be to complete our 2014 carryover projects, which are expected to contribute in the second half of 2015. We will remain disciplined and measured in assessing investment opportunities and deployment of capital in the quarters ahead. We will continue to fund contract opportunities, and have the financial flexibility to increase our capital spending as market conditions improve.
Other items
On February 19, 2015, the Board of Directors elected to suspend the Dividend Reinvestment Plan (DRIP), effective with the dividends payable on April 15, 2015, to eliminate the dilution associated with the issuance of Shares through the DRIP, and to reflect our improved liquidity following the completion of the Industrial divestiture.
The following section contains forward looking information as it outlines our Outlook for 2015. Our Outlook is based on several key assumptions including growth capital contributions, commodity prices and activity levels of the industries we serve. Changes to these assumptions could cause our actual results to differ materially. Please refer to the Sensitivities section for a summary of the key metrics.
Outlook
We enter 2015 well positioned to confront challenging market conditions, with approximately $130 million in Adjusted EBITDA from Continuing Operations in the prior year to set the foundation. A number of factors are expected to have direct and indirect impact on our performance through the year and are outlined below.
We have a resilient business model and a strong balance sheet to weather the current volatile market. Management of our debt leverage and optimal use of our cash and capital are of the highest priority. We will remain well within our debt covenants throughout 2015. With the sale of Industrial to be completed in Q1 2015, and our business model making the final transition to a pure play, lean and agile energy services company, we believe we are well positioned to deliver strong returns. In a normalized US$70 to US$75 WTI oil price environment, supported by actions taken to date to drive margin efficiencies across the organization, and reflecting full returns from our 2014 growth capital, our business model would be expected to generate in excess of $170 million Adjusted EBITDA with an Adjusted EBITDA margin in excess of 30%.
RESULTS OF OPERATIONS - NEW MARKETS
OVERVIEW
New Markets includes a network of more than 15 locations with over 400 employees in western Canada and the U.S. New Markets'' services involve the mobilization of equipment and our people to manage waste on our customers'' sites; the processing of oilfield-generated wastes and the sale of recovered crude oil to our account at our locations. New Markets is organized into the Heavy Oil and U.S. business units.
We operate onsite services in both Heavy Oil and the U.S. Our onsite services, excluding drill site, generally follow a similar sales cycle. We establish our market position through the execution of short-term projects which ideally lead to longer term contracts, providing a more stable cash flow. The cycle to establish longer term contracts can be between 18 months to three years. Characteristics of projects and contracts are:
The business units contributed the following to division revenue:
New Markets Revenue and New Markets Gross Profit ($ Millions):
The following table compares New Market''s results for the periods indicated:
New Markets Q4 2014 revenue and gross profit increased 31% and 12%, respectively, to $82.1 million and $19.7 million compared to prior year. Performance was driven primarily by returns from our growth capital investments, specifically our MFT contracts and U.S. expansion, and increased drill site utilization. Q4 2014 gross profit as a percentage of revenue was 24%, down from 28% in the prior year, due to the timing of MFT contracts and to a shift in waste mix at our facilities.
2014 revenue and gross profit increased by 27% and 14%, respectively, compared to prior year. 2014 results reflect similar factors as the quarter and increased activity at our Heavy Oil facilities. U.S. revenue increased 44%. Compared to prior year, contract revenue increased 14%, generating 42% of divisional revenue (2013: 46%).
In 2014, we made substantial progress on our New Markets growth plans, specifically:
HEAVY OIL
Heavy Oil is dedicated to serving both the oil sands in Alberta and the heavy oil region in Alberta and Saskatchewan. We began working in the heavy oil industry 19 years ago when we introduced centrifugation as a solution to treat waste oil emulsions. This business has expanded from processing heavy oil waste at facilities in our network to long-term contracts to process waste on our customers'' site. Leveraging our facilities as staging areas, we deliver a broad range of specialized services at numerous customer sites.
Heavy Oil revenue is primarily generated from:
Revenue for the quarter increased 17% compared to prior year driven by returns from growth capital invested, specifically the MFT contracts. 2014 revenue increased by 21% compared to prior year due to the same factors as the quarter and were also positively impacted by increased contributions from our facilities. Recovered crude oil sales increased by 21% due to increased volumes and higher crude oil prices.
Recovered Crude Oil (''000 BBL) and Average WTI and Heavy Oil Price Received (CDN$):
U.S.
