Chemtrade Logistics Income Fund reports significantly higher 2008 first quarter results
TORONTO, May 8 /CNW/ - Chemtrade Logistics Income Fund (TSX: CHE.UN)
today announced results for the three months ended March 31, 2008. The Fund
reported significant increases in revenue and earnings, primarily as a result
of historically high prices for sulphuric acid, which enabled Chemtrade's
Sulphur Products and International segments to earn substantially higher
margins. The higher revenues more than offset the impact of the stronger
Canadian dollar on U.S. denominated revenues.
Cash flow from operating activities for the first quarter was
$6.0 million (2007: $5.8 million) and distributable cash after maintenance
capital expenditures for the period was $17.9 million, or $0.53 per unit
(2007: $6.6 million, or $0.20 per unit), generated from revenue of
$217.8 million (2007: $128.7 million) and earnings before interest, income
taxes, depreciation and amortization ("EBITDA") of $22.2 million (2007:
$11.0 million). Net earnings for the first quarter were $9.5 million compared
with a net loss of $0.5 million in the same period in 2007. The results for
the first quarter of 2008 include a recovery of restructuring costs of
$1.2 million and the first quarter of 2007 included charges of $1.5 million
related to the cessation of powder SHS production at Chemtrade's Leeds,
South Carolina facility. Higher corporate costs included accruals related to
the Fund's long-term incentive program and unrealized losses on natural gas
and foreign exchange hedges.
Mark Davis, President and Chief Executive Officer of Chemtrade, said,
"All of our businesses performed well in the first quarter, although it was
the escalating margins for sulphuric acid in our Sulphur Products &
Performance Chemicals and International segments that drove the improved
results." Mr. Davis noted that two other key significant events took place
during the quarter being the renewal of the long-term contract between
Chemtrade and Vale Inco, and the investment in Buenos Aires-based Meranol
S.A.C.I., a leading Argentine producer of sulphuric acid and other sulphur
products.
Sulphur Products & Performance Chemicals ("SPPC") generated revenue of
$98.9 million and EBITDA of $19.9 million compared with $72.9 million and
$7.5 million, respectively, in 2007. The higher revenue reflected higher
prices for our products, particularly merchant acid, as well as higher volumes
of SHS, the latter including sales to customers acquired through the Olin
asset acquisition. These were partially offset by the effect of the stronger
Canadian dollar. The higher EBITDA was due primarily to improved margins on
sulphuric acid and SHS. The higher acid prices more than offset higher sulphur
costs and foreign exchange impact. As well, Chemtrade's two major regen plants
took maintenance turnarounds in the first quarter last year, whereas only one
turnaround was completed in the first quarter of 2008. SHS results benefited
from lower net zinc costs and higher realized selling prices for SHS products.
Pulp Chemicals reported first quarter revenue of $14.8 million compared
with $14.0 million in 2007, reflecting higher volumes of sodium chlorate.
EBITDA was $5.2 million compared with $4.7 million. Costs were lower this year
due mainly to lower costs for salt which last year were high due to the
transition to a new supplier.
International reported revenue of $104.1 million for the first quarter,
compared with $41.7 million in 2007. This was a result of significantly higher
prices and volume for sulphuric acid, and significantly higher prices for
sulphur. The continuing tightness in global markets enabled International to
generate EBITDA for the quarter of $6.2 million compared with $1.4 million
last year.
Mr. Davis said, "The actions we have taken over the past few years have
solidified our business and positioned us to benefit from the very robust
markets for our sulphur products. As a result, Chemtrade generated significant
earnings in the first quarter. We expect the sulphuric acid market to remain
buoyant throughout 2008 and 2009 and continue to be a strong benefit for
Chemtrade. Despite our anticipated increased maintenance capital spending, we
now expect to generate higher distributable cash over the next 12 months
relative to the previous 12 months."
Distributions
Distributions declared in the first quarter totalled $0.30 per unit,
comprised of monthly distributions of $0.10 per unit.
Chemtrade operates a diversified business providing industrial chemicals
and services to customers in North America and around the world. Chemtrade is
one of the world's largest suppliers of sulphuric acid, liquid sulphur dioxide
and sodium hydrosulphite, and a leading processor of spent acid. Chemtrade is
also a leading regional supplier of sulphur, sodium chlorate, phosphorous
pentasulphide, and zinc oxide.
This news release contains certain statements which may constitute
"forward-looking" statements within the meaning of certain securities laws,
including the "safe harbour" provisions of the Securities Act (Ontario). The
use of any of the words "anticipate", "continue", estimate", "expect", "may",
"will", "project", "should", "believe" and similar expressions are intended to
identify forward-looking statements.
This news release contains forward-looking statements about the
objectives, strategies, financial condition, results of operations and
businesses of the Fund. These statements are "forward-looking" as they are
based on current expectations about our business and the markets we operate
in, and on various estimates and assumptions.
- Forward-looking statements in this news release describe our
expectations as of the date of this news release.
- Our actual results could be materially different from our
expectations if known or unknown risks affect our business, or if our
estimates or assumptions turn out to be inaccurate. As a result, we
cannot guarantee that any forward-looking statement will materialize.
- Forward-looking statements do not take into account the effect that
transactions or non-recurring items announced or occurring after the
statements are made may have on our business.
- We disclaim any intention or obligation to update any forward-looking
statement even if new information becomes available, as a result of
future events or for any other reason.
- Risks that could cause our actual results to differ materially from
our current expectations are discussed in the Risks and Uncertainties
section of our MD&A.
Further information can be found in the disclosure documents filed by
Chemtrade Logistics Income Fund with the securities regulatory authorities,
available at www.sedar.com.
A conference call to review the first quarter 2008 results will be
webcast live on www.chemtradelogistics.com and www.newswire.ca/webcast on
Friday, May 9, 2007 at 8:30 a.m.
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Balance Sheets
(in thousands of dollars)
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 9,344 $ 11,804
Accounts receivable 130,556 76,203
Inventories (note 2) 30,626 24,331
Prepaid expenses and other assets (note 8) 6,745 5,942
-------------------------------------------------------------------------
177,271 118,280
Property, plant and equipment 150,146 148,942
Other assets 1,508 1,413
Future tax asset 13,721 10,272
Intangibles (note 3) 141,304 143,968
Goodwill 89,428 87,700
-------------------------------------------------------------------------
$ 573,378 $ 510,575
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Operating line of credit $ 41,797 $ 41,113
Accounts payable 63,876 42,509
Accrued and other liabilities (note 8) 55,540 26,496
Distributions payable 3,358 3,358
Income taxes payable 2,199 1,563
-------------------------------------------------------------------------
166,770 115,039
Long-term debt 158,899 155,206
Other long-term liabilities (note 8) 8,174 5,081
Post-employment benefits 4,145 3,767
Future tax liability 27,320 25,396
Unitholders' equity
Units (note 5) 412,957 412,957
Deficit (154,187) (153,566)
Accumulated other comprehensive income (loss) (50,700) (53,305)
-------------------------------------------------------------------------
208,070 206,086
-------------------------------------------------------------------------
$ 573,378 $ 510,575
-------------------------------------------------------------------------
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See accompanying notes to consolidated financial statements
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Operations
(in thousands of dollars, except net earnings per unit amounts)
(unaudited)
Three Months Ended
--------------------------
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Revenue $ 217,790 $ 128,661
Cost of sales and services (excluding
depreciation disclosed below) 182,943 108,654
-------------------------------------------------------------------------
Gross profit 34,847 20,007
Selling, general, administrative and other costs 13,884 7,502
Restructuring costs (note 4) (1,238) 1,481
-------------------------------------------------------------------------
Earnings before the under-noted 22,201 11,024
Depreciation and amortization (note 2) 9,845 10,225
Net interest and accretion expense 3,031 3,060
-------------------------------------------------------------------------
Earnings (loss) before income taxes and
minority interest 9,325 (2,261)
Income taxes
Current 1,370 144
Future (1,499) (1,858)
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(129) (1,714)
-------------------------------------------------------------------------
Earnings (loss) before minority interest 9,454 (547)
Minority interest - (2)
-------------------------------------------------------------------------
Net earnings (loss) $ 9,454 $ (545)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings (loss) per unit (note 5)
Basic $ 0.28 $ (0.02)
Diluted $ 0.28 $ (0.02)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cost of sales and services does not include $4,623 (2007 - $5,305) of
depreciation relating to plant buildings and equipment (note 2).
