TERVITA NOW
2018 ANNUAL REPORT
Taking the very best from our heritage and
combining it with our current strengths,
we are a strong and resilient company.
With a prudent strategy to prosper in
today’s environment while paving a path
for future success and growth, we are
steadfast in the present, while keeping our
sights on the future. This is Tervita Now.
Contents
2018 Highlights 3
President’s Message 4
Our Operations 8
Safety Matters 10
People Matters 13
Community Matters 14
Management’s Discussion and Analysis 17
Financial Statements 54
Corporate Information 99
TSX: TEV
Tervita is a leading waste management and environmental solutions provider offering waste processing, treating,
recycling, and disposal services to customers in the oil and gas, mining, and industrial sectors. We serve our customers
onsite and through a network of facilities in Canada and the United States.
For 40 years, Tervita has been focused on delivering safe and efficient solutions through all phases of a project while
minimizing impact, maximizing returns™. Our dedicated and experienced employees are trusted sustainability partners
to our clients. Safety is our top priority, it influences our actions and shapes our culture. Tervita trades on the TSX as TEV.
For more information, visit tervita.com.
COVER PHOTO: Treatment, Recovery and Disposal facility at Big Valley, AB. 2018 Highlights
In 2018, Tervita Generated Strong Growth in Revenue,
Adjusted EBITDA and Discretionary Free Cash Flow.
Key Accomplishments
• Revenue (excluding energy marketing) of $637 million
increased 26% compared to 2017
• Adjusted EBITDA of $191 million increased 22% and 16% per
share compared to 2017, with Adjusted EBITDA margin of 30%1
• Discretionary Free Cash Flow of $103 million grew 47%
compared to 2017 1, 2
• Merged with Newalta Corporation in a transformative
transaction and became publicly traded on July 24, 2018
under the ticker symbol TSX:TEV
• Achieved synergies from the Newalta transaction of $32
million on an annualized basis; continue to expect to achieve
$40 - $45 million in synergies by 2020
• Executed $56 million in growth and expansion capital
investments in 2018 focused on strong returns on invested
capital and cash flow per share growth
REVENUE
(excluding energy marketing)
$ million
ADJUSTED EBITDA1
$ million
Adjusted EBITDA Margin
DISCRETIONARY FREE CASH FLOW2
$ million
505
457
637
22%
99
30%
191
31%
156
103
70
17
2016
2017
2018
2016
2017
2018
2016
2017
2018
(1) Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted EBITDA per share and Discretionary Free Cash Flow are Non-GAAP measures. Reconciliations to GAAP
measures can be found in the “Non-GAAP Measures” section of the attached Management’s Discussion & Analysis (“MD&A”).
(2) Discretionary Free Cash Flow in 2018 is before transaction costs. 2016 Discretionary Free Cash Flow is calculated using 2017 interest paid and is before debt
restructuring costs.
TSX | TEV 3
President’s Message
Fellow Shareholders:
Tervita is now in precisely the right position,
with the proper focus and opportunities to
achieve the next level of success.
2018 was a transformative year for Tervita. Financially, we generated
strong growth in revenue, Adjusted EBITDA and Discretionary Free Cash
Flow, while significantly strengthening our business and demonstrating
resilience in a challenging environment.
We generated revenue (excluding energy marketing) of $637 million
in 2018, 26% higher than a year ago, and Adjusted EBITDA of $191
million, 22% ahead of 2017, on stable Adjusted EBITDA margins of
30%. We continued our focus on efficiencies, improving our General
and Administrative (G&A) costs to 8% compared to 10% of revenue
(excluding energy marketing) in 2017. Operationally, Tervita made
advancements in both reportable segments:
• Energy Services operations enjoyed strong contributions from our
expanded footprint with the newly acquired Newalta operations,
and higher throughput of oil volumes at our facilities supported by
strategic growth investments.
• Industrial Services operations saw contributions from acquisitions,
metals recycling growth and increases in project activity.
JOHN COOPER
President and Chief Executive Officer
We generated revenue 26% higher than a year
ago, and Adjusted EBITDA 22% ahead of 2017.
We continued our core focus and commitment to safety with Total
Recordable Injury Frequency (TRIF) improving to 0.52 from 0.66 in
2017. Although only a few examples, these accomplishments are a clear
reflection of our employees’ dedication and hard work throughout a
very busy 2018. I have great faith in our people and they continued
to impress me in 2018 by improving operating efficiencies and
productivity standards, augmenting service levels for our customers,
and increasing return on investment. Strategically, we expanded
infrastructure and services while also driving continuous improvement
across all operations.
To that end, in July 2018, we completed one of the most significant
and accretive transactions in our history: the acquisition of Newalta
Corporation that established Tervita as a leading publicly traded energy-
focused waste and environmental solutions provider in Canada.
4 TERVITA | Annual Report 2018
We are extremely pleased with the results and
the progress made with the Newalta transaction.
The integration has proceeded on track and is
delivering exactly the kind of incremental benefits
we had envisioned.
With this transaction, we generated $13 million of
synergies in 2018, ahead of our plan, which translates
to $32 million annualized. This is just the start. We
continue to expect $40 - $45 million in annualized
synergies within two years from when we closed
the merger.
We are encouraged by our results to date as a
combined company, as they demonstrate the merger
significantly enhances Tervita’s ability to generate
resilient Discretionary Free Cash Flow.
For our customers, the combined business strengthens
our ability to provide even more solutions designed
to lower their costs, improve operational sustainability
and efficiency and free up their capital to focus on
their own growth initiatives through our safe, efficient
and environmentally responsible solutions.
Tervita’s new size and scope has the potential to
deliver double-digit growth over the next two to
three years supported by a strong, self-funded
balance sheet.
On the growth side, in 2018 we invested $56 million
in growth and expansion capital investments aimed
primarily at our ability to meet growing customer
demand in the Montney and Duvernay regions in
Alberta and British Columbia. Projects included the
addition of new disposal wells at two of our Treatment
Recovery and Disposal (TRD) facilities in the Montney
to be completed and tied in during 2019; preliminary
spending towards the growth of a third TRD facility;
expanding capacity at key energy marketing locations,
and the construction of new landfill cells.
A RESILIENT BUSINESS MODEL
Tervita is an industry pioneer, having provided oilfield waste management and
disposal services to the energy sector for forty years.
We are very proud of where we are now as a public
company, with a significant footprint built over
decades. This network would be very difficult to
replicate today and represents the core of Tervita’s
suite of services.
stable Discretionary Free Cash Flow, we are able to
internally fund our growth capital program while
managing leverage.
Our extensive infrastructure is strategically located
in all the key higher activity plays in the Western
Canadian Sedimentary Basin (WCSB).
Our facility network has a strong track record of
delivering significant Adjusted EBITDA margins and
resilient stable cash flows. This is underpinned by our
exposure to oil and gas production-based customer
waste streams which represents about 63% of Energy
Services revenue, excluding energy marketing.
This stability is matched with our enviable positioning
to benefit from key industry catalysts such as Liquified
Natural Gas (LNG) development in the Montney play.
With our well-placed assets in these regions, we are
already seeing increased activity with the building of
infrastructure creating demand for our services. We are
well positioned for significant upside potential from
increased industry activity levels due to anticipated
pipeline capacity that should be coming online over
the next few years.
Tervita’s balance sheet is well capitalized and we
have a strong liquidity position. Coupled with our
We have taken steps over the past two years to
reduce costs to be competitive while providing
superior services to our customers. These steps have
focused on creating a highly efficient structure that
allows us to deliver high quality services and value
for our customers through the full oilfield lifecycle.
Because of these efforts, we have seen significant
improvements in all our key operating metrics,
including increases in Adjusted EBITDA and
Discretionary Free Cash Flow. Our reduced cost
structure also bolsters our resiliency in challenging
market conditions.
Finally, Tervita has a substantial pipeline of organic
growth capital opportunities, predominantly targeted
at our Energy Services business in high activity areas.
In addition to accretive tuck-in acquisitions, we expect
this will support future EBITDA and cash flow growth.
I am excited about the opportunities in front of
us and believe that we’ve set the foundation for
delivering value through continued optimization
and further growth.
TSX | TEV 5
STRATEGIC AGENDA
With the acquisition of Newalta complete, we
have substantial opportunities to further increase
our operating efficiencies, add to the scale of our
existing services and further expand our customer
service offerings.
We are following through on our strategies and key
objectives, including the most fundamental of all:
enhance cash flow per share and return on capital by
raising our performance standards for shareholders
and customers. In support of this goal we will:
• Optimize our core business by leveraging our
expanded infrastructure to enhance our already
strong market position in waste sheds in our
Energy Services segment; and improve profitability
through operational efficiencies and process
improvements across the organization.
• Execute on the full $40 - $45 million of annualized
synergies from the Newalta transaction and
2019 OUTLOOK
Toward the end of 2018, Canadian oil price
differentials widened significantly compared to West
Texas Intermediate (WTI) prices due to a continued
lack of pipeline takeaway capacity in Western Canada,
causing uncertainty in the market. In response,
the Government of Alberta mandated production
curtailments that have served to improve Canadian
commodity pricing and reduce volatility. We expect
Canadian price differentials to stabilize in 2019,
providing opportunities to attract and optimize
oil volumes throughout our expansive network of
facilities while continuing to assist our customers to
maximize the price they receive for their products. We
are already seeing stability in our markets in 2019.
With 63% of Tervita’s 2018 Energy Services’ revenue
(excluding energy marketing) coming from stable
oil and gas production-related activities, our
Energy Services business remains resilient even in a
challenging environment.
We remain focused on evaluation of expansion and
growth opportunities, and development of our capital
plan is expected to be robust over the next several
years. In this current environment, we continue to see
customer demand for an attractive pipeline of organic
ensure that the integration is a success. We have
already achieved 75% of the synergies on a run
rate basis, and we are on track to achieve full
synergies by 2020, if not sooner. We will also look
at additional synergies such as supply
chain opportunities.
• Invest in organic growth projects with a significant
multi-year pipeline of identified opportunities.
We will also look at select accretive tuck-in
acquisitions and leverage our existing platform to
capitalize on emerging opportunities such as LNG
and water technologies.
We will remain judicious and disciplined with our
growth initiatives in the current environment and we
will target spending within our cash flow. We have
identified several opportunities in the near term with
attractive returns that we expect will generate strong
returns and Discretionary Free Cash Flow.
growth projects. With stable levels of market activity,
and in addition to Newalta transaction synergies, we
expect this pipeline (including tuck-in acquisitions) to
support low double-digit growth in reported Adjusted
EBITDA over the next two to three years.
As for our planned capital spend in 2019, we
expect maintenance capital in the $30 - $35 million
range, focused on providing high quality service to
customers, while delivering stable Discretionary Free
Cash Flow.
Our 2019 growth and expansion capital is focused
primarily on building well disposal capacity in the
Montney region, expansion at several facilities to add
energy marketing capabilities, landfill cell expansion in
Energy Services, and rail car and equipment purchases
to service water management in Industrial Services. We
expect this program to be funded from Discretionary
Free Cash Flow generated by the business with any
excess cash directed to the balance sheet to reduce
net debt. We anticipate total 2019 capital spending,
including maintenance, growth and expansion, to be in
the range of $90 - $135 million.
6 TERVITA | Annual Report 2018
Tervita’s new size and scope
has the potential to deliver
double-digit growth over
the next two to three years
supported by a strong, self-
funded balance sheet.
CONCLUSION
We are now well positioned to take advantage of our
many opportunities. But opportunity alone does not
guarantee success. We must perform at a higher level
than in 2018 and have set new internal targets to do
just that.
As always, we will do our utmost to exceed our
previous performance standards on behalf of
customers and shareholders. This is the meaning of
continuous improvement and the driver of our vision.
In closing, we are extremely happy about the progress
made in making the combined company stronger.
I would like to thank our employees for their
extraordinary efforts, energy and dedication over this
past very busy year and all that they will do in 2019.
I also want to thank our Board for their guidance and
wisdom, and our customers and stakeholders for their
continued support.
Yours sincerely,
(Signed) John Cooper
President and Chief Executive Officer
March 13, 2019
Our Operations
“2018 was a year of significant
development for our operations and
we intend to make the most of our
expanded infrastructure. We have
substantial opportunities to strengthen
our operating efficiencies and enhance
our customers’ experience.”
BRAD DLOUHY
Chief Operating Officer
PHOTO: Treatment, Recovery and Disposal facility at Big Valley, AB.
Tervita provides a broad range of services to natural resource
and industrial clients. Our services are delivered through
our strategically located network of facilities and specialized
equipment and assets.
Industrial Services
ENVIRONMENTAL SERVICES
Provides comprehensive environmental
solutions, including site remediation, demolition,
decommissioning, environmental construction and
related services.
METALS RECYCLING & RAIL SERVICES
Tervita operates recycling facilities that purchase and
process ferrous and non-ferrous metals recovered from
commercial and industrial operations.
Tervita also provides full-service response to derailments
including track clearing, asset recovery, reclamation and
remediation, car scrapping and re-railing.
WASTE SERVICES
Provides waste container services for the collection and
processing of hazardous and non-hazardous materials,
waste products and recyclable products. Also provides
cost-effective services for management and disposal
of Naturally Occurring Radioactive Materials (NORMs).
In addition, Tervita provides a full suite of field services
for the management of turnarounds, and day-to-day
operational requirements.
Energy Services
FACILITIES:
Treatment, Recovery & Disposal
Tervita operates a strategically situated network of
treatment, recovery and disposal (TRD) facilities that
can handle the complete spectrum of petroleum
industry waste by-products—from initial drilling
through to production. With our network of facilities
across the Western Canadian Sedimentary Basin we
are able to offer our clients the services they need,
where they need them.
Engineered Landfills
Tervita’s engineered landfills provide for the
disposal of oilfield and industrial waste solids and
contaminated soil.
Caverns & Disposal Wells
Our underground salt caverns provide an
environmentally sound disposal option for
oilfield liquid and solid wastes and our network
of deep disposal wells are designed to provide
safe, permanent disposal of the produced water
and wastewater streams generated by oil and gas
development activity.
ENERGY MARKETING
Tervita’s Energy Marketing group markets and
sells oil that is recovered or processed at its TRD
facilities. Numerous Tervita facilities are pipeline
connected.
ONSITE SERVICES
The Onsite Services team specializes in bringing
custom-engineered solutions directly to our
clients’ sites in order to provide measurable
realized value through product recovery. Tervita
also offers a combination of solids control
services and equipment rentals for oilfield
drilling operations in Canada and the US.
• TERVITA FACILITY
TSX | TEV 9
Safety Matters
For Tervita, safety is at the core of everything
we do. Whether we are providing environmental
remediation, operating treatment, recovery and
disposal facilities or working in an office, safety
influences our actions, and guides our decisions.
We work hard every day to build a culture of
safety at Tervita, where our people choose safe
behaviours naturally and without hesitation
to prevent harm to our people, and the
communities where we work.
Our commitment to safety is simple:
No job is ever too important that we can’t take
the time to do it safely.
2019 Focus
In 2019, we will start our transition from a systems-based safety
program to a values-driven one with a stronger focus on the parts of
our program that are behavior based. These changes will ensure the
sustainability of our safety performance.
10 TERVITA | Annual Report 2018
Safety Culture and Standards
We are focused on communicating our safety
expectations clearly and consistently across
our operations and providing tools to our
employees and contractors to help them make
safe decisions.
One of our key tools is our Safety Absolutes.
Tervita Safety Absolutes provide clarity about
our standards and our expectations of how high-
risk tasks will be completed.
If these conditions cannot be achieved, we
actively encourage and support our employees
to STOP and refuse unsafe work until a safe work
environment can be assured.
10 ft/
3 m
100% tie off at
10 ft/3 m or higher
Stand clear
of suspended load
DO NOT enter a confined
space without authorization
DANGER
DO
NOT
OPERATE
SIGNED BY
DATE
Follow company driving rules
Isolate all energy before
starting work
Identify all underground
hazards before starting work
Identify all hazardous
Identify all hazardous
materials and atmospheres
materials
DO NOT lift/carry/pull/push
hazardous loads
DO NOT remove or bypass
safety devices
2018 Safety Performance
We are proud of the safety focus of our employees and the solid performance we achieved in 2018 through
a dynamic and changing environment.
• Lost-Time Injury Frequency (LTIF) was 0.09, below our target of 0.30. LTIF refers to the number of people
for every 100 employees whose injury precludes them from working for at least one day post injury.
• Serious Incident Frequency (SIF) was 0.14, below our target of 0.50. (SIF) measures the number of actual
and potential serious incidents that occur per 100 employees working over a year.
• Total Recordable Incident Frequency (TRIF) was 0.52, below our target of 1.00. TRIF refers to the number
of people injured per 100 employees to the extent they could not perform their regular work duties.
LTIF
Lost Time Injury Frequency
0.25
SIF
Serious Incident Frequency
0.25
0.26
TRIF
Total Recordable Injury Frequency
1.34
0.09
0.04
0.14
0.66
0.52
2016
2017
2018
2016
2017
2018
2016
2017
2018
TSX | TEV 11
People Matters
We are proud of how our employees responded to the changes
in 2018. From the merger with Newalta and becoming a public
company, to implementing a new Enterprise Resource Planning system,
Tervita employees showed their resiliency, loyalty and ability to adapt.
Our culture emphasizes timely and transparent communication. Our
leadership team hosted live Town Hall events to keep employees
updated on the integration process. Frequent integration updates
were also posted to the company intranet and a dedicated page was
developed for those employees from Newalta who joined the Tervita
team to help them transition.
As we move into 2019, the development of our culture will be a primary
focus. We will be looking at our employee engagement processes
to enhance our culture, values and leadership to provide a strategic
advantage. In addition, we will be placing focus on continuous
improvement of many of our Talent Management processes and
building out our manager and leadership training programs.
Our people are the reason we are a
leader in our industry and we will
continue to build our company as a
great place to work, learn and develop.
TSX | TEV 13
Community Matters
At Tervita, giving back to the communities where we live
and work is part of our culture, and in 2018 we were proud
to contribute in several ways.
Industry Education Opportunities
Tervita connects with local school divisions and
youth organizations to provide information about the
work we do and the career opportunities available
in the industry. In 2018 the South Taylor Treatment,
Recovery and Disposal (TRD) facility hosted more than
40 students as a part of the Northern Opportunities
Energy Week Tour – an educational event aimed at
providing students with hands-on learning experience
to explore career opportunities in the energy sector.
In addition, for the fourth consecutive year, the
Drayton Valley TRD facility in Alberta welcomed Grade
5 students from the Wild Rose School Division to tour
their reclaimed Land Treatment Facility, learn about
remediation, the ecosystems and the nearby wetlands.
Tervita employees also had the opportunity to visit a
local Calgary school to lead Grade 4 and 5 students’
exploration of ‘Waste in Our World’ and how Tervita
works to preserve and protect the environment.
Caring for the Environment
Tervita is proud to offer its support of community
initiatives where we can provide for the safe disposal
of potentially hazardous waste. On September 20, a
group of 15 Tervita volunteers spent the day safely
collecting, sorting and properly disposing of eight
tonnes (100 cubic yards) of household and hazardous
waste at the Doig River First Nation (DRFN) northeast
of Fort St. John, BC.
In addition, Tervita provided professional and safe water
and paint disposal for Canada’s longest mural project.
The initiative was an idea in one of Calgary’s local
communities as a way to celebrate the community’s
25th anniversary and involved hundreds of volunteers
coming together to paint approximately 18,000 square
feet of wooden fence line.
South Taylor TRD facility hosted more than 40 students
as part of an educational event aimed at providing
students an experience to explore career opportunities.
14 TERVITA | Annual Report 2018
Volunteer Hours
In addition to sponsoring local organizations and raising funds, our
employees illustrated their commitment to our communities by
volunteering several hundred hours of their time to make a difference.
United Way
2018 marked Tervita’s 30th anniversary of its workplace
giving partnership with the United Way of Calgary.
Over the years we have invested more than $1 million
towards building a better and stronger community.
Our employees organize and run the annual
United Way campaign, working side-by-side to
plan fundraising activities and volunteer in their
community. The company encourages their
efforts, knowing that these actions build personal
connections within the company and inspire all of us
to help further.
In 2018, our annual campaign raised more than
$52,000, and with the Tervita match, more than
$104,000 was donated directly to the United Way,
making a difference to the lives of those in need in
our communities.
Sponsorship
26TH ANNUAL CUPS/CALGARY
STAMPEDERS KICKOFF BREAKFAST.
The event raised essential funds and awareness for
Calgary Urban Project Society (CUPS), a non-profit
that helps adults and families in Calgary living with
the adversity of poverty and traumatic events to
become self-sufficient through integrated healthcare,
education and housing.
BOYS AND GIRLS CLUB OF CALGARY
(BGCC) STAMPEDE CLEANUP CREW.
The BGCC is a charitable, community supported,
organization that serves more than 10,000 vulnerable
children and youth in Calgary, AB. As a part of their
mission, BGCC provides over 350 youth with various
employment assignments throughout the year.
This is the first job for many of the kids, creating
employability and transferable skills for the future.
TSX | TEV 15
Financials
“We have taken steps over the past
two years to create a highly efficient
structure that allows us to deliver
high quality services and value for our
customers through the cycles while
maintaining our strong Adjusted
EBITDA margins.”
ROB DAWSON
Chief Financial Officer
Contents
Management Discussion and Analysis 17
Financial Statements 54
Corporate Information 99
16 TERVITA | Annual Report 2018
MANAGEMENT’S DISCUSSION & ANALYSIS
March 13, 2019
TSX | TEV 17
ABOUT THIS MANAGEMENT’S DISCUSSION AND ANALYSIS
The following management’s discussion and analysis (“MD&A”) is a summary of the financial position and results of
operations of Tervita Corporation (“Tervita”, the “Company”, “we”, “our”, “us” and similar expressions) for the three months
and twelve months ended December 31, 2018 and as compared to the three months and twelve months ended December
31, 2017. This MD&A, approved by Tervita’s Board of Directors on March 13, 2019, includes information available up to that
date.
This MD&A is a review of the financial results of Tervita, prepared in accordance with International Financial Reporting
Standards (“IFRS”), which are also generally accepted accounting principles (“GAAP”) for publicly accountable enterprises
in Canada. This MD&A should be read in conjunction with our audited annual Consolidated Financial Statements and
accompanying notes (the “Financial Statements”) for the years ended December 31, 2018 and 2017 and our Annual
Information Form for the year ended December 31, 2018.
On July 19, 2018 (the “Acquisition Date”), Tervita completed an acquisition of Newalta Corporation (“Newalta”) through a
Plan of Arrangement (the “Arrangement”). The Financial Statements and MD&A include financial results in respect of the
former Newalta business since the Acquisition Date. Please refer to the section Newalta Acquisition for more information.
All financial information reflected herein is expressed in millions of Canadian dollars (“$” or “C$”) unless otherwise stated.
References to US$ mean United States dollars. References to “n/m” indicates a percentage change is not meaningful.
Throughout this MD&A, “Q4” means the three months ended December 31 and “full year” means the twelve months ended
December 31.
Certain comparative information has been reclassified to conform to the MD&A presentation adopted for the current year.
Comparative figures related to acquired entities pertain to the period after the Acquisition Date.
This MD&A contains references to the following measures not in accordance with IFRS (“non-GAAP measures”): Adjusted
EBITDA, Adjusted EBITDA Margin, Divisional EBITDA, Divisional EBITDA Margin, Discretionary Free Cash Flow, Net Debt to
Adjusted EBITDA (Pro Forma LTM), Covenant EBITDA, and Adjusted Working Capital. Please refer to the section Non-GAAP
Measures for a full discussion on management’s use of non-GAAP measures and their reconciliation to IFRS measures.
This MD&A contains forward-looking statements regarding Tervita and the industries in which we operate. Please refer to
the section Forward-Looking Statements for more information.
ABOUT TERVITA
Tervita is a leading waste and environmental solutions provider offering waste processing, treatment, recycling, and
disposal services to customers in the oil and gas, mining, and industrial sectors. We serve our customers onsite and through
a network of facilities in Canada and the United States (“US”).
Tervita provides a broad and integrated array of services and environmental management solutions for customers,
including: treatment, recovery, and disposal of solids and fluids used in and generated by oil and gas drilling, completions,
and production activity; landfill construction; specialized onsite services; waste management; oil terminalling; energy
marketing; metals recycling; equipment rental; demolition; and decommissioning. Our network of facilities as at December
31, 2018 consisted of 117 active waste processing, disposal, and industrial facilities, including: 52 treatment, recovery, and
disposal facilities (“TRDs”); eight stand-alone disposal wells; 25 engineered landfills (which included 20 owned sites, two
sites operated under contract, and three sites that we market under contract for other landfill operators); three cavern
disposal facilities; 11 onsite facilities; four transfer stations; one naturally occurring radioactive material (“NORM”) facility;
eight bioremediation facilities; and five metals recycling facilities.
Tervita’s activities are carried out through five operating segments, which are aggregated in accordance with IFRS into two
reporting segments: Energy Services and Industrial Services.
•
Energy Services includes three service lines: facilities, energy marketing, and onsite. These service lines collectively
provide many services to the oil and gas sector, including: treatment, recovery, and disposal of fluids; energy
marketing; processing and disposal of solid materials used in, and generated by, natural resource and industrial
production; disposal of oilfield-generated waste; providing specialized onsite services using centrifugation or other
processes for heavy oil producers involved in mining and in situ production; and supplying and operating drill site
processing equipment, including solids control and drill cuttings management.
18 TERVITA | Annual Report 2018
Page | 1
•
Industrial Services provides comprehensive environmental solutions through four operating segments: waste
services, metals recycling, rail services, and environmental services. The services provided by these operating
segments include site remediation, facility decommissioning, environmental construction and technologies,
hazardous and non-hazardous waste management, emergency response, rail services, recycling services to oil and gas
and other industrial companies, and waste transportation and classification. Recycling services include the purchase
and processing of ferrous and non-ferrous metals recovered from demolition sites and other locations.
In addition to our two reporting segments, Tervita presents intersegment eliminations and general and administrative
(“G&A”) and other non-operating expenses as Corporate. G&A includes expenses for executive leadership, human
resources, information technology, finance, accounting, business development, communications, legal, and regulatory.
Intersegment profit eliminations include those related to the construction and transfer of long-lived assets between
reporting segments.
FINANCIAL AND OPERATING HIGHLIGHTS
CHANGE IN REPORTING
Tervita adopted IFRS 15 “Revenue from Contracts with Customers” (“IFRS 15”) prospectively effective January 1, 2018. This
change did not affect reported net profit (loss), Divisional EBITDA, or Adjusted EBITDA, however, revenue and direct costs
for energy marketing were impacted as certain pipeline transactions previously reported as gross under revenue and direct
costs are now reported as net under direct costs. In accordance with our adoption of IFRS 15, comparative information for
energy marketing in our Financial Statements has not been adjusted. If the comparative financial information had been
restated, the Q4 2017 and YTD 2017 revenue and direct expenses for energy marketing, revenue, and revenue excluding
energy marketing would have been as follows:
Three Months Ended December 31
2018
2017
IFRS 15
Impact
Adjusted
2017
Year Ended December 31
IFRS 15
Impact
2017
2018
Energy Services revenue
Facilities revenue
Onsite revenue
Energy marketing revenue
Industrial Services revenue
Intersegment elimination
Total revenue
Energy marketing direct expense
Revenue excluding energy marketing
110
21
208
339
63
-
402
(208)
194
77
-
474
551
59
(4)
606
(474)
132
-
-
(233)
(233)
-
-
(233)
233
-
77
-
241
318
59
(4)
373
(241)
132
370
41
1,337
1,748
231
(5)
1,974
295
-
1,824
2,119
221
(11)
2,329
(1,337)
(1,824)
637
505
-
-
(839)
(839)
-
-
(839)
839
-
Adjusted
2017
295
-
985
1,280
221
(11)
1,490
(985)
505
For purposes of this MD&A, all energy marketing revenue and direct expenses for 2017 and earlier comparative periods
have been adjusted for the IFRS 15 impact.
Page | 2
TSX | TEV 19
FINANCIAL HIGHLIGHTS
Fourth Quarter and Annual Financial Highlights
Three Months Ended December 31
Increase
Year Ended December 31
Increase
2018
2017
(Decrease) % Change
2018
2017
(Decrease) % Change
Energy Services revenue
Facilities revenue
Onsite revenue
Energy marketing revenue
Industrial Services revenue
Intersegment eliminations
Revenue
Revenue excluding energy marketing
General and administrative expenses
Profit (loss) from continuing operations
- per share ($), basic and diluted
Net profit (loss)
- per share ($), basic and diluted
Adjusted EBITDA(1)
- per share ($), basic and diluted
Adjusted EBITDA margin(1)
Energy Services Divisional EBITDA(1)
Industrial Services Divisional EBITDA(1)
Divisional EBITDA(1)
Capital expenditures
Discretionary free cash flow(1)
Adjusted Working Capital(1)
110
21
208
339
63
-
402
194
(15)
(75)
(0.64)
(75)
(0.64)
50
0.43
26%
58
7
65
36
(1)
78
77
-
241
318
59
(4)
373
132
(11)
(65)
(0.62)
(65)
(0.62)
40
0.38
30%
45
5
50
39
6
49
33
21
(33)
21
4
4
29
62
4
(10)
(0.02)
(10)
(0.02)
10
0.05
-4%
13
2
15
(3)
(7)
29
43%
100%
-14%
7%
7%
-100%
8%
47%
36%
-15%
-3%
-15%
-3%
25%
13%
29%
40%
30%
-8%
-117%
59%
370
41
1,337
1,748
231
(5)
1,974
637
(50)
(74)
(0.67)
(74)
(0.67)
191
1.73
30%
212
28
240
84
81
78
295
-
985
1,280
221
(11)
1,490
505
(52)
(82)
(0.78)
(81)
(0.77)
156
1.49
31%
170
29
199
75
70
49
75
41
352
468
10
6
484
132
(2)
8
0.11
7
0.10
35
0.24
-1%
42
(1)
41
9
11
29
Shares as at December 31 (000's of shares)(2)
Shares outstanding
Weighted average shares outstanding
117,557
117,557
104,626
104,626
12,931
12,931
12%
12%
117,557
110,471
104,626
104,626
12,931
5,845
25%
100%
36%
37%
5%
-55%
32%
26%
-4%
10%
14%
9%
13%
22%
16%
25%
-3%
21%
12%
16%
59%
12%
6%
(1)
(2)
Please refer to the section Non-GAAP Measures for definitions and reconciliation.
As at March 13, 2019, the Company had 117,557,112 common shares, 2,702,649 common share purchase warrants, 2,249,127 options, and 241,824
Integration Incentive Units (“IIUs”) issued and outstanding. The IIUs may be settled through issuance of shares.
Industry Benchmarks
Average WTI (USD / bbl)(1)
Edmonton Mixed Sweet (USD / bbl)(1)
WCS (USD / bbl)(1)
AECO (CAD / MMbtu)(1)
Average Oil Production (Mbbl/d)(2)
Average Gas Production (MMcf/d)(2)
Meters drilled (000's of meters drilled)(3)
Three Months Ended December 31
Increase
Year Ended December 31
Increase
2018
2017
(Decrease) % Change
2018
2017
(Decrease) % Change
$58.79
$36.27
$25.48
$1.52
4,579
16,097
4,790
$55.46
$52.58
$38.60
$1.61
4,213
15,522
4,880
$3.33
($16.31)
($13.12)
($0.09)
366
575
(90)
6%
-31%
-34%
-6%
9%
4%
-2%
$64.86
$53.41
$38.53
$1.44
4,762
15,852
19,420
$50.92
$48.31
$38.20
$2.07
4,419
16,125
19,210
$13.94
$5.10
$0.33
($0.63)
343
(273)
210
27%
11%
1%
-30%
8%
-2%
1%
(1)
(2)
(3)
Information from Bloomberg.