We entered the U.S. market in 2006 with our drill site services. We have since leveraged our drill site relationships to expand our offerings to include onsite work for our customers and establish satellite facilities.
U.S. revenue is primarily generated from:
Revenue in Q4 2014 increased 78% compared to prior year. This significant improvement was driven by contributions from our new satellites coupled with higher drill site revenue. Our two Bakken satellite facilities, established in late 2013, are fully contributing, in line with our expectations. Q4 2014 drill site utilization was 68% compared to 48% in Q4 2013.
2014 revenue increased 44% compared to 2013 and was impacted by the same factors as the quarter. Full year results were also tempered by lower drill site utilization in the first quarter of 2014.
RESULTS OF OPERATIONS - OILFIELD DIVISION
OVERVIEW
Oilfield includes an integrated network of over 30 locations with more than 450 employees to service key markets in British Columbia, Alberta, Saskatchewan and Manitoba.
Oilfield generates revenue from:
Oilfield Revenue and Oilfield Gross Profit ($ Millions):
The following table compares Oilfield''s results for the periods indicated:
Q4 2014 Oilfield revenue and gross profit increased 7% and 4%, respectively, compared to prior year. Performance was driven by increased contributions from our facilities and higher drill site utilization. Drilling activity in the quarter was relatively flat, while Canadian Light Sweet (CLS) dipped 12% over prior year. The impact of these factors was mitigated by productivity improvements and a shift in the waste mix received at our facilities. Drill site utilization increased to 55%, up from 21% in the prior year.
2014 revenue and gross profit increased by 12% and 10%, respectively, compared to prior year. Performance was driven by returns from growth capital investments which resulted in ongoing productivity improvements as well as increased demand at our facilities and for our drill site services. 2014 revenue growth of 12% was slightly below our target of 15% due to weaker than expected crude oil prices and activity in the fourth quarter.
In 2014, we made progress on our Oilfield growth plans, specifically:
OILFIELD FACILITIES METRICS AND INDUSTRY DRIVERS
Recovered Crude Oil (''000 BBL), Average WTI and Oilfield Price Received (CDN$) and Metres Drilled in WCSB:
CORPORATE AND OTHER
The above table removes all stock-based compensation, amortization and non-recurring items from SG&A to provide improved transparency with respect to the comparison of our results. In addition, SG&A includes research and development expenses related to our Technical Development group.
Adjusted SG&A before non-recurring items improved to 15.5% of revenue in Q4 2014 from 16.6% in the prior year period. For 2014, this ratio improved to 14.9% from 16.4% in prior year. The improvements reflect cost control initiatives, partially offset by executive recruitment and associated charges.
Stock-based compensation fluctuates based on the effects of vesting, volatility in our share price and dividend rate changes.
Compared to Q4 2013, finance charges were flat. 2014 finance charges increased due to the early redemption of the Series 1 Senior Unsecured Debentures. In Q2, we used the net proceeds from the issuance of the Series 3 Senior Unsecured Debentures to redeem all of the outstanding Series 1 Senior Unsecured Debentures. As a result, we expensed $1.5 million in unamortized financing charges and $4.8 million for the call premium related to the Series 1 Senior Unsecured Debentures. Finance charges associated with the Series 1, Series 2 and Series 3 Senior Unsecured Debentures (collectively the "Senior Unsecured Debentures") include the annual coupon rates as well as the accretion of issue costs.
The non-cash loss on the embedded derivatives is associated with the early redemption feature for the Series 1 and Series 2 Senior Unsecured Debentures. In 2014, the increase in the non-cash loss on embedded derivatives was driven by the redemption of the Series 1 Senior Unsecured Debentures. Upon redemption, the fair value of the embedded derivative related to these debentures was extinguished and a non-recurring loss of $17.5 million was recognized. Gains or losses on the embedded derivatives have no impact on current or future cash flows and are primarily impacted by the risk-free rate, market volatility, and our credit spread. See Note 20 to the Financial Statements for further information.
In Q4, deferred tax recovery was $3.8 million compared to deferred tax expense of $0.7 million in the prior year. The decrease was driven primarily by lower pre-tax income as a result of impairment and restructuring and other related costs. The 2014 effective rate was (31.6%) compared to 17.9% in 2013. The change in the effective tax rate was driven primarily by the non-deductible loss on embedded derivatives. The effective rate is impacted by several other factors including: non-deductible items such as stock-based compensation, changes in statutory and other rates, and changes in estimates in respect of prior year tax pools. Loss carry forwards were approximately $147 million at December 31, 2014. We do not anticipate paying any significant income tax until 2017.
