NEWALTA CORPORATION ANNUAL INFORMATION FORM FOR THE FINANCIAL YEAR ENDED DECEMBER 31, 2015

Transcription

1 NEWALTA CORPORATION ANNUAL INFORMATION FORM FOR THE FINANCIAL YEAR ENDED DECEMBER 31, 2015 March 2, 2016

2 NEWALTA CORPORATION ANNUAL INFORMATION FORM TABLE OF CONTENTS FORWARD-LOOKING INFORMATION... 1 CORPORATE STRUCTURE... 2 GENERAL DEVELOPMENT OF OUR BUSINESS... 3 Our Business... 3 Our History... 4 Recent Developments... 4 DESCRIPTION OF OUR BUSINESS... 5 Overview... 5 Current Operating Divisions... 7 Principal Service Offerings Competitive Conditions Environmental Considerations Social and Environmental Policies Seasonality of Operations Employees RISK FACTORS AFFECTING OUR BUSINESS ADDITIONAL INFORMATION Share Capital Description of Senior Unsecured Debentures Directors and Executive Officers Market for Shares Dividend Record and Policy Legal Proceedings and Regulatory Actions Interest of Management and Others in Material Transactions Transfer Agents and Registrars Material Contracts Interests of Experts External Auditor Service Fees Audit Committee Matters Where You Can Find Additional Information Page

3 FORWARD-LOOKING INFORMATION Certain statements contained in this document constitute "forward-looking information" as defined under applicable securities laws. When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", "potential", "strategy", "target" and similar expressions, as they relate to Newalta Corporation and the subsidiaries of Newalta Corporation, or their management, are intended to identify forward-looking information. In particular, forward-looking information included or incorporated by reference in this document includes information with respect to: future operating and financial results; business prospects and strategy including related timelines; capital expenditure programs and other expenditures; realization of anticipated benefits from the sale of the Industrial Division including the ability to reinvest the net proceeds of disposition in a timely and efficient manner; realization of anticipated benefits of growth capital investments, acquisitions, divestitures and our innovation and process development initiatives; realization of anticipated benefits from the implementation of cost rationalization initiatives including the anticipated value and sustainability of the cash savings from such initiatives; anticipated industry activity levels; anticipated commodity prices; expected demand for our services; expected expansion opportunities for our business; the amount of dividends declared or payable in the future; our projected cost structure; and expectations and implications of changes in legislation. Such information reflects our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation: strength of the oil and gas industry, including drilling activity; general market conditions; fluctuations in commodity prices for oil and the price we receive for our recovered oil; fluctuations in interest rates and exchange rates; financial covenants in our debt agreements that may restrict our ability to engage in transactions or to obtain additional financing; success of our growth, acquisition and innovation and process development strategies including integration of businesses and processes into our operations and potential liabilities from acquisitions; our ability to secure future capital to support and develop our business, including the issuance of additional common shares; the highly regulated nature of the environmental services and waste management business in which we operate; dependence on our senior management team and other operations management personnel with waste industry experience; the competitive environment of our industry in Canada and the United States.; possible volatility of the price of, and the market for, our common shares, and potential dilution for shareholders in the event of a sale of additional shares; potential operational and safety risks and hazards, obtaining insurance for such risks and hazards on reasonable financial terms and potential failure of meeting customer safety standards; the seasonal nature of our operations; risk of pending and future legal proceedings; risk to our reputation; our ability to attract, retain and integrate skilled employees; open access for new industry entrants and the general unprotected nature of technology used in the waste industry; costs associated with operating our landfills; and such other risks or factors described from time to time in reports we file with securities regulatory authorities. By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking information will not occur. Many other factors could also cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking information and readers are cautioned that the foregoing list of factors is not exhaustive. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Furthermore, the