See accompanying notes to consolidated financial statements
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Changes in Unitholders' Equity
(in thousands of dollars)
(unaudited)
Three Months Ended
--------------------------
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Units
Balance, beginning of period $ 412,957 $ 412,944
Issued on conversion of debentures - 13
-------------------------------------------------------------------------
Balance, end of period $ 412,957 $ 412,957
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity component of convertible debentures
Balance, beginning of period $ - $ 160
Redemption of debentures - (160)
-------------------------------------------------------------------------
Balance, end of period $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit
Balance, beginning of period $ (154,040) $ (134,579)
Changes in accounting policies (note 2) 474 556
-------------------------------------------------------------------------
Balance, beginning of period, as adjusted (153,566) (134,023)
Redemption of debentures - 160
Net earnings (loss) 9,454 (545)
Distributions (10,075) (10,075)
-------------------------------------------------------------------------
Balance, end of period $ (154,187) $ (144,483)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
(note 6)
Balance, beginning of period $ (53,305) $ (31,426)
Changes in accounting policies - 1,783
-------------------------------------------------------------------------
Balance, beginning of period, as adjusted (53,305) (29,643)
Other comprehensive income (loss) 2,605 (1,699)
-------------------------------------------------------------------------
Balance, end of period $ (50,700) $ (31,342)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Statements of Comprehensive Income
(in thousands of dollars)
(unaudited)
Three Months Ended
--------------------------
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Net earnings (loss) $ 9,454 $ (545)
Change in unrealized gain (loss) on translation
of self-sustaining foreign operations 4,714 (1,313)
Change in unrealized loss on derivatives
designated as cash flow hedges (2,109) (386)
-------------------------------------------------------------------------
Other comprehensive income (loss) 2,605 (1,699)
-------------------------------------------------------------------------
Comprehensive income (loss) $ 12,059 $ (2,244)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Cash Flows
(in thousands of dollars)
(unaudited)
Three Months Ended
--------------------------
March 31, March 31,
2008 2007
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings (loss) $ 9,454 $ (545)
Items not affecting cash:
Depreciation and amortization (note 2) 9,845 10,225
Future income taxes (1,499) (1,858)
Minority interest - (2)
Accretion expense 205 196
Early settlement of debt - 29
Change in fair value of derivatives 1,437 46
Non-cash restructuring costs - 25
Unrealized foreign exchange loss (gain) 460 (46)
-------------------------------------------------------------------------
19,902 8,070
(Increase) in working capital (13,893) (2,319)
-------------------------------------------------------------------------
6,009 5,751
Financing activities:
Distributions to unitholders (10,075) (10,746)
Redemption of convertible debentures - (16,378)
Increase in operating line of credit 684 24,828
Financing transaction costs - (317)
Increase in other long-term liabilities 3,085 -
-------------------------------------------------------------------------
(6,306) (2,613)
Investing activities:
Additions to property, plant and equipment (2,254) (1,479)
-------------------------------------------------------------------------
(2,254) (1,479)
Effect of exchange rates on cash held in foreign
currencies 91 17
-------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (2,460) 1,676
Cash and cash equivalents - beginning of period 11,804 6,147
-------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 9,344 $ 7,823
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental information:
Cash taxes paid $ 734 $ 1,161
Cash interest paid $ 2,835 $ 3,844
See accompanying notes to consolidated financial statements
CHEMTRADE LOGISTICS INCOME FUND
Notes to Consolidated Financial Statements
(in thousands of dollars, except amounts per tonne)
(uaudited)
March 31, 2008
-------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS:
Chemtrade Logistics Income Fund ("the Fund") commenced operations on
July 18, 2001 when it completed an Initial Public Offering and the
acquisition of certain sulphur related assets and operations. The
Fund operates in four business segments: Sulphur Products and
Performance Chemicals, Pulp Chemicals, International and Corporate.
For additional information regarding the Fund's business segments see
note 7.
These interim consolidated financial statements of the Fund have been
prepared by management in accordance with accounting principles
generally accepted in Canada. These interim consolidated financial
statements include the accounts of the Fund and its wholly-owned
subsidiaries. Inter-company transactions and balances have been
eliminated. These interim consolidated financial statements have been
prepared following the same accounting policies and methods of
computation as the annual consolidated financial statements of the
Fund for the year ended December 31, 2007, except as disclosed in
note 2. These interim consolidated financial statements do not
contain all disclosures required by generally accepted accounting
principles and accordingly should be read in conjunction with the
annual consolidated financial statements and the notes thereto.
2. CHANGES IN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS:
(a) Changes in accounting policies:
(i) Capital disclosures
Effective January 1, 2008, the Fund adopted the recommendations of
the Canadian Institute of Chartered Accountants ("CICA") Handbook
Section 1535, Capital Disclosures. This section establishes standards
for disclosing information about an entity's capital and how it is
managed. The entity's disclosure should include information about its
objectives, policies and processes for managing capital and disclose
whether or not it has complied and the consequences of non-compliance
with any capital requirements to which it is subject. This new
section relates to disclosure and did not have an impact on the
Fund's financial results. These disclosures are contained in note 9.
(ii) Inventories
Effective January 1, 2008, the Fund adopted the recommendations of
CICA Handbook Section 3031, Inventories. Under the new section,
inventories are required to be measured at the "lower of cost and net
realizable value", which is different from the previous guidance of
the "lower of cost and market". The new section requires the reversal
of any write-downs previously recognized, if applicable. Certain
minimum disclosures are also required, including the accounting
policies used, carrying amounts, amounts recognized as an expense,
write-downs, and the amount of any reversal of any write-downs
recognized as a reduction in expenses.
The new section also clarifies the definition of cost to include all
costs of purchase, costs of conversion and other costs incurred to
bring inventories to their present location and condition. Costs of
conversion include a systematic allocation of fixed and variable
production overheads that are incurred in converting materials into
finished goods. The allocation of fixed production overheads is based
on normal production capacity of the production facilities.
The new section requires that depreciation be included in the fixed
costs of conversion when costing inventories. Previously, the Fund
had excluded depreciation from its cost of inventory. The Fund has
elected to apply this section retrospectively and has adjusted the
comparative figures to comply with the new section. As a result, the
opening deficit balances for 2008 and 2007 have been decreased by
$474 and $556 respectively. The closing inventory and deficit
balances as at December 31, 2007 have also been adjusted by $474 to
comply with the new section. Depreciation and amortization expense
for the three months ended March 31, 2008 and 2007, includes the
depreciation expense related to cost of sales and services of $4,623
and $5,305 respectively.
(iii) Financial instruments
Effective January 1, 2008, the Fund adopted the recommendations of
CICA Handbook Sections 3862, Financial Instruments - Disclosures, and
3863, Financial Instruments - Presentation. Section 3862 modifies the
disclosure requirements of Section 3861, Financial Instruments -
Disclosure and Presentation, including required disclosure of the
assessment of the significance of financial instruments for an
entity's financial position and performance and of the extent of
risks arising from financial instruments to which the Fund is exposed
and how the Fund manages those risks, whereas Section 3863 carries
forward the presentation related requirements of Section 3861. These
new sections relate to disclosure and presentation only and did not
have an impact on the Fund's financial results. These disclosures are
contained in note 8.
(b) Recent accounting pronouncements:
(i) Convergence to international financial reporting standards
("IFRS")
In January 2006, the CICA Accounting Standards Board ("AcSB") adopted
a strategic plan for the direction of accounting standards in Canada.
The AcSB has recently confirmed that accounting standards in Canada
for public companies are to converge with IFRS effective for fiscal
periods beginning on or after January 1, 2011. The Fund has assembled
an IFRS transition team which has started to assess the impact of the
convergence of Canadian GAAP and IFRS, and will implement the new
IFRS standards.
(ii) Goodwill and intangible assets
In February 2008, the CICA issued Handbook Section 3064, Goodwill and
Intangible Assets. Section 3064 states that upon their initial
identification, intangible assets are to be recognized as assets only
if they meet the definition of an intangible asset and the
recognition criteria. This section also provides further information
on the recognition of internally generated intangible assets
(including research and development costs). As for subsequent
measurement of intangible assets, goodwill, and disclosure, Section
3064 carries forward the requirements of the old Section 3062,
Goodwill and Other Intangible Assets. The new section will become
effective on January 1, 2009 for the Fund. The Fund is currently
evaluating the effect of the adoption of this new section on the
consolidated financial statements.
3. INTANGIBLES:
During the first quarter, the Fund renewed its agreement with Vale
Inco Limited for the marketing of all sulphur by-products produced by
the Vale Inco smelter in Sudbury, Ontario. The new 10-year contract,
which contains similar terms to the existing agreements between the
parties, is effective as of January 1, 2008.
At the time of the Fund's IPO, it had recorded intangibles of
$29,157 related to the Vale Inco Limited agreement and these
intangibles were considered to have an indefinite life. Management
has revised its estimate of the useful life of this relationship to
10 years in line with the current agreement term. As a result, the
Fund has begun amortizing these intangibles on a straight-line basis
over 10 years beginning January 1, 2008. Consequently, for the three
months ended March 31, 2008, the Fund recorded amortization of $729.
4. RESTRUCTURING COSTS:
During the fourth quarter of 2006, the Fund decided to discontinue
production of powder SHS and costs of $2,706 related to that decision
were recorded in that quarter. These costs included a provision for a
penalty on a long-term supply agreement. During the first quarter of
2008, the Fund had substantially concluded negotiations with the
supplier and the penalty was waived. As a result, the Fund reversed
the penalty provision previously recorded.
5. UNITS:
(a) Units outstanding:
Number of Units Amount
---------------------------------------------------------------------
Units
Balance - December 31, 2007 and
March 31, 2008 33,582,936 $ 412,957
---------------------------------------------------------------------
---------------------------------------------------------------------
(b) Net earnings per unit:
Net earnings per unit has been calculated on the basis of the
weighted average number of units outstanding for the three months
ended March 31, 2008 which amounted to 33,582,936 units (2007-
33,582,578 units). For 2007, the effect of conversion of the
convertible debentures into trust units was not included in the
computation of diluted net earnings per unit as the effect of
conversion was anti-dilutive.
(c) Distributions:
Distributions paid for the three month period ended March 31, 2008
were $10,075 (2007 - $10,746). All of the Fund's distributions are
discretionary.