Information from National Energy Board, Estimated Production of Canadian Crude Oil and Equivalent and Marketable Natural Gas Production in Canada.
Information from JuneWarren-Nickle’s Energy Group and pertains to Canada.
20 TERVITA | Annual Report 2018
Page | 3
Select Three Year Comparative Information
Revenue (excluding energy marketing)
Energy marketing revenue
Total revenue
Profit (loss) from continuing operations
- per share ($), basic and diluted
Net profit (loss)
- per share ($), basic and diluted
Adjusted EBITDA(1)
Total assets
Non-current financial liabilities
Shares as at December 31 (000's of shares)
Shares outstanding
Weighted average shares outstanding - basic and diluted
(1)
Please refer to the section Non-GAAP Measures for definitions and reconciliation.
Quarterly Revenue and Adjusted EBITDA
Year ended December 31
2018
637
1,337
1,974
(74)
(0.67)
(74)
(0.67)
191
1,809
824
2017
505
985
1,490
(82)
(0.78)
(81)
(0.77)
156
1,226
476
2016
457
845
1,302
675
0.38
654
0.37
99
1,245
481
117,557
110,471
104,626
104,626
104,626
1,759,875
Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18
Revenue (excl. energy marketing)
Adjusted EBITDA
114
28
98
12
123
25
122
34
125
41
114
33
134
42
132
40
116
37
124
33
203
71
194
50
Adjusted EBITDA Margin
24.6% 12.2% 20.3% 27.9% 32.8% 28.9% 31.3% 30.3% 31.9% 26.6% 35.0% 25.8%
Revenue Before Intersegment Eliminations ($ millions)
Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18
Energy marketing
196
218
211
220
324
259
161
241
274
416
Facilities
Onsite
Industrial Services
71
-
44
47
-
52
62
-
65
70
-
54
77
-
50
68
-
48
73
-
64
77
-
59
76
-
41
67
-
58
439
117
20
69
208
110
21
63
Page | 4
TSX | TEV 21
22 TERVITA | Annual Report 2018
Page | 5 Net Profit (Loss) ($ millions) 451931424735434544357558-7106789529107Q1 16Q2 16Q3 16Q4 16Q1 17Q2 17Q3 17Q4 17Q1 18Q2 18Q3 18Q4 18Divisional EBITDA ($ millions)Energy ServicesIndustrial Services(64)(114)(247)1,079 (2)(12)(2)(65)3 -(2)(75)Q1 16Q2 16Q3 16Q4 16Q1 17Q2 17Q3 17Q4 17Q1 18Q2 18Q3 18Q4 184463256104 6 7 11 769775112910 9 12 25 0%50%100%Q1 16Q2 16Q3 16Q4 16Q1 17Q2 17Q3 17Q4 17Q1 18Q2 18Q3 18Q4 18Capital Expenditure by Type as % of Total Spend ($ millions)MaintenanceGrowth and expansionQ4 2016 includes the recognition of one-time gains on the settlement of debt as part of the recapitalization of our debt and share capital in December 2016. G&A (Excluding Severance) as a % of Revenue ($ millions)
16%
15%
12%
11%
10%
9%
7%
8%
8%
9%
7%
8%
$17
$16
$15
$14
$13
$10
$10
$10
$9
$11
$14
$15
Q1 16
Q2 16
Q3 16
Q4 16
Q1 17
Q2 17
Q3 17
Q4 17
Q1 18
Q2 18
Q3 18
Q4 18
G&A excluding severance (millions)
G&A as a % of revenue (excluding energy marketing)
Fourth Quarter Results
Overview and Highlights
•
•
•
Tervita’s Q4 2018 revenues, Adjusted EBITDA, and Adjusted EBITDA per share all grew over the same period in 2017,
despite the macro environment. We believe these increases reflect the continued focus on our core strategies of
consolidating capacity in the markets in which we operate to realize efficiencies, and executing our pipeline of growth
projects to meet our customers’ continued growth needs with a focus on containing overhead costs.
During Q4, 2018, the Western Canadian Sedimentary Basin (“WCSB”) experienced significant volatility:
o Average West Texas Intermediate (“WTI”) prices fell from US$69.43 per barrel in Q3 2018 to US$58.79 per barrel in
Q4 2018.
o
Continued growth in oil production rose beyond the available egress capacity significantly impacting the price for
Western Canadian heavy oil blends and, eventually, light oil and condensates.
o Drilling programs were suspended and voluntary shut-ins began, with a decline of rig activity by 30% in Q4 2018
compared to Q4 2017. In response, the Government of Alberta implemented mandatory production curtailments.
Production-related waste volumes through our Energy Services facilities rose 42% in Q4 2018 over Q4 2017. 63% of Q4
2018 facilities revenue (excluding revenue from oil volumes) was earned from production-related activities.
• Marketed-oil volumes rose 29% to 710 thousand m3 in Q4 2018 (excluding Newalta volumes marketed by a third party),
due to continued success in attracting customer volumes to our facilities and the positive impact of growth capital
investments to expand capacity at facilities during 2018.
• We have made excellent progress on the integration of Newalta operations and workforce in Q4 2018. Transaction
synergies of $9 million were realized in Q4 2018. At December 31, 2018, the annualized run-rate of achieved synergies
was $32 million, ahead of our targeted $20 - $22 million by the end of 2018. To date, we have incurred $18 million to
achieve these synergies.
•
Tervita’s Q4 2018 results were impacted by a decrease in Energy Services’ Divisional EBITDA Margin, from 58% in Q4
2017 to 44% in Q4 2018, due to the following:
o While volumes at our facilities in the high activity Montney region grew from the prior year, this region remains
very competitive. Treatment and disposal prices at several of our facilities in this region principally, but also across
our network, were lower in Q4 2018 compared to the same quarter of 2017.
o A decrease in recovered oil volumes (down 8% from the prior year) and prices, which was due to the significant
volatility in Canadian oil prices and volumes, also reduced margins by $3 million (2% negative impact to Energy
Services’ Divisional EBITDA Margin).
o
Repairs and maintenance costs were $5 million higher in Q4 2018 (4% negative impact to Energy Services’
Divisional EBITDA Margin), primarily from work completed at acquired Newalta facilities.
Page | 6
TSX | TEV 23
o
The newly added onsite facilities business from Newalta offers more stable long-term contracted revenue but at
a lower margin. Full year 2018 Energy Services Divisional EBITDA margins were 52%. We anticipate annual
divisional margins in the 45 - 50% range in 2019.
Q4 Revenue Increases 8% to $402 Million
• Q4 2018 revenue of $402 million increased by $29 million and 8% over Q4 2017’s revenue of $373 million. This increase
in revenue reflects the continued successful execution of our strategic plan to invest in targeted and accretive growth
and expansion opportunities, enlarging our facility infrastructure in Energy Services and Industrial Services, and
enhancing our service line offerings to our customers. Our acquisitions of Newalta in Q3 2018, 3K Oil Services Ltd. (“3K”)
in Q4 2017, and two metals operations in Q3 2017, resulted in higher revenue through increased waste and
commodities volumes. Our acquisition of Newalta also added onsite services to our existing Energy Services offerings,
which contributed $21 million of incremental revenue in Q4 2018. Our increased network of Energy Services facilities
also provided us with a larger geographic footprint into the US and expanded our reach in the WCSB, providing new
sources of revenue.
•
Production-related and drilling-related waste volumes through our Energy Services facilities increased by 42% and 8%,
respectively, in Q4 2018 compared to Q4 2017, reflecting incremental volumes associated with our acquired facilities
and our ability to capitalize on activity in the Montney region.
• Marketed oil volumes were 29% higher than Q4 2017 as our facilities in the Montney were at or near capacity. However,
extreme volatility and weakness in differentials resulted in decreased energy marketing direct expenses and revenue
and a reduction in recovered oil volumes of 8% in Q4 2018 compared to Q4 2017.
Q4 Divisional EBITDA Increases by $15 Million and 30%
• Q4 2018 Divisional EBITDA of $65 million was a $15 million and 30% increase over Q4 2017 Divisional EBITDA of $50
million, primarily driven by the $29 million increase in revenues offset somewhat by higher direct expenses, particularly
at Energy Services facilities.
•
•
Energy Services’ Q4 2018 Divisional EBITDA of $58 million increased $13 million over Q4 2017 Divisional EBITDA of $45
million. Net Energy Services’ revenue increased by $54 million in Q4 2018 compared to Q4 2017, driven by our
investment in growth and expansion opportunities in 2018 and 2017, including our acquisition of Newalta. Direct
expenses increased by $40 million in Q4 2018 compared to the same period in 2017, primarily due to operating costs
associated with higher waste and oil volumes through our facilities and the addition of onsite services. Direct expenses
were also impacted by some additional discretionary cost, including higher repairs and maintenance at some acquired
facilities as they were transitioned to Tervita’s maintenance program.
Industrial Services’ Q4 Divisional EBITDA of $7 million was $2 million and 40% higher than Q4 2017. This increase was
driven by an improvement in revenue of $4 million resulting from higher ferrous prices and incremental contributions
from acquired waste services facilities (Newalta) and two metals recycling yards.
Q4 Adjusted EBITDA Increases by $10 Million and 25%
• Q4 2018 Adjusted EBITDA was $50 million, a $10 million and 25% improvement over Q4 2017 Adjusted EBITDA of $40
million. This improvement reflects increased Divisional EBITDA contributions of $15 million offset by $5 million of
higher G&A expense in Q4 2018 compared to the same quarter in 2017, adjusted for $1 million of severance included
in Q4 2017 G&A expense. The increase in G&A expense was primarily a result of the integration of acquired Newalta
corporate activities.
• Q4 2018 Adjusted EBITDA Margin was 26%, a decrease of 4% when compared to Q4 2017. This decrease was primarily
a result of a decline in Energy Services’ Divisional EBITDA Margin due to the acquisition of onsite services with Newalta,
a lower margin service line, combined with somewhat higher direct operating expenses in other service lines.
Q4 2018 Net Loss of $75 Million Primarily Due to Transaction Costs and Non-Cash Impairment
•
The Q4 2018 net loss of $75 million was a $10 million increase over the net loss of $65 million in Q4 2017. Included in
the net loss for Q4 2018 was $43 million of transaction costs associated with the acquisition of Newalta, comprised of
$5 million of one-time integration costs and $38 million of impairment of assets for acquired inactive sites primarily
due to a change in discount rate on related decommissioning obligations.
24 TERVITA | Annual Report 2018
Page | 7
•
Excluding the Newalta transaction costs, our Q4 2018 net loss was $32 million, a $33 million improvement from the Q4
2017 net loss of $65 million. This improvement was primarily due to the $10 million increase in Adjusted EBITDA and
a $49 million decrease in impairment expense. Q4 2018 impairment expense included $23 million of goodwill
impairment in Industrial Services. Q4 2017 included $74 million of impairment expense in Energy Services, comprised
of $57 million of goodwill impairment, and $17 million of asset impairment largely a result of waste slumps at two
landfills.
Full Year Results
2018 Revenue Increases 32% to $1.974 Billion
•
•
Revenue increased by $484 million, from $1.490 billion in 2017 to $1.974 billion in 2018. This 32% increase in revenue
reflects our strategic investment in growth and expansion opportunities in 2017 and 2018, including: our acquisitions
of Newalta, 3K, and two metals recycling yards; our investment in pipeline takeaway capacity; and other growth and
expansion capital spend that provided additional waste disposal, storage and blending capacity in Energy Services.
Our increased network of Energy Services facilities provided us with a larger geographic footprint in the WCSB and
into the US. We also increased our service line offerings and customer base by adding onsite services to Energy
Services, which provides specialized services for heavy oil producers involved in mining and in situ production, as well
as drill site processing services for solids control and drill cutting management. This expansion into onsite services
provided incremental revenue of $41 million in 2018.
These growth and expansion investments contributed to a 25% increase in production-related waste volumes through
our facilities in 2018 when compared to 2017.The higher revenue earned by these increased volumes was somewhat
offset by continued pricing pressure in the highly competitive Montney and a shift in product mix as certain customers
continued their vertical integration of disposal capacity, particularly for produced water.
• Marketed oil volumes in 2018 were 18% higher than 2017 due to production market growth (24% improvement year-
over-year) and wider differential pricing from a shortage of pipeline capacity to exit the WCSB.
•
Industrial Services contributed an additional $10 million of revenue in 2018 as compared to 2017 reflecting
contributions from our strategic investments, higher ferrous pricing driven by strong global demand for steel, and an
increase in rail services work.
2018 Divisional EBITDA Increases by $41 Million and 21%
•
•
•
2018 Divisional EBITDA of $240 million was a 21% increase over our 2017 Divisional EBITDA of $199 million. This $41
million increase in Divisional EBITDA was primarily a result of higher revenues earned in both Energy Services and
Industrial Services, somewhat offset by increased operating expenses in both segments.
Energy Services’ 2018 Divisional EBITDA of $212 million was a $42 million and 25% increase over 2017’s Divisional
EBITDA of $170 million. This increase reflects the positive contributions from our investment in growth and expansion,
higher throughput of oil volumes, and contributions from our expanded service offering with onsite, offset somewhat
by higher expenses, particularly some repairs and maintenance at acquired facilities, and lower WCSB pricing.
Industrial Services’ Divisional EBITDA of $28 million was a $1 million decrease from the 2017 Divisional EBITDA of $29
million. Higher revenues for ferrous sales and project-based work, including rail services, was more than offset by lower
contributions from facility-based services, particularly in the first half of 2018. Facility-based services revenue declined
13% year-over-year due to a highly competitive market and the impact of the loss of a significant contract at end of
Q4 2017. However, direct expenses in the first half of the year remained higher, reflecting the time needed to adjust
the fixed-cost component of the business.
2018 Adjusted EBITDA Increases by $35 Million
•
2018 Adjusted EBITDA of $191 million was a $35 million and 22% improvement compared to 2017’s Adjusted EBITDA
of $156 million. This improvement was a result of increased contribution from Divisional EBITDA of $41 million offset
by higher G&A expense (excluding severance) of $6 million. The increase in G&A expense was primarily due to the
acquisition of Newalta.
Page | 8
TSX | TEV 25
• Our Newalta integration activities in 2018 resulted in realized pro forma synergies of $13 million ($7 million in
operations and $6 million in corporate G&A expense) with an annualized synergy run rate of approximately $32 million.
2018 Net Loss of $74 Million Primarily Due to Transaction Costs and Non-Cash Impairment
•
•
The 2018 net loss of $74 million was an improvement of $7 million over the 2017 net loss of $81 million. Included in
the 2018 net loss was $69 million of transaction costs associated with the acquisition of Newalta, comprised of $13
million of costs incurred to complete the Arrangement, $18 million of integration costs, and $38 million of non-cash
impairment of assets for inactive sites related to a change in discount rate on associated decommissioning obligations.
Not including these transaction costs, our 2018 net loss would have been $5 million, an improvement of $76 million
compared to the 2017 net loss of $81 million.
Compared to the prior year, the 2018 net loss included the $35 million increase in Adjusted EBITDA, a $51 million
decrease in impairment expense, and a reduction in changes to onerous and legal provision of $13 million. These
reductions were somewhat offset by transaction costs of $69 million, higher depreciation and amortization expense
on new assets of $16 million, and increased finance costs of $14 million associated with the issuance of new debt.
2018 Capital Spend
•
•
During 2018, our Board of Directors approved $140 million in projects aimed primarily at growing our ability to meet
customer demands in the Montney and Duvernay regions of Alberta and British Columbia. Cash spend towards these
growth and expansion projects (excluding the Newalta acquisition) was $56 million, $4 million higher than 2017, and
consistent with our focus on identifying, planning, and executing a growth capital portfolio. The acquisition and
integration of the Newalta facilities, as well as the subsequent review of the incremental growth capital opportunities,
resulted in a modest deferral of planned capital spending in the second half of 2018. Growth and expansion capital
spend during 2018 included:
growth at two of our TRD facilities in the Montney region, including the addition of two new disposal wells to be
completed and tied-in during 2019;
preliminary spending towards the growth of a third TRD facility;
the completion of projects at key energy marketing facility locations to expand capacity; and
the construction of new waste cells at three of our landfills.
o
o
o
o
2018 cash spend on maintenance capital was $28 million, $5 million higher than the $23 million spent in 2017 and
reflective of the acquisition of additional facilities into our infrastructure. Maintenance capital of $28 million was below
our original estimate of $35 - $40 million reflecting the deferral of certain, non-critical discretionary projects including
heavy equipment replacements.
Discretionary and Free Cash Flow
•
•
•
Tervita generated $81 million of Discretionary Free Cash Flow in 2018, a 16% increase from the $70 million generated
in 2017. Excluding the cash transaction costs incurred as part of the Newalta acquisition, 2018 Discretionary Free Cash
Flow was $103 million or 47% higher than 2017. Discretionary Free Cash Flow was more than sufficient to fund the $56
million of growth and expansion capital spend in 2018.
Tervita’s Discretionary Free Cash Flow reduced by $7 million in Q4 2018 compared to Q4 2017 primarily due to the
additional interest expense on the US$250 million senior secured notes and the cash transaction costs incurred as part
of the Newalta acquisition.
Tervita’s existing facility network, underpinned by a significant exposure to production-based revenues, generates
stable Discretionary Free Cash Flows, providing confidence in Tervita’s ability to fund its ongoing growth and
expansion capital programs.
26 TERVITA | Annual Report 2018
Page | 9
Full Year 2017 Versus Full Year 2016 Comparative Highlights
•
•
•
•
•
•
Revenue in 2017 was higher than 2016 due to increased activity in our core WCSB markets reflecting an improvement
in WTI prices and higher volumes and prices for ferrous metal.
The loss from continuing operations in 2017 was primarily a result of non-cash expenses. Most significantly,
impairment expense of $76 million primarily related to our landfill operations for goodwill and capacity reductions
associated with waste movement at two facilities, and a provision of $13 million for onerous contracts for vacated
floors in our head office. Excluding these items, the 2017 profit from continuing operations reflects improved business
results and significantly lower interest costs compared to 2016.
In 2016, profit from continuing operations included $286 million of realized foreign exchange gains on the settlement
of debt and debt-related swaps and the effects of a recapitalization transaction under section 192 of the Canada
Business Corporations Act (the “Recapitalization Transaction”), for which a $670 million gain on debt restructuring was
recognized. These gains more than offset a $270 million impairment expense, primarily related to goodwill for our TRD
and landfill service lines.
The results of discontinued operations are added to profit (loss) from continuing operations to arrive at net profit (loss).
2016’s net profit incorporated $21 million of loss from discontinued operations, primarily comprised of the loss on the
disposal of our production services operating segment.
The increase in 2017 Adjusted EBITDA as compared to 2016 reflects increased operating results from better market
activity and reduced costs for both operating segments and general and administrative from the full year impact of
cost containment initiatives begun in 2016 and the transfer of additional office space to onerous contracts in both
2016 and 2017.
The decrease in total assets in 2017 compared to 2016 reflects an increase in cash from improved working capital more
than offset by impairments of goodwill and property, plant and equipment.
• Our non-current financial liabilities and outstanding share capital for 2017 and 2016 reflect the Recapitalization
Transaction in December 2016, which significantly reduced our debt and changed our equity structure.
OUTLOOK
MARKET OUTLOOK
• With 63% of Tervita’s 2018 Energy Services revenue excluding energy marketing coming from anticipated stable oil
and gas production-related activities, we believe that Tervita’s Energy Services business remains resilient even during
the current challenging environment. While reduced drilling activity is expected to result in partially lower drilling and
completions related revenues, particularly in the first half of 2019, we remain focused on what is under our control. We
believe that the contribution from a full year of results from the acquired Newalta operations, the continued successful
execution of Newalta integration synergies, additional contributions from growth capital spending, and steady
improvements from our Industrial Services businesses, will result in continued sustained growth in Tervita’s Adjusted
EBITDA in 2019 vs 2018.
•
Following the early 2019 recovery of WTI to US$50 - $55 per barrel and the return of Canadian oil price differentials to
fundamental ranges, we anticipate relatively stable oil and gas prices in 2019.
• While egress challenges persist, Western Canadian oil and gas production is anticipated to remain at levels matching
takeaway capacity in 2019. We anticipate the continued increase in crude by rail capacity will likely be sufficient to
support higher industry drilling activity in the second half of the year assuming a stable price environment.
• We continue to expect to find opportunities to attract and optimize crude oil volumes throughout our expansive
network of facilities, while continuing to assist our customers to maximize the price they receive for their products in
this challenging environment. This includes the internalization of oil marketing activities at the newly added Newalta
facilities. These volumes were marketed by a third party until December 31, 2018.
•
For Industrial Services, we expect moderate market growth in-line with GDP growth across Western Canada. Our
metals recycling business is expected to continue to grow with our investment in additional rail cars to increase our
capacity to ship metal to end markets. Business lines with higher exposure to energy activity will fluctuate with those
Page | 10
TSX | TEV 27
activity levels and capital spending by our customers. Although environmental project opportunities increased in
2018, the average revenue available on those projects decreased compared to prior years, particularly in Alberta, and
we do not anticipate this will change in 2019. Since the close of the Newalta acquisition, we have identified several
field-based service lines that are common in a variety of geographies. During 2019, we intend to reorganize these field
services and rationalize service offerings across a single-field organization. Overall, while revenues from these various
service lines is expected to fall, we anticipate lower costs will more than compensate for this decrease in revenue,
resulting in higher overall contributions to Industrial Services’ Divisional EBITDA in 2019.
NEWALTA INTEGRATION
• We continue to expect that the integration of Newalta will realize annualized synergies of $40 - $45 million of Adjusted
EBITDA. Due to identified repairs and maintenance required at certain facilities, we have increased the estimated one-
time costs from $20 million to $21 - $23 million, of which the remaining $3 - $5 million will be spent in 2019.
• We realized synergies of $13 million in 2018 ($7 million in operations and $6 million in corporate) representing an
annualized synergy run rate at December 31, 2018 of approximately $32 million. In 2019, we expect to realize $35 -
$40 million of synergies and to have almost fully realized the $40 - $45 million in annualized synergies by the end of
2019. Effective January 1, 2019, we have assumed the marketing of all oil volumes previously marketed on behalf of
Newalta by a third party. As well, with the conversion of all legacy accounting, payroll and operating systems onto
Tervita’s systems effective January 1, 2019, the remainder of the corporate-based synergies are expected to be
completed in the first half of 2019.
CAPITAL SPEND
•
•
2018 maintenance capital was $28 million, in line with our Q3 2018 reported range of $25 - $30 million and below our
original $35 - $40 million expectations set at the beginning of 2018. We anticipate maintenance capital in the $30 -
$35 million range for 2019, reflecting the full-year impact of the added Newalta facilities. Our 2019 maintenance capital
program is focused on delivering stable and significant Discretionary Free Cash Flow to the business appropriate to
fully fund our pipeline of growth and expansion projects and continue to reduce balance sheet leverage.
2018 growth and expansion capital was $56 million. During 2019 we anticipate spending approximately $60 - $100
million on expansion and growth projects. The capital program will depend on the success of our drilling programs
and will be closely monitored against operating results and overall industry activity levels in the current environment.
Spending will be largely focused in our Energy Services segment and includes:
o
o
o
o
o
the completion and tie-in of two new disposal wells drilled in 2018. This will expand our capacity to serve
customers at two highly utilized existing facilities in the Montney oil and gas region;
drilling and completion of new disposal wells at two additional facilities (one existing and one greenfield),
including the expansion of surface facilities to meet increasing customer demand for produced water treatment
and disposal infrastructure;
expansions at four of our facilities to add to energy marketing capabilities;
the construction of new cells at three of our landfills and the continued washing of new caverns at our Lindbergh
facility; and
growth capital in Industrial Services will include new rail cars to expand our metals delivery capacity and the
purchase of equipment to continue growing our water management customer service lines.
• We remain focused on evaluation and planning of expansion and growth opportunities. In this current environment,
we continue to see customer demand for an attractive pipeline of organic growth capital projects. Assuming stable
levels of market activity, and in addition to Newalta transaction synergies, the pipeline of organic capital projects
(including tuck-in acquisitions) continues to support low double-digit growth in Adjusted EBITDA over the next two
to three years.
• Our expansion and growth capital program is expected to be funded from Discretionary Free Cash Flows generated
by the business with any excess cash directed to the balance sheet to reduce net debt.
• We anticipate total 2019 capital spending, including maintenance, growth and expansion, to be in the range of $90 -
$135 million.
28 TERVITA | Annual Report 2018
Page | 11
NEWALTA ACQUISITION
PLAN OF ARRANGEMENT
On July 19, 2018, Tervita and Newalta completed the Arrangement, culminating in the amalgamation of the two companies
into one publicly-traded company, Tervita Corporation. Tervita’s common shares and common share purchase warrants
(“warrants”) trade on the Toronto Stock Exchange (“TSX”) under the trading symbols “TEV” and “TEV.WT”, respectively.
Financial results for Q4 2018 and full year 2018 were materially impacted by the Arrangement. Refer to note 3 of the
Financial Statements for details regarding the terms of the Arrangement.
Under the terms of the Arrangement, Tervita completed the acquisition of 100% of Newalta’s issued and outstanding
shares through the issuance of common shares and warrants valued at $110 million and $1 million, respectively, and the
defeasance of Newalta’s debt for cash of $394 million, which was partially financed from the proceeds on issuance of the
US$250 million senior secured notes. Immediately after close of the Arrangement, Tervita Corporation had 117,557,112
common shares and 2,702,649 warrants issued and outstanding, and an additional US$250 million of 7.625% senior
secured notes due December 2021.
The waiting period under the Competition Act (Canada) (“the Act”) expired prior to the closing of the Arrangement;
however, the Act permits the Commissioner of Competition to make an application to the Competition Tribunal in respect
of an acquisition transaction within a period of one year after its implementation. As of March 13, 2019, Tervita was not
aware of any such application being filed.
PURCHASE PRICE ALLOCATION
The Arrangement has been accounted for as a business combination using the acquisition method under which the assets
acquired and liabilities assumed are recorded at fair value. The fair value of the identifiable assets and liabilities acquired
were:
Cash and cash equivalents
Trade and other receivables
Inventory
Other current assets
Property, plant and equipment
Intangible assets
Other assets
Trade and other payables
Capital leases
Provisions
Total identifiable net assets
Goodwill
Purchase consideration
19
45
4
5
506
16
5
(52)
(13)
(62)
473
32
505
Page | 12
TSX | TEV 29
PRO FORMA STATEMENT OF PROFIT (LOSS)
The following is an unaudited pro forma statement of profit (loss) for the year ended December 31, 2018 as if the
Arrangement had been completed on January 1, 2018. This unaudited pro forma statement of profit (loss) is for illustrative
purposes and is not necessarily indicative of the results of operations that would have resulted had the acquisition occurred
on January 1, 2018, or of future results:
Revenue
Operating expenses
Direct operating expenses
General and administrative
Depreciation and amortization
Impairment expense
Operating profit (loss)
Finance costs
Transaction costs
Other income (expense)
Profit (loss) before tax
Tervita (1)
1,974
Newalta (2)
132
Pro Forma
Adjustments (3)
-
Pro Forma
Consolidated
2,106
(1,734)
(50)
(96)
(25)
69
(69)
(69)
(4)
(73)
(93)
(14)
(33)
-
(8)
(23)
(19)
(1)
(51)
-
-
-
-
-
9
88
-
97
(1,827)
(64)
(129)
(25)
61
(83)
-
(5)
(27)
(1)
(2)
(3)
From our Consolidated Statements of Comprehensive Profit (Loss) (“Statements of Profit (Loss)”) for the year ended December 31, 2018, and includes
revenue of $108 million and net loss of $58 million in relation to Newalta’s operations from the Acquisition Date to December 31, 2018.
Reflects financial results for Newalta’s operations from January 1, 2018 to the Acquisition Date.
Proforma adjustments to finance costs reflect the finance costs that would have been incurred if the US$250 million senior secured notes were issued on
January 1, 2018 and exclude the finance costs that were incurred under Newalta’s long-term debt.
The unaudited pro forma Adjusted EBITDA for the year ended December 31, 2018 was as follows:
Net profit (loss)
Add back:
Severance costs
Depreciation and amortization
Impairment expense
Finance costs
Other expense (income)
Adjusted EBITDA(1)
Adjusted EBITDA Margin (1)
Pro Forma
Consolidated
2018
(27)
1
129
25
83
5
216
28%
(1)
Please refer to the section Non-GAAP Measures for definitions and reconciliation.
NON-GAAP MEASURES
Tervita uses both IFRS measures and non-GAAP measures to assess performance. To supplement financial information
presented in accordance with IFRS, non-GAAP measures referred to in this MD&A are provided to enhance the reader’s
understanding of Tervita’s operational and financial performance. The non-GAAP measures presented in this MD&A are
not measurements of financial performance under IFRS and should not be considered as an alternative to profit (loss), cash
provided by (used in) operating activities, or other performance measures derived in accordance with IFRS. As non-GAAP
measures do not have a standardized meaning prescribed by IFRS, Tervita’s method of determining non-GAAP measures
may vary from the methods used by other companies and may not be comparable to similarly titled measures, ratios, or
credit statistics disclosed by other companies.
ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN
We believe Adjusted EBITDA is useful in measuring Tervita's operating performance. Adjusted EBITDA is derived from the
Statements of Profit (Loss) and is defined as net profit (loss) before tax, other income (expense), finance costs, impairment
expense, depreciation and amortization, and certain items that are considered non-recurring in nature. For this MD&A, we
have added back all severance and transaction costs, if any.
30 TERVITA | Annual Report 2018
Page | 13
Management believes that Adjusted EBITDA provides improved comparability of our operating results from our principal
business activities over time and is an important indicator of our ability to generate liquidity through cash flow from
operating activities. Adjusted EBITDA allows us to evaluate the results of our business activities prior to consideration of
how those activities are financed and the impacts of foreign exchange, taxation, depreciation and amortization, and other
non-cash charges that add volatility to our financial results (such as impairment expenses, share-based compensation, and
other transactions that are non-recurring in nature). Management utilizes Adjusted EBITDA to set objectives and as a key
performance indicator of our Company’s success.
The presentation of Adjusted EBITDA should not be construed as an inference that future results will be unaffected by
unusual or non-recurring items. Adjusted EBITDA should not be considered a measure of discretionary cash available for
the return of capital to debt and equity stakeholders and to invest in the business.
Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by revenue excluding energy marketing.
Adjusted EBITDA and Adjusted EBITDA Margin for the three months and year ended December 31, 2018 included financial
results for Newalta from the Acquisition Date.
For the three months and year ended December 31, Tervita's net profit (loss) was reconciled to Adjusted EBITDA as follows:
Net profit (loss)
Add back:
Severance costs (excluding Newalta transaction costs)
Depreciation and amortization
Impairment expense
Finance costs
Other expense (income)
Transaction costs
Income taxes expense (recovery)
Loss (profit) from discontinued operations, net of tax
Adjusted EBITDA
Adjusted EBITDA Margin
Three Months Ended
December 31
Year Ended
December 31
2018
(75)
2017
(65)
2018
(74)
2017
(81)
-
32
25
21
4
43
-
-
50
2
19
74
11
2
-
(3)
-
40
1
96
25
69
4
69
1
-
191
26%
30%
30%
10
80
76
49
26
-
(3)
(1)
156
31%
DIVISIONAL EBITDA AND DIVISIONAL EBITDA MARGIN
We believe Divisional EBITDA is useful in measuring our reporting segments’ performance. Divisional EBITDA is defined as
Adjusted EBITDA excluding general and administrative expenses and severance costs. Divisional EBITDA provides an
indication of the results generated by the reporting segments’ principal business activities prior to how those activities are
financed and assets are depreciated, amortized, or impaired. We believe Divisional EBITDA provides improved
comparability of our reporting segments’ results over time and, as such, is also an important indicator of Tervita’s ability to
generate future profitability.