4 - 2 - forward-looking information contained in this document is made as of the date of this document and, in each case, is expressly qualified by this cautionary statement. Unless otherwise required by law, we do not intend, or assume any obligation, to update any such forward-looking information. Newalta completed an internal reorganization which resulted in (a) the wind-up of Newalta Income Fund, a wholly-owned subsidiary of Newalta Inc., on December 31, 2009, and (b) the name change of Newalta Inc. to Newalta Corporation in connection with an amalgamation on January 1, Unless otherwise indicated, information provided on or prior to December 31, 2008 is provided in respect of Newalta Income Fund, information provided on or prior to December 31, 2009 but after December 31, 2008 is provided in respect of Newalta Inc. and information provided thereafter is provided in respect of Newalta Corporation. References to "Newalta", "we", "our" and similar terms mean collectively, where the context requires, Newalta Corporation, Newalta Inc. and Newalta Income Fund. Unless otherwise indicated, all references to "dollars" or "$" are in Canadian currency. CORPORATE STRUCTURE Newalta Corporation (a predecessor entity) was incorporated on July 15, 1980 and was continued under the Business Corporations Act (Alberta), including the regulations promulgated thereunder (the "ABCA"), in August Since then, Newalta Corporation has been a party to the following reorganizations: In June 1991, two wholly-owned subsidiaries of Newalta Corporation amalgamated to form Newalta Environmental Services Corporation which then amalgamated with Newalta Corporation and continued under the name Newalta Corporation. On January 1, 2002, Newalta Corporation amalgamated with three of its wholly-owned subsidiaries and again continued under the name Newalta Corporation. In March 2003, pursuant to the terms of a plan of arrangement, Newalta converted to an income trust structure. Pursuant to this plan of arrangement Newalta Income Fund became a public entity, as its outstanding trust units were traded on the Toronto Stock Exchange, and Newalta Corporation became a direct, wholly-owned subsidiary of Newalta Income Fund through which (along with other subsidiaries) the business operations of Newalta were conducted. On December 31, 2008, pursuant to the terms of another plan of arrangement, Newalta Income Fund reorganized its trust structure into a corporate structure. As a result of this arrangement: (i) Newalta Inc. (a predecessor entity of Newalta Corporation) became a public entity, as its common shares were traded on the Toronto Stock Exchange; (ii) Newalta Income Fund became a direct, wholly-owned subsidiary of Newalta Inc.; and (iii) Newalta Corporation amalgamated with its wholly-owned subsidiaries Newalta Industrial Services Inc. and Newalta Services Holdings Inc. effective January 1, Newalta Corporation was the resulting operating entity from this amalgamation. The most recent reorganization occurred on December 31, 2009, with the wind-up of Newalta Income Fund and, subsequently on January 1, 2010, the amalgamation of Newalta Inc. with Newalta Corporation, with the resulting entity continuing under the name Newalta Corporation. The head office of Newalta Corporation is located at th Avenue SW., Calgary, Alberta T2R 0C6, and the registered office is located at 4500 Bankers Hall East, nd Street SW., Calgary, Alberta T2P 4K7. Newalta Corporation is both the public entity and Canadian operating entity and, as at the end of our last completed financial year, did not have any material subsidiaries. Newalta Environmental Services, Inc. ("NESI") is Newalta's United States operating subsidiary. NESI is a wholly-owned subsidiary of Newalta

5 - 3 - and is incorporated in the State of Delaware. In 2015, NESI s total revenue accounted for less than 10% of the consolidated total revenue of Newalta. Our Business GENERAL DEVELOPMENT OF OUR BUSINESS From 1993 to present, Newalta evolved to become a full service environmental waste management company engaged primarily in adapting technologies to maximize the value inherent in oil and gas exploration and production waste streams through processing to recover and recycle resources. Today, Newalta is one of Canada's largest providers of environmental services to the energy industry and a leader in the recovery and recycling of valuable products from waste streams from oil and gas customers. We provide innovative, engineered environmental solutions that enable customers to reduce disposal, enhance recycling and recover valuable resources from waste. We serve customers onsite directly at their operations and through a network of locations in Canada and the United States. Generally, the oil and gas environmental solutions industry services oil and gas exploration and production companies by treating and disposing of by-product wastes. These wastes are generated through the drilling, completion and production from crude oil and natural gas wells, and include drilling muds and cuttings, completion fluids, frac flowback water, produced water, contaminated soils and tank bottom waste. The charts below show the percentage of revenue generated from the following sources in 2013, 2014 and Note: (1) Projects & Other Revenue include Water Disposal, Service Revenue, Environmental Services, and Short Term Project Revenue We operate a network of facilities and provide a range of services to provide customers with access to integrated service options, close facility proximity and operating practices which improve efficiency, reduce costs and are conducted with high standards for safety and environmental performance. We focus on investments in innovation and process development that are intended to maximize the recovery of products for resale and minimize the waste residues that require disposal. Several technologies have been applied through operating knowledge to various waste streams including to recover crude oil from oilfield waste and to recycle drilling mud. Technological developments have led to new market opportunities.