6. OTHER COMPREHENSIVE INCOME (LOSS):
The components of accumulated other comprehensive income (loss) as at
March 31, 2008 and other comprehensive income (loss) for the three
months then ended were as follows:
Opening Ending Opening
Accumulated other balance balance balance
comprehensive December 31, March 31, December 31,
income (loss) 2007 Net change 2008 2006
---------------------------------------------------------------------
Unrealized (loss)
gain on
translation of
self-sustaining
foreign
operations $ (52,867) $ 4,714 $(48,153)(1) $ (31,426)
Unrealized (loss)
gain on
derivatives
designated as
cash flow
hedges (438) (2,109) (2,547)(2) -
---------------------------------------------------------------------
Accumulated other
comprehensive
income (loss) $ (53,305) $ 2,605 $ (50,700) $ (31,426)
---------------------------------------------------------------------
---------------------------------------------------------------------
Ending
Accumulated other Change in balance
comprehensive accounting March 31,
income (loss) policies Net change 2007
--------------------------------------------------------
Unrealized (loss)
gain on
translation of
self-sustaining
foreign
operations $ - $ (1,313) $(32,739)(1)
Unrealized (loss)
gain on
derivatives
designated as
cash flow
hedges 1,783 (386) 1,397(2)
--------------------------------------------------------
Accumulated other
comprehensive
income (loss) $ 1,783 $ (1,699) $ (31,342)
--------------------------------------------------------
--------------------------------------------------------
(1) Net of income tax expense of $nil (2007 - $nil).
(2) Net of cumulative income tax recovery of $1,312 (2007 - expense
$546).
7. BUSINESS SEGMENTS:
The Fund operates in four business segments: Sulphur Products and
Performance Chemicals ("SPPC"), Pulp Chemicals ("Pulp"),
International ("Intl") and Corporate ("Corp").
SPPC markets, removes and/or produces five major products - merchant
and regenerated sulphuric acid, liquid sulphur dioxide, sodium
hydrosulphite, elemental sulphur and phosphorous pentasulphide. These
products are marketed primarily to North American customers.
Pulp operations produce sodium chlorate and crude tall oil. These
products are marketed primarily to Canadian customers.
International operations provide removal and marketing services for
two products - elemental sulphur and sulphuric acid. These products
are marketed to customers in Europe, the Mediterranean, North Africa,
Central and South America, North America, as well as in the Pacific
region.
Corporate is a non-operating segment that provides centralized
services such as treasury, finance, information systems, human
resources and risk management.
Three Months Ended March 31, 2008
---------------------------------------------------------------------
SPPC Pulp Intl Corp Total
---------------------------------------------------------------------
Revenue from
external customers $ 98,856 $ 14,839 $104,095 $ - $217,790
Earnings before the
under-noted 19,938 5,241 6,226 (9,204) 22,201
Depreciation and
amortization 7,154 2,329 362 - 9,845
Net interest and
accretion expense 2,589 524 (82) - 3,031
Income taxes (1,176) - 1,047 - (129)
Net earnings (loss) 11,371 2,388 4,899 (9,204) 9,454
Total assets 325,507 117,574 128,963 1,334 573,378
Goodwill 59,101 - 30,327 - 89,428
Intangibles 92,123 43,651 5,530 - 141,304
Capital expenditures 1,573 25 596 60 2,254
---------------------------------------------------------------------
---------------------------------------------------------------------
Three Months Ended March 31, 2007
---------------------------------------------------------------------
SPPC Pulp Intl Corp Total
---------------------------------------------------------------------
Revenue from external
customers $ 72,925 $ 14,015 $ 41,721 $ - $128,661
Earnings before the
under-noted 7,466 4,749 1,409 (2,600) 11,024
Depreciation and
amortization 7,245 2,315 665 - 10,225
Net interest and
accretion expense 2,532 494 (93) 127 3,060
Income taxes (1,747) - 19 14 (1,714)
Minority interest - - (2) - (2)
Net (loss) earnings (564) 1,940 820 (2,741) (545)
Capital expenditures 1,371 105 2 1 1,479
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---------------------------------------------------------------------
December 31, 2007
---------------------------------------------------------------------
SPPC Pulp Intl Corp Total
---------------------------------------------------------------------
Total assets $302,611 $117,940 $ 87,983 $ 2,041 $510,575
Goodwill 57,672 - 30,028 - 87,700
Intangibles 93,436 45,002 5,530 - 143,968
---------------------------------------------------------------------
---------------------------------------------------------------------
Geographic segments:
The Fund operates primarily in Canada, the United States ("US") and
Europe. Revenue is attributed to customers based on location of
customer.
Revenue
---------------------------------------------------------------------
March 31, March 31,
2008 2007
---------------------------------------------------------------------
Canada $ 32,255 $ 31,752
US and other 81,440 55,188
Europe 104,095 41,721
---------------------------------------------------------------------
$ 217,790 $ 128,661
---------------------------------------------------------------------
---------------------------------------------------------------------
Property, Plant and Equipment, Goodwill and Intangibles
---------------------------------------------------------------------
March 31, December 31,
2008 2007
---------------------------------------------------------------------
Canada $ 130,655 $ 133,900
US and other 208,596 206,000
Europe 41,627 40,710
---------------------------------------------------------------------
$ 380,878 $ 380,610
---------------------------------------------------------------------
---------------------------------------------------------------------
For the three months ended March 31, 2008, the Fund obtained product
from a producer that accounted for 12.9% (2007 - 12.5%) of the Fund's
total revenue. For the three months ended March 31, 2008, revenue
from a customer accounted for 11.7% (2007 - 9.0%) of the Fund's total
revenues.
8. FINANCIAL INSTRUMENTS:
(a) Fair values of financial instruments:
Fair value is the value that would be agreed upon in an arm's length
transaction between willing and knowledgeable counter-parties. The
carrying amounts of cash and cash equivalents, accounts receivable,
operating line of credit, accounts payable, accrued and other
liabilities and distributions payable approximate their fair values
because of the short-term maturity of these financial instruments.
The carrying amount of long-term debt, excluding transaction costs,
approximates fair value as the debt accrues interest at prevailing
market rates.
The Fund has classified its cash and cash equivalents as held-for-
trading, which are recorded at fair value. Accounts receivable are
classified as loans and receivables, which are recorded at amortized
cost. Operating line of credit, accounts payable, accrued and other
liabilities, distributions payable and long-term debt, are classified
as other financial liabilities, which are measured at amortized cost,
using the effective interest method.
(b) Derivatives and hedging:
The Fund has entered into swap arrangements with its principal
banker, which fix interest rates on all of its outstanding long-term
debt. Under the swap arrangements the effective interest rate on the
outstanding U.S. dollar long-term debt is 5.85% and on the
outstanding Canadian dollar long-term debt is 5.22%. In 2007, the
Fund entered into a swap arrangement with its principal banker, which
fixed the interest rate on US$10,000 of its operating lines of
credit. The effective interest rate under this swap arrangement is
5.73%. As at March 31, 2008 the fair value losses of the U.S. and
Canadian swap arrangements are $3,344 (US$3,258) and $515,
respectively. As at December 31, 2007 the fair value loss of the U.S.
swap arrangements was $1,011 (US$1,020) and the fair value gain of
the Canadian swap arrangements was $347. Gains are included in other
assets and losses are included in other long-term liabilities with
the offset included in other comprehensive income.
The Fund has entered into foreign exchange contracts to manage its
exposure to foreign currencies. The Fund buys and sells specific
amounts of currencies at pre-determined dates and exchange rates,
which are matched with the anticipated operational cash flows.
Contracts in place at March 31, 2008 include future contracts of
US$7,290 at a weighted average exchange rate of C$1.206 and CHF 900
at a weighted average exchange rate of US$0.88. There are unrealized
gains of $1,385 (December 31, 2007 - $1,960) and unrealized losses of
$nil (December 31, 2007 - $26) from these contracts at March 31,
2008. Gains are included in prepaid expenses and other assets, and
losses are included in accrued and other liabilities with the offset
included in selling, general, administrative and other costs.
To manage its exposure to changes in the price of natural gas, the
Fund has entered into natural gas forward contracts. The Fund buys
and sells specific quantities of natural gas at pre-determined dates
on indices, which are matched with the anticipated operational cash
flows. There is a net unrealized loss of $1,093 (December 31, 2007 -
gain of $367) from these forward contracts at March 31, 2008. Losses
are included in accrued and other liabilities and gains are included
in prepaid expenses and other assets with the offset included in
selling, general, administrative and other costs.
The Fund's International business segment has commitments to buy and
sell commodities and has entered into commodity forward contracts to
manage its exposure to commodity price changes.
The commitments to buy and sell commodities are treated as
derivatives and are measured at fair value. The commodity forward
contracts are derivatives and are measured at fair value. At March
31, 2008 and December 31, 2007, the net unrealized value of these
transactions is not significant.
(c) Risks associated with financial instruments:
(i) Credit risk
Credit risk arises from the non-performance by counter-parties of
contractual financial obligations. The Fund manages credit risk for
trade and other receivables through established credit monitoring
activities. The Fund does not have a significant concentration of
credit risk with any single counter-party or group of counter-
parties. The primary counter-parties related to the foreign exchange
forward contracts, commodity price contracts and interest rate swaps
carry investment grade ratings. The Fund's maximum exposure to credit
risk at the reporting date is the carrying value of its receivables
and derivative assets.
(ii) Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty
in meeting obligations associated with financial liabilities. The
Fund manages liquidity risk by maintaining adequate cash and cash
equivalent balances, and by appropriately utilizing its lines of
credit. The Fund's Treasury department continuously monitors and
reviews both actual and forecasted cash flows, and also matches the
maturity profile of financial assets and liabilities.
The undiscounted cash flow requirements for non-current financial
liabilities as at March 31, 2008 are as follows:
Contractual Less Than 1-3 4-5 After
Obligations Total 1 Year Years Years 5 Years
---------------------------------------------------------------------
Long-Term Debt $160,000 $ - $160,000 $ - $ -
Operating Line of
Credit 41,797 - 41,797 - -
Interest on
Long-Term Debt 12,001 9,001 3,000 - -
---------------------------------------------------------------------
Total Contractual
Obligations $213,798 $ 9,001 $204,797 $ - $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
(iii) Market risk
Market risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate due to changes in market prices.