Divisional EBITDA is calculated including directly attributable costs (such as those related to reporting segment leadership,
business development, environmental health and safety, and sales and marketing) with no allocation of Corporate G&A
expenses, other expenses (income), or income tax expense (recovery).
Divisional EBITDA Margin is defined as Divisional EBITDA divided by the respective segment’s revenue (excluding energy
marketing).
Page | 14
TSX | TEV 31
For the three months and year ended December 31, Divisional EBITDA was as follows:
Net profit (loss)
Add back:
Severance costs (excluding Newalta transaction costs)
Depreciation and amortization
Impairment expense
Finance costs
Other expense (income)
Transaction costs
Income taxes expense (recovery)
Loss (profit) from discontinued operations, net of tax
Adjusted EBITDA
Add back:
General and administrative expenses
Severance costs in general and administrative expenses (excluding Newalta transaction costs)
Divisional EBITDA
Divisional EBITDA by reporting segment
Energy Services
Industrial Services
Divisional EBITDA
Divisional EBITDA Margin
Energy Services
Industrial Services
DISCRETIONARY FREE CASH FLOW
Three Months Ended
December 31
Year Ended
December 31
2018
(75)
2017
(65)
2018
(74)
2017
(81)
-
32
25
21
4
43
-
-
50
15
-
65
58
7
65
2
19
74
11
2
-
(3)
-
40
11
(1)
50
45
5
50
1
96
25
69
4
69
1
-
191
50
(1)
240
212
28
240
44%
11%
58%
8%
52%
12%
10
80
76
49
26
-
(3)
(1)
156
52
(9)
199
170
29
199
58%
13%
We use a calculation of Discretionary Free Cash Flow to determine how much cash generated from operating activities is
available for growth and expansion, reducing debt, or other purposes. Discretionary Free Cash Flow is defined as funds
from operations, less cash spent on maintenance capital, plus cash proceeds on the sale of long-lived assets.
For the three months and year ended December 31, Discretionary Free Cash Flow was as follows:
Funds from (used in) operations
Less:
Cash spend on maintenance capital
Add:
Proceeds on disposition of long-lived assets
Discretionary Free Cash Flow
Add:
Cash spend on transaction costs
Discretionary Free Cash Flow before transaction costs
Three Months Ended
December 31
Year Ended
December 31
2018
10
2017
13
2018
102
2017
87
(11)
(10)
(28)
(23)
-
(1)
3
2
3
6
-
6
7
81
22
103
6
70
-
70
NET DEBT TO ADJUSTED EBITDA (PRO FORMA LTM)
We monitor our Net Debt to Adjusted EBITDA (Pro Forma LTM) as a measure of Tervita’s overall indebtedness and capital
structure. We believe Net Debt to Adjusted EBITDA (Pro Forma LTM) is an appropriate measure of our debt capacity. Net
Debt is calculated as debt and derivative liabilities associated with that debt less cash and cash equivalents. For purposes
of this calculation, Adjusted EBITDA (Pro Forma LTM) is defined as Adjusted EBITDA calculated for the last twelve months,
including Newalta Adjusted EBITDA for the same months.
32 TERVITA | Annual Report 2018
Page | 15
Tervita’s Net Debt to Adjusted EBITDA (Pro Forma LTM) at December 31, 2018 was as follows:
Net profit (loss)
Add back:
Depreciation and amortization
Impairment expense
Finance costs
Other expense (income)
Transaction costs
Income taxes expense (recovery)
Eligible adjustments:
Severance costs (excluding Newalta transaction costs)
Adjusted EBITDA (Pro Forma LTM)
Current portion of capital leases
Long-term debt
Derivative liabilities
Less: unrestricted cash and cash equivalents
Net debt
Net Debt to Adjusted EBITDA (Pro Forma LTM)
COVENANT EBITDA
Pro Forma
LTM
December 31,
2018
(125)
129
25
92
5
88
1
1
216
As at
December 31,
2018
4
814
-
(46)
772
3.57
The terms of our revolving credit facility require the Company to comply with certain financial and non-financial covenants,
as defined by its lenders. Covenant EBITDA is defined as Adjusted EBITDA (Pro Forma LTM) excluding the Adjusted EBITDA
(Pro Forma LTM) of our unrestricted subsidiary.
Tervita’s Covenant EBITDA at December 31, 2018 was as follows:
Net profit (loss)
Add back:
Depreciation and amortization
Impairment expense
Finance costs
Other expense (income)
Transaction costs
Income taxes expense (recovery)
Eligible adjustments:
Severance costs (excluding Newalta transaction costs)
Adjusted EBITDA of unrestricted subsidiaries
Covenant EBITDA
Pro Forma
LTM
December 31,
2018
(125)
129
25
92
5
88
1
-
1
(1)
215
Page | 16
TSX | TEV 33
ADJUSTED WORKING CAPITAL
Adjusted Working Capital is defined as trade and other receivables, inventories, and other current assets less trade and
other payables. We believe Adjusted Working Capital is a useful metric as it demonstrates our ability to most efficiently
manage our resources and meet our short-term obligations, and is monitored internally for such purposes. Other
companies may not disclose working capital on the same basis as Tervita, and as such, should not be considered
comparable measures.
Trade and other receivables
Inventory
Other current assets
Trade and other payables
Adjusted Working Capital
OPERATING RESULTS
ENERGY SERVICES
As at December 31
2018
180
12
8
(122)
78
2017
130
9
4
(94)
49
Facilities include our TRDs, caverns, disposal wells, and landfills, and represent activities related to the treatment, recovery,
and disposal of fluids, the processing and disposal of solid materials used in and generated by natural resource and
industrial production, and the disposal of oilfield waste.
Onsite represents specialized services provided on a customer’s site including the use of centrifugation or other processes
for heavy oil producers involved in mining and in situ production, as well as the supply and operation of drill site processing
equipment, including equipment for solids control and drill cuttings management.
Energy marketing represents activities related to the purchase and resale of oil volumes associated with treatment,
recovery, and disposal services. Revenue and direct expenses for energy marketing activities are recorded at the purchased
cost of oil. Revenue related to services provided by TRD facilities to prepare the energy marketing oil volumes for entry to
the pipeline, including treatment, blending, and terminalling, are reported with facilities revenue.
Energy Services Financial Highlights
Facilities revenue
Onsite revenue
Energy marketing revenue
Less: energy marketing direct expenses
Net Energy Services revenue
Facilities and onsite direct expenses
Depreciation and amortization
Impairment expense
Operating profit (loss)
Finance costs
Transaction costs
Other income (expense)
Net profit (loss)
Divisional EBITDA(1)
Divisional EBITDA Margin (1)
Maintenance capital expenditures
Growth and expansion capital expenditures
Three Months Ended December 31
2018
110
21
208
(208)
131
(73)
(30)
1
29
(3)
(12)
(2)
12
58
44%
7
21
Increase
(Decrease) % Change
43%
100%
-14%
14%
70%
121%
88%
-101%
-163%
200%
100%
100%
-126%
33
21
(33)
33
54
40
14
(75)
75
2
12
2
59
13
-14%
-
(7)
29%
n/m
n/m
n/m
2017
77
-
241
(241)
77
(33)
(16)
(74)
(46)
(1)
-
-
(47)
45
58%
7
28
Year Ended December 31
Increase
2018
370
41
1,337
(1,337)
411
(199)
(82)
(1)
129
(10)
(12)
1
108
212
52%
18
50
2017
295
-
985
(985)
295
(126)
(69)
(76)
24
(6)
-
(2)
16
170
58%
17
47
(Decrease) % Change
25%
100%
36%
-36%
39%
58%
19%
-99%
438%
67%
100%
-150%
575%
75
41
352
(352)
116
73
13
(75)
105
4
12
(3)
92
42
-6%
1
3
25%
n/m
n/m
n/m
(1)
Please refer to the section Non-GAAP Measures for definitions and reconciliations.
34 TERVITA | Annual Report 2018
Page | 17
Energy Services Quarterly Results ($millions)
Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18
Divisional EBITDA
Net Revenue
Direct Expenses
45
71
27
19
47
28
31
62
31
42
70
28
47
77
30
35
68
33
43
73
30
45
77
33
44
76
32
35
67
32
75
137
62
58
131
73
TRDs, Caverns and Wells Volumes by Revenue Source (000's of m3)
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018
Drilling
83
50
70
123
212
128
163
163
147
80
170
139
Production 1,449
1,448
1,517
1,484
1,527
1,861
1,616
1,782
1,684
1,865
2,425
2,530
3,000
2,500
2,000
1,500
1,000
500
-
•
•
Production volumes are related to oil and gas production operations and include volumes for treatment, terminalling, and disposal activities for emulsion
and produced water.
Drilling volumes are related to oil and gas drilling activities and include volumes for processing and disposal of waste and waste water.
Landfills Volumes by Revenue Source (000's of tonnes)
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018
Remediation & other
Drilling
Production
347
255
171
130
70
93
300
168
124
404
239
99
359
351
111
220
184
49
319
300
81
358
309
84
256
372
100
174
175
95
559
349
95
500
370
120
•
•
•
Production volumes are related to oil and gas production operations and include volumes for disposal activities for emulsion.
Drilling volumes are related to oil and gas drilling activities and include volumes for drill cuttings.
Remediation & other volumes are related to the processing and disposal of solid waste from spill cleanup and remediation or reclamation activities, revenue
earned on managed landfills, and other service-related activities.
Page | 18
TSX | TEV 35
000's m3
800
700
600
500
400
300
200
100
0
Marketed Oil Volumes Compared to Average WTI Prices
$45.44 $44.97
$49.07 $51.86
$48.28 $48.08
$33.51
$62.95
$55.46
$67.91 $69.76
$58.79
582
554
542
541
588
631
415
552
613
607
646
710
Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18
$80.00
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
WTI
•
Q3 18 and Q4 18 marketed oil volumes exclude volumes marketed by a third party. Beginning January 1, 2019, these excluded volumes are marketed by
Tervita.
Energy Services Fourth Quarter Results
Q4 Divisional EBITDA Increases By $13 Million
•
Energy Services’ Divisional EBITDA increased by 29% to $58 million in Q4 2018 compared to $45 million in Q4 2017
primarily due to the execution of our strategic plan to invest in growth and expansion opportunities in the WCSB,
expanding our facility infrastructure and enhancing our service line offerings to our customers. Our investments in
Newalta in Q3 2018 and 3K in Q4 2017 contributed to higher revenue and waste volumes through our facilities, as
production-related and drilling-related volumes increased 42% and 8%, respectively, in Q4 2018 compared to the same
quarter in 2017. In addition to these volumes, our soil volumes at landfills, reflecting higher customer remediation and
reclamation activities, increased by 40%.
• Our investment in Newalta introduced onsite services, a new complement of service offerings for our customers,
particularly heavy oil producers. Onsite services contributed 16% of our total revenue for the quarter.
• Marketed oil volumes increased by 29% in Q4 2018 compared to Q4 2017, due to increased industry activity and higher
takeaway capacity across our network, including pipeline connections added at two sites in 2018. However, revenue
on those volumes decreased by 12% due to the exceptionally wide differentials in the WCSB experienced in Q4 2018.
The decline in WCSB pricing resulted in 37% lower revenue for recovered oil, which was impacted by both lower price
and 8% lower volume due to less development activity.
•
Energy Services’ Divisional EBITDA Margin for Q4 2018 was 44%, a 14% decrease from the 58% earned in Q4 2017. This
decrease in margin reflects the impact of onsite services, a lower margin operation, as well as an increase in facilities
direct expenses, particularly repairs and maintenance, as acquired facilities transitioned to Tervita’s maintenance
program.
Q4 Net Profit Improves By $59 Million
•
Energy Services’ Q4 2018 net profit was $12 million, an improvement of $59 million over the net loss of $47 million in
Q4 2017. In addition to the $13 million increased contribution from Divisional EBITDA, the increase in net profit was
primarily due to lower impairment expense somewhat offset by higher depreciation and amortization expense for
acquired assets, increased finance costs associated with letters of credit in our facilities and energy marketing
operations, and transaction costs related to the Newalta acquisition.
• Q4 2017’s net loss included $57 million of goodwill impairment, and $17 million of asset impairment largely a result of
waste slumps at two landfills.
•
Included in Energy Services’ Q4 2018 net profit was $12 million of transaction costs related to the Newalta acquisition,
comprised of a non-cash impairment expense associated with a change in discount rate on decommissioning
obligations for inactive sites. Excluding these transaction costs, Energy Services’ Q4 2018 net profit was $24 million, a
$71 million improvement over Q4 2017.
36 TERVITA | Annual Report 2018
Page | 19
Q4 Net Revenue Increases $54 Million to $131 Million
•
•
•
•
•
The 70% and $54 million increase in Energy Services net revenue in Q4 2018 compared to Q4 2017 was primarily driven
by our investments in new facility infrastructure and onsite services in 2018 and 2017, including our acquisition of
Newalta and 3K, the completion of two new pipeline connections at existing TRD facilities, and other growth and
expansion capital spend that provided additional waste disposal, storage and blending capacity.
TRD facilities volumes increased by 37% or 724 thousand m3 in Q4 2018 versus Q4 2017, a result of our acquisitions in
Newalta and 3K and higher production-related volumes at existing Tervita facilities driven by activity in the Montney.
Revenue from these increased production-related volumes, however, was offset by lower realized prices due to a
combination of downward pricing pressure from competitive activity and of product mix. Product mix was impacted
by vertical integration of disposal capacity by some producers, particularly for produced water in key regions.
Consistent with lower rig activity in the market, drilling volumes decreased, however, this was offset by increased
revenue from better pricing in some regions and a change in product mix.
Landfill volumes increased by 32% or 239 thousand tonnes in Q4 2018 compared to the same quarter in 2017. Soil
volumes received from customer remediation projects increased 40%, contributing an additional 14% in revenue
quarter-over-quarter. Both production and drilling related volumes increased in Q4 2018 compared to Q4 2017,
particularly in the Montney. However, revenue from these volumes remained flat primarily due to product mix and
lower pricing for drilling-related volumes.
The acquisition of Newalta provided us an opportunity to expand our service offerings to heavy oil and other producers
in the WCSB and US. Approximately 28% of onsite revenue in Q4 2018 was related to long-term service contracts.
In Q4 2017, the market was still recovering after the completion of the Peace Pipeline Expansion in Q3 2017 and
Tervita’s energy marketing volumes continued to be impacted by the increased pipeline capacity in the Montney
region and, we believe, increased producer direct pipeline access which resulted in lower available volumes on truck
and increased competition for available oil. For most of Q4 2018, Tervita’s Alberta facilities in these regions operated
near capacity and volumes surpassed pre-Peace Pipeline Expansion levels, primarily due to production growth in the
region and wide and volatile differentials, which supported the ability to improve producer netbacks and attract
volumes to our network. Higher WTI prices and higher marketed volumes were more than offset by wider differentials,
leading to decreased oil purchase costs compared with the same period in 2017, resulting in lower energy marketing
direct expenses and revenue.
• Q4 2018 energy marketing volumes were also positively impacted by our completion of facility expansions which
allowed for increased ability to gather volumes into these sites.
• Marketed oil volumes were negatively impacted by an 8% reduction in associated recovered oil volumes at TRDs driven
by a 34% decline in average Canadian crude oil pricing and associated reduction in development activity.
Energy Services Full Year 2018 Results
2018 Divisional EBITDA Increases by $42 Million
•
Energy Services’ 2018 Divisional EBITDA was $212 million, a $42 million and 25% increase over the $170 million
reported in 2017, reflecting the positive contributions from our strategic Newalta and 3K acquisitions, as well as
increased earnings from higher throughput of oil volumes. Our investments in Newalta and 3K resulted in 25% higher
production-related waste volumes through our facilities in 2018 when compared to 2017.
• Our investment in Newalta introduced onsite services, a new complement of service offerings for our customers,
particularly heavy oil producers. This investment contributed 10% of our total revenue for the year.
• Marketed oil volumes were 18% higher in 2018 compared to 2017, due to increased industry activity and facilities
expansions which increased takeaway capacity. Recovered oil volumes decreased as stable volumes received
throughout the first three quarters of the year were offset by a decrease in volumes in Q4 2018 due to the decline in
Canadian crude oil pricing.
•
Energy Services’ 2018 Divisional EBITDA Margin was 52%, a decrease of 6% when compared to 2017’s Divisional EBITDA
Margin of 58%. This decrease in margin reflects the impact of onsite services, a lower margin operation, as well as an
increase in direct expenses at facilities, particularly repairs and maintenance at acquired facilities.
Page | 20
TSX | TEV 37
2018 Net Profit Increases by $92 Million
•
•
•
Energy Services’ 2018 net profit was $108 million, an improvement of $92 million over the net profit of $16 million in
2017. In addition to the $42 million increased contribution from Divisional EBITDA, the increase in net profit was
primarily due to lower impairment expense offset somewhat by higher depreciation and amortization for acquired
assets, and transaction costs associated with the Newalta acquisition.
2017’s net loss included $57 million of goodwill impairment, and $19 million of asset impairment largely a result of
waste slumps at two landfills.
Included in Energy Services’ 2018 net profit was $12 million of transaction costs associated with the Newalta
acquisition, comprised of non-cash charges associated with a change in discount rates on decommissioning
obligations for inactive sites. Excluding these transaction costs, Energy Services’ 2018 net profit was $120 million, a
$104 million improvement over 2017.
2018 Net Revenue Increases by 39% to $411 Million
•
•
•
•
•
•
•
Energy Services’ 2018 net revenue was $411 million, an increase of $116 million and 39% compared to 2017’s net
revenue of $295 million. This increase was driven by our investments in new facility infrastructure and onsite services
in 2018 and 2017, including our acquisitions of Newalta and 3K, the completion of two new pipeline connections at
existing TRD facilities, and other growth and expansion capital spend that provided additional waste disposal, storage
and blending capacity.
TRD facilities volumes increased by 21% or 1.587 million m3 in 2018 versus 2017, a result of our acquisitions in Newalta
and 3K and higher production-related volumes at existing Tervita facilities driven by activity in the Montney.
Consistent with lower rig activity in the market, drilling volumes decreased by 131 thousand m3.
Landfill volumes increased by 16% or 440 thousand tonnes in 2018 compared to the same quarter in 2017. Soil volumes
received from customer remediation projects increased 19%, contributing an additional 14% in revenue year-over-
year. Both production and drilling related volumes increased by 86 thousand tonnes and 121 thousand tonnes,
respectively, in 2018 compared to 2017, reflecting additional volumes from our acquisitions as well as higher activity
in some existing Tervita facilities.
Revenue from higher waste volumes received at facilities was somewhat offset by negative pricing impacts associated
with downward pricing pressure in some key competitive regions as well as a shift in waste mix.
The addition of onsite services through our acquisition of Newalta contributed $41 million of incremental revenue,
comprising approximately 10% of total Energy Services’ revenue for the year.
Strong Montney development and higher WTI prices and wider differential pricing due to a shortage of pipeline
capacity to exit the WCSB led to strong energy marketing volumes in 2018, higher than volumes in the same period in
2017. These were positive results, particularly after the reduced volumes experienced in the second half of 2017 due
to the Peace Pipeline Expansion. 2018 energy marketing volumes were also positively impacted by our completion of
two new pipeline connections at existing TRD facilities in the first half of 2018, which allowed for increased ability to
gather volumes into these sites. The decline in recovered oil volumes in Q4 2018 as compared to Q4 2017 also
contributed to a 2% decline in recovered oil volumes for full year 2018 when compared to full year 2017. The negative
impact of this decline in revenue, however, was more than offset by higher realized earnings on these volumes of 14%.
Increasing WTI prices led to higher oil purchase costs, resulting in greater energy marketing direct expenses and,
accordingly, direct revenue for 2018 when compared to 2017.
38 TERVITA | Annual Report 2018
Page | 21
INDUSTRIAL SERVICES
Industrial Services is comprised of four operating segments: waste services, metals recycling, rail services, and
environmental services. Revenue from these operating segments is derived from: commodity-based sales from ferrous and
non-ferrous metals; facility-based services including hazardous and non-hazardous waste management, and waste
transportation and classification; and project-based services including site remediation, facility decommissioning,
environmental construction and technologies, emergency response, and rail services.
Industrial Services Financial Highlights
Commodity-based sales
Facility-based services
Project-based services
Total revenue
Direct expenses
Depreciation and amortization
Impairment expense
Operating profit (loss)
Finance costs
Other income (expense)
Net profit (loss)
Divisional EBITDA(1)
Divisional EBITDA Margin (1)
Maintenance capital expenditures
Growth and expansion capital expenditures
Three Months Ended December 31
2018
14
10
39
63
(56)
(2)
(23)
(18)
-
(1)
(19)
7
11%
3
4
Increase
(Decrease) % Change
27%
11%
0%
7%
4%
0%
100%
-700%
-100%
100%
-575%
3
1
-
4
2
-
23
(21)
1
1
(23)
2
3%
-
3
40%
n/m
0%
300%
2017
11
9
39
59
(54)
(2)
-
3
1
-
4
5
8%
3
1
Year Ended December 31
Increase
2018
49
33
149
231
(203)
(9)
(23)
(4)
-
(2)
(6)
28
12%
6
6
2017
44
38
139
221
(192)
(7)
-
22
-
(1)
21
29
13%
6
5
(Decrease) % Change
11%
-13%
7%
5%
6%
29%
100%
-118%
0%
100%
-129%
5
(5)
10
10
11
2
23
(26)
-
1
(27)
(1)
-1%
-
1
-3%
n/m
0%
20%
(1)
Please refer to the section Non-GAAP Measures for definitions and reconciliations.
Industrial Services Fourth Quarter Results
Q4 Divisional EBITDA Contributes $7 Million
•
•
Industrial Services’ Q4 2018 Divisional EBITDA of $7 million was a $2 million and 40% increase from the Q4 2017
Divisional EBITDA, driven by an improvement in revenue of $4 million from higher ferrous prices and incremental
contributions from acquired waste services facilities (Newalta) and two metals recycling yards.
Industrial Services’ Q4 2018 Divisional EBITDA Margin of 11% was a 3% increase over the 8% in Q4 2017. This primarily
reflects higher margins earned on commodity sales.
Q4 Net Loss of $19 Million Driven by Non-Cash Impairment Expense
•
Industrial Services’ Q4 2018 net loss of $19 million was $23 million lower than the $4 million net profit in the same
period in 2017, primarily due to goodwill impairment in our waste services operating segment due to ongoing
challenges in a highly competitive market.
Q4 Revenue Increases 7%
•
Industrial Services’ Q4 2018 of $63 million, a $4 million and 7% increase when compared to the $59 million of revenue
in Q4 2017, due to contributions from our acquired Newalta operations and higher ferrous pricing consistent volumes.
The impact of higher ferrous prices was primarily responsible for the increase in commodity-based sales revenue in Q4
2018 compared to Q4 2017 and reflects the strong global demand for steel. The 11% increase in facility-based revenue
is primarily due to our new facilities from our acquisition of Newalta. Q4 2018 project-based service revenue was
consistent with Q4 2017. Although project activity increased in Q4 2018 compared to Q4 2017, the average revenue
per project decreased reflecting changes in the scope and complexity of the work, customer base, and the competitive
environment.
Page | 22
TSX | TEV 39
Industrial Services Full Year 2018 Results
2018 Divisional EBITDA of $28 Million
•
Industrial Services’ 2018 Divisional EBITDA of $28 million was $1 million less than 2017 and was primarily a result of
lower facility-based service revenues with a trailing decrease in related direct expenses, in part due to the fixed cost
nature of some facility expenses.
2018 Net Loss of $6 Million
•
Full year 2018 net loss was $6 million, a decrease of $27 million compared to the net profit of $21 million in 2017. The
net loss was primarily due to the $23 million goodwill impairment in the waste services’ operating segment.
2018 Revenue Increases by $10 Million
•
•
•
•
Industrial Services’ 2018 revenue was $231 million, $10 million and 5% higher than 2017. This increase in revenue
primarily reflects contributions from strategic growth investments, including operations acquired from Newalta in Q3
2018, and two metals operations acquired in Q3 2017.
Commodity-based sales revenue increased 11% in 2018 compared to 2017. Ferrous sales volumes decreased 7% in
2018 compared to 2017, primarily due to rail logistical challenges in the first half of the year that limited our ability to
move the metals to market. However, strong ferrous prices due to higher demand for steel led to an overall increase
in commodity-based sales for the year.
Facility-based services revenue decreased by 13% in 2018 compared to 2017, resulting from continued competitive
activity, particularly in the first half of 2018, and the current year impact of a significant lost contract at the end of 2017.
Higher project-based services revenue of 7% was primarily a result of increased rail services work for both emergency
response for rail disruptions driven by increased rail traffic, as well as planned rail services work.
CORPORATE
Revenue - intersegment eliminations
Direct costs - intersegment eliminations
General and administrative expenses
Depreciation and amortization
Impairment expense
Finance costs
Transaction costs
Other income (expense)
Income tax recovery (expense)
Total corporate expenses
G&A as a % of revenue
Maintenance capital expenditures
Three Months Ended December 31
2018
-
-
(15)
-
(3)
(18)
(31)
(1)
-
(68)
8%
1
Increase
(Decrease) % Change
-100%
100%
36%
-100%
100%
64%
100%
-50%
100%
209%
(4)
4
4
(1)
3
7
31
(1)
3
46
-1%
1
n/m
100%
2017
(4)
4
(11)
(1)
-
(11)
-
(2)
3
(22)
8%
-
Year Ended December 31
Increase
2018
(5)
5
(50)
(5)
(1)
(59)
(57)
(3)
(1)
(176)
8%
4
2017
(11)
11
(52)
(4)
-
(43)
-
(23)
3
(119)
10%
-
(Decrease) % Change
-55%
55%
-4%
25%
100%
37%
100%
-87%
133%
48%
(6)
6
(2)
1
1
16
57
(20)
4
57
-2%
4
n/m
100%
General and Administrative Expenses
• Q4 2018 G&A expenses increased by $4 million in Q4 2018 when compared to Q4 2017, primarily due to the Newalta
acquisition.
•
•
Full year 2018 G&A expense was $50 million, a decrease of $2 million or 4% when compared to full year 2017. Included
in 2017 G&A was $9 million of severance expense compared to $1 million in 2018. Excluding 2017 severance costs,
G&A in 2018 increased by $6 million and was attributable to the acquired Newalta corporate operations.
Since the acquisition of Newalta in Q3 2018, we have realized $6 million of corporate synergies with an expected $15
million of annualized savings.
40 TERVITA | Annual Report 2018
Page | 23
Finance Costs
Interest expense
Amortization of debt issue costs
Finance costs
Three Months Ended December 31
2018
(16)
(2)
(18)
Increase
2017
(10)
(1)
(11)
(Decrease) % Change
60%
100%
64%
6
1
7
Year Ended December 31
Increase
2018
(52)
(7)
(59)
2017
(39)
(4)
(43)
(Decrease) % Change
33%
75%
37%
13
3
16
•
The increase in finance costs in Q4 and YTD was due to the issuance of the additional US$250 million senior secured
notes in 2018 for the acquisition of Newalta.
Transaction Costs
• Q4 2018 transaction costs included $1 million legal and advisory fees, $4 million of integration costs, and $26 million
on non-cash impairment expense on inactive sites. Certain assets acquired with Newalta were non-operating as at the
Acquisition Date. As these assets were and will continue to be inactive, Tervita has not assigned them to an operating
segment. $26 million of impairment expense, recorded under transaction costs, is associated with certain of these
assets and is primarily related to the change in discount rate on related decommissioning obligations.
•
Full year 2018 transactions costs included $13 million of expenses incurred for the completion of the Arrangement and
Joint Information Circular with Newalta, $18 million of integration costs, including those related to severance,
branding, site suspension, employee compensation, onerous contracts, and information technology, and $26 million
of non-cash impairment expense on related decommissioning obligations.
Other Income (Expense)
Gain (loss) on sale of assets
Share-based compensation
Gain (loss) on provisions
Foreign exchange gain (loss)
Other
Other income (expense)
Three Months Ended December 31
2018
1
-
(4)
2
-
(1)
Increase
2017
-
(1)
(1)
-
-
(2)
(Decrease) % Change
100%
-100%
300%
100%
0%
-50%
1
1
(3)
2
-
1
Year Ended December 31
Increase
2018
5
(4)
(5)
1
-
(3)
2017
-
(3)
(19)
(1)
-
(23)
(Decrease) % Change
100%
33%
-74%
-200%
0%
-87%
5
(1)
14
2
-
20
•
The YTD 2017 loss on provisions included $13 million for onerous contracts associated with vacated office space and
legal claims that were settled in 2018. This settlement resulted in a $2 million gain on provision in 2018, which was
partially offset by a $7 million loss for adjustments to existing onerous provisions.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND LIQUIDITY RISK
The term liquidity refers to the ability and speed with which a company’s assets can be converted into cash. Liquidity risk
refers to the risk encountered in meeting financial obligations settled by cash or another financial asset. Our liquidity risk
may arise from general day-to-day cash requirements and in the management of our assets, liabilities, and capital
resources. We manage our cash and credit facility balances to have sufficient capital to fund ongoing operations, capital
programs, and growth initiatives. Our liquidity and operational cash requirements are managed through cash flow
forecasts, monitoring of operational expenditures compared to budget, and monitoring of financial leverage ratios. Our
liquidity needs and working capital requirements can be sourced through cash provided by operating activities, existing
credit facilities, and access to debt and capital markets.
Our debt structure as at December 31, 2018 included: (i) an undrawn $275 million revolving credit facility; and (ii) US$610
million senior secured notes issued December 2016 (US$360 million) and July 2018 (US$250 million). The senior secured
Page | 24
TSX | TEV 41
notes bear a coupon rate of 7.625%, with interest payable semi-annually on June 1 and December 1, and mature on
December 1, 2021.
On December 21, 2018, Tervita renewed and upsized its revolving credit facility from $200 million to $275 million. In
addition, the maturity date of the credit facility was extended from December 2019 to June 2021.
On June 1, 2018, Tervita issued US$250 million of escrow notes to partly finance the Newalta Acquisition. On the closing of
the Newalta Acquisition, the escrow notes were exchanged for the July 2018 US$250 million senior secured notes described
above.
At December 31, 2018, Tervita had $87 million in letters of credit (“LCs”) issued against our revolving credit facility. The
remaining $188 million of capacity, combined with $46 million of cash and cash equivalents, provided $234 million in
available liquidity. The credit facility has a scheduled termination date of June 1, 2021, with normal course extension
provisions under the credit agreement.
For the year ended December 31, 2018, not including cash invested and related finance costs associated with the Newalta
acquisition, Tervita generated $96 million (2017 - $104 million) from operations (net of working capital) and invested
approximately $77 million (net of dispositions) (2017 - $68 million). Tervita did not require any additional liability to support
continuing operations.
Adjusted Working Capital at December 31, 2018 was $78 million (December 31, 2017 - $49 million). The change in Adjusted
Working Capital was a result of the Newalta acquisition, implementation of a new Enterprise Resource Planning system,
and the integration of Newalta operations. Adjusted Working Capital is sufficient to meet our planned strategy and achieve
intended results.
At current activity levels, we have ample liquidity to meet our ongoing commitments and operational requirements of the
business.
For the year ended December 31, 2018, Discretionary Free Cash Flow (before transaction costs) was $103 million compared
to $70 million in 2017. Discretionary Free Cash Flow represents Tervita’s capacity to fund its ongoing growth capital
spending and reduce net debt. For the year ended December 31, 2018, Discretionary Free Cash Flow was more than
sufficient to fund the $56 million of growth and expansion capital spend.
Net Debt to Adjusted EBITDA (Pro Forma LTM) at December 31, 2018 was 3.57.
SOURCES OF CASH
Our liquidity needs can be sourced in several ways, including: funds from operations, borrowings against or increases in
our revolving credit facility, new debt instruments, return of letters of credit or replacement of letters of credit with other
types of financial security, proceeds from the sale of long-term assets, and issuance of share capital.