6 - 4 - Our History In 1993, we had six oilfield facilities in western Canada generating revenue of approximately $15 million with 120 employees. The next year we entered the industrial waste management market in western Canada and, through a combination of executing on organic growth and acquisition opportunities, we increased our network to over 40 facilities by the end of 2005, generating revenue of approximately $250 million with 900 employees. With our facility network in western Canada largely complete, we focused on our onsite service platform for customers and providing innovative solutions to our customers' waste management needs. We continued our expansion by acquiring industrial and recycling facilities in eastern Canada in 2006 and 2007, extending the facility network into Ontario, Québec and Atlantic Canada. By the end of 2010, we had a national network with revenue of approximately $575 million and 2,000 people. Since 1993, we have applied and commercialized proven technologies to recover valuable products from waste, expanded our service offerings, entered new geographic markets and acquired complementary businesses. Our growth was attributable to both acquisitions and the development of new facilities and additional services at existing facilities. We have leveraged our facility network to expand our service offering by providing our services on our customers' sites and through modular processing facilities. During 2013 and 2014 our operating structure consisted of three divisions: (i) New Markets; (ii) Oilfield; and (iii) Industrial. In February 2015, we completed the sale of our Industrial Division. This resulted in Newalta becoming a pure play energy services company. Subsequently, we restructured our operating divisions into: (i) Heavy Oil; and (ii) Oilfield. Today, both our facility business and onsite services model play an important role in both of these operating divisions. See "Description of our Business - Current Operating Divisions" below. The next phase for our organization will focus on growing our onsite capabilities, leveraging our modular processing facility model, expanding our presence in the United States and Canada and commercializing innovative solutions. For a more detailed discussion of our strategy see Newalta's management's discussion and analysis for the year ended December 31, 2015 which is available by accessing our SEDAR profile at Recent Developments Credit Facility Amendments On March 1, 2016, we amended the terms of our credit agreement to, among other things: decrease the borrowing amount under our Credit Facility from $175.0 million to $160.0 million; extend the waiver of our Total Debt to EBITDA covenant to Q1 2018; and revise the Senior Debt to EBITDA and Interest Coverage covenant thresholds. Additional adjustments were made to our covenant package to take into consideration the current economic environment in the industry, including a restriction on declaring dividends through the period ending March 31, 2018.

7 - 5 - Initiatives undertaken to Withstand a Lower Oil Price and Activity Level Environment Suspension of the quarterly dividend The Board of Directors suspended the quarterly dividend effective March 31, This suspension represents $14 million in annualized cash flow savings. Reduced total capital spending budget - Based on the current outlook for the year, capital expenditures in 2016 are targeted to total approximately $15 million. Incremental cost rationalization In February 2016, Newalta implemented various actions which are expected to result in an incremental $12 million in annualized cost savings ($10 million in 2016) based on eliminating various positions across General and Administrative (G&A) and operations and further consolidating excess office space. Combined with actions taken in 2015, Newalta has reduced its cost base in excess of $50 million. We allocate capital to specific growth initiatives based on numerous factors including strategic fit, risk of execution and expected financial returns with reference to discounted after tax cash flow. As a result, we regularly assess the allocation of capital expenditures and the aggregate dollar amount to be expended and the amounts allocated to each growth area and operating division may be reallocated amongst the divisions and specific projects. We will continue to monitor market opportunities and will leverage our financial flexibility to invest in additional opportunities as they arise. Management and the Board of Directors also review corporate and division return on capital metrics, applying traditional definitions of Return on Capital Employed ("ROCE"), (where we apply Net earnings plus tax adjusted interest as the numerator), as well as a cash basis ROCE (where we apply Adjusted EBITDA less cash stock-based compensation, cash taxes and maintenance capital as the numerator) as means to evaluate the overall effectiveness of our growth capital spend program. ROCE and Adjusted EBITDA are non-gaap measures that do not have a standardized meaning prescribed by GAAP, or Generally Accepted Accounting Principles. Readers are directed to our management's discussion and analysis for the year ended December 31, 2015 which contains a definition of each such non-gaap measure and a reconsolidation thereof to the most directly comparable measure calculated in accordance with GAAP. Overview DESCRIPTION OF OUR BUSINESS Newalta provides comprehensive and integrated environmental services to the oil and gas industry consisting of oilfield waste management services for waste recycling, treatment and disposal to customers in Canada and the United States. We provide innovative engineered environmental solutions to enable our customers to reduce disposal, enhance recycling and recover valuable resources from oil and gas exploration and production waste streams. We operate in all of the significant resource producing areas in North America from a base of over 45 locations. The map below identifies our current operating locations within Canada and the United States.

8 - 6 - We offer a wide range of services to manage oil and natural gas-related waste materials that are generated through the various stages of an oil or natural gas well. Oilfield waste is generated during drilling, completion and production operations. Waste streams generally consist of a mixture of fluids, comprised of water and chemicals, as well as solids. Drilling. We treat, recycle and dispose of materials generated during well drilling including drilling fluids and drill cuttings that are brought back to the surface during the drilling process. We focus on enhanced techniques to recover oil from the cuttings that typically are disposed of in a landfill. Completion. We treat, recycle and dispose of materials produced during well completion, such as, completion fluids and flowback water from hydraulic fracturing operations with a focus on innovative water management solutions for water re-use. The drilling and completion phase typically occurs over the first 60 to 90 days of the life of a well in many of the regions in which we operate. Production. We treat, recycle and dispose of water produced during the oil and natural gas extraction process. We also provide integrated services, such as recycling and processing "tank bottom" waste, which consists of a near-solid-state sludge that settles at the bottom of storage tanks for crude and heavy petroleum products. Production waste is generated throughout the life of a well, which in the regions we operate can often exceed 20 years. Our core competencies are designing, building and operating advanced processing equipment to recover value from complex waste streams. We generate income from the sale of reclaimed oil and processed and treated waters. Because these products are derived from our waste treatment activities, we are able to