Market risk comprises three types of risk: currency risk, interest
rate risk and other price risk. The Fund's market risks are as
follows:
(a) Currency risk
The Fund is exposed to fluctuations in the exchange rate of the
U.S. dollar relative to the Canadian dollar, as a portion of the
Fund's distributable cash is earned in U.S. dollars. On an
unhedged basis, the Fund currently estimates that a one-cent
change in the exchange rate will have an impact of less than $150
per annum. The Fund is fully hedged for 2008 at a rate of US$0.83
per Canadian dollar.
(b) Interest rate risk
The Fund has a credit facility with long-term debt and operating
lines of credit which bear variable rates of interest. As at March
31, 2008, on an unhedged basis, a change in interest rates of 1%
per annum would have an impact of approximately $2,000 per annum.
As at March 31, 2008, the Fund had fixed interest rates on
approximately 80% of its total debt, for the remainder of its
current credit agreement.
(c) Other price risks
Sulphuric acid pricing -
A change in realized sulphuric acid pricing, net of freight, of
$1 per tonne, would have an impact in the quarter on revenues in
North America of approximately $280. However, given the risk-
sharing aspect of a key supply contract, the impact of price
changes on earnings would have ranged from $120 to $140. In any
specific period, the exact impact would also depend upon the
volume that is subject to sales contracts, where pricing has been
fixed for a period of time. The magnitude of realized price
changes also depends upon regional market dynamics.
Sulphur costs -
The Fund uses sulphur in the manufacturing of several of its
products, including sulphuric acid. At current operating levels,
an increase of $1 per tonne would have an impact of approximately
$33 for the quarter, with approximately 80% of this related to the
production of sulphuric acid. It is important to note that a
change in the cost of sulphur is likely to lead to a change in the
price for sulphuric acid as this is a key input cost in the
manufacturing of sulphuric acid. Thus, the net impact on earnings
of changes in sulphur costs would depend upon changes in sulphuric
acid pricing. Increasingly, the pricing of sulphuric acid is being
adjusted for changes in sulphur costs and consequently future
changes in the cost of sulphur are expected to be offset by
changes in sulphuric acid pricing.
9. CAPITAL MANAGEMENT
The Fund's objective when managing its capital is to safeguard the
Fund's assets and its ability to continue as a going concern, to meet
external capital requirements on its credit facilities, and to
maximize the growth of its business and the returns to its
Unitholders. The Fund's capital structure is comprised of units and
long-term debt.
The Fund intends to maintain a flexible capital structure consistent
with the objectives stated above and to respond to changes in
economic conditions and the risk characteristics of underlying
assets. In order to maintain or adjust its capital structure, the
Fund may purchase units for cancellation, issue new units, raise debt
(secured, unsecured, convertible and/or other types of available debt
instruments) or refinance existing debt with different
characteristics.
The Fund utilizes annual capital and operating expenditure budgets to
facilitate the management of its capital requirement. These budgets
are approved by the Board of Trustees. Budgets are updated if there
are significant changes in the fundamental underlying assumptions
during a period.
The Fund is subject to certain covenants on its credit facilities,
which include a debt to EBITDA ratio (as both terms are defined in
the credit agreement) and an interest coverage ratio. The Fund
monitors these ratios and reports them to its lenders on a quarterly
basis. As at March 31, 2008 and December 31, 2007, the Fund was in
compliance with the above restrictions.
There were no changes in the Fund's approach to managing capital
during the period.
10. SUBSEQUENT EVENT:
On March 26, 2008, the Fund announced that it was investing
US$2.5 million in Meranol S.A.C.I. ("Meranol"). Meranol is based in
Buenos Aires, Argentina and is a leading Argentine producer of
sulphuric acid and other sulphur products. Meranol, including its
predecessor companies have been in the chemical business for
approximately 120 years. The investment was made on April 14, 2008 in
the form of convertible notes, convertible into 10% of the equity of
Meranol. The Fund also has options to increase its investment to up
to 45% of Meranol's common stock at a pre-determined price.
CHEMTRADE LOGISTICS INCOME FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2008
The information in this Management's Discussion and Analysis, or MD&A, is
intended to assist the reader in the understanding and assessment of the
trends and significant changes in the results of operations and financial
condition of Chemtrade Logistics Income Fund. Throughout this MD&A, the term
the "Fund" refers to Chemtrade Logistics Income Fund and its consolidated
subsidiaries. The terms "we", "us" or "our" similarly refers to the Fund. This
MD&A should be read in conjunction with the unaudited consolidated financial
statements of the Fund for the three month period ended March 31, 2008 and the
annual MD&A for the year ended December 31, 2007.
The Fund's financial statements are prepared in accordance with
accounting principles generally accepted in Canada, or Canadian GAAP. The
Fund's reporting currency is the Canadian dollar. In this MD&A per unit
amounts are calculated using the weighted average number of units outstanding
for the applicable period unless otherwise indicated.
This MD&A contains certain statements which may constitute
"forward-looking" statements within the meaning of certain securities laws,
including the "safe harbour" provisions of the Securities Act (Ontario). The
use of any of the words "anticipate", "continue", estimate", "expect", "may",
"will", "project", "should", "believe" and similar expressions are intended to
identify forward-looking statements.
This MD&A contains forward-looking statements about the objectives,
strategies, financial condition, results of operations and businesses of the
Fund. These statements are "forward-looking" as they are based on current
expectations about our business and the markets we operate in, and on various
estimates and assumptions.
- Forward-looking statements in this MD&A describe our expectations as
of the date of this MD&A.
- Our actual results could be materially different from our
expectations if known or unknown risks affect our business, or if our
estimates or assumptions turn out to be inaccurate. As a result, we
cannot guarantee that any forward-looking statement will materialize.
- Forward-looking statements do not take into account the effect that
transactions or non-recurring items announced or occurring after the
statements are made may have on our business.
- We disclaim any intention or obligation to update any forward-looking
statement even if new information becomes available, as a result of
future events or for any other reason.
- Risks that could cause our actual results to differ materially from
our current expectations are discussed in the RISKS AND UNCERTAINTIES
section of this MD&A.
FINANCIAL HIGHLIGHTS
Three Months Ended
------------------
March 31, March 31,
($'000 except per unit amounts) 2008 2007
-------------------------------------------------------------------------
Revenue $ 217,790 $ 128,661
Gross profit $ 34,847 $ 20,007
Net earnings (loss)(4) $ 9,454 $ (545)
Net earnings (loss) per unit - Basic(4) $ 0.28 $ (0.02)
- Diluted(4) $ 0.28 $ (0.02)
Total assets(4) $ 573,378 $ 556,275
Long-term debt $ 158,899 $ 170,818
EBITDA(3) $ 22,201 $ 11,024
EBITDA per unit(1) $ 0.66 $ 0.33
Cash flows from operating activities $ 6,009 $ 5,751
Cash flows from operating activities
per unit(1) $ 0.18 $ 0.17
Adjusted cash flows from operating
activities(3) $ 19,993 $ 8,089
Adjusted cash flows from operating activities
per unit(1)(3) $ 0.60 $ 0.24
Distributable cash after maintenance capital
expenditures(3) $ 17,937 $ 6,620
Distributable cash after maintenance capital
expenditures per unit(1)(3) $ 0.53 $ 0.20
Distributions declared $ 10,075 $ 10,075
Distributions declared per unit(2) $ 0.30 $ 0.30
Distributions paid $ 10,075 $ 10,746
Distributions paid per unit(2) $ 0.30 $ 0.32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Based on weighted average number of units
outstanding for the period of: 33,582,936 33,582,578
(2) Based on actual number of units outstanding on record date.
(3) See NON-GAAP MEASURES.
(4) For the three months ended March 31, 2007, net loss and total assets
have been adjusted as a result of adopting CICA Handbook Section 3031
- Inventories on a retrospective basis. The adjustment did not have a
material impact on net loss per unit (basic and diluted).
NON-GAAP MEASURES
EBITDA -
Throughout this MD&A, the term EBITDA is used to describe earnings before
any deduction for net interest and debt accretion, taxes, depreciation and
amortization and other non-cash charges such as minority interest. EBITDA is a
metric used by many investors and analysts to compare organizations on the
basis of ability to generate cash from operations. Management considers EBITDA
(as defined) to be an indirect measure of operating cash flow, which is a
significant indicator of the success of any business. It is not intended to be
representative of cash flow from operations or results of operations
determined in accordance with Canadian generally accepted accounting
principles ("GAAP") or cash available for distribution.
EBITDA is not a recognized measure under Canadian GAAP. The Fund's method
of calculating EBITDA may differ from methods used by other income funds or
companies, and accordingly may not be comparable to similar measures presented
by other organizations. A reconciliation of EBITDA to net earnings follows:
Three Months Ended
------------------
March 31, March 31,
($'000) 2008 2007(1)
-------------------------------------------------------------------------
Net earnings (loss) $ 9,454 $ (545)
Add:
Depreciation and amortization 9,845 10,225
Net interest and accretion expense 3,031 3,060
Net taxes (129) (1,714)
Minority interest - (2)
-------------------------------------------------------------------------
EBITDA(2) $ 22,201 $ 11,024
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net loss and depreciation and amortization have been adjusted as a
result of adopting CICA Handbook Section 3031 - Inventories on a
retrospective basis.
(2) EBITDA for the three months ended March 31, 2008 includes recoveries
of $1,238 (2007 - charges of $1,481) for restructuring.