RESTRUCTURING AND OTHER RELATED COSTS
Restructuring and other related costs of $6.4 million and $7.0 million for the quarter and the year, respectively, were primarily driven by the recognition of onerous leases for Industrial properties retained by Newalta that will no longer be in use.
RESULTS OF DISCONTINUED OPERATIONS
OVERVIEW
On December 23, 2014, we entered into an agreement with Revolution, to sell our Industrial Division for cash proceeds of $300 million plus the assumption of certain decommissioning liabilities. We will retain the land at VSC and the associated decommissioning liability. The present value of the obligation is $12.1 million. The sale proceeds are subject to customary purchase price adjustments related to closing balance sheet working capital and capital expenditure targets. The transaction is expected to close in the first quarter of 2015, upon satisfaction of customary closing conditions and receipt of regulatory approvals. Based on the estimated Net Sale Proceeds, an impairment loss of $185.8 million was recorded within Discontinued Operations in our Consolidated Statements of Operations.
The Industrial Division includes an integrated network of more than 30 locations with over 900 employees to service key market areas across Canada. This division features Canada''s largest lead-acid battery recycling facility located at Ville Ste-Catherine, Quebec, an engineered non-hazardous solid waste landfill located at Stoney Creek, Ontario, and a used oil re-refining facility in North Vancouver. We also provide onsite services, engaged primarily in short-term or event-based projects, which will vary from quarter-to-quarter.
Industrial is organized into Western Industrial and Eastern Industrial business units. The business units contributed the following to division revenue:
The following table compares results from Discontinued Operations for the periods indicated:
Compared to Q4 2013, Industrial revenue was flat while gross profit was down 23%. Gains at VSC coupled with the savings realized from the Rationalization Plan were offset by lower contributions from our eastern processing facilities and ORS. VSC results were driven largely by a shift towards direct sales and a more favorable foreign exchange rate, with revenue increasing 26% over prior year. We realized approximately $2.4 million in the quarter and $9.4 million in the year in cash savings from the Rationalization plan in Discontinued Operations. SG&A for the quarter and the year decreased 31% and 19%, respectively, reflecting approximately one third of the total savings associated with the Rationalization Plan. Net loss from Discontinued Operations of $139.7 million was driven by the $185.8 million impairment recognized in the quarter based on the estimated Net Sale Proceeds. See Note 4 to the Financial Statements for further information.
2014 revenue and gross profit were flat to prior year. Savings realized from the Rationalization Plan, gains from favorable commodity prices and increased demand for our eastern onsite services were offset by lower waste receipts at the Stoney Creek Landfill (SCL) and reduced contributions from our processing facilities and ORS. 2014 VSC revenue increased 7% compared to prior year driven by a more favourable foreign exchange rate. Net loss from Discontinued Operations of $130.3 million was driven by the $185.8 million impairment and by restructuring costs. Restructuring and other related costs for the year were $8.6 million. Approximately 40% of these costs related to the Strategic Review initiated in April with the balance related to the Rationalization Plan. In Q1 2014, we initiated the Rationalization Plan with the closure of four facilities, overhead reductions and initiatives to redirect certain lines of businesses.
LIQUIDITY AND CAPITAL RESOURCES
The term liquidity refers to the speed with which a company''s assets can be converted into cash, or its ability to do so, as well as cash on hand. Liquidity risk refers to the risk that we will encounter difficulty in meeting obligations associated with financial obligations that are settled by cash or another financial asset. Our liquidity risk may arise due to general day-to-day cash requirements and in the management of our assets, liabilities and capital resources. Liquidity risk is managed against our financial leverage to meet obligations and commitments in a balanced manner. For further information on liquidity risk management, refer to Note 20 to the Financial Statements.
Our debt capital structure is as follows:
We continue to focus on managing our working capital accounts while supporting our growth. Working capital from Continuing Operations at December 31, 2014 was negative $51.6 million (December 31, 2013: negative $42.3 million). Working capital reflected a decrease in accounts and other receivables due to timing of receipts, as well as an increase in accounts payable and accrued liabilities due to the timing of capital expenditures. At current activity levels, working capital is expected to be sufficient to meet our ongoing commitments and operational requirements of the business. We continue to manage working capital well within our targets, commensurate with activity levels. For further information on credit risk management, refer to Note 20 to the Financial Statements.