9 - 7 - generate revenue for these products from oilfield waste that would otherwise be disposed. We typically recover more than two million barrels of crude oil annually (not all from our account) from the waste that we process. We provide our oilfield waste treatment and recycling services at our waste management facilities and on a customer's site. Fixed facilities provide the ability to stage our equipment, train our people in a controlled environment, access skilled people from a broad pool, provide technical support and manage any residual waste. We have adapted existing fixed facility technologies to provide innovative solutions. Leveraging this technical and operating expertise and capitalizing on our fixed facility network as staging points allows us to provide innovative solutions to our customers' complex waste challenges. We have also focused on the ability to make our facilities modular to better support our customers. We have built standardized, modular equipment known as modular processing facilities to allow us to be more agile in a rapidly changing energy market. We are able to offer services on customer sites that are more cost-effective and environmentally secure than traditional treatment and disposal methods. Onsite capabilities reinforce our approach to singlesource service solutions for customers. When we manage waste directly onsite we bring our people, processing expertise, specialized equipment and technology to a customer's site to manage their needs at the source. This is both a short-term and long-term solution since it may result in either a short turnaround or a complete design, build and operate solution for the customer. Our onsite approach creates value for our customers' operations, minimizes off-site disposal and decreases environmental impacts associated with the transport of materials off-site. This model allows us to transition from a capitalintensive, facility based business to a flexible operating platform embedded in our customers' operations. We believe the successful expansion of our services is based on the following competencies: safety and risk management; operating expertise and knowledge; project management scoping, scheduling and execution; innovative solution execution and ability to adapt existing technologies and commercialize proven technologies; employee development and retention; customer service/relationship building; and technical support and engineering services. Current Operating Divisions Our current operating structure consists of the following divisions and business units: Division Heavy Oil Oilfield Business Units Facilities Business Unit Onsite Business Unit Facilities Business Unit Drilling Services Business Unit

10 - 8 - A historical breakdown of revenue for our operating divisions for the last three financial years is provided below. Revenue ($ millions) Year Ended December % of Revenue % of Total ($ Total Revenue Revenue millions) Revenue ($ millions) % of Total Revenue Heavy Oil % % % Oilfield % % % Total % % % Note: (1) Revenue has been restated according to operating division structure implemented effective in A detailed description of our Heavy Oil Division and our Oilfield Division is below. Heavy Oil Division The Heavy Oil Division includes eight facilities to serve the oil sands in Alberta and the conventional heavy oil region in Alberta and Saskatchewan. In addition, we mobilize equipment and our people to manage waste on our customers' sites and process oilfield-generated wastes, with a focus on reuse and recovery. The Heavy Oil Division is currently comprised of approximately 250 employees in western Canada. Our heavy oil operations began 19 years ago when we introduced centrifugation as a solution to treat waste oil emulsions at our fixed facilities. This business has expanded from processing heavy oil waste at facilities in our network to operating equipment and processing waste on customers' sites. Leveraging our facilities as staging areas, we deliver a broad range of specialized services at numerous customer sites. The Heavy Oil market consists of a limited number of sophisticated customers looking for highly engineered solutions for their production waste streams. Newalta has become a trusted service provider with our innovative approach and professional operations. By processing onsite, Newalta enhances the customer's sustainability performance and reduces transportation costs. We focus on providing technically differentiated solutions to these customers, expanding long-term contacts and extracting additional product value from our processes. Our Heavy Oil operations recovered and sold for our own account approximately 200,000 barrels of oil during The Heavy Oil Division is comprised of the Onsite business unit and the Facilities business unit. Onsite Business Unit Onsite services developed as we began to look for new ways to reduce waste and disposal costs for our customers. In response, we found innovative ways to apply some of our technologies used at our fixed facilities directly to our customers' sites. In 2005, we began providing heavy oil onsite services in western Canada. Onsite services are primarily directed at our larger customers. In many cases, unique solutions are required for a particular waste generated within our customers' main processes and we leverage the specific expertise within our organization to evaluate technology alternatives that are cost effective and environmentally superior to traditional methods. The execution of our onsite services business model