Cash Flow -
The following table is derived from, and should be read in conjunction
with, the consolidated statement of cash flows. Management believes this
supplementary disclosure provides useful additional information related to the
cash flows of the Fund including the amount of cash available for distribution
to Unitholders, repayment of debt and other investing activities. Certain
sub-totals presented within the cash flows table below, such as "Adjusted cash
flows from operating activities", "Distributable cash after maintenance
capital expenditure" and "Distributable cash after all capital expenditure",
are not defined terms under Canadian GAAP. These sub-totals are used by
management as measures of internal performance and as a supplement to the
consolidated statement of cash flows. Investors are cautioned that these
measures should not be construed as an alternative to using net income as a
measure of profitability or as an alternative to the GAAP consolidated
statement of cash flows. Further, the Fund's method of calculating each
measure may not be comparable to calculations used by other income trusts
bearing the same description.
Three Months Ended
------------------
March 31, March 31,
($'000) 2008 2007
-------------------------------------------------------------------------
Cash flows from operating activities $ 6,009 $ 5,751
Add (deduct):
Changes in non-cash working capital and
other items 13,984 2,338
-------------------------------------------------------------------------
Adjusted cash flows from operating activities 19,993 8,089
Less:
Maintenance capital expenditure 2,056 1,469
-------------------------------------------------------------------------
Distributable cash after maintenance capital
expenditure 17,937 6,620
Less:
Non-maintenance capital expenditure(1) 198 10
-------------------------------------------------------------------------
Distributable cash after all capital expenditure 17,739 6,610
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Non-maintenance capital expenditures are either pre-funded, usually
as part of a significant acquisition and related financing or are
considered to expand the capacity of the Fund's operations.
CONSOLIDATED OPERATING RESULTS
Consolidated revenue for the first quarter of 2008 was $217.8 million, an
increase of $89.1 million from consolidated revenue of $128.7 million recorded
in the first quarter of 2007. Most of the Fund's products achieved higher
revenues; however, the principal reason for the increase in revenues is the
significantly higher price for sulphuric acid. The higher prices more than
offset the negative effect of the stronger Canadian dollar relative to the
U.S. dollar, on U.S. dollar denominated revenues.
The Fund's net earnings and EBITDA for the first quarter of 2008 were
$9.5 million and $22.2 million respectively compared to a net loss of
$0.6 million and EBITDA of $11.0 million for the first quarter of 2007. The
main reasons for the improvement in EBITDA were the considerably stronger
results in the SPPC and International segments. Additionally, there was a
recovery of restructuring costs of $1.2 million during the first quarter of
2008, whereas there was an expense of $1.5 million recorded during the
comparable quarter of 2007 (as described in the RESTRUCTURING section below).
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
SPPC -
Three Months Ended
------------------
March 31, March 31,
($'000) 2008 2007(1)
-------------------------------------------------------------------------
Revenue $ 98,856 $ 72,925
Earnings before the under-noted 19,938 7,466
Depreciation and amortization 7,154 7,245
Net interest and accretion expense 2,589 2,532
Income tax (recovery) (1,176) (1,747)
-------------------------------------------------------------------------
Net earnings (loss) $ 11,371 $ (564)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Depreciation and amortization and net loss have been adjusted as a
result of adopting CICA Handbook Section 3031 - Inventories on a
retrospective basis.
SPPC manufactures and distributes sulphuric acid and other sulphur based
products to an extensive customer base in Canada and the U.S., and provides
acid regeneration services to the petroleum industry, primarily in the U.S.
Gulf Coast area. SPPC also supplies liquid and powder sodium hydrosulphite
("Liquid SHS" and "Powder SHS"), which is sold to the pulp and paper industry
and to a lesser extent, to the textile industry.
Results for 2008 were positively impacted by the recording of a recovery
of $1.2 million and 2007 results were negatively impacted by the recording of
a charge of $1.5 million, related to the cessation of production of powder SHS
(as described in the RESTRUCTURING section below).
For the first quarter of 2008, SPPC generated revenue of $98.9 million,
which compares to $72.9 million for the first quarter of 2007. The increase in
revenues is mainly due to higher prices for sulphuric acid, sulphur and higher
volumes of SHS. The increase in revenues was partially offset by the effect of
the stronger Canadian dollar relative to the U.S. dollar. SHS results include
sales to customers acquired as a result of the Olin asset acquisition (as
described in the LIQUIDITY AND CAPITAL RESOURCES - Investing Activities -
Acquisitions section). During the first quarter of 2008, SPPC's EBITDA was
higher than the levels achieved in 2007 by $12.5 million. The higher EBITDA
was mainly due to improved margins on sulphuric acid and SHS. Higher pricing
for sulphuric acid more than offset the negative impact of rising sulphur
costs and the impact of the stronger Canadian dollar relative to the U.S.
dollar. Also, during the first quarter of 2007, the Fund took maintenance
turnarounds at two of its largest regen plants, whereas in 2008, one
turnaround was completed in the first quarter and the second turnaround
commenced late in the first quarter and was completed early in the second
quarter. SHS results were positively impacted by lower net zinc costs as zinc
prices remained relatively stable during the quarter at levels well below the
first quarter of 2007. SHS products also realized higher selling prices during
the first quarter of 2008 compared with the first quarter of 2007.
The first quarter income tax recovery primarily relates to future taxes,
driven by increased temporary differences between the accounting and tax basis
of certain future tax assets and reduced temporary differences of certain
future tax liabilities, partially offset by reduced future tax loss benefits.
Pulp Chemicals -
Three Months Ended
------------------
March 31, March 31,
($'000) 2008 2007(1)
-------------------------------------------------------------------------
Revenue $ 14,839 $ 14,015
Earnings before the under-noted 5,241 4,749
Depreciation and amortization 2,329 2,315
Net interest expense 524 494
-------------------------------------------------------------------------
Net earnings $ 2,388 $ 1,940
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Depreciation and amortization and net loss have been adjusted as a
result of adopting CICA Handbook Section 3031 - Inventories on a
retrospective basis.
Pulp Chemicals produces sodium chlorate and crude tall oil ("CTO"), both
of which are chemicals used in the pulp and paper industry. Sodium chlorate is
used to bleach pulp and CTO is used as a less expensive alternative energy
source to natural gas.
First quarter 2008 Pulp Chemicals revenue was $0.8 million higher than
the level achieved during the first quarter of 2007. The increase in revenue
was mainly due to higher volume of sodium chlorate. The improvement in net
earnings and EBITDA for the first quarter was due to higher sales volume and
lower costs. Costs during the first quarter of 2007 were high due to the
transition to a new salt supply.
International -
Three Months Ended
------------------
March 31, March 31,
($'000) 2008 2007
-------------------------------------------------------------------------
Revenue $ 104,095 $ 41,721
Earnings before the under-noted 6,226 1,409
Depreciation and amortization 362 665
Net interest income (82) (93)
Income tax expense 1,047 19
Minority interest - (2)
-------------------------------------------------------------------------
Net earnings $ 4,899 $ 820
-------------------------------------------------------------------------
-------------------------------------------------------------------------
International operations provide removal and marketing services for
elemental sulphur and sulphuric acid. These products are marketed to customers
in Europe, the Mediterranean, North Africa, Central and South America, North
America, as well as the Pacific region.
During the first quarter of 2008, International's revenue was $104.1
million compared to $41.7 million for the same period of 2007. The increase in
2008 revenue is primarily due to the significantly higher prices and volume
for sulphuric acid and significantly higher prices for sulphur.
International net earnings and EBITDA during the first quarter of 2008
were considerably higher than the comparable periods in 2007, mainly due to
the tightness in the global sulphuric acid and sulphur markets.
Corporate -
Three Months Ended
------------------
March 31, March 31,
($'000) 2008 2007
-------------------------------------------------------------------------
Cost of services $ 9,204 $ 2,600
Loss before the under-noted (9,204) (2,600)
Net interest and accretion expense - 127
Income tax expense - 14
-------------------------------------------------------------------------
Net earnings $ (9,204) $ (2,741)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Corporate segment includes the administrative costs of corporate
activities which are not directly allocable to an operating segment, such as
information technology, finance and human resources. For the first quarter of
2008 corporate costs were $6.5 million higher than the first quarter of 2007.
There were a few reasons for the higher Corporate costs in the first
quarter of 2008, with the principal one being accruals with respect to the
Total Shareholder Return Long-Term Incentive Plan ("TSR LTIP") and annual
incentive compensation, totalling $4.7 million compared to $0.7 million for
the same period of 2007. Additionally, the first quarter of 2008 includes
unrealized losses of $1.4 million with respect to natural gas contracts and
$0.6 million with respect to foreign exchange contracts. Corporate costs for
the first quarter of 2008 also include $0.8 million of realized foreign
exchange gains compared with $0.1 million in the same period of 2007. Finally,
the first quarter of 2007 benefited from the recovery of $0.9 million related
to an insurance claim with respect to Hurricane Rita.
The TSR LTIP accruals relate to the 2006, 2007 and 2008 TSR LTIP. The
2006, 2007 and 2008 TSR LTIP's are payable at the beginning of 2009, 2010 and
2011, respectively. Although an accrual with respect to these plans has been
recorded, the payouts will be based upon Total Shareholder Return, as
described in the Fund's Management Information Circular, achieved over the
three-year performance periods of each plan. The nature of this calculation
makes it difficult to forecast the amount of TSR LTIP expenses that will be
recordable in any period as it is based upon future distributions and changes
in unit value. Based on the current unit price, it is anticipated that
additional TSR LTIP accruals for the remainder of 2008 will be $5.5 million.