At December 31, 2018, Tervita had cash and cash equivalents of $46 million.
Revolving Credit Facility
At December 31, 2018, $188 million was available and undrawn under our revolving credit facility for general corporate
purposes, as well as to provide LCs to third parties. The maximum amount of LC’s which can be issued under the LC
program is $200 million.
Under the terms of Tervita’s revolving credit facility, we must comply with certain financial and non-financial covenants: 1)
Total Leverage Ratio; 2) Secured Leverage Ratio; and 3) Interest Coverage Ratio.
Total Leverage Ratio
Total Leverage Ratio is calculated as the ratio of Total Indebtedness to Covenant EBITDA. Total Indebtedness consists of
the outstanding principal value of the senior secured notes, reported in C$ and reflecting the impact of cross currency
swaps, plus the amount of capital lease obligations, and less cash balances up to a total of $75 million.
Tervita’s Total Leverage Ratio cannot exceed 5.00 to 1.00 in 2018 and 4.50 to 1.00 thereafter.
42 TERVITA | Annual Report 2018
Page | 25
Secured Leverage Ratio
Secured Leverage Ratio is defined as Secured Indebtedness to Covenant EBITDA. Secured Indebtedness consists of the
outstanding LC’s (which reduce the borrowing availability under the revolving credit facility) less cash balances up to a
total of $75 million.
Tervita must maintain a Secured Leverage Ratio of less than 2.50 to 1.00.
Interest Coverage Ratio
Interest Coverage Ratio is defined as Covenant EBITDA to Interest Expense, where Interest Expense consists of interest
payments on the senior secured notes for the last twelve months and interest due on LC’s and standby fees.
Tervita must maintain an Interest Coverage Ratio greater than 1.75 to 1.00 for the year ended December 31, 2018 and 2.00
to 1.00 thereafter.
Covenant Compliance at December 31, 2018
The Company complied with its covenants at December 31, 2018, as follows:
Total Leverage Ratio
Secured Leverage Ratio
Interest Coverage Ratio
Proceeds from the Sale of Assets
Required
Less than 5.00
Less than 2.50
Greater than 1.75
Achieved
3.56
0.20
3.21
Proceeds from the sale of assets for the three months and year ended December 31, 2018 were $nil and $7 million,
respectively, and primarily relate to the sale of a non-core landfill and the disposal of miscellaneous equipment. For the
three months and year ended December 31, 2017, we received proceeds of $3 million and $6 million, respectively, from
the sales of a landfill and vacant land.
USES OF CASH
Our primary uses of cash include capital expenditures, operating and G&A expenses, and reduction of debt. Some of these
cash outflows are contractually obligated into the future.
Capital Expenditures
Capital expenditures are classified as either growth and expansion capital or maintenance capital. Growth and expansion
capital expenditures are cash spend to expand existing facilities, primarily cell expansion at our landfills and cavern
development, or with the intent of expanding existing businesses, or entering into new locations or markets. Maintenance
capital expenditures are cash spend on capital asset replacements or improvements required to maintain existing assets
at their current level of service. The amount and timing of future maintenance capital is primarily dependant on the volume
of waste that is received at our facilities.
Cash spend on capital, excluding the Newalta acquisition, for the three months and year ended December 31 was as
follows:
Capital expenditures
Growth and expansion
Maintenance
Three months ended December 31
Increase
Year Ended December 31
Increase
2018
2017
(Decrease) % Change
2018
2017
(Decrease) % Change
25
11
36
29
10
39
(4)
1
(3)
-14%
10%
-8%
56
28
84
52
23
75
4
5
9
8%
22%
12%
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
Page | 26
TSX | TEV 43
that provide stable cash flows and where there is a high degree of certainty of completing the project on time and on
budget.
In 2018, we continued our 2017 initiative of identifying, planning, and executing a growth capital portfolio. Please refer to
Outlook section for a discussion of expected capital spend for 2019.
Commitments
As at December 31, 2018, commitments for 2019 and thereafter were as follows:
Interest
Office and facility leases
Operating leases
Pipeline transportation commitment
Utility purchase commitments
Investment commitment
Total commitments
SUMMARY OF QUARTERLY RESULTS
SEASONALITY
2019
64
10
1
22
2
1
100
2020-21
127
19
1
7
2
-
156
2022-23 Thereafter
-
42
-
-
-
-
42
-
17
-
-
-
-
17
Total
191
88
2
29
4
1
315
Our quarterly results reflect how the oilfield services industry is influenced by seasonal weather patterns. During the spring
thaw and at other times of the year, wet weather can make the ground unstable. Consequently, municipalities and
provincial transportation departments enforce road bans that restrict the movement of trucks, rigs, and other heavy
equipment, reducing the activity levels and placing an increased importance on the location of the equipment prior to the
imposition of the road bans. As a result, Energy Services tends to earn lower revenue (excluding energy marketing) and
operating profit in the second fiscal quarter. If the spring weather or wet weather causes the ground to be unstable for
longer than usual, operating results may be negatively impacted.
QUARTERLY REVIEW SUMMARY
Revenue (excluding energy marketing)
Energy marketing revenue
Revenue
Profit (loss) from continuing operations
- per share ($), basic and diluted
Net profit (loss)
- per share ($), basic and diluted
Q4 2018 Q3 2018 Q2 2018 Q1 2018 Q4 2017 Q3 2017 Q2 2017 Q1 2017
125
324
449
116
274
390
203
439
642
124
416
540
194
208
402
114
259
373
134
161
295
132
241
373
(75)
(0.64)
(75)
(0.64)
(2)
(0.02)
(2)
(0.02)
-
-
-
-
3
0.03
3
0.03
(65)
(0.62)
(65)
(0.62)
(2)
(0.02)
(2)
(0.02)
(13)
(0.12)
(12)
(0.11)
(2)
(0.02)
(2)
(0.02)
Q3 2018 to Q4 2018
• The decrease in revenue was primarily attributable to the decline in energy marketing revenue
due to the extreme widening of differentials during Q4 2018.
• Net loss increased primarily due to transaction and finance costs incurred on the Arrangement,
goodwill impairment in Industrial Services, and an impairment of assets associated with inactive
sites in Energy Services.
Q2 2018 to Q3 2018
• Revenue increased primarily due to the acquisition of Newalta operations as well as higher WTI
prices on greater than Q2 2018 marketed oil volumes.
• Net profit decreased primarily due to transaction and finance costs incurred on the
Arrangement. The increase in these costs were largely offset by the increase in operating profit.
Q1 2018 to Q2 2018
• Revenue increased primarily from higher energy marketing volumes and WTI prices, and
increased project-related revenue in Industrial Services.
44 TERVITA | Annual Report 2018
Page | 27
• Net profit decreased due to the interest expense incurred on the escrow notes.
Q4 2017 to Q1 2018
• Revenue increased primarily from higher energy marketing volumes and WTI prices, offset
slightly by a decrease in project-related activity in Industrial Services.
• Net profit increased due to the impairments of goodwill and certain landfill assets in Q4 2017.
Q3 2017 to Q4 2017
• Volumes recovered at facilities increased due to production growth and development in some
key regions, which resulted in higher energy marketing revenue.
• Net loss increased due to the impairments of goodwill and certain landfill assets in Q4 2017.
Q2 2017 to Q3 2017
• Revenue was negatively impacted by the Peace Pipeline Expansion, which increased pipeline
capacity and intensified competition for trucked volumes.
• Net loss decreased as Industrial Services saw higher project-related activity.
Q1 2017 to Q2 2017
• Revenue decreased due to a decline in WTI prices.
• Net loss increased due to recognition of a provision for onerous contracts and legal claims.
OTHER ITEMS
FINANCIAL INSTRUMENTS
As at December 31, 2018, financial instruments included cash and cash equivalents, trade and other receivables, equity
investments, trade and other payables, long-term debt, interest payable, derivative assets (liabilities) and contingent
considerations. Excluding long-term debt, the fair values of the financial instruments approximated their carrying values
due to the short-term maturities.
In December 2016, Tervita issued US$360 million senior secured notes as part of the recapitalization of our debt and share
capital. Our risk management strategy for the senior secured notes is to mitigate the foreign currency risk due to
movements in the US$ to C$ exchange rates. As a result, at the same time as the issuance of the US$ 360 million senior
secured notes, Tervita entered into cross-currency swap agreements (“cross currency swaps”) and applied hedge
accounting to the transactions to mitigate foreign exchange risk and variability in cash flows due to interest rate risk
(“Designated Hedge”). All gains and losses related to these senior secured notes and the cross-currency swaps are
recognized in accumulated other comprehensive profit (loss), except for gains or losses recognized in profit (loss) related
to the portion of hedge deemed to be ineffective. During 2018, the Designated Hedge was deemed to be effective and $39
million was recognized in accumulated other comprehensive profit (loss). The carrying value of the US$360 million senior
secured notes and the fair value of the cross-currency swaps were disclosed in the Financial Statements. The fair value of
the cross-currency swaps is a Level 2 valuation based on observable inputs.
In May 2018, Tervita entered into swap agreements (the “swaps”) to provide a fixed US$ to C$ conversion rate on the
US$250 million proceeds from the June 1, 2018 issuance of the escrow notes. On July 19, 2018 the swaps were settled in
conjunction with the close of the Arrangement. Tervita recognized a loss of $8 million in the Statements of Profit (Loss)
with the settlement of the swaps.
In May 2018, Tervita entered into forward contract swap agreements (“forward swaps”) to mitigate the foreign exchange
risk on the escrow notes. The forward swaps have a maturity date of December 2019 with a fixed foreign exchange US$ to
C$ rate at 0.7809. The forward swaps were not settled at the close of the Arrangement and continue to mitigate the foreign
exchange risk on the repayment of principal related to the US$250 million senior secured notes. All gains and losses
associated with changes to the fair value of the forward swaps are included in profit (loss). The fair value of the forward
swaps is a Level 2 valuation based on observable inputs. During 2018, $18 million was recognized in the Statements of
Profit (Loss) associated with unrealized changes in the fair value of the forward swaps.
Tervita is exposed to foreign currency risk with respect to its US$ debt. Tervita manages this exposure through its cross-
currency swaps, thereby fixing the exchange rate on certain US$ debt. Absent the swap agreements, a $0.01 change in the
US$ to C$ exchange rate would result in a change to net profit (loss) of $6 million (2017 - $4 million).
Tervita’s cash and cash equivalents, trade and other receivables and derivative assets are associated with credit risk. The
credit risk on cash and cash equivalents is presumed to be low since deposits are held with highly-rated financial
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institutions. We are currently monitoring certain customers for risk of default, however, we believe that this risk is mitigated
by the size, reputation and diversified nature and number of the customers to which Tervita extends credit, with no
customer individually making up more than 10% of our credit exposure. Tervita is exposed to counterparty credit risk and
internal credit risk on the US$360 million senior secured notes issued and the Designated Hedge. We have not hedged the
credit risk as part of the hedging relationship, however, changes in credit risk did not result in significant changes in the
fair value of the derivative asset as at December 31, 2018.
For further information regarding our financial and other instruments as well as how we manage the risk associated with
these instruments, refer to notes 2, 19, 20 and 23 of the Financial Statements and the Liquidity and Liquidity Risk section
of this MD&A.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of operations, Tervita engages in a variety of transactions that, under IFRS, are either not recorded on
our consolidated balance sheets or are recorded at amounts that differ from the full contract amounts. As at December 31,
2018 and December 31, 2017, the Company did not have any off-balance sheet arrangements, other than the
commitments, contingencies and guarantees discussed in notes 27, 28 and 29, respectively, of the Financial Statements.
These commitments include operating leases, agreements to pay interest on our long-term debt, and pipeline
transportation commitments.
We do not reasonably expect any presently known trend or uncertainty to affect our ability to continue using these off-
balance sheet arrangements. Tevita does not believe that it has any off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future material effect on the company’s financial performance or financial condition,
results of operations, liquidity, or capital expenditures.
RELATED PARTY TRANSACTIONS
As at December 31, 2018, Tervita identified its related parties as being its key management personnel (“KMP”), which
comprise the Board members, majority equity owners, Tervita’s executive leadership, and certain other individuals
employed by Tervita, as well as their close family members.
Two of the equity owners can exert significant influence over Tervita through their investment in Tervita’s share capital.
During 2018, one of these equity owners, who also has representation on the Board of Directors, earned fees for issuance
of the escrow notes of $4 million (note 3).
Other material transactions with related parties included share-based compensation and payment of interest on their
proportionate holdings in the US$360 million senior secured notes and US$250 million senior secured notes. During 2018,
equity owners and certain members of the Board of Directors earned US$2 million in interest income (2017 - US$2 million).
The share-based compensation expense regarding the KMP in 2018 was $2 million (2017 - $1 million).
All transactions with related parties were considered arm’s length transactions with standard terms and conditions.
Other than the interest payable on the US$610 million senior secured notes and settlements under the share-based
compensation plans, there were no other ongoing commitments to the KMP.
For more information on Tervita’s transactions with the KMP and a summary of compensation of KMP, refer to note 26 of
the Financial Statements.
LEGAL AND ENVIRONMENTAL MATTERS
Refer to note 28 of the Consolidated Financial Statements for disclosure of legal and environmental matters.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of financial statements requires management to make judgments and estimates that affect the application
of accounting policies and the reported assets, liabilities, revenues, expenses and disclosures of contingencies. These
estimates and assumptions are subject to change based on experience and available information. Critical accounting
estimates are those that require management to make assumptions about matters that are highly uncertain at the time
the estimate is made. Critical accounting estimates are also those estimates which, where a different estimate could have
46 TERVITA | Annual Report 2018
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been used or where changes in the estimate that are reasonably likely to occur, would have a material impact on the
company’s financial condition, changes in financial condition, or financial performance.
Tervita uses critical estimates and judgments in arriving at the carrying values disclosed in the Financial Statements, in the
following areas:
Fair Values
Tervita utilizes fair value measurements and disclosure for several items within the Financial Statements. Fair value is the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell
the asset or transfer the liability takes place in either the principal market or the most advantageous market for the asset
or liability. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data
is available, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
Fair value estimates were used in arriving at the Purchase Price Allocation (“PPA”) of the Arrangement. Tervita utilised the
services of a third-party business valuator to estimate the fair values of a majority of the assets acquired that form part of
the PPA.
The fair value of Tervita’s cash generating units (“CGUs”) is estimated for purposes of the annual goodwill impairment test
using a Level 3 discounted cash flow valuation approach. Inherent in the valuation approach are key assumptions that are
subjective and represent reasonable estimates with respect to factors affecting operations including economic,
operational, and market conditions. These conditions are sensitive to change and could affect the fair value. The fair value
of Tervita and each CGU is estimated using a discounted cash flow approach based on CGU specific weighted average costs
of capital ranging from 10% to 11% (2017 – 13% to 14%) based on comparable companies using a cross-section of industry
peers. The discounted cash flows assume average annual revenue and expense growth rates of two percent, and two per
cent for terminal years. These conditions are sensitive to change and could affect the fair value.
Cash flows are based on Tervita’s operating budget for the next fiscal year, which is approved by management and the
Board of Directors. The budget is based on past performance as well as management’s assessment of expected market
trends, growth strategy, and economic conditions. For future years not included in the budget, assumptions are made,
including growth rates implicit in the cash flow projections for each CGU to reflect their unique market characteristics,
growth capital spending opportunities, and economic conditions.
The key assumptions in establishing fair value less costs of disposal for specific CGUs focus on revenue estimates which are
driven primarily by forecast activity levels in the oil and gas sector. Budgeted growth rates are normally aligned with these
forecast activity levels and peer group growth expectations. Historical margins are guidelines for budgeting future
earnings, with adjustments made for anticipated one-time or non-recurring events. For CGUs that experienced significant
growth in prior periods due to acquisitions, we consider the increased scale of operations, new markets entered, or services
offered to estimate future revenue and earnings. For energy marketing, forecast commodity prices, the equalization
density penalty applicable to crude oil densities, and heavy oil differentials are estimated market inputs impacting the
revenue and earnings forecasts. Management considers the revenue estimates and margins reflected in the budget and
strategic plan as achievable. Fair value less costs of disposal for specific assets or groups of assets is a Level 3 valuation,
which contemplates the sale of similar assets in like markets and relies on third party offers and independent valuations
and appraisals to value the assets. The key assumptions used relate to the comparability of similar assets used for valuation
purposes, as well as the fact that historic market data is indicative of future market prices.
Revenue
Revenue is assessed for certain revenue streams on a portfolio basis, as the contracts in the portfolio have similar
characteristics and performance obligations, and Tervita does not expect the effects of applying IFRS 15 to the portfolio of
contracts would differ materially from applying it to the individual contracts. Judgment is required in the assessment of
contract characteristics and performance obligations to determine if application of IFRS 15 on a portfolio basis
appropriately presents the nature and timing of those contracts on an individual basis.
Timing of the satisfaction of the performance obligations associated with revenue recognition involves an understanding
of the nature of the performance obligations and contracts. Judgment is required in determining the methods used to
recognize revenue for the transfer of inventory and rendering of services. Transfer of inventory generally occurs when
control of the inventory transfers to the buyer, and the Company must assess whether the indicators of a transfer of control
are satisfied. Rendering of services generally occurs when Tervita has a right to invoice, and the Company must determine
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the appropriate criteria to use to assess achievement of performance obligations and how performance obligations are to
be allocated to the contract purchase price under fixed-pricing arrangements.
Determination of the transaction price and allocation of it to each performance obligation involves an understanding of
the fair value of goods and services provided. Judgment is required in determining the stand-alone selling prices for
contracts under which the transaction price is a lump-sum fixed-fee arrangement.
Tervita records revenue for certain services based on an estimate of the completion of the performance obligations for
those services. The achievement of performance obligations and the total anticipated activity are subject to significant
estimates by management.
Decommissioning Liabilities
Determination of decommissioning liabilities requires estimation of the nature, timing, and cost of the remediation
process, the timing of cash outflows, and applicable discount rates. Tervita uses a risk-free rate for calculating
decommissioning liabilities, which is assessed quarterly and updated when there is a material change in the rate. Estimates
are based upon Tervita’s best practices and current regulatory requirements. Changes in estimates reflect both revisions
to the expected amount and timing of future expenses and the revision of the discount rates.
The risk-free rates used to estimate the decommissioning liabilities at December 31, 2018 ranged from 1.86% to 2.50%
(December 31, 2017 – 1.68% to 2.26%) and an inflation rate of two per cent (December 31, 2017 – two per cent), and were
specific to the timing of the cash flows and the jurisdiction of the obligations. The undiscounted cash flows associated with
Tervita’s liabilities at December 31, 2018 were estimated at $837 million (December 31, 2017 – $511 million). Payments to
settle the decommissioning liabilities occur on an ongoing basis and will continue over the remaining lives of the operating
assets, which are up to 106 years.
Onerous Contracts
The determination of an onerous contract provision often requires an estimation of the potential outcomes of different
courses of action, the likelihood of these outcomes occurring, and the appropriate discount rate.
The risk-free rates used to estimate the onerous provisions at December 31, 2018 ranged from 1.86% to 1.96%
(December 31, 2017 – 1.68% to 2.04%) and an inflation rate of five per cent to reflect the terms of the onerous contracts
(December 31, 2017 – five per cent), and were specific to the timing of the cash flows. The undiscounted cash flows
associated with Tervita’s liabilities at December 31, 2018 were estimated at $74 million (December 31, 2017 – $38 million).
Payments to settle the onerous contracts occur on an ongoing basis and will continue over the remaining lives of the
operating assets, which are up to 14 years.
There were no material changes to our accounting estimates or judgments during 2018 other than those disclosed in note
2 of the Financial Statements related to the transition to IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from Contracts
with Customers”.
Tervita is not aware of any trends or uncertainties that is expected to reasonably impact the estimates used or the
assumptions described.
IMPACT OF NEW ACCOUNTING STANDARDS
Revenue from Contracts with Customers
Tervita adopted IFRS 15 “Revenue from Contract with Customers” ("IFRS 15") on January 1, 2018, using the cumulative effect
method and practical expedients, with any impact of initial application recognized in accumulated earnings (deficit) on
January 1, 2018. Accordingly, the comparative financial results for 2017 were not restated and have been presented as
previously reported under IAS 11 ''Construction Contracts'', IAS 18 ''Revenue'' and related interpretations.
The Company applied three practical expedients upon adoption of IFRS 15:
•
•
Revenue was recognized for certain contracts when Tervita had the right to invoice, as the value provided to the
customer under such contracts corresponded directly to the work billed to date;
The transaction price allocated to remaining performance obligations and the timing of revenue recognition related
to those unsatisfied performance obligations was not disclosed on contracts where Tervita recognized revenue using
the right to invoice; and
48 TERVITA | Annual Report 2018
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•
Revenue was assessed for certain revenue streams on a portfolio basis, as the contracts in the portfolio had similar
characteristics and performance obligations and Tervita determined that the effects of applying this standard to the
portfolio of contracts would not differ materially from applying it to the individual contracts.
The Company’s accounting policies in relation to revenue recognition were not substantially impacted by the transition to
IFRS 15. However, there were changes to the timing or recognition of revenue for certain energy marketing pipeline
activities and lump-sum fixed price contracts.
The following table summarizes the impact of adopting IFRS 15 on the Company’s Statements of Profit (Loss) for the year
ended December 31, 2018 for each of the line items affected:
Three Months Ended December 31
Year Ended December 31
Amounts
Without IFRS
15 Adoption
590
(525)
Adjustments
December 31,
2018 Reported
(188)
188
402
(337)
Amounts
Without IFRS
15 Adoption
3,031
(2,791)
Adjustments
(1,057)
1,057
December 31,
2018 Reported
1,974
(1,734)
Revenue
Direct expenses
There was no material impact to the Company’s Consolidated Statements of Financial Position (“Statements of Financial
Position”) as at December 31, 2018 and its Consolidated Statements of Cash Flows ("Statements of Cash Flows") for the year
then ended.
The transition to IFRS 15 resulted in a change to the timing of revenue recognition on these types of contracts, which is
now recorded when control of performance obligations is transferred to the customer. Under IAS 18, the transfer of risks
and rewards was used to determine the timing and amount of revenue to be recognized. The change in timing of revenue
recognition may result in the recognition of contract assets and liabilities. As at December 31, 2018, contract assets and
liabilities were $nil.
There were no potential effects on Tervita’s business from the adoption of IFRS 15.
Financial Instruments
Tervita adopted IFRS 9 ''Financial Instruments'' ("IFRS 9") using retrospective application on January 1, 2018, except for
hedge accounting requirements, which were required to be adopted prospectively.
Tervita elected to exercise a transition exemption whereby prior periods were not restated for the classification and
measurement requirements of IFRS 9 that were adopted and disclosed retrospectively. Except for changes in classification
of certain financial instruments, the application of IFRS 9 did not have an impact on the Financial Statements.
IFRS 9 eliminated several financial asset categories under IAS 39: available for sale, held to maturity, and loans and
receivables. Tervita's transition to IFRS 9 resulted in the reclassification of cash and cash equivalents and trade and other
receivables from fair value through profit or loss ("FVTPL") and loans and receivables, respectively, to amortized cost.
Financial assets measured at amortized cost under IFRS 9 are held within a business model whose objective is to collect
contractual cash flows arising from payments of principal and interest. This did not result in any changes to carrying value
of the financial assets at the date of initial application.
Impairment of financial assets changed from an incurred loss model under IAS 39 to an expected credit loss ("ECL") model
under IFRS 9. ECLs are a probability-weighted estimate of credit losses over the expected life of the financial instrument.
Credit losses are measured as the difference between the cash flows due to the Company under a contract and the cash
flows that Tervita expects to receive. Tervita uses reasonable and supportable information that is available without undue
cost or effort to determine the credit risk at the date that financial instruments are initially recognized. The Company
assessed receivables for indicators of a significant increase in credit risk since initial recognition and noted no changes to
the previous assessment.
Tervita elected to adopt the new general hedge accounting model in IFRS 9. This requires the Company to ensure that
hedge accounting relationships are aligned with its risk management objectives and strategy and to apply a more
qualitative and forward-looking approach to assessing hedge effectiveness. Requirements for hedge effectiveness include
the existence of an economic relationship between the hedging instrument and hedged item, that the effect of credit risk
does not dominate the value changes that result from that economic relationship, and that the hedge ratio is maintained.
IFRS 9 also requires that the unrecoverable amount of cash flow reserves held at a loss is recognized in profit (loss) at the
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time of discontinuation. This compares to the hedging requirements of IAS 39, which required a retrospective analysis of
hedge effectiveness, and assessed hedge effectiveness using quantitative limits. These changes had no material impact on
the accounting for hedging relationships at Tervita, but require additional disclosure of qualitative assessments. Hedging
relationships previously designated under IAS 39 were determined at the date of initial application to meet the criteria for
hedge accounting under IFRS 9, and there was no change to the hedge ratio of 1:1.
Share-Based Compensation
The IASB issued amendments to IFRS 2 ''Share-Based Payment'' ("IFRS 2") in June 2016, which required prospective
application effective for annual periods beginning on or after January 1, 2018.
The amendments provide clarification on the classification and measurement of share-based compensation transactions:
accounting for cash-settled payments which include vesting requirements, classifying transactions with net settlement
features, and accounting for transactions modified from cash-settled to equity-settled.
Tervita assessed there was no impact on the measurement and classification of share-based compensation from
implementation of the amendments.
Leases
IFRS 16 ''Leases'' ("IFRS 16") was issued in January 2016 and is effective for annual periods beginning on or after January 1,
2019. IFRS 16 replaces IAS 17 ''Leases'' ("IAS 17"), IFRIC 4 "Determining Whether an Arrangement Contains a Lease", SIC-15
"Operating Leases-Incentives", and SIC-27 "Evaluating the Substance of Transactions Involving the Legal Form of a Lease".
IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases, which requires
lessees to account for operating leases on the Statements of Financial Position like accounting for finance leases under IAS
17. At the commencement date of a lease, a lessee will recognise a liability to make lease payments and a right-of-use asset
representing the right to use the underlying asset during the lease term.
Tervita has elected to adopt IFRS 16 using the modified retrospective transition approach, whereby the right-of-use asset
is measured at the value of the lease liability upon the date of initial application. The modified retrospective approach does
not require restatement of prior periods. Tervita has applied certain practical expedients that are available under this
adopted approach and has elected to apply recognition exemptions for short-term and low-value leases. As a lessee,
Tervita's most significant lease contracts relate to real estate, equipment, and surfaces. Tervita does not have any material
lease agreements where Tervita acts as lessor.
IFRS 16 requires lessees and lessors to disclose additional key information regarding the lease arrangements. The complete
impact of adopting IFRS 16 will be disclosed in the Financial Statements for the first quarter of 2019.
Tervita does not expect these changes to impact compliance with the financial covenants that form part of our long-term
debt.
KEY RISKS
General economic conditions and dependency on exploration and production activity levels in
the markets
Demand for Tervita's services in all our divisions depends, in large part, on the level of exploration and production of oil
and gas and the oil and gas industry's willingness to purchase our services. This willingness depends on oil and gas prices,
expectations about future prices, the cost of the services Tervita offers, the cost of the services our competitors offer, the
cost of exploring for, producing and delivering oil and gas, regulatory charges and requirements, the discovery rate of new
oil and gas reserves, the ability of oil and gas companies to raise capital and various other economic and industry factors
beyond our control. Domestic and international political, regulatory, military and general economic conditions beyond our
control also affect the oil and gas industry.
Prices for oil and gas have historically been volatile and have reacted to changes in the supply and demand for oil and gas,
domestic and worldwide economic conditions and political instability in oil-producing countries. These changes have
historically significantly affected Tervita's customers and, consequently, Tervita. Tervita expects the prices for oil and gas
to continue to be volatile and affect the demand for Tervita's services. Either a material decline in general economic
conditions or a material decline or continued volatility in the price of oil or gas could materially affect the demand for
Tervita's services and have a material adverse effect on Tervita's business, financial condition, results of operations, and
cash flows or Tervita's ability to make required payments on debt outstanding.
50 TERVITA | Annual Report 2018
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WCS prices and other Canadian crude oil grades have been declining relative to WTI prices due to limited pipeline capacity
in Canada and rising production. Canadian oil producers are expected to experience a disconnect from benchmark North
American crude prices (represented by the WTI benchmark) and their operating performance and cash flows. Low
Canadian prices and their negative impact on cash flows will likely reduce producers' capital investments and their desire
to ramp up production until transportation constraints ease and prices improve. Producers of heavy oil are most impacted
by the low prices and, as a result, many Canadian oil producers are suspending or maintaining drilling programs, thereby
negatively impacting Tervita's business. In addition, a higher WTI price promotes increased production in the United States,
which in turn dampens demand for Canadian oil.
Limited pipeline capacity adversely affects the delivery of both oil and gas from Canada to other markets, severely impacts
Canadian oil and gas producers and places them at a competitive disadvantage compared to producers in the United
States or other countries. As a result, the Canadian oil and gas industry is facing significant challenges to remain
competitive, as companies with operations in numerous countries determine their capital allocations and financial
investors determine the companies and countries they intend to invest in.
Tervita is particularly reliant on oil and gas exploration and production in the WCSB. Any decline in oil and gas exploration
and production in this region could have a material adverse effect on Tervita's business, financial condition, results of
operations, and cash flows or our ability to make required payments on debt outstanding.
Changes in Environmental Regulations
Tervita's business is subject to extensive Canadian federal, provincial, territorial, state and local environmental laws and
regulations, including those governing the use, discharge, management, transportation, treatment, processing, storage
and disposal of non-hazardous, hazardous, toxic and other regulated materials, land use and reclamation, the
establishment, operation, decommissioning, closure, abandonment and restoration of facilities or of natural resources,
worker and public health and safety and the reporting, investigation and remediation of releases of, and exposure to,
regulated substances. Tervita's failure to comply with such laws and regulations or to obtain or comply with environmental
permits or our incurrence of environmental investigation or remediation costs or liabilities could result in the imposition
of fines and penalties, some of which may be material, the suspension or revocation of regulatory permits, or otherwise
have a material adverse effect on our business, financial condition, results of operations, and cash flows or our ability to
make required payments on debt outstanding.
Environmental laws and regulations and their enforcement are subject to frequent change and have tended to become
more stringent over time. Changes in environmental regulation can result in increased operating or capital expenditures
that could have a material adverse effect on Tervita's ability to comply with such regulations, our financial position, results
of operations, cash flows or ability to make required payments on debt outstanding, or affect Tervita's reputation or
customer demand for our services. Tervita monitors and assesses the environmental impact of its operations as part of its
internal environmental liability management program. The program also includes soil and groundwater management and
remediation as required. Some environmental laws and regulations can impose liability for damages without regard to
negligence or fault, and in some cases damages may be joint and several.
In addition, many of Tervita's customers are heavily reliant on hydraulic fracturing and other enhanced recovery
techniques, a practice that involves the pressurized injection of water, chemicals, proppants and other substances into
tight rock formations to stimulate hydrocarbon production by creating fractures extending from the well bore through the
rock formation to enable natural gas or oil to move more easily through the rock pores to a production well. Various
Canadian federal, provincial and territorial regulatory and legislative initiatives are underway to regulate, or further
investigate, the environmental impacts of hydraulic fracturing. Hydraulic fracturing has also generated increased public
interest in Canada regarding its potential environmental impacts.
The adoption of Canadian federal or provincial laws or regulations imposing or permitting disclosure or other regulatory
obligations related to, or otherwise limiting, the hydraulic fracturing process could make it more difficult or expensive for
Tervita's customers to complete oil and natural gas wells, which could result in adverse impacts on demand for Tervita’s
services.