11 - 9 - typically follows a consistent pattern: first, we establish a market presence through the execution of short-term projects; and second, we leverage our success and relationship with our customer into longer term, stable cash flow generating contracts. The Onsite business unit provides specialized onsite services using centrifugation for heavy oil producers involved in heavy oil mining and steam-assisted gravity drainage ("SAGD") production. Waste streams that are processed by this business unit include slop oil from SAGD production, mature fine tailings and other oil sands mining waste. We have developed relationships with major operators in the oil sands and are continually discussing additional onsite opportunities where we can collaborate with our customers to find ways to reduce costs and maximize returns. The success of our Heavy Oil Onsite business is impacted by the timing, number and scope of projects and contracts that allow us to retain and grow our customer base, with this being driven by levels of investment in SAGD and oil sands mining and, to a lesser extent, seasonality with a decline in services that can be provided during certain winter months. Facilities Business Unit Our Heavy Oil Facilities business unit focuses on processing oilfield-generated wastes from the heavy oil industry at our fixed or modular facilities located in western Canada. Waste streams that we process include slop and slop oil from SAGD and conventional heavy oil production, waste water and associated by-products, tank bottom emulsions and turnaround waste from storage, terminal or battery facilities. Production activity drives the nature and amount of waste generated by our customers, which can be impacted by other industry factors including the price of crude oil. Oilfield Division The Oilfield Division is comprised of an integrated network of more than 35 locations with approximately 330 employees strategically located to service key markets in western Canada and the United States. At these locations, Newalta processes and recovers oil and water and reduces solid wastes from drill site locations. We recover oil for our customers, as well as for our own account. Our Oilfield Division recovered and sold approximately 190,000 barrels of oil during Newalta has served the environmental recovery needs of Canadian oilfield markets since 1993, introducing the use of centrifuges to treat waste and recover valuable crude oil. These oilfield services have provided the foundation to expand and adapt our services and enter new geographic markets over the years. We entered the United States market in 2006 with a focus on our drill site business. Our operations offer a broad range of services to a stable customer base in local markets. The business is largely transactional and customer buying decisions are typically made locally by field managers. Activity is driven by repeat business, characterized as small transactions across a broad customer base. A small number of large customers drive the market. Customers have clear environmental objectives, stringent safety rules, prefer a single service provider and have a broad range of complex waste management issues. We have developed a strong sales presence with key customers to advance the service offering and maximize opportunities. Newalta remains well positioned within the oilfield market with technology, operating experience and good quality assets. To date, growth has been achieved by executing organic opportunities to diversify services, expand geographically and improve productivity, as well as acquiring complimentary businesses. Given our focus on continuous improvement, we deliver strong environmental and safety

12 performance in line with our key customer expectations. We maintain a strong market presence by establishing customer expectations and adapting services to meet market demand through technology development and the integration of recycling and recovery options into our service portfolio. In western Canada, we operate in a mature market, however, conventional oil and gas basins continue to be revitalized with unconventional drilling techniques. This provides opportunities for Newalta. We look for strategic alliances with key customers, technology or other service providers to offer an increased range of services to our customers. Our strategy for our United States expansion was to leverage our drill site experience and replicate our western Canadian oilfield model of satellite and modular processing facilities, as well as the provision of onsite services, to customers requiring unique waste management solutions. Our operations in the United States are led from our U.S. head office in Denver, Colorado, with regional offices in our primary operating regions. The Oilfield Division is comprised of the Oilfield Facilities business unit and the Drilling Services business unit. Facilities Business Unit The Oilfield Facilities business unit has 29 locations throughout British Columbia, Alberta, Saskatchewan and Manitoba. In the United States, four modular processing facilities serve the Bakken and Eagleford plays in North Dakota and Texas. Waste streams that we process include (i) production related waste (tank bottom emulsions, waste from well work-overs, spills and turnaround waste from storage, terminal or battery facilities) and (ii) drilling and completion related waste, drilling mud and frac fluids. Key considerations in determining the location of our facilities include the location of existing production and future drilling sites; number, size and financial strength of oil and natural gas exploration and production companies; the geological characteristics of the area; access to road and power infrastructure; and our ability to obtain the necessary permits to conduct operations. Production activity and drilling activity, including drilling techniques and metres drilled impact the nature and volume of the waste that we receive. Our United States facilities are particularly affected by location, geological factors and varying regulatory environments. Due to geological factors, some areas in the UNITED STATES have a limited ability to inject waste water and produced fluids downhole. Operators and environmental solution companies in these areas have had to adapt and now lead the industry in the recycle and reuse of waste water and produced fluids. In western Canada, our facility network is well positioned to service the conventional oil and gas industry, however, we continue to look for ways to improve our service offering to our customers with innovative solutions and good customer service. Drilling Services Business Unit Our Drilling Services business unit is comprised of our drill site services and our environmental services in western Canada and the United States, with operations in the U.S. primarily in the Marcellus, Bakken, Eagleford, Niobrara and Arklatex regions. Drill site services involve the supply and operation of drill site processing equipment for drilling customers. This includes the use of solids control equipment and drill cuttings equipment. Solids control equipment consists of centrifuges and ancillary equipment that can be used on any drilling location to