Debt Ratings
DBRS Limited (DBRS) and Moody''s Investor Service, Inc. (Moody''s) provide a corporate and Senior Unsecured Debentures credit rating. In December, upon the announcement of an agreement to sell the Industrial Division, Moody''s reaffirmed the ratings outlined below. In light of the pending sale of Industrial, DBRS placed Newalta "Under Review, with Developing Implications." This reflects DBRS''s intent to revisit our ratings upon completion of the transaction.
SOURCES OF CASH
Our liquidity needs can be sourced in several ways including: Funds from operations, borrowings against or increases in our Credit Facility, new debt instruments, the issuance of securities from treasury, return of letters of credit or replacement of letters of credit with other types of financial security and proceeds from the sale of assets.
Credit Facility
At December 31, 2014, $77.4 million was available and undrawn to fund growth capital expenditures and for general corporate purposes, as well as to provide letters of credit to third parties for financial security up to a maximum amount of $60 million. The aggregate dollar amount of outstanding letters of credit is not categorized in the financial statements as long-term debt; however, the issued letters of credit reduce the amount available under the Credit Facility and are included in the definition of Total Debt for covenant purposes. Under the Credit Facility, surety bonds (including performance bonds) to a maximum of $125 million are excluded from the definition of Total Debt. As at December 31, 2014, surety bonds issued and outstanding related to Continuing Operations totalled $13.0 million, $51.0 million related to Combined Operations.
Effective July 15, 2014, we exercised an accordion option within our existing Credit Facility to increase it from $250 million to $280 million. Newalta may, at its option, request an extension of the Credit Facility on an annual basis. If no request is made to extend the Credit Facility, the entire amount of the outstanding indebtedness would be due in full on July 12, 2016.
Financial performance relative to the financial ratio covenants(1) under the Credit Facility(2) is reflected in the table below.
Our Total Debt was $472.2 million as at December 31, 2014, which reflected an $89.3 million increase over December 31, 2013. The Total Debt to EBITDA ratio was 2.77 in Q4 2014 down from 2.85 in Q3 2014 (2.54 in Q4 2013), and above our target of 2.50. Total Debt increased to fund our growth capital program. Throughout 2014, our covenant ratios under the Credit Facility remained well within their thresholds.
In 2015, we will manage within our covenants. Upon closing, the proceeds from the sale of the Industrial Division will immediately be used to pay down debt. Our Net Debt leverage will be under 2.0 at the close of the transaction. Net Debt is defined as sum of amount drawn on the Credit Facility, Letters of Credit and Senior Unsecured Debentures less Cash on hand (Net Debt).
Senior Unsecured Debentures
On April 1, 2014, we closed an offering of Series 3 Senior Unsecured Debentures due April 1, 2021 with an aggregate principal amount of $150 million. The debentures bear interest at the rate of 5.875% per annum, payable semi-annually in arrears. On May 1, 2014, the net proceeds from this issuance were used to redeem our Series 1 Senior Unsecured Debentures. We paid a redemption price of $129.8 million, plus $4.2 million in accrued and unpaid interest to redeem these debentures. The Series 1 Senior Unsecured Debentures were to mature on November 23, 2017.
The outstanding Senior Unsecured Debentures are unsecured senior obligations and rank equally with all other existing and future unsecured senior debt and are senior to any subordinated debt that may be issued by Newalta or any of its subsidiaries. The outstanding Senior Unsecured Debentures are effectively subordinated to all secured debt to the extent of collateral on such debt.
The trust indenture and supplemental trust indentures under which the Senior Unsecured Debentures have been issued contain certain annual restrictions and covenants that, subject to certain exceptions, limit our ability to incur additional indebtedness, pay dividends, make certain loans or investments and sell or otherwise dispose of certain assets subject to certain conditions, among other limitations.
Covenants(1) under our trust indenture include:
We will manage within our covenants throughout 2015.
USES OF CASH
Our primary uses of funds include maintenance and growth capital expenditures as well as acquisitions, payment of dividends, operating and SG&A expenses and the repayment of debt.