Increase in Market Competition
There are many competitors of our businesses, including waste treatment, recovery and disposal, environmental site
remediation, metals recycling and waste services businesses. In addition, many of Tervita's customers manage a portion of
their own waste internally without the use of a third-party service providers. Many of Tervita's customer relationships can
be short-term in nature as our customers are generally not bound by long-term contracts or service agreements, and many
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of our relationships are subject to cancellation by our customers upon short notice with limited or no damages payable to
Tervita. In addition, there is no certainty that the backlog of orders for Tervita's services will in fact result in actual sales at
the times or in the amounts estimated at any time. Tervita's customers regularly evaluate the best combination of value
and price from competing alternatives and/or emerging technologies and can move between alternatives or, in some
cases, develop their own alternatives with relative ease. This competition influences the prices Tervita charges and requires
Tervita to control our costs aggressively and maximize efficiency to maintain acceptable operating margins; however,
Tervita may be unable to do so and remain competitive on a cost-for-service basis. In addition, existing and future
competitors may develop or offer services and/or emerging technologies that have price, location or other advantages
over the services we provide. If we are unable to retain our customers, develop new customers or maintain the prices we
charge due to any of the foregoing factors, it could have a material adverse effect on Tervita's business, financial condition,
results of operations, and cash flows or our ability to make required payments on debt outstanding.
Additionally, competitors of Tervita's energy marketing division include companies that own pipelines. These competitors
could implement controls or tariffs which impede Tervita's ability to physically or economically access the pipelines they
control, which could have a material adverse effect on Tervita's business, financial condition, results of operations, and cash
flows or our ability to make required payments on debt outstanding.
Changes in Industry Practices
Tervita's energy marketing practices result in exposure to market price risk for crude oil and condensate, volume and basis
exposure on marketing transactions and through upgrading of different product streams. Energy marketing transactions
are also associated with counterparty credit risk of non-performance. Tervita's risk management policies for this division
may not be effective in mitigating these risks. Our failure to effectively mitigate these risks could result in losses for Tervita,
and any such losses could be material.
For information regarding risks pertaining to our liquidity and financial and other instruments as well as how we manage
the risk associated with these instruments, refer to the Liquidity and Liquidity Risk and Financial Instruments sections
of this MD&A.
Additional discussion regarding Tervita’s risk factors is presented in our most recent Annual Information Form filed with
the Canadian securities commissions at www.sedar.com.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
We have documented risks, controls, results of testing, and reporting procedures based on criterion established in the
Internal Control – Integrated Framework (2013) (“COSO 2013”) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”). The Chief Executive Officer and the Chief Financial Officer (collectively, the “Certifying
Officers”) have evaluated the design and effectiveness of our disclosure controls and procedures, and the operational
effectiveness of our internal controls over financial reporting using COSO 2013. As of December 31, 2018, the Certifying
Officers have concluded that such disclosure controls and procedures and internal controls over financial reporting were
effective.
52 TERVITA | Annual Report 2018
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FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements and forward-looking information
(collectively referred to herein as “forward-looking statements”) within the meaning of
securities legislation. Such forward-looking statements include, without limitation,
forecasts, estimates, expectations and objectives for future operations that are subject
to assumptions, risks and uncertainties, many of which are beyond the control of
Tervita. Forward-looking statements are statements that are not historical facts and are
generally, but not always, identified by the words “expects”, “plans”, “anticipates”,
“believes”, “intends”, “estimates”, “projects”, “potential” and similar expressions, or are
events or conditions that “will”, “would”, “may”, “could” or “should” occur or be
achieved. These statements are not guarantees of future performance and are subject
to risks, uncertainties and other key factors that could cause actual results or events to
be materially different from those anticipated in such forward-looking statements.
Specific forward-looking statements contained in this MD&A include, amongst others,
statements and management’s beliefs, expectations or intentions regarding the
following:
•
the long-term oil and gas environmental services market outlook in Canada will
generate sufficient demand for Tervita’s services;
• market outlook with respect to drilling activity, relatively stable oil and gas prices,
Western Canadian oil and gas production levels, and moderate market growth and
GDP growth across Western Canada;
• oil and gas producers will continue to outsource waste by-product treatment and
•
•
•
disposal;
it is difficult for third parties to replicate the extensive footprint of Tervita’s facilities;
that Tervita’s strategy will be successful;
cash generated from operations, asset sales and amounts available under the credit
facilities will be adequate to permit Tervita to meet its debt service obligations,
ongoing costs of operations, working capital needs, capital expenditure
requirements and to fund acquisitions (other than material acquisitions) for the
foreseeable future;
the amount and nature of insurance coverage obtained will be adequate
considering the potential hazards;
•
timing of the completion of projects under development and their attendant costs;
• governmental regulation of the oil and gas industry, permits and other legal
•
requirements, including Tervita’s expectations with respect to permits;
• expected continued benefits of the Arrangement;
• plans and objectives for future operations;
• anticipated operational and financial performance (including expected synergies
and cost reductions) for each operating segment;
• ability to execute on our growth strategy; and
• expectations regarding future cash flow, liquidity and financial position, our
maintenance capital spending, growth and expansion capital projects, and sources
of funding for our capital program.
Forward-looking statements relating to our business contain uncertainties and
assumptions, including the following:
•
•
•
• demand for services in our businesses can be adversely impacted by general
economic conditions and we are dependent on exploration, drilling and production
activity levels in the markets where we offer our services;
the ability of management to execute its business plan;
the ability of the Company to realize the expected synergies from the Arrangement;
the risks of the environmental solutions industry, such as operational risks and
market demand;
risks inherent in Tervita’s marketing operations, including credit risk;
the uncertainty of estimates and projections relating to revenues, costs, expenses,
and capital expenditures;
fluctuations in oil and natural gas prices, foreign currency exchange rates and
interest rates;
•
•
•
• health, safety and environmental risks;
• uncertainties as to the availability and cost of financing;
• general economic conditions in Canada, the United States, and globally;
•
•
industry conditions;
the possibility that government policies or laws may change or governmental
approvals may be delayed or withheld;
• governmental regulation of the environmental solutions industry, including
environmental regulation;
• unanticipated operating events;
•
•
failure to obtain third-party consents and approvals, when required;
risks associated with existing and potential future lawsuits and regulatory actions
against Tervita;
the highly competitive nature of our markets, and competition that could adversely
impact our financial position, results of operations, cash flows or our ability to make
required payments on debt outstanding;
•
• global financial conditions are subject to increased volatility;
•
legislative and regulatory initiatives related to hydraulic fracturing that could result
in increased costs and additional operating restrictions or delays as well as adversely
affect our support services;
increasing concern regarding earthquake activity connected to oil/gas production
and waste disposal wells could adversely affect our business;
successful implementation of our investment and acquisition strategy;
the difficulty of identifying and executing acquisitions on favorable terms, including
successfully integrating businesses we acquire, and our significant exposure from
unknown liabilities related to our acquisitions;
susceptibility to seasonality due to adverse weather conditions;
risks related to changes in industry practices related to crude oil equalization and
declines in oil prices that may affect our energy marketing business;
risk of implementation of controls or tariffs on competitor-owned pipelines which
impede Tervita’s ability to physically or economically access the pipelines that may
affect our energy marketing business;
•
•
•
•
•
•
• our operations being subject to numerous natural disasters and operating hazards
and the lack of assurance that such events will be covered by insurance or whether
any such insurance coverage would be adequate;
• potential impairment losses in respect of our physical assets from reduced industry
activity and a sustained decline in demand for services involving such assets;
• our ability to attract and retain qualified workers;
• dependence on our senior management, the loss of which could materially harm our
business;
• obligation to comply with health and safety regulations at our facilities and our
operations, the failure of which could result in significant liability and/or fines and
penalties;
failure by our employees to follow applicable procedures and guidelines or on-site
accidents;
•
• deterioration in our safety record would harm our relationships with customers,
make it less likely for customers to contract for our services and subject us to
penalties and fines, which could adversely affect our business, operating results and
financial condition;
fluctuations in exchange rates;
the inability of counterparties or customers to fulfill their obligation to us;
technology we use in our business is increasingly subject to protection by
intellectual property rights; and
•
•
•
• our treatment, recovery and disposal facilities, cavern disposal facilities and
engineered landfill operations could be adversely affected by more stringent closure
and post-closure obligations and a variety of other risks.
For a more detailed discussion of risks relating to Tervita see our most recent Annual
Information Form.
These factors should not be construed as exhaustive. The forward-looking statements
included in this MD&A are made only as of the date hereof and Tervita does not
undertake to publicly update these forward-looking statements for new information,
future events or otherwise, except as required by applicable laws. Any forward-looking
statements contained herein are expressly qualified by this cautionary statement.
The estimates regarding Tervita’s future financial performance, including estimates
regarding Tervita’s expected realization of synergies from the Arrangement, are based
on assumptions about future events, including economic conditions and proposed
course of action, based on management’s assessment of the relevant information
currently available. See “Outlook”. The estimates of certain of Tervita’s financial results
for the year ended December 31, 2018, assuming the Arrangement had been
completed as of January 1, 2018 may constitute financial outlook, but they are not a
forecast or projection of future results, and are based on management’s assessment of
the relevant information currently available. See “Newalta Acquisition”. The estimates
are based on the same assumptions and risk factors set forth above and are based on
Tervita’s historical results of operations. The financial outlook or potential financial
outlook set forth in this MD&A were approved by management as of the date of this
MD&A for the purpose of providing investors with an estimation of: (a) the outlook for
Tervita for 2019 and onwards, where applicable; and (b) results for the year ended
December 31, 2018, assuming the Arrangement had been completed at January 1,
2018. Readers are cautioned that any such financial outlook contained herein should
not be used for purposes other than those for which it is disclosed herein. The
prospective financial information set forth in this MD&A has been prepared by
management. Tervita and management believe that the prospective financial
information has been prepared on a reasonable basis, reflecting management’s best
estimates and judgements, and represents, to the best of management’s knowledge
and opinion, Tervita’s expected course of action in developing and executing its
business strategy and growth opportunities relating to its business operations.
However, actual results may vary from the prospective financial information set forth in
this MD&A. See above for a discussion of the risks that could cause actual results to vary.
The prospective financial information set forth in this MD&A should not be relied on as
necessarily indicative of future results.
Page | 36
TSX | TEV 53
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
54 TERVITA | Annual Report 2018
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Tervita Corporation
Opinion
We have audited the consolidated financial statements of Tervita Corporation (Tervita), which comprise the consolidated statements of financial position
as at December 31, 2018 and 2017 and the consolidated statements of comprehensive profit or loss, equity and cash flows for the years then ended, and
notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Tervita as
at December 31, 2018 and 2017 and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with
International Financial Reporting Standards (IFRSs).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further
described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of Tervita in
accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other
ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Other Information
Management is responsible for the other information. The other information comprises:
Management’s Discussion and Analysis
The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so, consider whether
the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears
to be materially misstated.
We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that
there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will perform on this other
information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such
internal controls as management determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing Tervita ’s ability to continue as a going concern, disclosing,
as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate Tervita or
to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing Tervita’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when
it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these consolidated financial statements.
TSX | TEV 55
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional
skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our
opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of Tervita’s internal controls.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by
management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Tervita’s ability to continue as a
going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related
disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on
the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause Tervita to cease to continue
as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the
consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express
an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We
remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and
to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Ann-Marie Brockett.
Chartered Professional Accountants
Calgary, Canada
March 13, 2019
56 TERVITA | Annual Report 2018
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at December 31 (millions of dollars)
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Inventory
Current portion of derivative assets
Other current assets
Property, plant and equipment
Intangible assets
Goodwill
Derivative assets
Other assets
TOTAL ASSETS
LIABILITIES
Current liabilities
Trade and other payables
Income taxes payable
Interest payable
Current portion of decommissioning liabilities
Current portion of long-term debt
Current portion of other provisions
Long-term debt
Decommissioning liabilities
Other provisions
Derivative liabilities
Other long-term liabilities
TOTAL LIABILITIES
EQUITY
Share capital
Contributed surplus
Share-based compensation reserve
Accumulated earnings (deficit)
Accumulated other comprehensive profit (loss)
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
See accompanying notes
Approved by the Board of Directors:
(Signed) Grant Billing
Director
(Signed) John Cooper
Director
Note
2018
2017
13
23
14
20, 23
3, 15
16
3, 17
20, 23
23
5
23
21
19
12, 21
3, 19, 23
3, 21
21
20, 23
3, 24
3
22
46
180
12
18
8
264
1,157
42
333
8
5
1,809
122
14
6
14
4
12
172
814
399
47
—
6
1,438
947
1
5
(593)
11
371
1,809
124
130
9
—
4
267
615
20
324
—
—
1,226
94
14
4
6
—
7
125
437
266
29
31
5
893
837
—
2
(519)
13
333
1,226
Page | 1
TSX | TEV 57
CONSOLIDATED STATEMENTS OF COMPREHENSIVE PROFIT (LOSS)
For the years ended December 31 (millions of dollars, except for per share amounts)
NET PROFIT (LOSS)
Revenue
Operating expenses
Direct expenses
General and administrative expenses
Depreciation and amortization
Impairment expense
Operating profit (loss)
Finance costs
Transaction costs
Other income (expense)
Profit (loss) before tax
Current income taxes recovery (expense)
Deferred income taxes recovery (expense)
Profit (loss) from continuing operations
Profit (loss) from discontinued operations, net of tax
NET PROFIT (LOSS)
Items that are or may be subsequently reclassified to net profit (loss):
Foreign operations - foreign currency translation differences
Net gain (loss) on cash flow hedges
OTHER COMPREHENSIVE PROFIT (LOSS), NET OF TAX
Note
2018
2017
2, 6
2
15, 16
18
3, 8
3
9
5
5
20
1,974
2,329
(1,734)
(50)
(96)
(25)
69
(69)
(69)
(4)
(73)
(1)
—
(74)
—
(74)
(1)
(1)
(2)
(2,131)
(52)
(80)
(76)
(10)
(49)
—
(26)
(85)
(1)
4
(82)
1
(81)
—
6
6
TOTAL COMPREHENSIVE PROFIT (LOSS)
(76)
(75)
Basic and diluted earnings per share
Weighted average shares outstanding - basic and diluted
10
10
(0.67)
110,471,450
(0.77)
104,625,779
See accompanying notes
58 TERVITA | Annual Report 2018
Page | 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 (millions of dollars)
OPERATING ACTIVITIES
Profit (loss) from continuing operations
Adjustments for:
Finance costs
Impairment expense
Depreciation and amortization
Income taxes (recovery) expense
Cash interest paid
Cash settlement of provisions
Realized foreign exchange (gain) loss - debt and derivatives
Unrealized foreign exchange (gain) loss
Other adjustments
Funds from (used in) operations
Changes in non-cash working capital:
Trade and other receivables
Inventory
Other current assets
Trade and other payables
Changes in total non-cash working capital
Cash provided by (used in) operating activities
FINANCING ACTIVITIES
Issuance of long-term debt
Settlement of debt-related derivatives
Debt issue costs
Contingent consideration payments
Capital leases
Cash provided by (used in) financing activities
INVESTING ACTIVITIES
Additions to property, plant and equipment
Additions to intangible assets
Acquisitions
Investment income
Proceeds from sale of property, plant and equipment
Cash provided by (used in) investing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents from continuing operations
Cash provided by (used in) discontinued operations
Cash and cash equivalents, beginning of period
CASH AND CASH EQUIVALENTS, END OF PERIOD
See accompanying notes
Note
2018
2017
8
18
15, 16
5
19
21
9
9
11
3, 19
3, 20
3, 19
19
4, 15
4, 16
3, 4
(74)
69
25
96
1
(52)
(14)
8
(9)
52
102
(10)
1
1
2
(6)
96
326
(8)
(20)
—
(2)
296
(73)
(11)
(395)
1
7
(471)
1
(78)
—
124
46
(82)
49
76
80
(3)
(39)
(16)
—
2
20
87
(1)
(3)
1
20
17
104
—
—
(1)
(1)
—
(2)
(50)
(3)
(22)
1
6
(68)
—
34
1
89
124
Page | 3
TSX | TEV 59
CONSOLIDATED STATEMENTS OF EQUITY
Note
Share capital
Contributed
surplus
Share-based
compensation
reserve
Accumulated
earnings
(deficit)
Foreign
currency
translation
reserve
Cash flow
hedge
reserve
Accumulated
other
comprehensive
profit (loss)
Total equity
3, 24
3, 24
3
9
9
9
9
9
9
837
—
(837)
947
—
—
—
—
—
947
837
—
—
—
—
—
837
—
—
—
—
1
—
—
—
—
1
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
3
5
—
—
—
—
—
2
2
(519)
(74)
—
—
—
—
—
—
—
(593)
(438)
(81)
—
—
—
—
(519)
6
—
—
—
—
—
1
(2)
—
5
6
—
—
(1)
1
—
6
7
—
—
—
—
39
(40)
—
—
6
1
—
(25)
31
—
—
7
13
—
—
—
—
39
(39)
(2)
—
11
7
—
(25)
30
1
—
13
333
(74)
(837)
947
1
39
(39)
(2)
3
371
406
(81)
(25)
30
1
2
333
(millions of dollars)
As at January 1, 2018
Net profit (loss)
Cancellation of shares
Issuance of shares
Issuance of warrants
Effective portion of cash flow hedges
Reclassified to net profit (loss)
Foreign currency translation differences
Share-based compensation
As at December 31, 2018
As at January 1, 2017
Net profit (loss)
Effective portion of cash flow hedges
Reclassified to net profit (loss)
Foreign currency translation differences
Share-based compensation
As at December 31, 2017
See accompanying notes
60 TERVITA | Annual Report 2018
Page | 4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Tervita Corporation is incorporated under the laws of Canada. In these Consolidated Financial Statements (the "Financial
Statements"), "we", "us", "our", "Company", and "Tervita" mean Tervita Corporation, its subsidiaries and joint arrangements.
Tervita’s common shares and warrants trade on the Toronto Stock Exchange ("TSX") under the symbols "TEV" and "TEV.WT",
respectively. Tervita’s registered office and head office is located at 1600, 140 - 10 Avenue S.E., Calgary, Alberta, Canada,
T2G 0R1.
Tervita provides a comprehensive suite of environmental solutions covering every stage of our customers' project life
cycle, from development to reclamation, helping to minimize environmental impact while maximizing recovery of valuable
resources. Tervita is a leading waste and environmental solutions provider offering waste processing, treating, recycling,
and disposal services to customers in the oil and gas, mining, and industrial sectors. Tervita serves customers onsite, and
through a network of facilities in Canada and the United States ("US").
2. BASIS OF PRESENTATION
These Financial Statements for the year ended December 31, 2018 have been prepared in accordance with International
Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). The accounting
policies have been consistently applied throughout all periods presented, except where noted.
These Financial Statements provide comparative information in respect of the previous year and are presented in millions
of Canadian ("C$") dollars, unless otherwise stated. They are prepared on a historical cost basis, except for certain assets
that are measured at fair value, as detailed in the accounting policies under the respective notes.
Certain prior period comparative figures have been reclassified to conform to current year's presentation. Comparative
figures related to acquired entities are from the date after Tervita obtained control ("acquisition date").
These Financial Statements were approved by the Board of Directors on March 13, 2019.
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Consolidation
These Financial Statements include the consolidated Financial Statements of Tervita, its subsidiaries, and
joint arrangements.
Consolidated entities are controlled by Tervita. Control is achieved when Tervita has the power to direct
the relevant activities of the entity, exposure or rights to variable returns from its involvement with the
entity, and the ability to use its power over the entity to affect its returns. When Tervita has less than a
majority of the voting or similar rights of an entity, we consider all relevant facts and circumstances in
assessing whether it has power over an entity, including the contractual arrangement with the other
voting holders of the entity, rights arising from other contractual arrangements, and Tervita’s voting rights
and potential voting rights.
Tervita reassesses whether it controls an entity if facts and circumstances indicate that there are changes
to one or more of the three elements of control. Consolidation of an entity begins when Tervita obtains
control over the entity and ceases when Tervita ceases to control the entity. Assets, liabilities, revenue,
and expenses of an entity acquired or disposed of during the year are included in the Financial Statements
from the date Tervita gains control until the date Tervita ceases to control the entity.
A change in the ownership interest of an entity without loss of control is accounted for as an equity
transaction. If Tervita ceases to control an entity, it derecognizes the assets (including goodwill) and
liabilities of the entity, derecognizes the foreign currency translation differences ("CTA") recorded in the
Consolidated Statements of Equity ("Statements of Equity"), recognizes the fair value of the consideration
received, recognizes the fair value of any investment retained, recognizes any surplus or deficit in the
Consolidated Statements of Comprehensive Profit (Loss) ("Statements of Profit (Loss)"), and reclassifies
Tervita’s share of components previously recognized in Other Comprehensive Profit (Loss) (''OCI'') to the
Statements of Profit (Loss) or accumulated deficit, as appropriate, as would be required if Tervita had
directly disposed of the related assets or liabilities.
Tervita's material subsidiary is Newalta Environmental Services Inc., which is incorporated in the US and
is wholly owned and controlled by Tervita. All significant intergroup balances and transactions are
Page | 5
TSX | TEV 61
eliminated on consolidation. Tervita also has a Canadian subsidiary which acts as guarantor for its senior
secured revolving credit facility (note 19).
Foreign currency The functional currency for each subsidiary is the currency of the primary economic environment in which
the entity operates. Transactions not denominated in an entity’s functional currency are translated to the
translation
functional currency using the exchange rate at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated at the functional currency rate of exchange at the
reporting date. All unrealized foreign currency re-measurement gains and losses are recognized in
unrealized foreign exchange gain (loss) on the Statements of Profit (Loss). Non-monetary items are not
re-measured at the reporting date and remain at the exchange rate as at the date of the transaction. Non-
monetary items measured at fair value are translated using the exchange rate at the date when the fair
value was determined.
The assets and liabilities for entities with a functional currency other than Canadian dollars are translated
to presentation currency using the exchange rate at the reporting date. Revenue and expenses are
translated at the average exchange rate for the month. Resulting translation differences are recognized
in the CTA component of OCI.
On disposal of Tervita's entire interest in a foreign subsidiary, all the exchange differences accumulated
in CTA in respect of that operation is reclassified to the Statements of Profit (Loss).
Current and
non-current
classification
Tervita presents assets and liabilities in the Consolidated Statements of Financial Position (''Statements
of Financial Position'') based on current or non-current classification. An asset is deemed to be current
when it is expected to be realized or sold in the normal operating cycle, expected to be realized within
twelve months after the reporting period, held primarily for trading, or in the form of cash and cash
equivalents that are not restricted from being exchanged or used to settle a liability within twelve months
of the reporting period. All other assets are classified as non-current.
Fair values
A liability is deemed to be current when it is expected to be settled in the normal operating cycle, held
primarily for trading, due to be settled within twelve months after the reporting period, or there is no
unconditional right to defer the settlement of the liability for at least twelve months after the reporting
period. All other liabilities are classified as non-current.
Tervita utilizes fair value measurements and disclosure for several items within the Financial Statements.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value measurement is based
on the presumption that the transaction to sell the asset or transfer the liability takes place in either the
principal market or the most advantageous market for the asset or liability. The Company uses valuation
techniques that are appropriate in the circumstances and for which sufficient data is available, maximizing
the use of relevant observable inputs and minimizing the use of unobservable inputs.
OTHER ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
The preparation of the Financial Statements requires management to make judgments and estimates that affect the
application of accounting policies and the reported amounts of assets, liabilities, revenue, and expenses. Accordingly, actual
results could differ significantly from those estimates. The Financial Statements have, in our opinion, been properly prepared
within reasonable limits of materiality and within the framework of Tervita’s significant accounting policies.
62 TERVITA | Annual Report 2018
Page | 6
To enable increased understanding of the Financial Statements, a discussion of accounting policies, significant judgments,
and sources of estimation uncertainty is included with the applicable financial disclosures throughout these notes to the
Financial Statements:
Business acquisitions
Segment information
Income taxes
Revenue
Employee benefits
Note 3
Note 4
Note 5
Note 6
Note 7
Note 12 Leases
Note 13 Cash and cash equivalents
Note 14 Inventory
Note 15 Property, plant and equipment
Note 16 Intangible assets
Note 17 Goodwill
Note 18 Impairment
Note 19 Long-term debt
Note 20 Derivatives and hedging
Note 21 Provisions
Note 22 Share-based compensation
Note 23 Financial instruments and risk management
Note 26 Related party transactions
Note 28 Contingencies
Accounting
Policy
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
N/A
Judgments
Yes
N/A
Yes
Yes
N/A
Yes
N/A
N/A
Yes
Yes
N/A
Yes
N/A
N/A
Yes
N/A
Yes
N/A
Yes
Estimates
Yes
N/A
Yes
Yes
N/A
N/A
N/A
N/A
Yes
Yes
N/A
Yes
N/A
Yes
Yes
Yes
Yes
N/A
N/A
NEW AND AMENDED STANDARDS AND INTERPRETATIONS
The following new standards, interpretations, and amendments to existing standards were issued by the IASB and were
mandatory for accounting periods beginning on or after January 1, 2018 (the ''date of initial application'').
Revenue from
contracts with
customers
Transition and Application
The IASB issued IFRS 15 ''Revenue from Contracts with Customers'' ("IFRS 15") in April 2016 to replace
IAS 11 ''Construction Contracts'' ("IAS 11"), IAS 18 ''Revenue'' ("IAS 18"), and any related interpretations.
Tervita adopted IFRS 15 using the cumulative effect method and practical expedients, with any impact
of initial application recognized in accumulated earnings (deficit) on January 1, 2018. Accordingly, the
comparative financial results for 2017 were not restated and have been presented as previously reported
under IAS 18, IAS 11, and related interpretations.
The Company applied three practical expedients upon adoption of IFRS 15:
•
•
•
Revenue was recognized for certain contracts when Tervita had the right to invoice, as the value
provided to the customer under such contracts corresponded directly to the work billed to date;
The transaction price allocated to remaining performance obligations and the timing of revenue
recognition related to those unsatisfied performance obligations was not disclosed on contracts
where Tervita recognized revenue using the right to invoice; and
Revenue was assessed for certain revenue streams on a portfolio basis, as the contracts in the portfolio
had similar characteristics and performance obligations and Tervita determined that the effects of
applying this standard to the portfolio of contracts would not materially differ from applying it to
the individual contracts.
Changes to the Timing and Recognition of Revenue
The Company’s accounting policies in relation to revenue recognition were not substantially impacted
by the transition to IFRS 15. However, there were changes to the timing or recognition of revenue for
certain energy marketing pipeline activities and lump-sum fixed price contracts.
Tervita determined that certain energy marketing pipeline activities do not qualify under IFRS 15 to be
presented as gross revenue, and are now recorded on a net basis against direct expenses. This change
did not result in any impact to operating profit (loss) or net profit (loss), as it decreased revenue and direct
expenses by the same amount.
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TSX | TEV 63
Financial
instruments
Tervita generates project revenue through the provision of a variety of environmental and
decommissioning services. Certain projects have multiple performance obligations with lump-sum fixed
pricing arrangements, which require allocation of the purchase price among the performance obligations.
The transition to IFRS 15 resulted in a change to the timing of revenue recognition on these types of
contracts, which is now recorded when control of performance obligations is transferred to the customer.
Under IAS 18, the transfer of risks and rewards was used to determine the timing and amount of revenue
to be recognized. The change in timing of revenue recognition may result in the recognition of contract
assets and liabilities. As at December 31, 2018, contract assets and liabilities were $nil.
Impact on the Financial Statements
The following table summarizes the impact of adopting IFRS 15 on the Company’s Statements of Profit
(Loss) for the year ended December 31, 2018 for each of the line items affected:
Revenue
Direct expenses
Amounts
Without IFRS
15 Adoption
3,031
(2,791)
December 31,
2018
Reported
1,974
(1,734)
Adjustments
(1,057)
1,057
There was no impact to the Company’s Statements of Financial Position as at December 31, 2018 and its
Consolidated Statements of Cash Flows ("Statements of Cash Flows") for the year then ended as a result
of adopting IFRS 15.
Transition and Application
The IASB issued IFRS 9 ''Financial Instruments'' ("IFRS 9") to replace IAS 39 ''Financial Instruments:
Recognition and Measurement'' ("IAS 39") and IFRIC 9 "Reassessment of Embedded Derivatives". Tervita
adopted IFRS 9 using retrospective application on January 1, 2018, except for hedge accounting
requirements, which were required to be adopted prospectively.
Tervita elected to exercise a transition exemption whereby prior periods were not restated for the
classification and measurement requirements of IFRS 9 that were adopted and disclosed retrospectively.
With the exception of changes in classification of certain financial instruments, the application of IFRS 9
did not have an impact on the Financial Statements.
Changes to the Classification and Measurement, Derecognition, Impairment, and Hedge Accounting
for Financial Instruments
IFRS 9 eliminated several financial asset categories under IAS 39: available for sale, held to maturity, and
loans and receivables. Tervita's transition to IFRS 9 resulted in the reclassification of cash and cash
equivalents and trade and other receivables from fair value through profit or loss ("FVTPL") and loans and
receivables, respectively, to amortized cost. Financial assets measured at amortized cost under IFRS 9 are
held within a business model whose objective is to collect contractual cash flows arising from payments
of principal and interest. This did not result in any changes to carrying value of the financial assets at the
date of initial application.
Impairment of financial assets changed from an incurred loss model under IAS 39 to an expected credit
loss ("ECL") model under IFRS 9. ECLs are a probability-weighted estimate of credit losses over the expected
life of the financial instrument. Credit losses are measured as the difference between the cash flows due
to the Company under a contract and the cash flows that Tervita expects to receive. Tervita uses reasonable
and supportable information that is available without undue cost or effort to determine the credit risk at
the date that financial instruments are initially recognized. The Company assessed receivables for
indicators of a significant increase in credit risk since initial recognition and noted no changes from the
previous assessment.
Tervita elected to adopt the new general hedge accounting model in IFRS 9. This requires the Company
to ensure that hedge accounting relationships are aligned with risk management objectives and strategy
and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness.
Requirements for hedge effectiveness include the existence of an economic relationship between the
hedging instrument and hedged item, that credit risk does not dominate the value changes that result
from that economic relationship, and that the hedge ratio is maintained. IFRS 9 also requires that the
unrecoverable amount of cash flow reserves held at a loss is recognized in profit or loss at the time of
64 TERVITA | Annual Report 2018
Page | 8
Share-based
compensation
discontinuation. This compares to the hedging requirements of IAS 39, which required a retrospective
analysis of hedge effectiveness, and assessed hedge effectiveness using quantitative limits. These
changes had no material impact on the accounting for hedging relationships at Tervita, but required
additional disclosure of qualitative assessments. Hedging relationships previously designated under IAS
39 were determined at the date of initial application to meet the criteria for hedge accounting under IFRS
9, and there was no change to the hedge ratio of 1:1.
The IASB issued amendments to IFRS 2 ''Share-Based Payment'' ("IFRS 2") in June 2016, which
required prospective application effective for annual periods beginning on or after January 1, 2018. The
amendments provide clarification on the classification and measurement of share-based compensation
transactions: accounting for cash-settled payments which include vesting requirements, classifying
transactions with net settlement features, and accounting for transactions modified from cash-settled to
equity-settled. There was no impact on the measurement and classification of share-based compensation
from implementation of the amendments.
STANDARDS ISSUED BUT NOT YET EFFECTIVE
The IASB and IFRS Interpretations Committee have issued the following standards and amendments or interpretations to
existing standards that were not yet effective and not applied as at December 31, 2018. Tervita did not early adopt any of
these standards.
Leases
IFRS 16 ''Leases'' ("IFRS 16") was issued in January 2016 and is effective for annual periods beginning on
or after January 1, 2019. IFRS 16 replaces IAS 17 ''Leases'' ("IAS 17"), IFRIC 4 "Determining Whether an
Arrangement Contains a Lease", SIC-15 "Operating Leases-Incentives", and SIC-27 "Evaluating the
Substance of Transactions Involving the Legal Form of a Lease".
IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases,
which requires lessees to account for operating leases on the Statements of Financial Position, similar to
the accounting for finance leases under IAS 17. At the commencement date of a lease, a lessee will
recognize a liability to make lease payments and a right-of-use asset representing the right to use the
underlying asset during the lease term.
Tervita has elected to adopt IFRS 16 using the modified retrospective transition approach, whereby the
right-of-use asset is measured at the value of the lease liability upon the date of initial application. The
modified retrospective approach does not require restatement of prior periods. Tervita has applied certain
practical expedients that are available under this adopted approach and has elected to apply recognition
exemptions for short-term and low-value leases.
IFRS 16 requires lessees and lessors to disclose additional key information regarding the lease
arrangements. The complete impact of adopting IFRS 16 will be disclosed in the financial statements for
the first interim reporting period of 2019.
Tervita does not expect these changes to impact the covenants that apply to our long-term debt.
3. BUSINESS ACQUISITIONS
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Business acquisitions ("acquisitions") are accounted for using the acquisition method. The consideration
for each acquisition is measured as the aggregate fair values of the assets given, liabilities incurred
or assumed, and equity instruments issued by Tervita, in exchange for control of the acquired entity or
business at the acquisition date. Acquisition-related costs, other than those associated with the issue of
long-term debt or equity, are recognized as incurred in general and administrative expenses on the
Statements of Profit (Loss), unless otherwise noted.
When Tervita acquires a business, it assesses the financial assets acquired and liabilities assumed for
appropriate classification and designation in accordance with the contractual terms, economic
circumstances, and pertinent conditions as at the acquisition date.
Goodwill arising from acquisitions is recognized as the excess of the aggregate consideration transferred
over the net identifiable assets acquired and liabilities assumed (note 17). Goodwill acquired in an
acquisition is, from the acquisition date, allocated to each of Tervita’s cash generating units ("CGUs") that
Page | 9
TSX | TEV 65
are expected to benefit from the acquisition, irrespective of whether other assets or liabilities of the
acquired entity are assigned to the CGUs (note 18).
The measurement period is the period from the acquisition date to the date Tervita receives complete
information about the facts and circumstances that existed as of the acquisition date, but cannot exceed
one year from the acquisition date. If the initial accounting for an acquisition is incomplete by the end
of a reporting period in which the acquisition occurs, provisional amounts are reported. Provisional
amounts are adjusted retrospectively during the measurement period. Additional assets or liabilities are
also recognized during the measurement period to reflect new information obtained about facts and
circumstances that existed as of the acquisition date that, if known, would have affected the amounts
recognized as of that date.
Tervita considers an acquired group of activities or assets to constitute a business when they are
capable of being conducted and managed to provide a return, in the form of dividends, lower costs, or
other economic benefits, directly to Tervita. Management uses its judgment in assessing whether the
acquired group of activities or assets have inputs and processes that are capable of producing outputs.
If management determines that the acquired group of activities or assets acquired constitute a business,
the acquisition is accounted for as a business combination. If, in management’s judgment, the acquired
group of activities or assets does not constitute a business, the acquisition is accounted for as a purchase
of assets.
Significant
judgments
Sources of
estimation
uncertainty
The allocation of the purchase price requires management to make assumptions to identify acquired
intangible assets, property, plant and equipment, liabilities assumed, and contingent consideration.
Estimates are made about the fair value of the acquired assets and liabilities based on quoted market
prices and widely accepted valuation techniques. Tervita uses asset and liability specific discount rates
to determine fair value.
SUPPORTING INFORMATION
Newalta Corporation
Arrangement Overview
On July 19, 2018 (the “Newalta Acquisition Date”), Tervita and Newalta Corporation (“Newalta”) completed a plan of
arrangement (the “Arrangement”), under which Tervita acquired 100% of Newalta’s issued and outstanding common
shares, and culminated in the amalgamation of Tervita and Newalta into one publicly-traded company, Tervita Corporation.
Prior to the Arrangement, Newalta was a full service environmental waste management company, focused primarily on
adapting technologies to maximize the value inherent in oil and gas exploration and production waste streams through
the processing, recovering and recycling of resources, with operations based in Canada and the US.
The completion of the Arrangement created a leading energy-focused environmental solutions provider in Canada,
providing waste processing, treatment, recycling, and disposal services to customers in the oil and gas, mining, and
industrial sectors. Anticipated benefits of the Arrangement include: an extensive infrastructure footprint; scale of
operations and strong asset base; significantly improved operating results which provide flexibility to fund expansion and
growth opportunities; considerable operational synergies between Newalta and Tervita; an attractive portfolio of growth
opportunities; strong customer relationships and a diverse customer base; significant market presence; experienced and
dedicated employees; and an experienced, results-driven management team.
Under the terms of the Arrangement, former shareholders of Newalta received 0.1467 of one common share of Tervita
Corporation for each Newalta common share held and 0.03066 of one common share purchase warrant, exercisable for
one Tervita common share at an exercise price of $18.75 per share with an expiration date of July 19, 2020. Prior to the
close of the Arrangement, Tervita shareholders exchanged their common and preferred shares for an equivalent amount
of new common shares of Tervita. Immediately after close of the Arrangement, Tervita Corporation had 117,557,112
common shares and 2,702,649 warrants issued and outstanding (note 24).
On June 1, 2018, Tervita closed an offering through a wholly-owned subsidiary (the “Escrow Corporation”) of 7.625% US
$250 million senior secured notes due 2021 (the “escrow notes”) to fund the defeasance of Newalta’s debt. On the Newalta
Acquisition Date, pursuant to the Arrangement, the Escrow Corporation was wound-up into Tervita. Concurrently, the
escrow notes were exchanged for the same principal value of additional notes (the “US$250 million senior secured notes”)
issued by Tervita under the existing indenture governing Tervita’s outstanding 7.625% US$360 million senior secured
notes due 2021, following which the escrow notes were deemed cancelled. See notes 19 and 20 for further details.
Page | 10
66 TERVITA | Annual Report 2018
The waiting period under the Competition Act (Canada) (“the Act”) expired prior to the closing of the Arrangement;
however, the Act permits the Commissioner of Competition to make an application to the Competition Tribunal in respect
of an acquisition transaction within a period of one year after its implementation. As of March 13, 2019, Tervita was not
aware of any such application being filed.
Purchase Price Allocation
The Arrangement was accounted for as a business combination. Tervita determined the purchase consideration for the
Arrangement to be $505 million, comprised of the following:
Common shares
Warrants
Cash and cash equivalents
Purchase consideration
Consideration
Transferred
110
1
394
505
Common shares issued represent the valuation of the exchange of 88,148,148 Newalta shares for 12,931,333 Tervita shares
based on the volume weighted average trading price of the Newalta common shares on the TSX for the five trading days
prior to the Newalta Acquisition Date ($1.24/share).
The valuation of warrants issued as part of the Arrangement was performed using a Black-Scholes valuation model.
Cash and cash equivalents included the proceeds received from the US$250 million escrow notes and additional cash and
cash equivalents transferred from Tervita to Newalta to defease Newalta’s senior unsecured debentures and settle
Newalta’s senior secured debt on the Newalta Acquisition Date, as well as settle any related interest and early repayment
fees.
There was no contingent consideration under the terms of the Arrangement.
The fair values of the identifiable assets and liabilities acquired were:
Assets
Cash and cash equivalents
Trade and other receivables
Inventory
Other current assets
Property, plant and equipment
Intangible assets
Other assets
Liabilities
Trade and other payables
Capital leases
Provisions
Total identifiable net assets
Goodwill
Purchase consideration
Previously
Reported
Provisional
Values
Adjustments
Finalized
Purchase
Price
Allocation
—
46
6
5
599
16
4
(53)
(13)
(136)
474
12
486
19
(1)
(2)
—
(93)
—
1
1
—
74
(1)
20
19
19
45
4
5
506
16
5
(52)
(13)
(62)
473
32
505
Provisional values previously reported on November 14, 2018 were based on facts and circumstances that existed at that
date and have since been revised. Material adjustments pertain to fair value adjustments to property, plant and equipment,
intangible assets, and the related decommissioning liabilities at the Newalta Acquisition Date, recognition of additional
intangible assets and certain unfavorable contracts acquired, and assessment of the tax impacts of the acquisition. All
adjustments were offset against goodwill. The $32 million of goodwill (note 17) recognized reflects value of expected
synergies that were identified within Newalta and those expected to be achieved as a result of combining Tervita's and
Newalta's operations. None of the goodwill is expected to be deductible for tax purposes.
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TSX | TEV 67
Acquisition-Related Costs
During the year ended December 31, 2018, costs incurred by Tervita to complete the Arrangement were:
•
•
•
Unamortized debt costs of $19 million of fees related to the issuance of the US$250 million senior secured notes;
Finance costs of $3 million related to interest expense on the escrow notes; and
Transaction costs comprised of:
$13 million of legal and advisory fees incurred by Tervita for the completion of the Arrangement;
$18 million of integration costs, including those related to severance, branding, site suspension, employee
compensation, onerous contracts, and information technology; and
$38 million of impairment expense as a result of the re-measurement of acquired decommissioning liabilities for
certain inactive assets from the credit-adjusted discount rate required under IFRS 3 "Business Combinations" to
a risk-free rate in accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”. Any changes
to the estimate of decommissioning liabilities are added to or deducted from the carrying value of the related
asset. If the change in estimate results in an addition to the cost of the decommissioning liability that is associated
with an inactive site, or if there is indication that the new carrying value of the related asset may not be recoverable,
this addition is charged to profit and loss as an impairment expense.
Pro Forma Statement of Profit (Loss)
The following presents an unaudited Pro Forma Statement of Profit (Loss) for the year ended December 31, 2018 as if the
Arrangement had been completed on January 1, 2018:
Revenue
Operating expenses
Direct expenses
General and administrative expenses
Depreciation and amortization
Impairment expense
Operating profit (loss)
Finance costs
Transaction costs
Other income (expense)
Profit (loss) before tax
Tervita
1,974
Newalta
132
(1,734)
(50)
(96)
(25)
69
(69)
(69)
(4)
(73)
(93)
(14)
(33)
—
(8)
(23)
(19)
(1)
(51)
Pro Forma
Adjustments
Pro Forma
Consolidated
—
—
—
—
—
—
9
88
—
97
2,106
(1,827)
(64)
(129)
(25)
61
(83)
—
(5)
(27)
Tervita information includes revenue of $108 million and net loss of $58 million in relation to Newalta’s operations from
the Newalta Acquisition Date to December 31, 2018. Newalta information reflects financial results for operations from
January 1, 2018 to the Newalta Acquisition Date.
Pro Forma adjustments to finance costs reflect the finance costs that would have been incurred if the US$250 million
senior secured notes were issued on January 1, 2018 and exclude the finance costs that were incurred under Newalta’s
long-term debt.
Other Acquisitions
On November 1, 2017, Tervita acquired all the share capital of 3K Oilfield Services ("3K"), an oily by-product storage
structure, landfill, and waste water well operation located in Saskatchewan, for proceeds of $19 million, net of cash
acquired, of which $18 million was paid in 2017 and $1 million was paid in 2018. The acquisition was made to complement
and enhance Tervita’s service offerings in the area.
The fair value of receivables acquired and the gross contractual amounts receivable were the same, and all amounts were
collected. Upon acquisition, goodwill of $5 million was recognized (note 18). From the acquisition date to December 31,
2017, 3K contributed $2 million to revenue and $1 million to operating profit (loss). If the acquisition had taken place at
the beginning of 2017, total revenue and profit (loss) before tax for the year ended 2017 would have been $11 million and
$5 million, respectively.
In July 2017 and September 2017, Tervita purchased assets related to metals recycling yards for a total cash consideration
of $4 million, which included $2 million of property, plant and equipment and $2 million of intangible assets. No goodwill
was recognized as part of these purchases.
68 TERVITA | Annual Report 2018
Page | 12
The fair values of the identifiable assets and liabilities acquired of these other acquisitions were:
Assets
Trade and other receivables
Property, plant and equipment
Intangible assets
Liabilities
Trade and other payables
Deferred tax liability
Decommissioning liabilities
Total identifiable net assets
Goodwill
Purchase consideration
4.
SEGMENT INFORMATION
Metals
Recycling
Yards
—
2
2
—
—
—
4
—
4
3K
2
7
12
(1)
(4)
(2)
14
5
19
Total
2
9
14
(1)
(4)
(2)
18
5
23
Our activities are carried out through five operating segments: Energy Services, waste services, metals recycling, rail
services, and environmental services. Our executive leadership is responsible for strategic decision making, resource
allocation, and assessing financial performance and, as a group, is identified as our chief operating decision maker for the
purposes of reporting segment information under IFRS. Tervita’s executive leadership is comprised of the following:
•
•
•
President and Chief Executive Officer;
Chief Financial Officer; and
Chief Operating Officer.
The operating segments of waste services, metals recycling, rail services, and environmental services have been
aggregated into one reportable segment named Industrial Services.
Energy Services
Energy Services is comprised of three service lines: energy marketing, facilities, and onsite. These service lines collectively
provide many services to the oil and gas sector including: treatment, recovering, and disposal of fluids; energy marketing;
processing and disposal of solid materials used in, and generated by, natural resource and industrial production; disposal
of oilfield-generated waste; providing specialized onsite services using centrifugation or other processes for heavy oil
producers involved in heavy oil mining and in situ production; and supplying and operating drill site processing
equipment, including solids control and drill cuttings management.
Industrial Services
Industrial Services provides comprehensive environmental solutions through four operating segments: waste services,
metals recycling, rail services, and environmental services. The services provided by these operating segments include:
site remediation, facility decommissioning, environmental construction and technologies, hazardous and non-hazardous
waste management, emergency response, rail services, recycling services to oil and gas and other industrial companies,
and waste transportation and classification. Recycling services include the purchase and processing of ferrous and non-
ferrous metals recovered from demolition sites and other locations.
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
The accounting policies of the operating segments are the same as those described in note 2 and
other relevant notes and are measured in a manner consistent with that of the Financial Statements.
Intersegment sales are made under terms that approximate market values.
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TSX | TEV 69
SUPPORTING INFORMATION
Financial Information for Reportable Segments
For the year ended and as at December 31, 2018
External revenue
Intersegment revenue
Segment revenue
Depreciation and amortization
Impairment expense
Segment operating profit (loss) before tax
Finance costs
Transaction costs
Other income (expense)
Assets
Purchases of property, plant and equipment and intangible assets
For the year ended and as at December 31, 2017
External revenue
Intersegment revenue
Segment revenue
Depreciation and amortization
Impairment expense
Segment operating profit (loss) before tax
Finance costs
Other income (expense)
Assets
Purchases of property, plant and equipment and intangible assets
Energy
Services
Industrial
Services
1,743
5
1,748
(82)
(1)
129
(10)
(12)
1
1,530
(68)
231
—
231
(9)
(23)
(4)
—
—
(2)
157
(12)
Energy
Services
Industrial
Services
2,108
11
2,119
(69)
(76)
24
(6)
(3)
929
(46)
221
—
221
(7)
—
22
(1)
(1)
143
(6)
Total
1,974
5
1,979
(91)
(24)
125
(10)
(12)
(1)
1,687
(80)
Total
2,329
11
2,340
(76)
(76)
46
(7)
(4)
1,072
(52)
Reconciliation of Information on Operating Segments to IFRS Measures
For the years ended December 31
Revenue
Total revenue for operating segments
Elimination of intersegment revenue
Consolidated revenue
Profit (loss) before tax
Total segment operating profit (loss) before tax
Unallocated general and administrative expenses
Unallocated depreciation and amortization
Unallocated impairment expense
Operating profit (loss)
Operating segment finance costs
Unallocated finance costs
Operating segment transaction costs
Unallocated transaction costs
Operating segment other income (expense)
Unallocated other income (expense)
Profit (loss) before tax
Note
2018
2017
2, 6
6
18
8
8
3
3
9
9
1,979
(5)
1,974
2,340
(11)
2,329
125
(50)
(5)
(1)
69
(10)
(59)
(12)
(57)
(1)
(3)
(73)
46
(52)
(4)
—
(10)
(7)
(42)
—
—
(4)
(22)
(85)
Costs included in general and administrative expenses on the Statements of Profit (Loss) are considered shared services
or corporate costs and are not allocated to the reporting segments.
70 TERVITA | Annual Report 2018
Page | 14
As at December 31
Total assets
Total assets for operating segments
Unallocated assets
Consolidated total assets
2018
2017
1,687
122
1,809
1,072
154
1,226
2017
52
1
22
75
For the years ended December 31
Total purchases of property, plant and equipment, intangible assets and acquisitions
Total operating segment purchases
Total corporate purchases
Total acquisitions
Consolidated purchases of property, plant and equipment, intangible assets and acquisitions
Note
2018
3
80
4
395
479
Geographic Information
For the years ended December 31
Revenue by location of services
Canada
US
Total revenue
As at December 31
Non-current assets
Canada
US
Total non-current assets
5.
INCOME TAXES
2018
2017
1,953
21
1,974
2018
1,468
77
1,545
2,329
—
2,329
2017
959
—
959
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Tervita carries on business through entities that are taxable under the Income Tax Act (Canada)
and certain other jurisdictions, including the US. Income taxes recovery (expense) is comprised of current
and deferred taxes. Current and deferred taxes are recognized in the Statements of Profit (Loss) except
to the extent they relate to amounts recognized directly in OCI or equity. An item reported in OCI or
equity is disclosed net of any taxes associated with the item. Deferred taxes recognized in a business
acquisition are reported on the Statements of Financial Position at the time of the acquisition.
Current tax is the expected tax payable or receivable calculated on the taxable profit (loss) for the period
using tax rates enacted, or substantively enacted, at the reporting date. Current tax assets and liabilities
are offset if there is a legally enforceable right to offset and the amounts are intended to be settled on
a net basis.
Deferred tax is recognized using the liability method of accounting for temporary differences at the
reporting date. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply
in the year when the asset is realized or the liability is settled based on the tax rates and tax laws that
have been enacted, or substantively enacted, at the reporting date. Temporary differences are differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
reported for taxation purposes. Deferred tax is not recognized for:
•
•
•
Temporary differences on the initial recognition of assets and liabilities in a transaction that is not
a business combination and that affects neither accounting nor taxable profit (loss);
Temporary differences related to investments in subsidiaries and jointly controlled entities to the
extent that they will not reverse in the foreseeable future; and
Taxable temporary differences arising on the initial recognition of goodwill.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off tax
assets against tax liabilities and the deferred taxes relate to the same taxation authority.
Page | 15
TSX | TEV 71
Significant
judgments
Sources of
estimation
uncertainty
Deferred tax assets are recognized on the Statements of Financial Position based on the results from
operating activities or due to the implementation of tax planning strategies which will create sufficient
taxable profit to offset the deferred tax assets. Judgment is required in determining the amount of
deferred tax assets to be recognized, based on the likely timing and the level of future taxable profits
available for their utilization in conjunction with the execution of certain tax planning opportunities,
and the likely timing of reversal. Management assesses the recognition of deferred tax assets each
reporting period.
Uncertainty exists with respect to the interpretation of complex income tax regulations. Current and
deferred income taxes include estimates of future earnings and reversals of timing differences. Actual
results may differ from assumptions made, which would necessitate future adjustments to previously
recorded income taxes recovery (expense). Tervita establishes provisions, based on reasonable estimates,
for the impact or outcome of audits by the tax authorities of the respective jurisdictions in which Tervita
operates.
SUPPORTING INFORMATION
Income taxes recovery (expense)
Income taxes recovery (expense) varies from the amounts that would be computed by applying the combined domestic
statutory income tax rate to the profit (loss) before tax due to the following differences:
For the years ended December 31
Profit (loss) before tax
Domestic statutory tax rates
Statutory tax (expense) recovery
Adjustments to income taxes due to:
(Non-recognition) recognition of operating losses and other assets
Non-deductible expenses
Total income taxes (expense) recovery
Income Tax Provision
For the years ended December 31
Total income taxes (expense) recovery
Effective income tax rate (%)
Deferred Income Taxes
2018
(73)
27%
20
(11)
(10)
(1)
2018
(1)
(1)%
2017
(85)
27%
23
(4)
(16)
3
2017
3
4%
In 2018 and 2017, no temporary differences related to an investment in a subsidiary were recognized as the Company
does not believe the liability will be incurred in the foreseeable future.
At December 31, 2018, $274 million of deferred tax assets were not recognized (December 31, 2017 - $203 million).
Tervita had the following non-capital loss carry forwards as at December 31, 2018:
Year of Expiry
2025
2026
Thereafter
US
—
—
35
35
Canada
42
29
790
861
As at December 31, 2018, Tervita had $119 million of deductible temporary differences for which no deferred tax asset
was recognized.
72 TERVITA | Annual Report 2018
Page | 16
6. REVENUE
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Revenue is measured at the fair value of the consideration received or receivable. Payment terms
are generally 30 days from invoice date, however, these terms may vary based on service line, customer,
and contract requirements. Customer creditworthiness is assessed prior to signing a contract and
throughout the contract period.
Revenue From the Sale of Inventory
Revenue from the sale of inventory ("commodity-based sales") is recognized on individual contractual
terms when indicators of the transfer of control exist, including but not limited to the following: the
significant risks and rewards of ownership are transferred to the buyer, Tervita has a present right to
payment for the inventory, the customer has legal title to the inventory, Tervita has transferred physical
possession of the inventory, the customer has accepted the inventory, and recoverability of consideration
is probable. These conditions are generally satisfied when the goods are provided to the customer based
on the shipping terms of the contract. Revenue earned from the sale of inventory includes the marketing
of crude oil and the sale of recycled and recovered waste products, including scrap metal.
Service Revenue Recognized at a Point in Time
Recognition of revenue from the rendering of services performed ("facility-based services") occurs based
on individual contractual terms when indicators of the transfer of control exist, which is generally satisfied
when the services are completed in accordance with the contract specifications. Revenue earned from
the rendering of services includes the treatment, recovering, and disposal of fluids and the processing,
recovery, and disposal of solid materials used in, and generated by, natural resource and industrial
production, the disposal of oilfield waste, and hazardous and non-hazardous waste management.
Service Revenue Recognized Over Time
Recognition of revenue for services performed over time ("project-based services") occurs when Tervita
has a right to invoice, or the value provided to the customer corresponds directly to the services billed
to date in accordance with the service contract, as this most closely represents the actual value provided
to the customer at the time of invoicing. The transaction price typically results from fixed-fee
arrangements over multiple performance obligations. Service revenue is earned from a variety of
sources, including the provision of environmental solutions for waste management, environmental
remediation, facility decommissioning and demolition, and rail services.
For customer contracts involving multiple deliverables over several reporting periods, management
allocates the performance obligations to the transaction price and recognizes revenue as the control of
performance obligations is transferred to the customer, or Tervita has the right to invoice. Transaction
prices with lump-sum fixed-fee arrangements over multiple performance obligations are valued on a
stand-alone basis and allocated to the total transaction price based on the stand-alone values. Criteria
used to assess the performance obligations for such contracts include, but are not limited to, the number
of hours worked, volume of materials handled, and project milestones achieved.
For certain contracts, the transaction price is based on specific units of measurement, such as rate per
unit of labor or usage of equipment. Revenue is recognized when the services are provided, based on
the rates specified in the contract.
Occasionally, such contracts include an option for a customer to purchase future goods or services.
Management assesses these contracts to determine if a material right exists over this option, or if the
customer would not receive such a discount or other right if not for the contract. If material rights are
deemed to exist, they are assessed as part of the performance obligations in the contract, at contract
inception, and an assessment of the probability of exercise is assessed by management. If the optional
future goods and services are deemed likely to occur, a value is assigned to the performance obligation
and the related revenue is deferred until the optional work is completed or the option expires.
Often, service contracts include mobilization costs or costs to fulfill the contract. Such costs are
recognized as a contract asset if all the following criteria are achieved: costs relate directly to the contract
and can be specifically identified, costs generate or enhance resources of Tervita that will be used in
Page | 17
TSX | TEV 73
satisfying performance obligations into the future, and the costs are expected to be recovered. Contract
assets are amortized on a straight-line basis over the life of the contract.
As Tervita adopted IFRS 15 using the cumulative effect method, revenue in 2017 was recognized under
IAS 18 as follows:
•
•
•
•
Revenue was measured at the fair value of the consideration received or receivable.
Revenue from the rendering of services was recognized after the service had been provided and in
accordance with the service contract. Service revenue was earned from a variety of sources, including
providing environmental solutions for waste management, environmental remediation, and facility
decommissioning and demolition.
For customer projects that involved multiple deliverables over several reporting periods,
management estimated the percentage of completion for those services and the corresponding
revenue was recognized in the respective reporting period based on several factors including the
number of hours worked, volume of materials handled, and project milestones achieved.
Revenue from the sale of inventory was recognized on individual contractual terms when all of the
following criteria were met: the significant risks and rewards of ownership were transferred to the
buyer; it was probable that the economic benefits associated with the transaction would flow to
Tervita; the costs incurred in respect of the transaction could be reliably measured; and the amount
of revenue could be reliably measured. These conditions were generally satisfied when the goods
were provided to the customer. Revenue earned from the sale of goods included the marketing of
crude oil and the sale of scrap metal.
Revenue is assessed for certain revenue streams on a portfolio basis, as the contracts in the portfolio
have similar characteristics and performance obligations, and Tervita does not expect that the effects
of applying IFRS 15 to the portfolio of contracts would differ materially from applying it to the individual
contracts. Judgment is required in the assessment of contract characteristics and performance
obligations to determine if application of IFRS 15 on a portfolio basis appropriately presents the nature
and timing of those contracts on an individual basis.
Timing of the satisfaction of the performance obligations associated with revenue recognition involves
an understanding of the nature of the performance obligations and contracts. Judgment is required in
determining the methods used to recognize revenue for the transfer of inventory and rendering of
services. Transfer of inventory generally occurs when control of the inventory transfers to the buyer, and
the Company must assess whether the indicators of a transfer of control are satisfied. Rendering of
services generally occurs when Tervita has a right to invoice, and the Company must determine the
appropriate criteria to assess achievement of performance obligations and how performance obligations
are to be allocated to the contract purchase price under fixed-pricing arrangements.
Determination of the transaction price and allocation of it to each performance obligation involves an
understanding of the fair value of goods and services provided. Judgment is required in determining
the stand-alone selling prices for contracts under which the transaction price is a lump-sum fixed-fee
arrangement.
Significant
judgments
Sources of
estimation
uncertainty
Tervita records revenue for certain services based on an estimate of the completion of the performance
obligations for those services. The achievement of performance obligations and the total anticipated
activity are subject to significant estimates by management.
SUPPORTING INFORMATION
Disaggregated Revenue
The reconciliation of disaggregated revenue with the Company's reportable segments was as follows:
For the year ended December 31, 2018
Commodity-based sales
Facility-based services
Project-based services
Disaggregated revenue
Note
2
Energy
Services
1,337
382
29
1,748
Industrial
Services
49
33
149
231
Intersegment
Eliminations
—
(5)
—
(5)
Total
1,386
410
178
1,974
Page | 18
74 TERVITA | Annual Report 2018
For the year ended December 31, 2017
Commodity-based sales
Facility-based services
Project-based services
Disaggregated revenue
7.
EMPLOYEE BENEFITS
Note
2
Energy
Services
Industrial
Services
Intersegment
Eliminations
1,824
295
—
2,119
44
38
139
221
—
(11)
—
(11)
Total
1,868
322
139
2,329
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Wages, salaries, bonuses, vacation pay, contributions to the Company’s matched savings plan, and other
short-term employee benefits are accrued on an undiscounted basis in the period in which the associated
services are rendered by employees.
Termination benefits are recognized as an expense when Tervita has demonstrably committed, without
realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the
normal retirement date, or to provide termination benefits. Termination benefits are recognized as an
expense if Tervita has made an offer of voluntary redundancy, it is probable that the offer will be accepted,
and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months
after the reporting date, they are discounted to their present value.
SUPPORTING INFORMATION
Wages and employee benefits for the year ended December 31, 2018 totaled $137 million, of which $112 million was
included in direct expenses and $25 million was included in general and administrative expenses (December 31, 2017 -
$140 million, of which $109 million was included in direct expenses and $31 million was included in general and
administrative expenses).
Termination benefits for the year ended December 31, 2018 totaled $8 million, of which $1 million was included in direct
expenses and $7 million was included in transaction costs (December 31, 2017 - $10 million, of which $9 million was included
in direct expenses and $1 million was included in general and administrative expenses).
In 2017, Tervita introduced an employee savings plan. For the year ended December 31, 2018, Tervita recognized $2 million
of expense related to the plan (December 31, 2017 - $1 million).
8.
FINANCE COSTS
For the years ended December 31
Interest expense
Amortization of debt issue costs
Accretion of decommissioning liabilities
Finance costs
9. OTHER INCOME (EXPENSE)
For the years ended December 31
Gain (loss) on sale of assets
Share-based compensation
Gain (loss) on provisions
Realized foreign exchange gain (loss) - debt and derivatives
Unrealized foreign exchange gain (loss) - debt and derivatives
Unrealized foreign exchange gain (loss) - other
Other
Other income (expense)
Note
19
19
21
Note
22
21
20
20
2018
55
7
7
69
2018
7
(4)
(8)
(8)
6
3
—
(4)
2017
41
4
4
49
2017
(1)
(3)
(19)
—
—
(2)
(1)
(26)
Page | 19
TSX | TEV 75
10.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing earnings attributable to common shareholders by the weighted
average number of common shares issued and outstanding. The number of shares included is computed using the treasury
stock method. The number of shares and warrants issued pursuant to the Arrangement were pro-rated for the year ended
December 31, 2018 to calculate weighted average common shares outstanding. As at December 31, 2018, Tervita had
2,702,649 warrants and 2,303,728 options outstanding, with a weighted average exercise price of $18.75 per share and
$9.61 per share, respectively.
There was no difference in the basic and diluted EPS calculation as a net loss was incurred during both 2018 and 2017,
due to which outstanding warrants and options were anti-dilutive.
11.
SUPPLEMENTAL CASH FLOW
For the years ended December 31
Loss (gain) on sale of assets
Share-based compensation
Non-cash change in provisions
Non-cash change in deferred revenue
Non-cash transaction costs
Other
Total other adjustments
12.
LEASES
Note
9
9
21
3
2018
(7)
4
8
(1)
47
1
52
2017
1
3
17
(1)
—
—
20
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Lessee
Leases in which Tervita assumes substantially all the risks and rewards of ownership are classified as
finance leases. On initial recognition, the leased asset is recorded at the lower of its fair value and the
present value of the future minimum lease payments. After initial recognition, the asset is accounted for
in accordance with accounting policies applicable to that asset type (note 15). Minimum lease payments
are apportioned between finance costs and the outstanding financial liability.
Operating lease payments are recognized in direct expenses (for operating segments) or unallocated
general and administrative expenses in the Statements of Profit (Loss) on a straight-line basis over the
lease term, unless another systematic basis is more representative of the benefits of the leased asset.
Operating leases are not recognized on the Statements of Financial Position.
Sale and leaseback transactions that meet the criteria of a finance lease are classified as such and any
excess of sales proceeds over the carrying amount is deferred and amortized over the term of the lease.
If the sale and leaseback transaction does not meet the criteria of a finance lease, it is accounted for as
an operating lease. Any gain or loss on disposal of the leased asset is recognized in gain (loss) on sale of
assets on the Statements of Profit (Loss) (note 9).
Lessor
When substantially all the risks and rewards of ownership of an asset are transferred to a third party,
Tervita recognizes a financial asset at an amount equal to the net investment in the lease plus any initial
direct costs. After initial recognition, the financial asset is carried at amortized cost and the asset is
depreciated in a consistent manner for similar owned assets.
Rental income from operating leases is recognized on a straight-line basis over the lease term in direct
expenses (for operating segments) or unallocated general and administrative expenses in the
Statements of Profit (Loss) unless another systematic basis is more representative of the time pattern in
which the benefit is derived from the leased asset.