Net interest and accretion expense in the first quarter was $nil compared
to $0.2 million for the first quarter of 2007. The decrease in the expense in
the first quarter of 2008 from 2007 was due to the redemption of all the
remaining outstanding convertible debentures in the first quarter of 2007.
RESTRUCTURING
During the fourth quarter of 2006, the Fund decided to discontinue
production of powder SHS and costs of $2.7 million related to that decision
were recorded in that quarter. These costs included a provision for a penalty
on a long-term supply agreement. During the first quarter of 2008, the Fund
had substantially concluded negotiations with the supplier and the penalty was
waived. As a result, the Fund reversed the penalty provision previously
recorded.
FOREIGN EXCHANGE
The Fund has operating subsidiaries that are U.S. based. The Fund's
International segment uses the U.S. dollar as its reporting currency. As the
Fund reports in Canadian dollars, its reported earnings are exposed to
fluctuations in the Canadian/U.S. dollar exchange rate. The Fund now estimates
that, on an unhedged basis, a $0.01 increase in the Canadian/U.S. dollar
exchange rate reduces distributable cash after maintenance capital
expenditures by less than $0.15 million on an annual basis and vice-versa.
To manage the volatility of foreign exchange rates, the Fund has entered
into a series of foreign exchange contracts with its principal bankers. All
foreign exchange contracts are under International Swap and Derivatives
Association ("ISDA") agreements. As of March 31, 2008, approximately all
planned transfers for 2008 have been effectively hedged at $0.8292.
Contracts in place at March 31, 2008 include foreign exchange contracts
of US$7.3 million and CHF 0.9 million at weighted average exchange rates of
$1.206 and US$0.88, respectively. There are unrealized gains of $1.4 million
from these contracts at March 31, 2008.
The purpose of these contracts is to hedge the value of the funds which
are used to pay dividends and interest by subsidiary companies to the Fund and
to meet other commitments. The amount of the related derivative must be
recorded at fair market value at the period end. The resultant non-cash charge
or gain is grouped with Selling, General and Administrative expense and is
also included with Prepaid expenses and other assets on the balance sheet. The
impact of this non-cash charge or gain is excluded from the computation of
distributable cash after maintenance capital expenditures. See NON-GAAP
MEASURES - Cash Flow.
The rate of exchange used to translate U.S. denominated balances has
changed from $1.0088 at December 31, 2007 to $0.9742 at March 31, 2008.
The Fund's International and U.S. based operations are considered to be
self-sustaining, as they are financially independent. As a result, gains or
losses arising from the translation of the assets and liabilities of
self-sustaining operations are recorded in other comprehensive income. The
changes recorded in the accumulated other comprehensive income account since
December 31, 2007 were a result of changes in the Canadian/U.S. dollar
exchange rate between December 31, 2007 and March 31, 2008. See RISKS AND
UNCERTAINTIES for additional comments on foreign exchange.
NET INTEREST AND ACCRETION EXPENSE
Net interest and debt accretion expense was $3.0 million in the first
quarter of 2008, essentially unchanged from $3.1 million in the first quarter
of 2007.
Interest on the Canadian dollar denominated debt amounted to $1.3 million
in the first quarter of 2008 and $1.0 million in the first quarter of 2007.
The increase in interest expense was a result of increased usage of the
operating lines of credit, primarily due to the redemption of all of the
outstanding convertible debentures part way through the first quarter of 2007
and an increase in the effective annual interest rate. These loans have an
effective annual interest rate of 5.22% at March 31, 2008 (December 31, 2007 -
5.22%).
The interest on the U.S. dollar denominated debt was $1.6 million for the
first quarter of 2008, compared to $1.7 million for the first quarter of 2007.
The expense was essentially unchanged from the comparable period of 2007. The
effective annual interest rate at March 31, 2008 was 5.85% (December 31, 2007
- 5.85%). See Liquidity and Capital Resources - Financing Activities -
Financial Instruments for information concerning swap arrangements.
Interest on the outstanding 10% convertible debentures was $nil for the
first quarter of 2008, compared to $0.2 million for the first quarter of 2007.
The expense in the first quarter of 2008 was lower than 2007 due to the
redemption of all of the outstanding convertible debentures in the first
quarter of 2007.
During the first quarters of 2008 and 2007, the Fund recorded $0.2
million of accretion expense. This accretion is due to the amortization of
transaction costs related to the Fund's borrowings.
INCOME TAXES
Current income tax expense was $1.4 million for the first quarter of
2008, compared to $0.1 million for the first quarter of 2007. The increase in
current tax expense for 2008 reflects increased earnings in certain
International and U.S. business operations.
The increase in future tax asset of $3.4 million at March 31, 2008
compared to December 31, 2007 is the result of increased tax loss carry
forwards, net of valuation allowances, and other tax benefits reported by
certain operating subsidiaries.
The increase in future tax liability of $1.9 million at March 31, 2008
compared to December 31, 2007 is the result of reduced timing differences
between the accounting basis and the tax basis of assets associated with
certain operating subsidiaries and the impact of the exchange rate used to
translate U.S. denominated balances.
CONTINGENT LIABILITIES
There were no significant contingent liabilities at March 31, 2008.
EXCESS CASH FLOWS AND NET INCOME OVER DISTRIBUTIONS PAID
The following table presents excess cash flows from operating activities
and net income over distributions paid for the three months ended March 31,
2008 and the years ended December 31, 2007 and 2006.
Three Months
Ended Year Ended Year Ended
March 31, December 31, December 31,
($'000) 2008 2007 2006
-------------------------------------------------------------------------
Cash flows from operating
activities $ 6,009 $ 47,742 $ 41,950
Net earnings(1) 9,454 20,596 3,820
Distributions paid during
period 10,075 40,971 47,908
Excess (shortfall) of cash
flows from operating
activities over cash
distributions paid (4,066) 6,771 (5,958)
Excess (shortfall) of net
income over cash
distributions paid $ (621) $ (20,293) $ (44,088)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the year ended December 31, 2007 net earnings has been adjusted
as a result of adopting CICA Handbook Section 3031 - Inventories on a
retrospective basis.
The Fund considers the amount of cash generated by the business in
determining the amount of distributions payable to its Unitholders. In
general, the Fund does not take into account quarterly working capital
fluctuations as these tend to be temporary in nature. The Fund does not
generally consider net income in setting the level of distributions as this is
a non-cash metric and is not reflective of the level of cash flow that the
Fund can generate. This divergence is particularly relevant for the Fund as it
has a relatively high level of depreciation and amortization expenses.
For the quarter ended March 31, 2008, distributions to Unitholders
exceeded cash flows from operating activities due to an increase in working
capital. The additional distribution was funded by an increase in bank debt
and a reduction in cash balances.
For the year ended December 31, 2006 distributions to Unitholders
exceeded cash flows from operating activities mainly due to an increase in
working capital. The additional distribution was funded by an increase in bank
debt.
Distributions -
On January 4, 2007, the Fund announced a change in the monthly
distribution rate to $0.10 per unit, effective with the January 2007
declaration.
Distributions to Unitholders for the three months ended March 31, 2008
were declared as follows:
Distribution
Record Date Payment Date Per Unit Total ($'000)
-------------------------------------------------------------------------
Three months ended
March 31:
January 31, 2008 February 29, 2008 $ 0.10 $ 3,358
February 29, 2008 March 31, 2008 0.10 3,358
March 31, 2008 April 30, 2008 0.10 3,359
-------------------------------------------------------------------------
Total for the year ended
March 31 $ 0.30 $ 10,075
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions declared in the three months ended March 31, 2007 were as
follows:
Distribution
Record Date Payment Date Per Unit Total ($'000)
-------------------------------------------------------------------------
Three months ended
March 31:
January 31, 2007 February 28, 2007 $ 0.10 $ 3,358
February 28, 2007 March 30, 2007 0.10 3,358
March 30, 2007 April 30, 2007 0.10 3,359
-------------------------------------------------------------------------
Total for the year ended
March 31 $ 0.30 $ 10,075
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Treatment of the Fund's distributions for Canadian income tax purposes for
2007 and 2008 is as follows:
Foreign
Non-Business
Other Income Income Total
-------------------------------------------------------------------------
2007 77.0% 23.0% 100.0%
2008(1) 75.0% 25.0% 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Represents anticipated tax characterization of planned distributions.
The actual treatment of 2008 distributions will be determined by
February 28, 2009.
LIQUIDITY AND CAPITAL RESOURCES
The Fund's distributions to Unitholders are sourced entirely from its
cash flows from investments in operating subsidiary companies. The Fund's
investments are financed by trust units held by Unitholders, long-term debt
and operating lines of credit. The cash flow of the Fund is required to fund
distributions to Unitholders, capital expenditures and repayment of interest
on long-term debt.
Cash Flow from Operating Activities
-----------------------------------
Cash flow from operating activities for the first quarter of 2008 was
$6.0 million, an increase of $0.3 million from the level generated during the
first quarter of 2007. The increase in cash flow is primarily due to the
improvement in earnings, partially offset by an increase in working capital.
Working capital was higher due to significantly higher prices for sulphuric
acid and sulphur, which resulted in higher levels of accounts receivable and
inventory although this was partially offset by higher accounts payable and
accruals.
Financing Activities
--------------------
Distributions to Unitholders during the first quarter of 2008 were $0.7
million lower than the same periods in 2007. These decreased distributions
were due to the lower distribution rate beginning in January 2007.
During the first quarter of 2007, the Fund increased the aggregate amount
that can be borrowed under the Fund's senior credit facilities with its
principal bankers by $50.0 million.
During the first quarter of 2007, the Fund used part of this increased
credit facility to redeem the 16,378 convertible debentures outstanding for
the principal amount plus accrued an unpaid interest.