13 remove unwanted solids from any type of drilling fluid and operate closed loop systems where the drilling muds and water can be reused. Drill cuttings equipment is used to recover oil-based fluids for reuse in the active mud system and to manage the drill cutting to minimize transportation and disposal of waste. Our drill site services are impacted by the number of active drilling rigs in the markets that we serve. Environmental services is comprised of environmental projects, drilling waste management services and site remediation. Demand for environmental services is impacted by oil and gas activity and the capital budgets of our customers. Principal Service Offerings Each of our locations acts as a portal into a broad suite of services and capabilities offered within each division. We provide an integrated approach to waste management through the core areas of: Waste Processing Recycling and Product Recovery Onsite Services and Drill Site Services Solids and Water Disposal Waste Processing Newalta operates an integrated facility network using our operating and technical knowledge to collect, consolidate and process oilfield waste in western Canada and certain regions of the United States. We process both organic and inorganic waste streams. We utilize our operating knowledge and technical expertise to apply centrifugation, distillation and physical chemical treatment in processing the waste streams we collect and receive at our facilities. Our strategic objective is to maximize the recovery of saleable and reusable products while reducing the volume of waste for disposal. Residues generated in our waste processing operations are further treated and disposed of to meet or exceed regulatory requirements either at our own disposal facilities or approved third party facilities. Recycling and Product Recovery One of our strategic objectives is to find technologies that will economically create valuable products from waste streams. Value can be derived from returning a product to its original use, creating a new use for a product or creating energy recovery from waste streams previously lost to final disposal options. Our innovative solutions have helped develop new markets for recycled and refined products. This can be seen in our ability to market the crude oil we recover from highly emulsified drilling production wastes using centrifugation. Onsite Services and Drill Site Services Our onsite project and drill site services capabilities further reinforce our approach to single-source service solutions for customers. When Newalta manages waste directly onsite, we bring our people, processing expertise, specialized equipment and technology to a customer's site to manage that customer's needs at the source.

14 Our onsite processing and drill site services and project capabilities include: Processing Drill cuttings systems and management Solids control Drilling waste management Spill clean-up Mobile centrifuges Tank cleanouts/turnarounds Sludge processing Environmental Services Laboratory analysis Site remediation Solids and Water Disposal Site assessments Waste characterization Site reclamation Well abandonment Disposing of residual wastes in an environmentally sound manner is a key component of a comprehensive oilfield waste management operation. We operate fully regulated and engineered landfills, water disposal wells (to dispose of wastewater) and salt caverns to support our operations and satisfy our customers' needs. Non-hazardous solid waste, generated primarily from the oil and gas industry in western Canada, is received and directed to one of our landfills located in western Canada or approved third party landfills. Salt cavern disposal facilities in western Canada provide: (i) a location for the disposal of waste that does not meet landfill disposal requirements; (ii) a final repository to manage difficult waste; (iii) crude oil recovery; and (iv) cost-effective options for secure disposal. Competitive Conditions Each aspect of our business is subject to significant competition that varies based on the nature of the service and the geographic location. With respect to the services we provide at our fixed and modular facilities, we compete with regional competitors and competitors for specific services. Our onsite facilities and services are also impacted by competitive conditions as we compete with regional competitors with respect to certain service offerings. The Canadian oil and gas services industry is well established and highly regulated, while in the United States it is more fragmented. The provision of waste management and recycling services is largely dependent upon the willingness of customers to outsource their waste management activities. Many customers, or potential customers, have internal options available to them. Additionally, many oilfield waste generators have abandoned wells that can be licensed to dispose of third party waste and production facilities that can be used to treat oilfield waste and to recover oil. In the oil and gas waste management industry in western Canada, consolidation has occurred over the last several years, effectively reducing the market of competitors. However, competitive conditions are always changing, with new players coming into various markets in which we compete. Newalta and these other competitors have an extensive network of facilities and are significant competitors for oilfield waste treatment and disposal services. In this marketplace, our principal competitors are Tervita Corporation, Secure Energy Services Inc. and Gibson Energy Inc. Although Newalta has a strong hold on present market opportunities in our Heavy Oil Onsite business, the competitive environment is always changing. There are competitors entering the market that primarily provide slop oil services, lime sludge processing and dredging services. We strive to continually improve our services to better meet the needs of our customers.

