Chemtrade Logistics Income Fund Reports 2009 Third Quarter Results
Further Improvements Over First and Second Quarters This Year
Comparing the third quarter 2009 results with the second quarter this year, cash flow from operating activities was
For the nine months ended
Sulphur Products & Performance Chemicals (SPPC) generated revenue of
Pulp Chemicals reported third quarter revenue of
International reported revenue of
Distributions
Distributions declared in the third quarter totalled
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", "expected", "intend", "may", "will", "project", "plan", "should", "believe" and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this news release describe the expectations of Chemtrade 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.
This news release contains forward-looking statements about the objectives, strategies, financial condition, results of operations and businesses of the Fund, including, but not limited to:
- The volume of sulphuric acid that may be available from new sources;
and
- The Fund's ability to sustain its current distribution rate.
Financial outlook information contained in this press release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this press release should not be used for purposes other than those for which it is disclosed herein.
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 third quarter 2009 results will be webcast live on www.chemtradelogistics.com and www.newswire.ca/webcast on
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Balance Sheets
(in thousands of dollars)
September 30, December 31,
2009 2008
-------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 12,887 $ 48,050
Accounts receivable (note 3) 60,462 138,640
Inventories 20,936 38,124
Prepaid expenses and other assets
(notes 8(b) and 10) 6,858 6,259
-------------------------------------------------------------------------
101,143 231,073
Notes receivable 2,677 3,045
Property, plant and equipment (note 3) 152,267 169,174
Other assets 2,414 2,583
Future tax asset 10,233 13,283
Intangibles 114,476 137,227
Goodwill 91,598 98,840
-------------------------------------------------------------------------
$ 474,808 $ 655,225
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Accounts payable $ 34,792 $ 122,685
Accrued and other liabilities (notes 5(f)
and 8(b)) 40,118 71,024
Distributions payable 3,067 3,178
Income taxes payable 2,216 8,157
-------------------------------------------------------------------------
80,193 205,044
Long-term debt (note 4) 162,983 185,023
Other long-term liabilities (notes 5(f)
and 8(b)) 12,623 12,706
Post-employment benefits 4,002 4,238
Future tax liability 17,646 30,278
Unitholders' equity
Units (note 5(b)) 377,144 389,932
Contributed surplus (note 5(c)) 9,720 5,272
Deficit (146,402) (153,141)
Accumulated other comprehensive (loss)
(note 6) (43,101) (24,127)
-------------------------------------------------------------------------
197,361 217,936
-------------------------------------------------------------------------
$ 474,808 $ 655,225
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Earnings
(in thousands of dollars, except per unit amounts)
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Revenue $ 126,989 $ 393,971 $ 413,436 $ 886,037
Cost of sales and
services (excluding
depreciation
disclosed below)
(note 3) 95,660 346,615 329,721 759,990
-------------------------------------------------------------------------
Gross profit 31,329 47,356 83,715 126,047
Selling, general,
administrative and
other costs (note 3) 9,803 5,662 26,453 32,553
Restructuring costs - - - (1,238)
-------------------------------------------------------------------------
Earnings before the
under-noted 21,526 41,694 57,262 94,732
Unrealized foreign
exchange (gain)
loss (6,802) 3,520 (12,046) 4,517
Depreciation and
amortization 11,086 9,893 33,523 29,883
Loss (gain) on sale
of property, plant
and equipment 94 (250) 94 (250)
Net interest and
accretion expense
(note 4) 2,122 3,639 6,567 9,465
-------------------------------------------------------------------------
Earnings before
income taxes 15,026 24,892 29,124 51,117
Income taxes
Current 973 2,098 2,805 5,429
Future (5,482) 3,304 (8,110) 2,897
-------------------------------------------------------------------------
(4,509) 5,402 (5,305) 8,326
-------------------------------------------------------------------------
Net earnings $ 19,535 $ 19,490 $ 34,429 $ 42,791
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per
unit (note 5(d))
Basic $ 0.64 $ 0.58 $ 1.12 $ 1.27
Diluted $ 0.64 $ 0.58 $ 1.12 $ 1.27
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cost of sales and services for the three months and the nine months ended
September 30, 2009 does not include $5,738 and $16,992 respectively (2008
- $4,627 and $14,124 respectively) of depreciation relating to plant
buildings and equipment.