For additional information on cash distributions, see NON-GAAP MEASURES -
Cash Flow and EXCESS CASH FLOWS AND NET INCOME OVER DISTRIBUTIONS PAID.
Financial Instruments -
The Fund has entered into swap agreements with its principal bankers in
order to fix the interest rates on its long-term debt. Under the swap
agreements, which are treated as a cash flow hedge for accounting purposes,
the effective interest rate on the outstanding U.S. long-term debt is 5.85%
and on the Canadian dollar long-term debt is 5.22%. In the fourth quarter of
2007, the Fund entered into a new swap arrangement to fix the interest rate on
US$10 million of its operating lines of credit. The effective interest rate
under the swap arrangement is 5.73%. At March 31, 2008, the fair values of
these agreements were losses of $3.3 million (US$3.3 million) and $0.5
million. See comments under NET INTEREST AND ACCRETION EXPENSE for comments on
these rates.
See RESULTS OF OPERATIONS BY BUSINESS SEGMENT - Foreign Exchange for
additional comments on hedging.
To manage its exposure to changes in the price of natural gas, the Fund
has entered into natural gas forward contracts. The Fund buys and sells
specific quantities of natural gas at pre-determined dates on indices which
are matched with the anticipated operational cash flows. At March 31, 2008,
the fair value of these agreements is a loss of $1.1 million. These contracts
are accounted for as derivatives.
Investing Activities
--------------------
Investment in capital expenditures was $2.3 million in the first quarter
of 2008, compared to $1.5 million in the first quarter of 2007. These amounts
include $2.1 million in the first quarter of 2008 and $1.5 million in the
first quarter of 2007 for maintenance capital requirements. Owing to the high
demand for skilled labour and materials, there has been an escalation in the
cost of capital projects. Accordingly, maintenance capital expenditures for
the remainder of 2008 are expected to be approximately $9.0 million.
Maintenance capital expenditures for the year ended December 31, 2007 were
$6.9 million.
Investment in non-maintenance capital expenditures were $0.2 million
during the first quarter of 2008 compared to approximately $nil during the
first quarter of 2007. Most of the non-maintenance capital expenses during the
first quarter were related to the expansion of the Rotterdam terminal. The
project is expected to be completed by the fall of 2008. Non-maintenance
capital expenditures are either pre-funded, usually as part of a significant
acquisition and related financing or are considered to expand or improve the
capacity of the Fund's operations.
On May 1, 2007, the Fund completed the purchase of Olin Corporation's
liquid sodium hydrosulphite ("SHS") customer contracts for $6.4 million
(US$5.7 million), a portion of which is subject to certain earn out
provisions. The acquisition does not include Olin's manufacturing assets. The
Fund incurred transaction related costs of $0.2 million.
Cash Balances -
At March 31, 2008 the Fund had net cash balances of $9.3 million and
working capital of $46.3 million. Comparable numbers for December 31, 2007
were $11.8 million and $35.9 million, respectively. The Fund defines working
capital to exclude cash, operating line of credit, distributions payable and
current portion of long-term debt. Cash generated by the Fund will be used to
fund cash distributions to Unitholders, capital requirements, interest and
other legal obligations.
Future Liquidity -
The future liquidity of the Fund will be primarily dependant on cash
flows of its operating subsidiaries. These cash flows will be used to finance
ongoing expenditures, including maintenance capital, distributions to
Unitholders and normal course financial commitments. Cash flows are sensitive
to changes in volume, sales prices and input costs and any changes in these
may impact future liquidity. Management believes that cash flows from
operating activities will be sufficient for the Fund to meet future
obligations and commitments that arise in the normal course of business
activities.
Capital Resources -
At March 31, 2008, the Fund had senior credit facilities of $236.5
million, consisting of a term loan of $160.0 million and a revolving credit
facility of $76.5 million. The term bank debt is not due or payable until
August 2009. At March 31, 2008, in addition to the entire term loan, the Fund
had used a total of $51.6 million (including US$14.3 million) of its revolving
credit facility. Subject to certain limits set out in the credit agreement,
the credit facilities may be used to finance working capital, fund
acquisitions, invest in capital assets, buy back units and pay distributions
to Unitholders.
Debt Covenants -
As at March 31, 2008, the Fund was compliant with all debt covenants
contained in its credit facility.
SUMMARY OF QUARTERLY RESULTS
Three Months Ended
------------------
March December September June
($'000) 31, 2008 31, 2007(1) 30, 2007(1) 30, 2007(1)
-------------------------------------------------------------------------
Revenue $ 217,790 $ 144,580 $ 143,232 $ 130,163
Cost of sales and
services 182,943 110,772 114,546 103,291
-------------------------------------------------------------------------
Gross profit 34,847 33,808 28,686 26,872
Selling, general,
administrative and
other costs 13,884 11,062 9,305 10,093
Restructuring costs (1,238) - - 490
-------------------------------------------------------------------------
Earnings before the
under-noted 22,201 22,746 19,381 16,289
Depreciation and
amortization 9,845 9,050 9,645 9,792
Net interest and
accretion expense 3,031 3,050 3,361 3,162
Income taxes (net) (129) 1,552 (647) (1,671)
Minority interest - (15) (3) (2)
-------------------------------------------------------------------------
Net earnings (loss) $ 9,454 $ 9,109 $ 7,025 $ 5,008
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Depreciation and amortization and net loss have been adjusted as a
result of adopting CICA Handbook Section 3031 - Inventories on a
retrospective basis.
Three Months Ended
------------------
March December September June
($'000) 31, 2007(1) 31, 2006 30, 2006 30, 2006
-------------------------------------------------------------------------
Revenue $ 128,661 $ 146,930 $ 148,692 $ 134,581
Cost of sales and
services 108,654 122,026 124,833 110,075
-------------------------------------------------------------------------
Gross profit 20,007 24,904 23,859 24,506
Selling, general,
administrative and
other costs 7,502 8,281 7,112 5,496
Restructuring costs 1,481 2,706 - -
-------------------------------------------------------------------------
Earnings before the
under-noted 11,024 13,917 16,747 19,010
Depreciation and
amortization 10,225 9,970 11,277 11,858
Impairment of property,
plant and equipment - (3,320) 15,596 -
Net interest and
accretion expense 3,060 2,992 3,018 2,763
Income taxes (net) (1,714) (1,110) (2,926) (478)
Minority interest (2) - - (1)
-------------------------------------------------------------------------
Net earnings $ (545) $ 5,385 $ (10,218) $ 4,868
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Depreciation and amortization and net loss have been adjusted as a
result of adopting CICA Handbook Section 3031 - Inventories on a
retrospective basis.
The Fund generally has higher earnings in the second half of the year
than the first half. This is because demand for SHS and Refinery Services is
typically highest during this period. The effect is exacerbated because owing
to the demand pattern, the Fund generally schedules maintenance turnarounds at
its major plants in the first half of the year.
In 2006, the earnings pattern described above was not readily apparent as
the third and fourth quarters of 2006 included asset impairment and
restructuring costs (as described in the RESTRUCTURING section above) of $12.3
million and $2.7 million respectively. The first half of 2006 also benefited
from the inclusion of foreign exchange gains of $2.6 million.
In 2007, earnings were even more weighted to the second half of the year,
as the first half of the year included restructuring costs of $2.0 million.
Additionally, to match the timing of a key customer's major maintenance
turnaround, the Fund decided to schedule turnarounds at two of its largest
regen plants during the first quarter. These factors resulted in the first
quarter of 2007 having an inordinately low level of earnings. Despite the
typical maintenance turnarounds during the first quarter of 2008, revenues and
earnings were relatively high, mainly due to higher prices for sulphuric acid
and sulphur, which lead to strong results in SPPC and International segments.
Selling, general, administrative and other costs ("S,G&A") during the
second quarter of 2007 were unusually high mainly due to the accrual of $3.1
million in connection with the Fund's TSR LTIP. The accrual related to the
2006 transitional TSR LTIP and the 2006 and 2007 TSR LTIP. The 2006
transitional TSR LTIP was paid out in July 2007 and the 2006 and 2007 TSR
LTIP's are payable at the beginning of 2009 and 2010 respectively. S,G&A was
also high in the third quarter of 2007 mainly due to the recording of expenses
related to the departure of a senior executive at the end of the third quarter
(approximately $0.9 million) and certain activities related to the Fund's
review of strategic alternatives that was announced in February 2007
(approximately $0.5 million). Finally, S,G&A in the fourth quarter of 2007 and
the first quarter of 2008 was high due to accruals for the TSR LTIP and for
annual incentive compensation.
CONTRACTUAL OBLIGATIONS
Information concerning contractual obligations is shown below:
Contractual
Obligations Less Than 1-3 4-5 After
($'000) Total 1 Year Years Years 5 Years
-------------------------------------------------------------------------
Long Term Debt $160,000 $ - $160,000 $ - $ -
Operating Leases 40,744 15,785 17,870 5,279 1,810
Interest on
Long-Term Debt 12,001 9,001 3,000 - -
-------------------------------------------------------------------------
Total Contractual
Obligations $212,745 $ 24,786 $180,870 $ 5,279 $ 1,810
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RISKS AND UNCERTAINTIES
The Fund is one of the world's largest suppliers of sulphuric acid
("acid"), liquid sulphur dioxide ("SO(2)") and sodium hydrosulphite ("SHS")
and a leading processor of spent acid, particularly in the U.S. Gulf Coast
region. The Fund is also a leading regional supplier of sulphur, sodium
chlorate and phosphorus pentasulphide, and also produces zinc oxide at three
North American locations. As such the Fund faces various risks associated with
its business. These risks include, amongst others, the loss of a portion of
its customer base, the interruption of the supply of sulphur-based products or
raw materials, price fluctuations in the products sold and/or raw materials
purchased, industry over-capacity, acquisition integration and operational and
product hazard risks associated with the nature of its business. The Fund
imports key raw materials and products from overseas and as such has
additional risks associated with the sourcing activity. The Fund makes
extensive use of the railway system to transport material within North
America. Certain locations are serviced by a sole carrier and thus a
disruption in service could have a significant negative impact on results. In
addition, the Fund sells a significant portion of its major products to large
customers. While many of these customers are under contract, there can be no
assurance that these contracts will be renewed. As the Fund's business is
international in nature, it is exposed to foreign exchange risks related to
the payment of dividends and other transactions by its foreign subsidiaries.