15 In the United States, numerous competitors have emerged, including Canadian and U.S. based companies, as a result of the rapid development of oil and gas plays in recent years. Many of these competitors have established or are establishing both drill site and facility operations. We differentiate our services from those of our competitors by focusing on our operational excellence, the development of modular processing capability and technical innovation to meet each customers' needs. In securing and maintaining business, we experience competition primarily in the areas of pricing and service. Customer relationships can be short-term in nature and, due to the competitive nature of the market, customers are generally not bound by long-term contracts or service agreements. Competitiveness is maintained by the customer's ability to seek the best combination of value and price from competing alternatives and to move between these alternatives with relative ease. We also face potential competition from innovative treatment and disposal solutions which may be developed and provide a more attractive solution to potential customers. With the reduction in oil prices and the industry downturn during 2015 and to date in 2016, the competitive market is changing. Although certain consolidation of competitors is expected given the decrease in activity in the oil and gas industry, there is also additional pricing pressure and increased competition from both other service providers and the internalization of waste management by our customers. For further details see "Risk Factors Affecting Our Business - Competition". Environmental Considerations The environmental services sector is highly regulated and subject to evolving regulation. All aspects of our operations are subject to environmental regulation pursuant to a variety of local, provincial, state and federal legislation in Canada and the United States. Canadian Environmental Regulations Both federal and provincial environmental regulation exists in Canada. Federal regulations regulate activities that cross provincial boundaries or are national in scope. The provinces retain control over environmental issues within their jurisdiction and have primary responsibility for regulating activities conducted by the environmental services sector and for issuing permits for environmental facilities. Principal federal legislation includes the Canadian Environmental Protection Act and the Transportation of Dangerous Goods Act. The majority of our activities in Canada occur in the western provinces. We have major fixed facility operations in Alberta. We also have smaller scale facilities in British Columbia, Saskatchewan and Manitoba. Our onsite operations are modular and are deployed to perform work on our customers' sites. In these cases our activities must be compliant with any regulatory approvals obtained by our customer applicable to the site and the work that we perform on such site. Alberta and British Columbia, for example, are two of the most heavily populated western provinces and have the highest potential for public scrutiny and opposition. As such, these provinces have the most detailed environmental regulations, more rigorous application processes, require broader public consultation on applications and have lengthier approval process times. These factors have the potential to impact our business as well as our customers' businesses.

16 The main provincial laws that are applicable to our business are: Alberta Environmental Protection and Enhancement Act and associated regulations including the Waste Control Regulation and various regulations under the jurisdiction of the Alberta Energy Regulator; British Columbia Waste Management Act, Environmental Management Act and various regulations under the jurisdiction of the British Columbia Ministry of the Environment and the British Columbia Oil and Gas Commission; Saskatchewan Environmental Management and Protection Act and various regulations and Oil and Gas Conservation Act under the jurisdiction of the Saskatchewan Ministry of the Economy; and Manitoba Oil and Gas Act and the Environment Act and various regulations. The regulatory agencies for each province listed above have responsibility for overseeing development of energy resources including the environmental aspects of these activities, within their respective provinces. Environmental regulations in each province are developed independently and generally control all aspects of: waste generation and recycling; water and wastewater treatment; waste recycling and management facilities from siting to operation through final closure; reclamation and recovery activities; air emissions; groundwater protection; surface water management; liability for contamination; and soil protection. Our business activities are dependent on the oil and gas industry. Therefore, how the industry is regulated impacts our business. In some jurisdictions regulations are becoming increasingly more stringent. When more stringent regulations are imposed on our customers it typically benefits our business, but there is no guarantee that the impact will always be positive. Certain regulations or proposed regulations that have the ability to positively or negatively impact our business or our customer's business are summarized below. There is an increased focus globally on initiatives to enact regulations around climate change and to foster and promote clean energy initiatives. Political changes in Alberta and Canada may advance the rate of development of these regulations, policies and programs. Alberta and Saskatchewan are each considering a new or updated regulatory framework for managing greenhouse gas emissions. British Columbia has had greenhouse gas emission regulations and programs in place for several years. Although many of these programs may not have a direct impact on Newalta, we may be indirectly affected by the impact to our customers. The extent of these impacts in those provinces with developing frameworks is not yet known.