Capital Expenditures
"Growth capital expenditures" or "growth and acquisition capital expenditures" are capital expenditures that are intended to improve our efficiency and productivity, allow us to access new markets and diversify our business. Growth capital, or growth and acquisition capital, are reported separately from maintenance capital because these types of expenditures are discretionary. "Maintenance capital expenditures" are capital expenditures to replace and maintain depreciable assets at current service levels. Maintenance capital expenditures are reported separately from growth activity because these types of expenditures are not discretionary and are required to maintain current operating levels. On an annual basis, maintenance capital, combined with repair and maintenance expense, (included in Cost of sales), is approximately 7% of the value of property, plant and equipment. Maintenance capital and repair and maintenance expense combined, approximate amortization expense.
Capital expenditures for Continuing Operations for the periods indicated are as follows:
Capital expenditures for the three months and year ended December 31, 2014, were $78.0 million and $171.8 million, respectively. Growth capital expenditures primarily relate to satellite facilities, onsite contracts, onsite equipment pool, and expansion at our facilities. Maintenance capital expenditures relate primarily to process equipment improvements at our facilities. Total capital expenditures from Combined Operations were $192.4 million, with growth capital expenditures of $154.9 million. Capital expenditures were funded from funds from operations and our Credit Facility.
In light of current market conditions, we have reduced our 2015 capital budget to $105 million, with $90.0 million in growth capital. Growth capital will comprise of approximately $45 million for New Markets ($20 million for Heavy Oil and $25 million for U.S), $35 million for Oilfield and the remaining balance will be directed to technical development and corporate investments. Growth capital will be prioritized and allocated towards the $50.0 million in carryover projects initiated in 2014 as well as those capital projects supporting contract opportunities. Carryover projects include our new full scale Heavy Oil facility in Fort McMurray, Alberta, new oilfield satellite facilities in both Canada and the U.S., and an additional drill cuttings treatment unit. All carryover projects are expected to be commissioned and contributing cash flow in 2015. The 2015 capital program will be funded from both funds from operations and net proceeds from the sale of the Industrial Division. We will remain disciplined and measured in assessing investment opportunities and deployment of capital in the quarters ahead. We will continue to fund contract opportunities, and have the financial flexibility to increase our capital spending as market conditions improve.
In 2015, we will seek out accretive acquisition opportunities in the energy services sector that will allow us to add meaningful value, accelerate growth, and provide access to oil and gas waste streams where we can apply our technologies, people and processes to reduce waste, enhance recycling, and recover value for our customers. Our objective is to incorporate acquisition growth alongside our proven organic growth strategy to drive overall revenue and Adjusted EBITDA expansion at an accelerated pace.
We may revise the capital budget, from time-to-time, in response to changes in market conditions that materially impact our financial performance and/or investment opportunities. Management evaluates capital projects based on their internal rate of return, timing of payback, fit with our corporate strategy, and the risk associated with the projects, among other factors. Capital spending is prioritized towards projects that provide stable cash flows and where there is a high degree of certainty of completing the project on time and on budget.
Management and the Board of Directors also review corporate and divisional return on capital metrics, applying traditional definitions of Return on Capital Employed (ROCE), (where we apply Net earnings plus tax adjusted interest as the numerator and Net Assets as the denominator), as well as a ROC - Cash and Divisional ROC as one of the means to evaluate overall effectiveness of our growth capital program.
Dividends and Share Capital
In determining the dividend to be paid to our shareholders, the Board of Directors considers a number of factors, including: the forecasts for operating and financial results; maintenance and growth capital requirements; as well as market activity and conditions. After review of all factors, the Board declared $7.0 million in dividends or $0.125 per share, paid January 15, 2015, to shareholders on record as at December 31, 2014.
As at February 19, 2015, Newalta had 56,193,117 Shares outstanding, and outstanding options to purchase up to 4,852,250 Shares.
On February 19, 2015, the Board of Directors elected to suspend the Dividend Reinvestment Plan (DRIP), effective with the dividends payable on April 15, 2015, to eliminate the dilution associated with the issuance of Shares through the DRIP, and to reflect our improved liquidity following the completion of the Industrial divestiture.
Contractual Obligations
Our contractual obligations, as at December 31, 2014 were:
In total, we contributed $2.3 million to the Enertech Partnership Agreement. Newalta is contingently committed to capital contributions up to a maximum of $7.0 million over the 10 year investment period. The investment is classified as held-for-trading and is recorded in other long-term assets.