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 Nine Months Ended
------------------ -----------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Units
Balance, beginning
of period $ 377,144 $ 412,957 $ 389,932 $ 412,957
Repurchase of units
(note 5(c)) - (2,444) (12,788) (2,444)
-------------------------------------------------------------------------
Balance, end of
period $ 377,144 $ 410,513 $ 377,144 $ 410,513
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning
of period $ 9,720 $ - $ 5,272 $ -
Repurchase of units
(note 5(c)) - 275 4,448 275
-------------------------------------------------------------------------
Balance, end of
period $ 9,720 $ 275 $ 9,720 $ 275
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit
Balance, beginning
of period $ (156,736) $ (150,415) $ (153,141) $ (154,040)
Changes in
accounting policies - - - 474
-------------------------------------------------------------------------
Balance, beginning
of period, as
adjusted (156,736) (150,415) (153,141) (153,566)
Net earnings 19,535 19,490 34,429 42,791
Distributions (9,201) (10,065) (27,690) (30,215)
-------------------------------------------------------------------------
Balance, end of
period $ (146,402) $ (140,990) $ (146,402) $ (140,990)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other
comprehensive (loss)
(note 6)
Balance, beginning
of period $ (31,853) $ (50,532) $ (24,127) $ (53,305)
Other comprehensive
(loss) income (11,248) 5,795 (18,974) 8,568
-------------------------------------------------------------------------
Balance, end of
period $ (43,101) $ (44,737) $ (43,101) $ (44,737)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Statements of Comprehensive Income
(in thousands of dollars)
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Net earnings $ 19,535 $ 19,490 $ 34,429 $ 42,791
Change in unrealized
loss on translation
of self-sustaining
foreign operations (11,186) 5,872 (18,630) 9,476
Change in unrealized
loss on derivatives
designated as cash
flow hedges (62) (324) (344) (1,155)
Losses on derivatives
designated as cash
flow hedges in
prior periods
transferred to net
income in the
current period - 247 - 247
-------------------------------------------------------------------------
Other comprehensive
(loss) income (11,248) 5,795 (18,974) 8,568
-------------------------------------------------------------------------
Comprehensive
income $ 8,287 $ 25,285 $ 15,455 $ 51,359
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Cash Flows
(in thousands of dollars)
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Cash provided by
(used in):
Operating
activities:
Net earnings $ 19,535 $ 19,490 $ 34,429 $ 42,791
Items not
affecting cash:
Depreciation and
amortization 11,086 9,893 33,523 29,883
Future income
taxes (5,482) 3,304 (8,110) 2,897
Accretion
expense 140 133 439 520
Loss (gain) on
sale of
property, plant
and equipment 94 (250) 94 (310)
Gain on
settlement of
property damage
claim (note 3) (2,671) - (2,671) -
Change in fair
value of
derivatives and
unrealized
foreign exchange
(gain) loss (6,426) 742 (11,236) 4,535
-------------------------------------------------------------------------
16,276 33,312 46,468 80,316
Decrease (increase)
in working capital 2,600 (19,344) (30,710) (26,594)
-------------------------------------------------------------------------
18,876 13,968 15,758 53,722
Financing activities:
Distributions to
unitholders (9,201) (10,075) (27,802) (30,225)
Repurchase of units
(note 5(c)) - (2,169) (8,340) (2,169)
(Decrease) in
operating line of
credit (777) (7,097) - (14,144)
Financing transaction
costs - - - (628)
Increase (decrease)
in other long-term
liabilities 1,164 965 (113) 3,577
-------------------------------------------------------------------------
(8,814) (18,376) (36,255) (43,589)
Investing activities:
Additions to
property, plant
and equipment (4,900) (4,940) (14,980) (11,590)
Proceeds from
disposal of
property, plant
and equipment 240 2,708 240 2,787
Notes receivable - - - (2,523)
-------------------------------------------------------------------------
(4,660) (2,232) (14,740) (11,326)
Effect of exchange
rates on cash held in
foreign currencies 55 (181) 74 -
-------------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalents 5,457 (6,821) (35,163) (1,193)
Cash and cash
equivalents -
beginning of period 7,430 17,432 48,050 11,804
-------------------------------------------------------------------------
Cash and cash
equivalents - end
of period $ 12,887 $ 10,611 $ 12,887 $ 10,611
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental
information:
Cash taxes paid $ 4,535 $ (82) $ 8,272 $ 1,292
Cash interest
paid $ 2,188 $ 3,394 $ 6,800 $ 9,070
See accompanying notes to consolidated financial statements
CHEMTRADE LOGISTICS INCOME FUND
Notes to Consolidated Financial Statements
(in thousands of dollars)
(unaudited)
September 30, 2009
-------------------------------------------------------------------------
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
purchased various assets and related businesses from Marsulex Inc.