17 Recently, the Federal Government of Canada also announced that it would be introducing an environmental assessment process for pipeline projects. Although our business is not directly tied to pipeline activity, if our customers cannot easily or efficiently move their products through pipelines, it has the potential to make exploration and production less attractive in the regions in which we operate. Potential impacts to industry from this change may be positive or negative and we are unable to assess this until further details are outlined. Directive 74 (Tailings Performance Criteria and Requirements for Oil Sands Mining Schemes) of the Alberta Energy Regulator was put in place to regulate certain activities of our onsite customers in Fort McMurray, Alberta. On March 13, 2015, the Alberta government announced a new Tailings Management Framework (Lower Athabasca Region Tailings Management Framework for the Mineable Athabasca Oil Sands) to provide guidance on managing fluid tailings so that new and legacy tailings will be reclaimed in a timely manner. At the same time, Directive 74 was suspended. The Alberta Energy Regulator released a new draft Directive (Fluid Tailings Management for Oil Sands Mining Projects) for comment during If enacted, this Directive would replace the current tailings management framework for our onsite customers in Fort McMurray. If the Directive is enacted in its current draft form, our customers will have regulatory timelines to meet with respect to reduction of tailings inventories and this could benefit our business. Hydraulic fracturing regulations continue to evolve in areas of the country where the practice is prevalent. Alberta and British Columbia law requires participants in the energy industry involved in hydraulic fracturing to publicly disclose the fluids used in the hydraulic fracturing process at all sites where the process is undertaken. To the extent that these regulations, or other legislation or regulations that are passed, limit the hydraulic fracturing process in Canada, our operations may be affected. United States Environmental Regulations Historically our business activities in the United States have been generated through onsite activities where we perform work on our customers' sites with a focus on servicing the oil and gas exploration and development sector. Our operations have expanded to include construction and operation of commercial oilfield waste treatment and recovery facilities. In general, our operations in the United States may be subject to federal, state and local laws and regulations governing environmental quality and pollution control. The regulations that govern these activities vary from state to state. In some cases these activities may be exempt from the federal environmental regulations and some state regulations. In the United States, environmental laws may require the acquisition of permits for certain activities, the installation of pollution control equipment, the special handling or disposal of materials used in our operations or place restrictions upon the location of certain activities in environmentally sensitive areas. Environmental regulations in the United States are largely administered by the federal agency known as the United States Environmental Protection Agency (the "EPA") and by states, either through delegation of federal programs or through state programs. The most significant environmental regulations affecting our business are the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act and the Toxic Substances Control Act. For some of these programs (including the Resource Conservation and Recovery Act, the Clean Air Act and the Clean Water Act), primary regulatory authority is delegated to the states which implement a program at least as stringent as the federal program. Oil and gas exploration and production activities are generally regulated by each state's energy or natural resource agency. These agencies also typically regulate waste and water management activities and other

18 environmental and waste management services that support exploration and production activities. For example, our oilfield treatment and recovery facilities in North Dakota are permitted and regulated by the North Dakota Industrial Commission. As a general matter, our customers in the oil and gas exploration and production industry as well as those that serve them have been under increasing regulatory scrutiny, with a clear trend of enacting additional regulations on the sector. The EPA has identified environmental compliance by the energy extraction sector as one of its national enforcement initiatives through 2016 and has solicited public comments on continuing this initiative for fiscal years 2017 to We believe this regulatory environment creates opportunities for oilfield waste management companies such as Newalta. For example, varying regulatory environments in each state dictate the disposal options available to our oil and gas customers, some of the more common practices include onsite burial, evaporation ponds, land treatment, landfill, deep well injection and mechanical and chemical separation. States with fewer regulations often result in the use of less expensive options for producers to dispose of oilfield waste, while in states with more stringent regulations, our services are more attractive and have greater value for a wider range of customers. To demonstrate its commitment to meet global efforts to reduce climate change, the United States introduced its Clean Power Plan in August Although this plan is not expected to directly impact our business, it demonstrates the global focus on the reduction of greenhouse gas emissions. Additionally, in 2012 the EPA issued final rules imposing new and amended requirements under Clean Air Act programs on various oil and gas operations, including "green completion" standards for hydraulically fractured wells. Further, in 2015, the EPA proposed new rules limiting methane emissions from the oil and gas industry. The proposed rules, if adopted, would amend the air emissions rules for the oil and natural gas sources and natural gas processing and transmission sources to include new standards for methane. In April 2015, the EPA proposed a rule to address wastewaters generated from unconventional oil and gas extraction facilities, being directed to wastewater treatment plants for disposal. If passed into regulation, the rule will require wastewater generated from oil and gas activities to be pre-treated prior to shipment to publicly operated wastewater treatment plants. The EPA is currently reviewing the necessity to introduce a similar rule for privately operated wastewater treatment plants. If enacted, these rules have the potential to positively impact our business through opportunities for receipt of additional volumes at disposal wells and added interest in treatment technology. In past sessions, bills have been introduced in the U.S. House and Senate regarding hydraulic fracturing that would impose reporting obligations on participants in the energy industry involved in the fracturing process. These did not become law. Many states and local governments have adopted or have considered adopting requirements for disclosure of chemicals in fracturing fluids and other limits on hydraulic fracturing. Further, the Bureau of Land Management, which exercises jurisdiction over federal lands, had adopted rules to regulate hydraulic fracturing. To the extent that legislation or regulations are passed that limit the hydraulic fracturing process in the United States, our U.S. operations would be indirectly impacted. The EPA is also conducting a wide-ranging study on the effects of hydraulic fracturing on drinking water resources. A draft report was issued in December These studies could result in additional regulatory scrutiny on oil and gas operations in general. The EPA has also indicated that it is looking into additional rules for the regulation of hydraulic fracturing chemicals under the Toxic Substances Control Act. Compliance with Environmental Regulations In order to comply with environmental regulations we make capital investments, train our personnel and work diligently to anticipate regulatory and political developments that could impact our business. We believe that our operations are in material compliance with the applicable requirements of federal, state,