Significant
judgments
A transaction or a series of transactions may not take the legal form of a lease, however, may be a
lease in substance if the arrangement conveys a right to use an asset in return for a payment or series
76 TERVITA | Annual Report 2018
Page | 20
of payments. Judgment is required when identifying and determining the proper accounting treatment
for lease transactions, including identifying whether substantially all the risks and rewards of ownership
have been transferred.
13. CASH AND CASH EQUIVALENTS
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Cash and cash equivalents consist of cash in financial institutions, cash on deposit, and short-term
interest-bearing securities with original maturities of less than three months.
14.
INVENTORY
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Inventory consists of crude oil, scrap metal, oilfield equipment, consumables, and chemicals. Inventory
is measured at the lower of cost and net realizable value. Inventory cost is determined using the
weighted average method. Cost of finished goods includes the cost of purchase and conversion costs,
such as direct labor and a systematic allocation of overhead expenses.
SUPPORTING INFORMATION
As at December 31
Crude oil
Scrap metal
Other
Inventory
2018
1
9
2
12
2017
2
7
—
9
In 2018, Tervita expensed $1,356 million of inventory which was included in direct expenses (2017 - $1,843 million).
15. PROPERTY, PLANT AND EQUIPMENT
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Property, plant and equipment assets are recorded at cost less accumulated depreciation and impairment.
Cost includes the purchase price to acquire an asset or for construction in progress ("CIP"), and all costs
directly attributable to bringing the asset to the location and condition necessary for its intended use. If
a legal or constructive obligation exists to decommission property, plant and equipment, the discounted
value of the obligation is included in the carrying value of the asset when the obligation arises and is
depreciated on the same basis as the related asset.
If the cost of an individual component of property, plant and equipment is significant relative to the total
cost of the asset, the individual component is depreciated separately. When the cost of replacing a part
of an item of property, plant and equipment is capitalized, the carrying amount of the replaced item is
derecognized and included in either direct expenses (for operating segments) or general and
administrative expenses on the Statements of Profit (Loss). The cost of major inspections or overhauls is
capitalized and depreciated over the period until the next major inspection or overhaul. Repair and
maintenance expenditures that do not improve or extend productive life are expensed as incurred to
either direct expenses (for operating segments) or general and administrative expenses on the
Statements of Profit (Loss).
If the construction of property, plant and equipment is of a sufficient size and duration, borrowing costs
are added to the cost of those assets until the assets are substantially ready for their intended use. The
capitalization rate is based on the weighted average cost of borrowing of all of Tervita’s outstanding third-
party debt during the reporting period.
An item of property, plant and equipment is derecognized on disposal and any resulting gain or loss is
included in gain (loss) on sale of assets on the Statements of Profit (Loss) (note 9).
Significant
judgments
For CIP, determination of costs to be capitalized is a matter of judgment. Determining when an asset
meets the criteria to be considered substantially ready for intended use is a matter of judgment,
Page | 21
TSX | TEV 77
particularly for projects where construction extends over a significant period. Judgment is also required
in determining the appropriate level of componentization and whether a cost incurred meets the criteria
of either major inspection or overhaul to be capitalized or routine repair and maintenance to be expensed.
Determining the appropriate method of depreciation for an asset requires judgment. Property, plant and
equipment assets are depreciated to reflect the pattern in which management believes the benefits
associated with the asset will be consumed:
Processing facilities – straight line over five to 25 years;
Cavern and landfill facilities – units-of-production utilized in a period;
Buildings – straight line over 25 years;
•
•
•
• Mobile equipment – straight line over 10 to 25 years; and
• Other (furniture, fixtures, information technology hardware) – straight line over three to 10 years.
Determining the useful life and expected residual value of an asset requires the use of estimates.
When it is determined that assigned asset lives do not reflect the expected remaining period of
benefit, prospective changes are made to their useful lives. Useful lives of property, plant and equipment
are subject to market conditions in the oil and gas, environmental remediation, and well servicing
industries. The useful life of engineered landfills is impacted by the type of waste received, compaction,
weather, and leachate factors. The useful life of disposal caverns is impacted by the type of waste received,
the ability to recover and process waste oil in the caverns, and uncertainty about total cavern capacity
available.
Sources of
estimation
uncertainty
SUPPORTING INFORMATION
Note
Land
Facilities
Buildings
Equipment
Other
CIP
Total
Cost
Balance, January 1, 2018
Additions
Acquisitions
Disposals
Change in decommissioning cost
Reclassification
Foreign exchange
Balance, December 31, 2018
Accumulated depreciation
Balance, January 1, 2018
Provision
Disposals
Impairment
Foreign exchange
Balance, December 31, 2018
Net book value
3
3, 18
44
1
4
(3)
—
—
—
46
1
—
—
—
—
1
45
1,164
127
57
325
(35)
107
—
3
4
80
(1)
—
—
—
1,621
210
740
62
(28)
39
2
815
806
63
9
—
—
—
72
138
129
9
82
(12)
—
(1)
1
208
92
17
(11)
—
1
99
109
33
2
3
(3)
—
—
—
35
31
2
(2)
—
—
31
4
45
(1)
12
—
—
—
—
56
—
—
—
1
—
1
55
1,542
72
506
(54)
107
(1)
4
2,176
927
90
(41)
40
3
1,019
1,157
Acquiring or constructing property, plant and equipment and the capitalization of decommissioning liabilities do not result
in a cash outflow until the related liability is settled. Therefore, investing activities for the property, plant and equipment
on the Statements of Cash Flows was adjusted for settlement of prior year’s liabilities and the accrual of current year liabilities.
For the year ended December 31, 2018, the non-cash adjustment to the Statements of Cash Flows was $1 million.
78 TERVITA | Annual Report 2018
Page | 22
Note
Land
Facilities
Buildings
Equipment
Other
CIP
Total
Cost
Balance, January 1, 2017
Additions
Acquisitions
Disposals
Change in decommissioning cost
Balance, December 31, 2017
Accumulated depreciation
Balance, January 1, 2017
Provision
Disposals
Impairment
Balance, December 31, 2017
Net book value
3
18
47
—
1
(4)
—
44
—
—
—
1
1
43
1,119
23
4
(10)
28
1,164
668
60
(5)
17
740
424
127
—
1
(1)
—
127
58
5
(1)
1
63
64
128
4
3
(6)
—
129
88
8
(4)
—
92
37
34
—
—
(1)
—
33
29
2
—
—
31
2
14
31
—
—
—
45
—
—
—
—
—
45
1,469
58
9
(22)
28
1,542
843
75
(10)
19
927
615
For the year ended December 31, 2017, the non-cash adjustment to the Statements of Cash Flows was $8 million.
Included in property, plant and equipment is equipment under finance lease arrangements with a net book value of $11
million as at December 31, 2018 (December 31, 2017 - $nil).
16.
INTANGIBLE ASSETS
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Purchased intangible assets are initially recognized at cost. Internally generated intangible assets arising
from development activities involving a plan or design for new or substantially improved products and
processes are capitalized only if the development costs can be reliably measured, the product or process
is technically and commercially feasible, future economic benefits are probable, and Tervita has the
intention and sufficient resources to complete development and use or sell the assets. Capitalized costs
for internally generated intangible assets are comprised of material, labor, and overhead expenses
directly attributable to preparing the asset for its intended use.
Intangible assets acquired as part of a business combination are capitalized separately from goodwill if
the asset is separable or arises from contractual or legal rights, and the fair value can be measured reliably
on initial recognition.
Expenditures on research activities undertaken with the prospect of gaining technical knowledge are
expensed as incurred in general and administrative expenses on the Statements of Profit (Loss).
Intangible assets with finite useful lives are measured at cost less accumulated amortization and
accumulated impairment losses. Intangible assets with finite useful lives include customer relationships,
trade names, technology, certain permits, and other (including marketing contracts, supplier
relationships, non-competition agreements, and leases).
Intangible assets with indefinite useful lives are measured at cost less accumulated impairment (note
18).
Significant
judgment
Determining the appropriate method of amortization for an asset requires judgment. Intangible
assets with finite lives are amortized on a straight-line basis to reflect the pattern in which management
believes the benefits associated with the asset will be consumed:
•
•
•
•
•
Customer relationships – three to five years;
Trade names – eight years;
Technology – four years;
Permits – three to 10 years; and
Other – two to 20 years.
Sources of
estimation
uncertainty
The useful life and expected residual value of an intangible asset are estimates, and are reviewed
on an annual basis. When it is determined that assigned asset lives do not reflect the expected
remaining period of benefit, prospective changes are made to their useful lives.
Page | 23
TSX | TEV 79
SUPPORTING INFORMATION
Note
Customer
Relationships
Trade Names
Technology
Permits
Other
Total
3
Cost
Balance, January 1, 2018
Additions
Acquisitions
Disposals
Reclassification
Balance, December 31, 2018
Accumulated amortization
Balance, January 1, 2018
Provision
Disposals
Balance, December 31, 2018
Net book value
266
—
—
(7)
—
259
265
—
(7)
258
1
47
—
—
(9)
—
38
47
—
(9)
38
—
59
3
—
—
—
62
55
3
—
58
4
14
—
16
—
—
30
1
1
—
2
28
30
8
—
(21)
1
18
28
2
(21)
9
9
416
11
16
(37)
1
407
396
6
(37)
365
42
Purchasing or internally generating intangible assets does not result in a cash outflow until the related liability is settled.
Therefore, investing activities for the intangible assets on the Statements of Cash Flows was adjusted for settlement of prior
year’s liabilities and the accrual of current year liabilities. For the year ended December 31, 2018, the non-cash adjustment
to the Statements of Cash Flows was $nil.
Note
Customer
Relationships
Trade Names
Technology
Permits
Other
Total
Cost
Balance, January 1, 2017
Additions
Acquisitions
Balance, December 31, 2017
Accumulated amortization
Balance, January 1, 2017
Provision
Balance, December 31, 2017
Net book value
3
265
—
1
266
265
—
265
1
47
—
—
47
47
—
47
—
57
2
—
59
51
4
55
4
2
—
12
14
1
—
1
13
28
1
1
30
27
1
28
2
399
3
14
416
391
5
396
20
For the year ended December 31, 2017, the non-cash adjustment to the Statements of Cash Flows was $nil.
17. GOODWILL
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Goodwill represents the excess of consideration transferred in a business combination over the fair
value of net identifiable assets of the acquired business at the acquisition date. Goodwill is initially
determined based on provisional fair values. These values are finalized within one year of the acquisition
date.
Goodwill is measured at cost less accumulated impairment losses. Goodwill is allocated to a CGU or group
of CGUs that is expected to benefit from the business combination. Goodwill is tested for impairment
annually or where there is an indication of impairment (note 18).
SUPPORTING INFORMATION
Balance, January 1
Additions
Impairment
Balance, December 31
80 TERVITA | Annual Report 2018
Note
3
18
2018
324
32
(23)
333
2017
376
5
(57)
324
Page | 24
18.
IMPAIRMENT
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Each reporting period, the carrying amounts of non-current assets are reviewed to determine if there
are any indications of impairment. If an indication of impairment exists, the recoverable amount of the
asset is estimated. For goodwill, indefinite-lived intangible assets, and intangible assets not yet available
for use, the recoverable amount is estimated at least annually, as well as when indicators of impairment
exist.
For goodwill impairment testing, assets are grouped together into CGUs. A CGU is the smallest
identifiable asset or group of assets that generates cash inflows that are largely independent of the cash
inflows of other assets or groups of assets. The estimated recoverable amount of an asset or CGU is the
greater of its fair value less costs of disposal and its value-in-use. In assessing the fair value less costs of
disposal, estimated future cash flows are discounted to their present value using a pre-tax discount rate.
For impairment testing, the goodwill acquired in a business combination is allocated to CGUs or groups
of CGUs that are expected to benefit from the synergies of the business combination, and reflects the
lowest level at which goodwill is monitored by management. An impairment loss is recognized if the
carrying amount of an asset or CGU exceeds its estimated recoverable amount. Impairment losses
recognized at the CGU level are allocated first to reduce the carrying amount of any goodwill carried by
the CGU and then to the carrying amounts of other assets in the CGU, on a pro rata basis. For CGUs and
assets where impairments have been noted, these have been calculated based on fair value less costs
of disposal.
An impairment loss with respect to goodwill may not be reversed. For other assets, impairment losses
may be reversed when the conditions for impairment no longer exist and there is an increase in the
recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount
does not exceed the carrying amount that would have been determined, net of depreciation and
amortization, if no impairment loss had been recognized. The reversal of an impairment loss is recognized
in impairment expense on the Statements of Profit (Loss).
Assets held for sale are classified as current and are carried at the lower of carrying value and fair value
less costs of disposal, with any adjustment to the carrying value recognized in either impairment expense
on the Statements of Profit (Loss) or, for assets held for sale which meet the classification criteria of
discontinued operations, in the results of discontinued operations.
The identification of a CGU is a matter of judgment that requires a determination of how cash inflows
are generated from an asset or group of assets and when those cash inflows are independent from other
assets or groups of assets. Tervita identifies CGUs at a regional or product line level for each operating
segment. For the purposes of goodwill impairment testing, management aggregates these CGUs to
reflect how goodwill is monitored by management within the operating segments.
The fair value of Tervita’s CGUs is estimated for purposes of the annual goodwill impairment test
using a Level 3 discounted cash flow valuation approach (note 23). Inherent in the valuation
approach are key assumptions that are subjective and represent reasonable estimates with respect to
factors affecting operations including economic, operational, and market conditions. These conditions
are sensitive to change and could affect the fair value. The fair value of Tervita and each CGU is estimated
using a discounted cash flow approach based on CGU specific weighted average costs of capital ("WACC")
ranging from 10 per cent to 11 per cent (2017 – 13 per cent to 14 per cent) based on comparable
companies using a cross-section of industry peers.
Cash flows for the next fiscal year are based on Tervita’s operating budget, which is approved by
management and the Board of Directors. The budget is based on past performance as well as
management’s assessment of expected market trends, growth strategy, and economic conditions. For
future years not included in the budget, assumptions are made, including growth rates implicit in the
cash flow projections for each CGU to reflect their unique market characteristics, growth capital spending
opportunities, and economic conditions. Subsequent to the next fiscal year, the discounted cash flows
assume average annual revenue and expense growth rates of two per cent, and two per cent for terminal
years. These conditions are sensitive to change and could affect the fair value.
Significant
judgments
Sources of
estimation
uncertainty
Page | 25
TSX | TEV 81
The key assumptions in establishing fair value less costs of disposal for specific CGUs focus on revenue
estimates which are driven primarily by forecast activity levels in the oil and gas sector. Budgeted growth
rates are normally aligned with these forecast activity levels and peer group growth expectations.
Historical margins are guidelines for budgeting future earnings, with adjustments made for anticipated
one-time or non-recurring events. For CGUs that experienced significant growth in prior periods due to
acquisitions, management reviews the increased scale of operations, new markets entered, or services
offered to estimate future revenue and earnings. For energy marketing, forecast commodity prices, the
equalization density penalty applicable to crude oil densities, and heavy oil differentials are estimated
market inputs impacting the revenue and earnings forecasts. Management considers the revenue
estimates and margins reflected in the budget and strategic plan as achievable.
Fair value less costs of disposal for specific assets or groups of assets is a Level 3 valuation, which
contemplates the sale of similar assets in like markets and relies on third party offers, independent
valuations and appraisals to value the assets. The key assumptions used relate to the comparability of
similar assets used for valuation purposes, as well as the fact that historic market data is indicative of
future market prices.
SUPPORTING INFORMATION
Allocation of Goodwill
As at December 31
TRDs
Landfills
Waste services
Energy marketing
Onsite
Total allocation to CGUs
Note
3
3
3
3
3
2018
297
12
7
16
1
333
2017
284
12
22
6
—
324
Upon acquisition of Newalta in 2018, $32 million of goodwill was recognized and allocated to CGUs as follows: $13 million
to TRDs, $10 million to energy marketing, $8 million to waste services, and $1 million to onsite.
Upon acquisition of 3K in 2017, $5 million of goodwill was recognized and allocated to the TRDs CGU.
Impairment Expense
For the years ended December 31
Property, plant and equipment
Goodwill
Impairment expense
Property, Plant and Equipment
The 2017 impairment included $16 million related to waste slumps at two landfill sites.
Goodwill
Goodwill impairment testing resulted in the following impairment expense (note 17):
For the years ended December 31
Landfills
Waste services
Goodwill impairment
Note
15
17
2018
2
23
25
2017
19
57
76
2018
—
23
23
2017
57
—
57
In 2018, an impairment of $23 million was recognized on the goodwill allocated to the waste services CGU, which is the
waste services operating segment (note 4), due to ongoing challenges in a highly competitive market.
Financial information about the waste services operating segment is disclosed under Industrial Services (note 4). The
estimated fair value for the assets tested are particularly sensitive to the following estimates:
•
•
An increase of 1% in the WACC would have increased the impairment by $3 million approximately; and
A decrease in the terminal growth rate by 1% would have increased the impairment by approximately $4 million.
82 TERVITA | Annual Report 2018
Page | 26
In 2017, an impairment of $57 million was recognized on the goodwill allocated to the landfills CGU due to reduced
estimates of future cash flows in calculating the fair value. The estimated fair value for the assets tested are particularly
sensitive to the following estimates:
•
•
An increase of 1% in the WACC would have increased the impairment by $1 million approximately; and
A decrease in the terminal growth rate by 1% would have increased the impairment by approximately $1 million.
19.
LONG-TERM DEBT
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Costs associated with the negotiation, extension, or amendment of Tervita’s debt facilities ("debt
costs") are capitalized and amortized to finance costs in the Statements of Profit (Loss) over the term of
the related liability using the effective interest method.
SUPPORTING INFORMATION
Senior secured notes of US$250 million due December 2021 were issued on the Newalta Acquisition Date (note 3). Refer
to note 23 for timing and amount of interest and debt repayment.
As at December 31
Senior secured notes
Senior secured notes
Unsecured debt - capital leases
Long-term debt
Premium on senior secured notes (US$250)
Unamortized debt costs
Total long-term debt
Less: current portion of capital leases
Long-term portion
Debt Covenants
Principal
US$360
US$250
Issuance Maturity
Dec 2016 Dec 2021
Dec 2021
Jul 2018
2018
491
341
13
845
1
(28)
818
(4)
814
2017
452
—
—
452
—
(15)
437
—
437
Tervita has a senior secured revolving credit facility ("Revolver") with a syndicate of Canadian banks. Under the terms of
the Revolver, Tervita must comply with certain financial and non-financial covenants as defined by its lenders. In December
2018, the Company amended and extended its Revolver from $200 million to $275 million. Refer to note 25 for a discussion
of the impact of this amendment on covenants.
As at December 31, 2018, Tervita complied with all covenants (note 25).
Outstanding Letters of Credit
Outstanding letters of credit at December 31, 2018 totaled $87 million (December 31, 2017 – $73 million). The outstanding
letters of credit reduce the borrowing available under the Revolver.
Guarantees
Tervita’s obligations under the Revolver are guaranteed by one of our subsidiaries. The guarantees are secured by
substantially all tangible and intangible assets owned by Tervita and the guarantor subsidiary.
Debt Costs
Balance, January 1
Costs associated with new debt
Amortization of debt costs
Balance, December 31
Note
3
8
2018
(15)
(20)
7
(28)
2017
(18)
(1)
4
(15)
Page | 27
TSX | TEV 83
20. DERIVATIVES AND HEDGING
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Initial Recognition and Subsequent Measurement of Hedging Instruments
From time to time, the Company uses derivative financial instruments, including cross currency swaps,
to hedge its foreign currency risk related to its US$ debt. Such derivative financial instruments are initially
recognized at fair value and any directly attributable transaction costs are recognized immediately in
net profit (loss). Derivative financial instruments are subsequently re-measured at fair value, and are
carried as financial assets when the fair value is positive and as financial liabilities when the fair value is
negative.
For hedge accounting, Tervita designates its hedges as cash flow hedges as they hedge the exposure to
variability in cash flows attributable to principal and interest of its US$ debt.
At the inception of a hedge relationship, the Company formally designates and documents the hedge
relationship to which it wishes to apply hedge accounting, and the risk management objective and
strategy for undertaking the hedge. Such hedges are expected to be highly effective in achieving
offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that
they will continue to meet the requirements for hedge effectiveness. When hedges meet the strict criteria
for hedge accounting, the effective portion of the gain or loss on the hedging instrument is recognized
in the cash flow hedge reserve in OCI, while any ineffective portion is recognized immediately in net
profit (loss). Amounts recognized in OCI are transferred to net profit (loss) when interest is paid on the
US$ debt or the US$ debt is revalued to C$ at period end.
If the hedging instrument expires or is sold, terminated or exercised without being replaced or rolled
over (as part of the hedging strategy), or when the hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss previously recognized in OCI remains separately in equity until
the forecasted transaction occurs. If the amount held within the cash flow hedge reserve is a loss and
the entirety or a portion of it is not expected to be recovered in future periods, the unrecoverable amount
is recognized in profit (loss) at the time of discontinuation.
Sources of
estimation
uncertainty
Tervita is required to determine the fair value of the swaps at the end of each reporting period. This
requires the use of a Level 2 discounted cash flow valuation approach. All inputs are considered
observable including contractual payments under the swaps, forward foreign exchange and forward
interest rate swaps, and the credit ratings of Tervita and our counterparties. See note 23 for fair value
disclosures.
SUPPORTING INFORMATION
Foreign Currency Risk
Tervita's risk management strategy for its senior secured notes is to mitigate the foreign currency risk due to movements
in the US$:C$ exchange rates.
Tervita issued the US$360 million senior secured notes (note 19) on December 13, 2016 (the “Designation Date”). On this
date, it also designated five cross currency swaps (the “Designated Hedge”) as hedges of the interest and principal
repayment of these notes to hedge the changes in cash flows due to changes in the US$:C$ exchange rates (note 20).
There is an economic relationship between the Designated Hedge and the US$360 million senior secured notes as the
fair value of the hedging instrument moves in the opposite direction of the change in the US$:C$ exchange rate. As a
result, the hedge ratio is maintained at 1:1 for the hedged instrument. Tervita accounts for the Designated Hedge as a
cash flow hedge. The debt includes fixed US$ interest payments, which are payable semi-annually, and full principal
repayment on maturity on December 1, 2021. The payment dates of the Designated Hedge match those of the US$360
million senior secured notes.
In May 2018, Tervita entered into cross-currency swaps ("forward swaps") with a maturity date of December 2, 2019. The
forward swaps mitigate the foreign currency risk associated with the variability in principal repayment of the US$250
million senior secured notes (note 19), issued July 2018, due to changes in the US$:C$ exchange rates. The forward swaps
were not designated as a hedge and have been classified and measured as financial liabilities at FVTPL (note 23).
84 TERVITA | Annual Report 2018
Page | 28
Sources of Hedge Ineffectiveness
Credit Risk
The Company is exposed to counterparty credit risk on the Designated Hedge and internal credit risk on the US$360
million senior secured notes issued. Hedge ineffectiveness could arise from changes to credit risk for either Tervita or any
of the counterparties issuing the Designated Hedge, or differences between the credit risks on either side of the hedging
relationships. Tervita is not hedging credit risk as part of the hedging relationship, and noted no changes in credit risk for
any of the involved parties. The change in credit risk was not a significant driver of changes in the fair value of derivatives
as at December 31, 2018, resulting in no hedge ineffectiveness from credit risk.
Timing of Derivative Designation
The Designated Hedge was not entered into at the same date at which the hedge was designated and, as such, at the
Designation Date an unrealized loss of $12 million was recorded to other income (expense). At the Designation Date, the
cash flow hedge was assessed to be effective. The non-zero element of the derivative at initial designation will cause hedge
ineffectiveness over the term of the hedge since the hypothetical derivative used to measure hedge ineffectiveness will
have a fair value of zero at the date of designation. The amount of ineffectiveness recognized in each period depends on
how future interest rates affect the cumulative fair value gains (losses) on the actual derivative from inception of the hedge
as compared to the effect they will have on the hypothetical derivative.
Cross-Currency Swap Agreements
Cross-currency swap agreements associated with the US$360 million senior secured notes and US$250 million senior
secured notes for the year-ended December 31, 2018 were:
Swap agreement
Designated Hedge
Swaps
Forward swaps
The fair value of cross-currency swaps were:
As at December 31
Forward swaps
Unrealized exchange gain (loss) on forward swaps
Current portion
Designated Hedge
US$360 million senior secured notes
Designated Hedge credit risk adjustment
Long-term portion
Total derivative assets (liabilities)
Inception Date
Maturity Date
Principal
Dec 2016
May 2018
May 2018
Dec 2021
Aug 2018
Dec 2019
476.6
321.6
320.1
Fixed Foreign
Exchange Rate
0.7554
0.7775
0.7809
2018
2017
18
18
7
1
8
26
—
—
(36)
5
(31)
(31)
The Designated Hedge mitigates the foreign exchange risk associated with the principal and interest amounts and the
cash flow risk associated with the variability in the interest on the US$360 million senior secured notes. In 2018, Tervita
recognized a total gain in OCI of $39 million (2017 - $25 million loss). For the year ended December 31, 2018, $40 million
of OCI was reclassified to other income (expense) (2017 - $31 million) to offset the $40 million unrealized foreign exchange
loss (2017 - $31 million unrealized foreign exchange gain) on revaluation of the debt. There was no tax impact for this
reclassification.
The swaps provided a fixed US$ to C$ conversion rate on cash of US$250 million, which were settled on July 19, 2018 in
conjunction with the close of the Arrangement and the exchange of the escrow notes. For the year ended December 31,
2018, a realized foreign exchange loss of $8 million associated with the settlement of the swaps was included in other
income (expense). See notes 3 and 9 for further details.
The forward swaps mitigate the foreign exchange risk on the principal amount of the US$250 million senior secured notes,
however these forward swaps are not designated as a hedging instrument. For the year ended December 31, 2018, an
unrealized foreign exchange gain of $18 million was included in other income (expense) due to changes to the fair value
of the forward swaps.
Page | 29
TSX | TEV 85
21. PROVISIONS
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Significant
judgments
Sources of
estimation
uncertainty
Decommissioning Liabilities
Tervita determines its decommissioning liabilities associated with the retirement of property, plant and
equipment at all its facilities. Tervita recognizes a provision measured at the present value of the future
costs of its decommissioning liabilities. The value of the decommissioning liabilities are determined
through an annual review of engineering and environmental studies, industry guidelines, current
regulations, and management’s best estimates.
The liabilities accrete to the periods the obligations are expected to settle, with accretion of
decommissioning liabilities recognized as a component of finance costs on the Statements of Profit
(Loss). The liabilities are reviewed each reporting period for revisions in the estimated timing and amount
of the future cash flows associated with the liabilities.
Contingent Consideration
When the consideration transferred by Tervita in a business combination or asset acquisition includes
assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration
is measured at its acquisition date fair value and included as part of the consideration transferred in a
business combination or asset acquisition. Any adjustments to fair value are recognized in other income
(expense) on the Statements of Profit (Loss).
Onerous Contracts
Where Tervita has identified that under certain contracts, the unavoidable costs of meeting the
contractual obligations exceed the expected benefits to be received, the contract is considered onerous.
Once a contract is identified as being onerous, a provision is recognized at the present value of the
unavoidable costs under the contract. Any adjustments are recognized in other income (expense) on
the Statements of Profit (Loss).
Determining whether Tervita has a present obligation and should recognize a provision is a matter
of judgment, and requires further judgment about outcomes of future events and interpretation of laws
and regulations.
Decommissioning Liabilities
Determination of the decommissioning liabilities requires estimation of the nature, timing, and cost of
the remediation process, the timing of cash outflows, and applicable discount rates. Tervita uses a risk-
free rate for calculating decommissioning liabilities, which is assessed quarterly and updated when there
is a material change in the rate. Estimates are based upon Tervita’s best practices and current regulatory
requirements.
Contingent Consideration
The fair value of contingent consideration is measured as part of the allocation of consideration
transferred in a business combination or asset acquisition at the acquisition date. Subsequent
measurement of fair value is based on discounted cash flows using a discount rate applicable for an
operating segment or business line. Estimates with respect to future commodity prices, cavern capacity,
cash flows, and discount rates may impact the fair value of contingent consideration. The fair value of
contingent consideration is based on Level 2 inputs under the fair value hierarchy (note 23).
Onerous Contracts
The determination of an onerous contract provision often requires an estimation of the potential
outcomes of different courses of action, the likelihood of these outcomes occurring, and the appropriate
discount rate.
86 TERVITA | Annual Report 2018
Page | 30
SUPPORTING INFORMATION
Note
Decommissioning
Liabilities
Contingent
Consideration
Onerous
Contracts
Legal
Balance, January 1, 2018
Acquisitions
Charged to profit (loss)
New obligations
Change in discount rate
Change in other estimates
Unwinding of discount
Capitalized to property, plant and equipment
Disposals
Change in discount rate
Change in other estimates
Settled during the year
Balance, December 31, 2018
Less: current portion
Long-term portion
3
3
8
3
272
44
—
—
—
7
(12)
104
3
(5)
413
14
399
9
—
—
—
2
—
—
—
—
—
11
1
10
24
18
6
6
3
—
—
—
—
(9)
48
11
37
3
—
—
—
—
—
—
—
—
(3)
—
—
—
Total
308
62
6
6
5
7
(12)
104
3
(17)
472
26
446
Provisions were settled for $14 million of cash, an exchange of $1 million of accounts receivable, and discontinuance of a
legal claim of $2 million.
Note
Decommissioning
Liabilities
Contingent
Consideration
Onerous
Contracts
Legal
Balance, January 1, 2017
Charged to profit (loss)
New obligations
Change in other estimates
Unwinding of discount
Capitalized to property, plant and equipment
8
New obligations
Disposals
Change in discount rate
Change in other estimates
Settled during the year
Balance, December 31, 2017
Less: current portion
Long-term portion
250
—
—
4
2
(2)
2
24
(8)
272
6
266
10
—
—
—
—
—
—
—
(1)
9
1
8
15
12
1
—
—
—
—
—
(4)
24
3
21
8
6
—
—
—
—
—
—
(11)
3
3
—
Total
283
18
1
4
2
(2)
2
24
(24)
308
13
295
Provisions were settled for $17 million of cash and an exchange of $7 million of accounts receivable.
Decommissioning Liabilities
The risk-free rates used to estimate the decommissioning liabilities at December 31, 2018 ranged from 1.86 to 2.50 per
cent (December 31, 2017 – 1.68 to 2.26 per cent) and an inflation rate of two per cent (December 31, 2017 – two per cent),
and were specific to the timing of the cash flows and the jurisdiction of the obligations. The undiscounted cash flows
associated with Tervita’s liabilities at December 31, 2018 were estimated at $837 million (December 31, 2017 – $511
million). Payments to settle the decommissioning liabilities occur on an ongoing basis and will continue over the remaining
lives of the operating assets, which are up to 106 years.
Decommissioning liabilities acquired through the Arrangement were valued at $44 million through the purchase price
allocation using a credit-adjusted discount rate, and were subsequently re-measured using the appropriate risk-free
discount rate, resulting in an adjustment to the decommissioning obligation of $99 million.
Included in decommissioning liabilities was $13 million (December 31, 2017 – $13 million) related to present obligations
to remediate waste slumps at two landfill sites. In 2017, corresponding assets of $13 million were capitalized upon
recognition of the decommissioning liability and immediately impaired (note 18). The landfill assets at one of the sites
were also impaired, as the site is not currently operational and remaining capacity in its current cell structure cannot be
Page | 31
TSX | TEV 87
utilized until repair work is completed. After the remediation work on the landfills has been completed, an assessment
will be performed to identify whether asset impairments can be reversed.