The Fund operates in four business segments: Sulphur Products &
Performance Chemicals (SPPC), 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, 2008, 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) Goodwill and intangible assets
Effective January 1, 2009, the Fund adopted the recommendations of
the Canadian Institute of Chartered Accountants (CICA) Handbook
Section 3064, Goodwill and Intangible Assets. Section 3064 states
that upon their initial identification, intangible assets are to be
recognized as assets if they meet the definition of an intangible
asset and if they satisfy the recognition criteria contained in the
Handbook section. This section also provides further information on
the recognition of internally generated intangible assets (including
research and development costs).
Section 3064 carries forward the requirements of the old Section
3062, Goodwill and Other Intangible Assets with regards to the
subsequent measurement of intangible assets, goodwill, and
disclosure. The adoption of this section did not have an impact on
the Fund's consolidated financial statements.
(ii) Fair value of financial assets and financial liabilities
Effective January 1, 2009, the Fund adopted the recommendations of
EIC-173, entitled Credit Risk and the Fair Value of Financial Assets
and Financial Liabilities, which provides further information on the
determination of the fair value of financial assets and financial
liabilities under Section 3855, entitled Financial Instruments -
Recognition and Measurement. This EIC states that an entity's own
credit and the credit risk of the counter-party should be taken into
account in determining the fair value of financial assets and
financial liabilities, including derivative instruments. The adoption
of this EIC did not have an impact on the Fund's consolidated
financial statements.
(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 is continuing to assess the impact of
the convergence of Canadian GAAP and IFRS, and will implement the new
IFRS standards.
(ii) Business combinations
In January 2009, the CICA issued Handbook Sections 1582, Business
Combinations; 1601, Consolidated Financial Statements; and 1602, Non-
Controlling Interests. These sections replace Handbook Sections 1581,
Business Combinations; and 1600, Consolidated Financial Statements.
Section 1582 establishes standards for the accounting for business
combinations that is equivalent to the business combination
accounting standard under IFRS. Section 1582 is applicable for the
Fund's business combinations with acquisition dates on or after
January 1, 2011. Early adoption of this section is permitted.
Sections 1601 and 1602 establish standards for the preparation of
consolidated financial statements and for accounting for a non-
controlling interest in a subsidiary in the consolidated financial
statements subsequent to a business combination. Sections 1601 and
1602 are applicable for the Fund's interim and annual consolidated
financial statements for its fiscal year beginning January 1, 2011.
Early adoption of these sections is also permitted. If the Fund
chooses to early adopt any one of these sections, the other two
sections must also be adopted at the same time. The Fund is currently
evaluating the effect of these new sections on the consolidated
financial statements.
3. INSURANCE CLAIM:
During the third quarter of 2008, an incident occurred at the Fund's
Beaumont, Texas facility, which resulted in property damage and
business interruption. The Fund has settled the property damage and
is pursuing the business interruption insurance claim with its
insurer.
During the second quarter of 2009, the Fund received a prepayment of
US$2,500 related to its business interruption claim. The Fund
allocated US$500 of this towards a receivable that had been
previously recorded and the balance was included in selling, general,
administrative and other costs in the SPPC segment. During the fourth
quarter of 2008 and the first quarter of 2009, the Fund incurred
capital expenditures of US$9,839 relating to the repair of damaged
property at the Beaumont facility. The Fund has concluded its
property damage claim and has recovered most of its capital
expenditures relating to the repair. Since the repair costs exceeded
the net book value of the damaged assets and because the Fund was
reimbursed the repair costs, the Fund recognized a non-cash gain of
$2,671 at the conclusion of the claim. This gain was included in
selling, general, administrative and other costs in the SPPC segment.
The Fund also recovered $1,097 of costs incurred to preserve the
assets during the repair process. This recovery was included in cost
of sales and services in the SPPC segment where the costs were
originally recorded.
4. LONG-TERM DEBT:
The interest rate on the Fund's term debt is the aggregate of LIBOR
and a margin which varies based on the level of a ratio, as set out
in the Fund's credit agreement. During the first quarter of 2009, the
Fund entered into new interest rate swap arrangements which fixed the
LIBOR component of its interest rate on all of its outstanding term
debt until August 2011. During the third quarter of 2009, the Fund's
weighted average effective interest rate on its term debt was 4.83%.