The Fund manages the risks associated with its customer base and sales
price by seeking to obtain contractual protection to mitigate these risks. The
Fund also seeks to differentiate its products and services with customers to
mitigate price fluctuations and uses its scale to obtain beneficial raw
material contracts.
All members of the Fund's senior management team were involved in an
enterprise-wide business risk assessment, which included a review of the North
American and international operations. Key risks were identified and
prioritized for review and the development of action plans. This
enterprise-wide risk review process is an ongoing aspect of the Fund's risk
management program. In addition, the Fund maintains an extensive insurance
program which includes general liability and environmental coverage.
Dependence on Inco Relationship -
Vale Inco Limited ("Vale Inco") is the Fund's largest sulphur products
supplier. During the first quarter of 2008, the Fund renewed its agreement
with Vale Inco for the marketing of all sulphur by-products produced by the
Vale Inco smelter in Sudbury, Ontario. The new 10-year contract, which
contains similar terms to the prior agreements between the parties, was
effective as of January 1, 2008. For the three months ended March 31, 2008,
this supply source accounted for approximately 13% of the Fund's revenues.
Exchange Rates -
The Fund is exposed to fluctuations in the exchange rate of the U.S.
dollar relative to the Canadian dollar, as a portion of the Fund's
distributable cash is earned in U.S. dollars. On an unhedged basis, the Fund
currently estimates that a one-cent change in the exchange rate will have an
impact of less that $0.15 million per annum. The Fund has forward exchange
contracts in place for 2008 at a rate of US$0.83 per Canadian dollar.
Interest Rates -
The Fund has a credit facility with term debt and operating lines of
credit which bear variable rates of interest. As at March 31, 2008, on an
unhedged basis, a change in interest rates of 1% per annum would have an
impact of approximately $2 million per annum. As at March 31, 2008, the Fund
had fixed interest rates on approximately 80% of its total debt, for the
remainder of its current credit agreement.
Sulphuric Acid Pricing -
A change in realized sulphuric acid pricing, net of freight, of $1 per
tonne, would have an impact on annual revenues in North America of
approximately $1.1 million. However, given the risk-sharing aspect of a key
supply contract, the impact of price changes on EBITDA would range from $0.5
million to $0.6 million. In any specific period, the exact impact would also
depend upon the volume that is subject to sales contracts where pricing has
been fixed for a period of time. The magnitude of realized price changes also
depends upon regional market dynamics.
Sulphur Costs -
The Fund uses sulphur in the manufacturing of several of its products,
including sulphuric acid. At current operating levels, an increase of $1 per
tonne would have an impact of approximately $0.15 million per annum. It is
important to note that a change in the cost of sulphur may lead to a change in
the price for sulphuric acid as this is a key input cost in the manufacturing
of sulphuric acid. Thus, the net impact of changes in sulphur costs would
depend upon changes in sulphuric acid pricing.
Sodium Chlorate Pricing -
Approximately 65% of the Fund's sodium chlorate sales are to Canfor Pulp
Limited Partnership on a long-term contract, whereby selling price is adjusted
based on changes in virtually all variable costs. Thus, the Fund's exposure to
changes in market prices of sodium chlorate is limited to the remainder of its
output.
Other Input Costs -
There are several other large input costs, such as natural gas, zinc,
salt and electricity, but in most cases there are contractual arrangements
with customers, or other offsets within the business, which mitigate the
exposure to changes in these costs.
CRITICAL ACCOUNTING POLICIES
The Fund's accounting policies are described in Note 3 to the
consolidated financial statements for the year ended December 31, 2007.
Capital Disclosures -
Effective January 1, 2008, the Fund adopted the recommendations of the
Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1535,
Capital Disclosures. This section establishes standards for disclosing
information about an entity's capital and how it is managed. The entity's
disclosure should include information about its objectives, policies and
processes for managing capital and disclose whether or not it has complied and
the consequences of non-compliance with any capital requirements to which it
is subject. This new section relates to disclosure and did not have an impact
on the Fund's financial results.
Inventories -
Effective January 1, 2008, the Fund adopted the recommendations of CICA
Handbook Section 3031, Inventories. Under the new section, inventories are
required to be measured at the "lower of cost and net realizable value", which
is different from the previous guidance of the "lower of cost and market". The
new section requires the reversal of any write-downs previously recognized, if
applicable. Certain minimum disclosures are also required, including the
accounting policies used, carrying amounts, amounts recognized as an expense,
write-downs, and the amount of any reversal of any write-downs recognized as a
reduction in expenses.
The new section also clarifies the definition of cost to include all
costs of purchase, costs of conversion and other costs incurred to bring
inventories to their present location and condition. Costs of conversion
include a systematic allocation of fixed and variable production overheads
that are incurred in converting materials into finished goods. The allocation
of fixed production overheads is based on normal production capacity of the
production facilities.
The new section requires that depreciation be included in the fixed costs
of conversion when costing inventories. Previously, the Fund had excluded
depreciation from its cost of inventory. The Fund has elected to apply this
section retrospectively and has adjusted the comparative figures to comply
with the new section.
Financial Instruments -
Effective January 1, 2008, the Fund adopted the recommendations of CICA
Handbook Sections 3862, Financial Instruments - Disclosures, and 3863,
Financial Instruments - Presentation. Section 3862 modifies the disclosure
requirements of Section 3861, Financial Instruments - Disclosure and
Presentation, including required disclosure of the assessment of the
significance of financial instruments for an entity's financial position and
performance and of the extent of risks arising from financial instruments to
which the Fund is exposed and how the Fund manages those risks, whereas
Section 3863 carries forward the presentation related requirements of Section
3861. These new sections relate to disclosure and presentation only and do not
have an impact on the Fund's financial results.
RECENT ACCOUNTING PRONOUNCEMENTS
Convergence to International Financial Reporting Standards ("IFRS") -
In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a
strategic plan for the direction of accounting standards in Canada. The AcSB
has recently confirmed that accounting standards in Canada for public
companies are to converge with IFRS effective for fiscal periods beginning on
or after January 1, 2011. The Fund has assembled an IFRS transition team which
has started to assess the impact of the convergence of Canadian GAAP and IFRS,
and will implement the new IFRS standards.
Goodwill and Intangible Assets -
In February 2008, the CICA issued Handbook Section 3064, Goodwill and
Intangible Assets. Section 3064 states that upon their initial identification,
intangible assets are to be recognized as assets only if they meet the
definition of an intangible asset and the recognition criteria. This section
also provides further information on the recognition of internally generated
intangible assets (including research and development costs). As for
subsequent measurement of intangible assets, goodwill, and disclosure, Section
3064 carries forward the requirements of the old Section 3062, Goodwill and
Other Intangible Assets. The new section will become effective on January 1,
2009 for the Fund. The Fund is currently evaluating the effect of the adoption
of this new section on the consolidated financial statements.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
In accordance with the requirements of Canadian securities regulators,
the CEO and CFO of the Fund are required to certify that they have designed
the Fund's disclosure controls and have evaluated their effectiveness for the
applicable period. Disclosure controls are those controls and procedures which
ensure that information that is required to be disclosed is recorded,
processed and reported within the time frames specified by the regulators.
The effectiveness of the Fund's Disclosure Policies and Procedures is
reviewed by the CEO and CFO. The CEO and CFO of the Fund have concluded that
the Disclosure Policies and Procedures of the Fund will provide reasonable
assurance that the Fund's policy of providing timely, consistent, fair and
accurate public disclosure of material information will be achieved.
OUTLOOK
We anticipate generally stable demand for most of our products and robust
demand for sulphuric acid. We agree with industry experts' opinions that
strong demand and limited supply will result in a continuation of the current
elevated price environment for sulphuric acid throughout the remainder of 2008
and into 2009. Strong demand for sulphur, a raw material used to produce
sulphuric acid, has also resulted in a dramatic increase in its cost. Despite
this increase we anticipate that the sulphuric acid price increases will be
sufficient to more than offset this cost pressure.
As previously indicated, in 2008 we expect to invest at a higher level in
our plants with a view to improving reliability. The increased investment
coupled with rapidly escalating material and labour costs associated with our
capital program mean that we expect 2008 capital expenditures to be
significantly higher than 2007.
We now believe that the strong acid margins achieved during the first
quarter of 2008 can be sustained through this year and well into 2009.
Consequently, despite the increased capital program, we expect to generate
higher levels of Distributable Cash after Maintenance Capital Expenditures
during the next twelve months relative to the previous twelve months. We also
continue to seek growth opportunities to make the business even stronger.
OTHER
Additional information concerning the Fund, including the Annual
Information Form, is filed on SEDAR and can be accessed at www.sedar.com.
For further information: Mark Davis, President and CEO, Tel: (416)
496-4176; Rohit Bhardwaj, Vice-President, Finance and CFO, Tel: (416)
496-4177