SUMMARY OF QUARTERLY RESULTS FOR COMBINED OPERATIONS
Quarterly performance is affected by, among other things, weather conditions, timing of onsite projects, the value of our products, foreign exchange rates, market demand and the timing of our growth capital investments as well as acquisitions and the contributions from those investments. Revenue from certain business units is impacted by seasonality. However, due to the diversity of our business, the impact is limited on a consolidated basis. For example, waste volumes received at our Oilfield facilities decline in the second quarter due to road bans which restrict drilling activity. This decline is offset by increased activity in our Eastern Industrial onsite business due to the aqueous nature of work performed, as well as potentially by fluctuations in the value of our products or event-based waste receipts at SCL. Quarterly results over the last eight quarters were also impacted by fluctuations in our share price, which impacts the stock-based compensation expense, non-cash gains or losses on the embedded derivatives and by commodity prices, with weaker commodity prices having a larger impact on Q1 2013, Q4 2013, Q1 2014 and Q4 2014.
Q1 2013 to Q2 2013 change:
Q2 2013 to Q3 2013 change:
Q3 2013 to Q4 2013 change:
Q4 2013 to Q1 2014 change:
Q1 2014 to Q2 2014 change:
Q2 2014 to Q3 2014 change:
Q3 2014 to Q4 2014 change:
SUMMARY OF QUARTERLY RESULTS FOR CONTINUING OPERATIONS
Results from our Continuing Operations are impacted by seasonality. In New Markets, results in the first half of the year are typically weaker than the second half. In the first quarter, cold weather impacts demand for our heavy oil onsite services and in the second quarter the increased demand for heavy oil onsite services is partially offset by road bans which restricts other activity. In Oilfield, results are weaker in the second quarter due to road bans.
Q1 2013 to Q2 2013 change:
Q2 2013 to Q3 2013 change:
Q3 2013 to Q4 2013 change:
Q4 2013 to Q1 2014 change:
Q1 2014 to Q2 2014 change:
Q2 2014 to Q3 2014 change:
Q3 2014 to Q4 2014 change:
SUPPLEMENTARY INFORMATION - NON-RECURRING CHARGES FOR CONTINUING OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance sheet arrangements.
SENSITIVITIES
Results from Continuing Operations are sensitive to changes in commodity prices for crude oil. The direct impact of these commodity prices is reflected in the revenue received from the sale of products such as crude oil. Approximately 20% of our revenue is sensitive to direct impact of commodity prices. Our results are also impacted by drilling activity. Drilling sensitivities are impacted by the area in which drilling occurs compared to areas which we operate and the drilling techniques employed. Where possible, we actively manage these impacts by strategically geographically balancing mobile assets to meet demand and shifts in activity levels where necessary.
The following table provides our estimates of fluctuations in key inputs and prices and the direct impact on revenue and Adjusted EBITDA from product sales:
In 2014, we began reporting Canadian Light Sweet as a benchmark price for conventional crude oil, replacing Edmonton Par which was discontinued.
Stock-based compensation expense is sensitive to changes in our share price. At December 31, 2014, a $1 change in our share price between $14 per share and $18 per share has approximately a $1.0 million direct impact on annual stock-based compensation reflected in SG&A from Continuing Operations. Stock-based compensation is also impacted by dividend rate changes and the effects of vesting.
RISK MANAGEMENT
To effectively manage the risk associated with our business and strategic objectives, our risk management approach continues to evolve. Our approach provides the framework to understand and address risks faced by our organization. Risk categories identified include:
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Financial Statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses for the period. Such estimates relate to unsettled transactions and events as of the date of the Financial Statements. Accordingly, actual results may differ from estimated amounts as transactions are settled in the future. Amounts recorded for amortization, accretion, future decommissioning obligations, embedded derivatives, deferred income taxes, and impairment calculations are based on estimates. By their nature, these estimates are subject to measurement uncertainty, and the impact of the difference between the actual and the estimated costs on the Financial Statements of future periods could be material.
Recoverability of Asset Carrying Values
The carrying values of all assets, including property, plant and equipment, intangibles and goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Events or changes in circumstances include items such as: significant changes in the manner in which an asset is used, including plans to restructure the operation to which an asset belongs, or plans to dispose of an asset before the previously expected date. When it is not possible to estimate the recoverable amount of an individual asset, the asset is tested as part of a CGU, which is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Judgment is applied in allocating assets into CGUs giving consideration to the level of integration between assets, shared infrastructure and the way in which management monitors operations. The carryin
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