Contingent Consideration
In 2000 and 2014, Tervita acquired caverns at its Unity facility. The purchase agreements included a provision whereby
Tervita would be required to pay a fixed payment per cubic meter of by-products received for disposal in the caverns and
related disposal wells. Fixed payment rates will increase annually based on the Consumer Price Index in accordance with
the contractual arrangements. The terms of this provision extend for an unlimited time, until the caverns and disposal
wells are at capacity. The total fair value of the obligations as at December 31, 2018 was $11 million, using a discount rate
of 10.2 per cent (December 31, 2017 – $9 million, 11.6 per cent discount rate).
The discount rate used for these liabilities was calculated using the WACC of comparable companies from a cross-section
of industry peers, which reflects the risks inherent in the liability. Volumes of waste collected and estimated cavern space
remaining are considered each reporting period to determine the fair value of this obligation.
Onerous Contracts
The risk-free rates used to estimate the onerous provisions at December 31, 2018 ranged from 1.86 to 1.96 per cent
(December 31, 2017 - 1.68 to 2.04 per cent) and an average operating cost increase of five per cent to reflect the terms of
the onerous contracts (December 31, 2017 - five per cent), and were specific to the timing of the cash flows. The
undiscounted cash flows associated with Tervita’s liabilities at December 31, 2018 were estimated at $74 million
(December 31, 2017 - $38 million). Payments to settle the onerous contracts occur on an ongoing basis and will continue
over the remaining lives of the operating assets, which are up to 14 years.
Onerous contracts acquired through the Arrangement were valued at $18 million through the purchase price allocation
using a credit-adjusted discount rate, and were subsequently re-measured using the appropriate risk-free discount rate.
This resulted in an adjustment to the onerous contracts liability of $3 million.
New obligations primarily represent the value of Newalta's head office building, which was acquired as part of the
Arrangement and included in transaction costs on the Statements of Profit (Loss).
22.
SHARE-BASED COMPENSATION
ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Accounting
policies
Option Plan
Tervita has an Option Plan, under which stock options ("options") are granted to members of the senior
management. The Option Plan is accounted for as an equity-settled plan. The fair value of the options
is estimated on the grant date using the Black-Scholes model.
Unless otherwise determined by the Board of Directors, options vest in equal amounts on the first three
anniversaries of the grant date, which is recognized in other income (expense) in the Statements of Profit
(Loss) and share-based compensation reserve in the Statements of Financial Position.
On the exercise of options, the consideration received and the amounts previously recognized in share-
based compensation reserve are recorded as an increase to issued capital. The options expire five years
after the grant date.
RSU Plan
Tervita has a Restricted Stock Units Plan ("RSU Plan"), under which RSUs are granted to certain eligible
employees based on criteria as determined by Tervita's management. The RSU Plan is accounted for as
a cash-settled plan.
Unless otherwise determined by Tervita's Board of Directors, RSUs vest in full 36 months after they are
granted, whereby share-based compensation expense is recognized in other income (expense) in the
Statements of Profit (Loss) and included in other long-term liabilities in the Statements of Financial
Position.
The fair value of the RSUs are estimated on the grant date and at each reporting period using the Black-
Scholes model, with any changes recognized in other income (expense) in the Statements of Profit (Loss).
88 TERVITA | Annual Report 2018
Page | 32
The RSUs are settled in cash after they are vested, which reduces the outstanding liability. RSUs are fully
cancelled if an employee resigns during the vesting period.
IIU Plan
Tervita granted an Integration Incentive Units Plan ("IIU Plan") to executive leadership and management
("Executives"), which is accounted for as a cash-settled plan. The IIU Plan is an incentive based plan to
award Tervita's Executives for achieving targeted synergies with respect to the Arrangement.
The IIUs were granted on December 31, 2018 and vest in full 24 months after they are granted. The share-
based compensation expense associated with the IIUs is recognized in other income (expense) in the
Statements of Profit (Loss) and included in other long-term liabilities in the Statements of Financial
Position. The IIUs are settled in cash after vesting.
Sources of
estimation
uncertainty
Determining the fair value of the options and RSUs requires the use of assumptions in applying
valuation techniques. Significant changes to one or more of these assumptions could result in a
material adjustment to the carrying value of the options and RSUs outstanding at the end of a reporting
period. The following key assumptions were used by Tervita in arriving at the fair values:
•
•
•
Expected annual volatility – as Tervita does not have sufficient traded market price history, the
volatility was determined based on publicly available trading data of comparable companies;
Expected life – options and RSUs can only be exercised or settled if certain liquidity events occur, as
defined in the respective contracts. As a result, the expected life is estimated based on the contractual
life of the options and RSUs since Tervita has limited experience with similar options and RSUs and
is unable to predict the occurrence and timing of these liquidity events;
Forfeiture rate – the actual forfeitures of the group of eligible employees and members of senior
management who received the grants were used in estimating future forfeiture rates;
• Market price – as Tervita does not have sufficient trading history, the Company has determined the
market price of the options based on available trading history and comparable peer companies.
The market price of RSUs is determined based on the five-day volume weighted average price at
each reporting date; and
• Dividend yield – Tervita has not historically paid dividends, and the dividend yield is assumed to be
$nil.
SUPPORTING INFORMATION
Option Plan
The inputs to determine the fair value of the options were:
Market price per unit
Expected annual volatility
Expected expiry period
Risk-free interest rate
Expected annual dividend yield
Expected annual forfeitures
Weighted average fair value per option granted during period
The changes in options granted were:
Units outstanding, January 1
Granted
Cancelled or forfeited
Units outstanding, December 31
$6.54
46%
5 years
1.9%
—
0% - 4%
$2.74
Weighted
Average
Exercise
Price
$10.00
$9.28
$9.35
$9.61
2018
$9.35
40%
5 years
2.0%
—
0% - 4%
$3.56
2017
$10.00
43%
5 years
1.1%
—
0% - 5%
$3.74
Weighted
Average
Exercise Price
—
$10.00
$10.00
$10.00
2017
—
1,102,579
(67,936)
1,034,643
2018
1,034,643
1,318,242
(49,157)
2,303,728
Page | 33
TSX | TEV 89
Exercise price
$6.54
$9.35
$10.00
$6.54 - $10.00
Weighted
Average
Remaining
Contractual
Life
4.99
4.26
3.16
3.77
Number
Outstanding
57,288
1,211,797
1,034,643
2,303,728
Weighted
Average
Exercise
Price
$6.54
$9.35
$10.00
$9.61
Number
Exercisable
—
—
344,881
344,881
Weighted
Average
Exercise
Price
—
—
$10.00
$10.00
The total share-based compensation expense included in the Statements of Profit (Loss) for the options was $3 million
(December 31, 2017 – $2 million).
RSU Plan
The inputs to the the Black-Scholes model to determine the fair value of the RSUs were:
Market price per unit
Expected annual volatility
Expected expiry period
Risk-free interest rate
Expected annual dividend yield
Expected annual forfeitures
The changes in RSUs granted were:
Units outstanding, January 1
Units issued
Units cancelled or forfeited
Units outstanding, December 31
Grant date market price
$8.04
$9.35
$10.00
$8.04 - $10.00
2018
$6.54
50%
2 years
2.0%
—
7%
2018
588,362
518,045
(105,904)
1,000,503
2017
$10.00
43%
3 years
1.1%
—
5%
2017
—
630,970
(42,608)
588,362
Weighted
Average
Remaining
Contractual
Life
2.91
2.26
1.03
1.61
Number
Outstanding
3,732
462,270
534,501
1,000,503
Weighted
Average
Exercise
Price
$8.04
$9.35
$10.00
$9.69
Number
Exercisable
Weighted
Average
Price
—
—
—
—
—
—
—
—
The total share-based compensation liability for RSUs included in other long-term liabilities on the Statements of Financial
Position was $2 million at December 31, 2018 (December 31, 2017 – $1 million). The total share-based compensation
expense included in the Statements of Profit (Loss) for the RSUs was $1 million (December 31, 2017 – $1 million).
IIU Plan
The Company granted 251,147 IIUs on December 31, 2018, as a result of which share-based compensation expense for
the year ended December 31, 2018 was $nil.
90 TERVITA | Annual Report 2018
Page | 34
23.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Financial Assets and Liabilities
Financial assets and financial liabilities ("financial instruments") are initially recognized at fair value, which
is normally equal to cost plus or minus directly attributable transaction costs, other than for those
financial instruments that are designated at FVTPL. The transaction costs are subsequently amortized
over the financial instruments’ remaining expected life using the effective interest method and are
included as part of finance costs on the Statements of Profit (Loss). Transaction costs related to financial
instruments classified as FVTPL or as designated hedges are expensed as incurred.
Subsequent to initial recognition, financial instruments are classified and measured at each reporting
date as follows:
•
•
Financial assets at amortized cost - Financial assets are measured at amortized cost using the
effective interest method when they are held within a business model whose objective is to collect
contractual cash flows, with such cash flows arising from payments of principal and interest on the
principal amount outstanding. Gains and losses are recognized when the asset is derecognized or
impaired. Assets that are short-term in nature have a carrying value that approximates fair value.
FVTPL - Financial instruments are classified as FVTPL when the financial instrument is either held
for trading or is initially designated as FVTPL.
• Designated hedges - Derivative financial instruments that are designated as effective hedges are
recognized in OCI with an amount reclassified to net profit (loss) when the hedged item affects net
profit (loss).
• Other financial liabilities - Other financial liabilities are measured at amortized cost using the
effective interest method. Liabilities that are short-term in nature have a carrying value that
approximates fair value. Tervita has determined that all assets and liabilities measured at fair value
are deemed to be recurring fair value measurements, other than assets held for sale and discontinued
operations which are non-recurring fair value measurements.
Derivatives and Hedging
Derivative financial instruments are utilized by Tervita in the management of its exchange rate exposures,
and not for trading or speculative purposes. Tervita has cross-currency swaps to manage the impact of
foreign exchange rates on its foreign currency denominated debt and to manage the overall cost of
borrowing on its total debt portfolio. The cross-currency swaps require periodic exchange of payments
without the exchange of the notional principal amount on which the payments are based.
Derivative financial instruments not designated as hedges are recorded at fair value each reporting date,
with any unrealized gains or losses recognized in net profit (loss).
Derivatives designated as hedges are recorded at fair value each reporting date. The effective portion
of the gain or loss on the hedging instrument is recognized in OCI in the cash flow hedge reserve, while
any ineffective portion is recognized immediately in net profit (loss). Amounts recognized in OCI are
reclassified to net profit (loss) when interest is paid on the US$ debt or the US$ debt is revalued to C$ at
period end.
Contracts and agreements are assessed for embedded derivatives and, where necessary, Tervita
separately recognizes the embedded derivative at fair value for each reporting period.
Derecognition of Financial Instruments
Financial assets are derecognized when the contractual rights to the cash flows expire, substantially all
the risks and rewards related to ownership are transferred to a third party, or Tervita is required to
extinguish all or part of the financial asset. Financial liabilities are derecognized when the contractual
obligation expires, is discharged, or is canceled.
Gains or losses arising from settlement, repurchase, or cancellation of financial instruments are
recognized in the Statements of Profit (Loss).
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TSX | TEV 91
Offsetting Financial Assets and Liabilities
Financial instruments are offset with the net amount presented in the Statements of Financial Position
if Tervita holds an enforceable legal right to offset and there is an intention to settle on a net basis or to
realize an asset and settle the liability simultaneously. In all other situations, financial instruments are
presented on a gross basis.
Impairment
Tervita assesses all trade and other receivables for impairment under the simplified method, which
requires only the consideration of the impact of lifetime ECLs, or the ECLs resulting from possible default
events over the life of the financial instruments. ECLs are a probability-weighted estimate of credit losses
over the expected life of the financial instrument. Credit losses are measured as the difference between
the contractual cash flows due to the Company and the cash flows Tervita expects to receive. Probabilities
based on historical experience and future expectations are applied to the aging categories of the
Company's provision matrix.
The Company measures its impairment on cash and cash equivalents at an amount equal to 12-month
ECLs, as the credit risk on these balances is presumed to be low since deposits are held with highly-rated
financial institutions.
Tervita assesses at each reporting date whether there is objective evidence that a financial asset or group
of financial assets is credit-impaired. A financial asset is credit-impaired if one or more events have
occurred since the initial recognition of the asset that has impacted the estimated future cash flows.
Evidence of a financial asset that is credit-impaired may include evidence or indications of financial
difficulty of the counterparty, failure to make scheduled payments, the probability that the counterparty
will enter bankruptcy or a similar arrangement, or general economic conditions that correlate with
increased risk of defaults.
Significant
judgments
All assets and liabilities, including financial assets and liabilities that are carried at fair value, are
categorized as one of the following levels in the IFRS fair value hierarchy depending on the valuation
technique used:
•
•
•
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value
measurement is directly or indirectly observable; and
Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value
measurement is unobservable.
Judgment is required to determine the hierarchy category in which the financial instruments should be
included. Where the fair values of financial instruments cannot be derived from active markets, they are
determined using valuation techniques, including a discounted cash flow model. Inputs are taken from
observable markets whenever possible. However, multiple methods exist by which fair value can be
determined, which can cause values to differ.
Sources of
estimation
uncertainty
Fair value estimates are made at a point in time and may not be reflective of future fair values.
Estimated fair values are designed to approximate amounts at which the financial instruments could
be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
Assumptions underlying the valuations may require estimates of costs and prices over time, discount
rates, inflation rates, defaults and other relevant variables.
ECLs are calculated using historical and future information regarding customer collectability. Uncertainty
exists over the estimation of ECLs, as the historical and forward-looking information included in the
calculation may not be representative of actual future cash flows.
92 TERVITA | Annual Report 2018
Page | 36
SUPPORTING INFORMATION
Fair Value of Financial Instruments
As at December 31, 2018
Cash and cash equivalents
Trade and other receivables
Equity investment
Trade and other payables
Interest payable
Long-term debt
Derivative assets (liabilities)
Derivative assets (liabilities)
Contingent consideration
As at December 31, 2017
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Interest payable
Long-term debt
Derivative assets (liabilities)
Contingent consideration
Note
Classification
Level
Carrying
Value
Estimated
Fair Value
Amortized cost
Amortized cost
FVTPL
Other financial liabilities
Other financial liabilities
Other financial liabilities
Designated hedge
FVTPL
FVTPL
—
—
3
—
—
—
2
2
2
3
19
19
20
20
21
Note
Classification
Level
FVTPL
Loans and receivables
Other financial liabilities
Other financial liabilities
Other financial liabilities
Designated hedge
FVTPL
—
—
—
—
—
2
2
19
19
20
21
46
180
4
(122)
(6)
(818)
8
18
(11)
46
180
4
(122)
(6)
(806)
8
18
(11)
Carrying
Value
Estimated
Fair Value
124
130
(94)
(4)
(437)
(31)
(9)
124
130
(94)
(4)
(454)
(31)
(9)
There were no transfers between levels of the fair value hierarchy in either 2018 or 2017. The fair value of debt is based
on third party observable quotes and may not reflect actual amounts payable by Tervita.
Offsetting Financial Assets and Liabilities
The Company enters into various energy marketing arrangements that allow for offsetting and are presented on a net
basis on the Statements of Financial Position. Tervita has determined that it has a legally enforceable right to set-off which
is necessary to permit balance sheet offsetting. The following tables show the actual effect of netting arrangements on
the Company’s financial position:
As at December 31, 2018
Trade and other receivables
Trade and other payables
As at December 31, 2017
Trade and other receivables
Trade and other payables
Risk Management
Counterparty Credit Risk
Gross Asset
29
29
Gross Asset
86
101
Gross
Liability
Net
Presentation
(12)
(44)
17
(15)
Gross
Liability
Net
Presentation
(65)
(115)
21
(14)
Credit risk is the financial risk associated with the non-performance of contractual obligations by counterparties. Tervita’s
revenue is primarily earned in the oil and gas industry potentially resulting in a concentration of counterparty credit risk.
Tervita generally extends unsecured credit to its customers and the collection of accounts receivable may be affected by
changes in economic or other conditions which may impact Tervita’s overall credit risk. Management believes the risk is
mitigated by the size, reputation and diversified nature of the companies to which Tervita extends credit. Tervita reviews
the financial strength of some of its customers and performs a detailed analysis of outstanding trade and other receivables
on an ongoing basis. None of the counterparties individually make up more than 10 per cent of Tervita’s credit exposure.
Page | 37
TSX | TEV 93
Loss Allowance
Balance, January 1
Provision for bad debts
Write-offs, net of recoveries
Balance, December 31
Aging Analysis of Trade Accounts Receivable Past Due
As at December 31
91 - 120 days
Greater than 121 days
2018
(1)
—
—
(1)
2018
6
15
21
2017
(3)
—
2
(1)
2017
4
3
7
The Company deems that the credit risk of a financial asset has increased significantly since initial recognition if it is more
than 30 days past due. Tervita considers a financial asset to be in default when the financial asset is more than 90 days
past due or there are indicators that payment from the borrower is unlikely. The Company's credit terms are customer
specific and could range from 30 days to 90 days. Financial assets are grouped together based on credit status and aging
when assessed for ECLs.
Tervita performs regular reviews of accounts that are past due and adjusts the credit-impaired status of related financial
assets according to these reviews, following which any accounts deemed uncollectible are expensed.
Cash and cash equivalents are held at major financial institutions. Management believes the credit risk is mitigated by the
high credit rating of these financial institutions.
Tervita’s maximum counterparty credit exposure as at December 31, 2018 was the total carrying value of cash and cash
equivalents and trade and other receivables.
Liquidity Risk
Liquidity risk is the risk that Tervita will encounter difficulties in meeting its financial obligations as they come due. Tervita
mitigates this risk by forecasting cash flows from operating activities and managing the borrowings under the Revolver,
as management expects to rely on these as primary sources of liquidity and to fund capital expenditures. At December 31,
2018, there was $188 million of borrowing available under the Revolver (December 31, 2017 - $127 million). There was
$46 million in cash available at December 31, 2018 (December 31, 2017 - $124 million).
The timing of Tervita’s cash outflows relating to financial liabilities on an undiscounted basis is:
Trade and other payables
Interest payable, net of related swaps agreements
Long-term debt (excludes foreign currency revaluation and unamortized debt costs)
Contingent consideration
Total
Foreign Exchange Risk
2019
122
64
10
1
197
2020-21
2022-23
Thereafter
As part of the Arrangement, the class A voting common shares and the class A voting preferred shares were cancelled
—
127
848
3
978
—
—
3
3
6
—
—
—
15
15
Tervita is exposed to foreign currency risk with respect to its US$ debt. Tervita manages this exposure through its cross-
currency swaps, thereby fixing the exchange rate on US$ debt (note 20). Absent the swap agreements, a $0.01 change in
the US$ to C$ exchange rate would result in a change to net profit (loss) of $6 million (2017 - $4 million).
94 TERVITA | Annual Report 2018
Page | 38
Page | 39
Changes in Liabilities Arising From Financing Activities
Balance, January 1, 2018
Cash flows
Foreign exchange movements
Fair value changes
Issuance of new debt
Acquisitions
Other
Balance, December 31, 2018
Balance, January 1, 2017
Cash flows
Foreign exchange movements
Fair value changes
Other
Balance, December 31, 2017
24.
SHARE CAPITAL
Long-Term
Derivative
Liabilities
(Assets)
Debt
437
(20)
332
49
—
13
7
818
466
(1)
(32)
—
4
437
31
—
(1)
(56)
—
—
(26)
6
—
(1)
26
—
31
Long-Term
Debt
Derivative
Liabilities
(Assets)
Total
468
(20)
48
(56)
332
13
7
792
Total
472
(1)
(33)
26
4
468
Value
816
21
837
(837)
947
947
Class A voting preferred shares with no par value
Unlimited number of preferred shares
102,010,181
Class A voting common shares with no par value
Unlimited number of common shares
Note
Authorized
shares)
(millions of C$)
Balance, December 31, 2017
Cancellation of shares under the Arrangement
Common shares with no par value
Balance, December 31, 2018
3
3
Unlimited number of common shares
117,557,112
Issued
(number of
2,615,598
104,625,779
(104,625,779)
117,557,112
and exchanged for common shares with no par value in Tervita (note 3).
The common shares have one vote per share, rank equally as to any dividends and distributions, and have an equal and
rateable claim to the assets of Tervita upon liquidation.
25. CAPITAL MANAGEMENT
Tervita’s capital management objectives are to enable ongoing access to capital to successfully implement its growth
strategy, to provide adequate returns for shareholders and benefits for other stakeholders, and to mitigate risk through
changing economic environments.
Tervita defines its capital as share capital, long-term debt including current portion but excluding debt costs, and cash
and cash equivalents. Tervita generates forecasts on a regular basis, incorporating acquisitions, internal investing activities,
and changes in economic conditions which may impact cash provided by operating activities. In the management of
capital, Tervita may incur new debt, sell assets, adjust its capital spending program, and reduce operating and general
and administrative expenses in accordance with changes in activity levels.
Liquidity Risk
of $87 million) as at March 13, 2019.
Tervita had cash and cash equivalents of $46 million and access to $188 million under its Revolver (net of letters of credit
Changes in Liabilities Arising From Financing Activities
Balance, January 1, 2018
Cash flows
Foreign exchange movements
Fair value changes
Issuance of new debt
Acquisitions
Other
Balance, December 31, 2018
Balance, January 1, 2017
Cash flows
Foreign exchange movements
Fair value changes
Other
Balance, December 31, 2017
24.
SHARE CAPITAL
Long-Term
Debt
Derivative
Liabilities
(Assets)
437
(20)
49
—
332
13
7
818
31
—
(1)
(56)
—
—
(26)
Long-Term
Debt
Derivative
Liabilities
(Assets)
466
(1)
(32)
—
4
437
6
—
(1)
26
—
31
Total
468
(20)
48
(56)
332
13
7
792
Total
472
(1)
(33)
26
4
468
Class A voting preferred shares with no par value
Class A voting common shares with no par value
Balance, December 31, 2017
Cancellation of shares under the Arrangement
Common shares with no par value
Balance, December 31, 2018
Note
Authorized
Unlimited number of preferred shares
Unlimited number of common shares
3
3
Unlimited number of common shares
Issued
(number of
shares)
102,010,181
2,615,598
104,625,779
(104,625,779)
117,557,112
117,557,112
Value
(millions of C$)
816
21
837
(837)
947
947
As part of the Arrangement, the class A voting common shares and the class A voting preferred shares were cancelled
and exchanged for common shares with no par value in Tervita (note 3).
The common shares have one vote per share, rank equally as to any dividends and distributions, and have an equal and
rateable claim to the assets of Tervita upon liquidation.
25. CAPITAL MANAGEMENT
Tervita’s capital management objectives are to enable ongoing access to capital to successfully implement its growth
strategy, to provide adequate returns for shareholders and benefits for other stakeholders, and to mitigate risk through
changing economic environments.
Tervita defines its capital as share capital, long-term debt including current portion but excluding debt costs, and cash
and cash equivalents. Tervita generates forecasts on a regular basis, incorporating acquisitions, internal investing activities,
and changes in economic conditions which may impact cash provided by operating activities. In the management of
capital, Tervita may incur new debt, sell assets, adjust its capital spending program, and reduce operating and general
and administrative expenses in accordance with changes in activity levels.
Liquidity Risk
Tervita had cash and cash equivalents of $46 million and access to $188 million under its Revolver (net of letters of credit
of $87 million) as at March 13, 2019.
Page | 39
TSX | TEV 95
Debt Covenants
In December 2018, the Company amended and extended its Revolver. Amendments included an extension of the
termination date from December 14, 2019 to June 1, 2021, an increase in accessible funds from $200 million to $275
million, a reduction of the standby fee, an increase in sublimits for letters of credit and specified draws, an increase in the
cash netting limit for financial covenants from $50 million to $75 million, and other specified changes to definitions and
terms.
At December 31, 2018, the terms of Tervita’s Revolver require the Company to comply with certain financial and non-
financial covenants, as defined by its lenders. This includes a covenant ("Total Leverage Ratio") which limits the amount
of total indebtedness, net of unrestricted cash and cash equivalents of up to $75 million, that Tervita can incur relative to
a defined measurement of earnings. Covenant EBITDA (referred to as Adjusted EBITDA in the credit agreement) is defined
as Last Twelve Months ("LTM") net profit (loss) before tax, other income (expense), finance costs, impairment expense,
depreciation and amortization, and any other items that are considered non-recurring in nature. Covenant EBITDA is
calculated inclusive of Newalta Pro Forma LTM Adjusted EBITDA, excluding unrestricted subsidiaries. For purposes of this
calculation, severance costs associated with headcount rationalization have been added back and the gain (loss) on debt
restructuring, if any, has been deducted. Covenant EBITDA is used in the determination of compliance with debt covenants
and is not a recognized measure under IFRS.
The Total Leverage Ratio cannot exceed 5.00 to 1.00 in 2018 and 4.50 to 1.00 thereafter. Tervita must also maintain a secured
indebtedness to Covenant EBITDA ratio ("Secured Leverage Ratio") of less than 2.50 to 1.00, and a Covenant EBITDA to
interest expense ratio ("Interest Coverage Ratio") of greater than 1.75 to 1.00 for the year ended December 31, 2018 and
2.00 to 1.00 thereafter.
Covenant EBITDA was calculated as:
For the year ended December 31
Net profit (loss)
Adjustments:
Depreciation and amortization
Impairment expense
Finance costs
Transaction costs
Other (income) expense
Income taxes (recovery) expense
(Profit) loss from discontinued operations, net of tax
Eligible adjustments:
Severance costs, excluding Newalta transaction costs
Adjusted EBITDA of unrestricted subsidiaries
Covenant EBITDA
The financial covenants for the Revolver for the year ended December 31, 2018 were:
Total Leverage Ratio
Secured Leverage Ratio
Interest Coverage Ratio
26. RELATED PARTY TRANSACTIONS
Note
15, 16
18
8
3
9
5
2018
(125)
129
25
92
88
5
1
—
1
(1)
215
Required
Less than 5.00
Less than 2.50
Greater than 1.75
Achieved
3.56
0.20
3.21
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Accounting
policies
Related parties include key management personnel, which comprise the Board members, executive
leadership, and certain other individuals employed by Tervita, as well as their close family members. All
related party transactions abide by Tervita’s general terms and conditions for transactions.
96 TERVITA | Annual Report 2018
Page | 40
SUPPORTING INFORMATION
Management Compensation
The remuneration of key management personnel included in direct expenses and general and administrative expenses
on the Statements of Profit (Loss) were:
For the years ended December 31
Salaries and short-term benefits
Termination benefits
Share-based compensation
Bonuses
Total key management compensation
2018
1
—
2
1
4
2017
1
8
1
—
10
The following units were issued and outstanding to key management personnel under the Option and RSU Plans:
Options outstanding
RSUs outstanding
Other Related Party Transactions
Note
22
22
2018
1,828,653
25,000
2017
880,073
25,000
Positions held in the US$360 million senior secured notes and US$250 million senior secured notes by certain equity
owners and members of the Board of Directors were:
(amounts in US$)
Balance, January 1
Issuance of US$250 million senior secured notes
Balance, December 31
2018
22
15
37
2017
22
—
22
During 2018, equity owners and certain members of the Board of Directors earned US$2 million in interest income (2017
- US$2 million) related to their proportionate holdings in the US$360 million senior secured notes and US$250 million
senior secured notes. During 2018, certain equity owners and members of the Board of Directors also earned fees for
issuance of the escrow notes of $4 million (note 3).
27. COMMITMENTS
Interest
Office and facility leases
Operating leases
Pipeline transportation commitment
Utility purchase commitments
Investment commitment
Total commitments
28. CONTINGENCIES
2019
64
10
1
22
2
1
100
2020-21
127
19
1
7
2
—
156
2022-23
—
17
—
—
—
—
17
Thereafter
—
42
—
—
—
—
42
ACCOUNTING POLICIES, JUDGMENTS, AND ESTIMATES
Significant
judgments
Tervita is exposed to possible losses and gains related to environmental and other legal matters in
the ordinary course of business. Prediction of the outcome of such uncertain events (i.e., being virtually
certain, probable, remote or undeterminable), determination of whether recognition in the Financial
Statements is required, and estimation of potential financial effects are matters for judgment. Where no
amounts are recognized, disclosure may be appropriate. While the amount disclosed may not be material,
the potential for large liabilities exists and, therefore, these estimates could have a material impact on
Tervita’s Financial Statements.
During the normal course of business, the Company is involved in legal proceedings, with several
unresolved claims currently outstanding. The legal process of these claims has not advanced sufficiently
Page | 41
TSX | TEV 97
to the point where it is practicable to assess the timing and financial effect of these claims, if any. The
Company does not anticipate that the financial position, results of operations or cash flows of the
Company will be materially affected by the resolution of these legal proceedings. Insurance coverage
against certain types of claims, including hazards which result in personal injury or death, damage to or
destruction of equipment and facilities, suspension of operations, environmental contamination,
damage to property of others, and directors and officers liability claims, is maintained at a level
determined by management to be prudent.
SUPPORTING INFORMATION
Legal and Environmental Matters
Secure Energy
Services
On December 21, 2007, Tervita commenced an action in the Alberta Court of Queen's Bench (the
"Court") seeking alleged damages against Secure Energy Services ("Secure") and several of its personnel
(former Tervita employees) in their individual capacities. Pembina Pipeline Corporation ("Pembina") and
Triumph EPCM Ltd. ("Triumph") were also named as defendants. The claim alleges that, among other
things, the former employees breached their employment contracts and fiduciary duties, and engaged
in other unlawful conduct by improperly taking confidential Tervita information and using it to enable
Secure, Pembina, and Triumph to continue Secure’s business in direct competition with Tervita’s business.
Secure filed a defence and counterclaim in November 2008 claiming alleged damages for alleged
conduct in contravention of the Act.
Tervita and Triumph have settled the claims against Triumph. The Court summarily dismissed portions
of Tervita’s claims against Pembina, and the balance of the claims were discontinued. As a result, Pembina
no longer has any involvement in the lawsuit.
29. GUARANTEES
As at December 31, 2018, Tervita had $111 million (December 31, 2017 – $69 million) of surety bonds outstanding to
secure work, provide for potential environmental liabilities, and for completion of work with respect to its operating
segments. These outstanding bonds do not impact the amount of credit available under the Revolver.
For guarantees associated with Tervita’s long-term debt, see note 19.
Tervita indemnifies its directors and officers who are, or were, providing guarantees on behalf of Tervita at Tervita’s request.
Historically, these costs have not been material to Tervita’s financial position, results of operations, or cash flows.
98 TERVITA | Annual Report 2018
Page | 42
Corporate Information
DIRECTORS
John Cooper, President and Chief Executive Officer
Grant Billing, Chair of the Board
Michael Colodner, Human Resources Compensation Committee | Governance Committee
Allen Hagerman, Audit Committee | Human Resources Compensation Committee
Cameron Kramer, Audit Committee | Health, Safety and Environment Committee
Gordon Pridham, Audit Committee
Doug Ramsay, Health, Safety and Environment Committee | Governance Committee
Susan Riddell Rose, Governance Committee
Jay Thornton, Human Resources Compensation Committee
Kevin Walbridge, Health, Safety and Environment Committee
SENIOR OFFICERS
John Cooper, President and Chief Executive Officer
Rob Dawson, Chief Financial Officer
Brad Dlouhy, Chief Operating Officer
AUDITORS
Ernst & Young LLP
LEGAL COUNSEL
Norton Rose Fulbright Canada LLP
TRANSFER AGENT
AND REGISTRAR
Odyssey Trust
350-300 5th Avenue SW
Calgary, AB T2P 3C4
T 587 885 0960
EXCHANGE
Toronto Stock Exchange
Symbol: TEV
2019 ANNUAL GENERAL MEETING
May 2, 2019 at 2:00 p.m. MST
Telus Convention Centre
120 9 Ave SE, Calgary AB
INVESTOR RELATIONS
Toll-free: 1-866-233-6690
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TERVITA CORPORATION
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