Previously the Fund had interest rate swaps related to its term debt
and operating lines of credit, which fixed interest rates until
August 2010. The Fund collapsed all of these interest rate swaps
upon entering into the new interest rate swap arrangements and rolled
the related fair value liability of $9,790 into its new interest rate
swaps. This value will be amortized on a straight-line basis over
the remaining term of the term debt in net interest and accretion
expense.
5. UNITS:
(a) Authorized:
Unlimited number of units.
(b) Outstanding:
Number
of Units Amount
---------------------------------------------------------------------
Units
Balance - December 31, 2008 31,710,410 $ 389,932
Units repurchased for cancellation
(note 5(c)) (1,039,940) (12,788)
---------------------------------------------------------------------
Balance - September 30, 2009 30,670,470 $ 377,144
---------------------------------------------------------------------
---------------------------------------------------------------------
(c) Normal course issuer bid:
From September 23, 2008 to September 22, 2009, the Fund purchased
an aggregate of 2,912,466 of its units by way of a normal course
issuer bid (the "Bid") through the facilities of the Toronto
Stock Exchange (TSX). The purchases were made in accordance with
the policies and rules of the TSX and units were purchased for
cancellation. The prices that the Fund paid for the units
purchased were the market price of such units at the time of
acquisition.
During 2009, the Fund purchased 1,039,940 units at an average per
unit price of $8.02 for an aggregate purchase amount of $8,340.
This resulted in $12,788 being recorded as a reduction to the
value of units and $4,448 being recorded as contributed surplus.
During 2008, the Fund purchased 1,872,526 units at an average per
unit price of $9.48 for an aggregate purchase amount of $17,753.
This resulted in $23,025 being recorded as a reduction to the
value of units and $5,272 being recorded as contributed surplus.
(d) 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
and the nine months ended September 30, 2009 which amounted to
30,670,470 units and 30,868,188 units respectively (2008 -
33,581,852 units and 33,582,572 units respectively).
(e) Distributions:
Distributions paid for the three months and the nine months ended
September 30, 2009 were $9,201 and $27,802 respectively (2008 -
$10,075 and $30,225 respectively). All of the Fund's
distributions are discretionary.
(f) Long-term incentive plan:
The Fund operates a Total Return Long-Term Incentive Plan (TR
LTIP) which grants cash awards based on achieving total
Unitholder return over a performance period. Total Unitholder
return consists of changes in unit price and distributions paid
to Unitholders. The Fund treats these awards as liabilities with
the value of these liabilities being re-measured at each
reporting period, based upon changes in the intrinsic value of
the awards. Any gains or losses on re-measurement are recorded in
the Consolidated Statements of Earnings, provided that the
aggregate compensation cost accrued during the performance period
is not adjusted below zero. For the three months ended September
30, 2009, the Fund recorded an expense of $3,800 (2008 - recovery
of $2,242). For the nine months ended September 30, 2009, the
Fund recorded a total expense of $2,567 (2008 - $3,765) related
to the TR LTIP. As at September 30, 2009 there was $2,960
included in Accrued and other liabilities and $3,040 included in
Other long-term liabilities related to the TR LTIP. As at
December 31, 2008, there was $1,661 included in Accrued and other
liabilities, and $3,500 included in Other long-term liabilities.
6. OTHER COMPREHENSIVE INCOME (LOSS):
The components of accumulated other comprehensive income (loss) as at
September 30, 2009 and other comprehensive income (loss) for the nine
months then ended were as follows:
Accumulated Opening Ending Opening
other balance balance balance
comprehensive December 31, Net September 30, December 31,
(loss) 2008 change 2009 2007
-------------------------------------------------------------------------
Unrealized (loss)
gain on translation
of self-sustaining
foreign operations $ (19,411) $ (18,630) $(38,041)(1) $ (52,867)
Loss on derivatives
designated as cash
flow hedges (4,716) (344) (5,060)(2) (438)
-------------------------------------------------------------------------
Accumulated other
comprehensive
(loss) $ (24,127) $ (18,974) $ (43,101) $ (53,305)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated Ending
other Transferred balance
comprehensive Net to net September 30,
(loss) change income 2008
-----------------------------------------------------------
Unrealized (loss)
gain on translation
of self-sustaining
foreign operations $ 9,476 $ - $(43,391)(1)
Loss on derivatives
designated as cash
flow hedges (1,155) 247 (1,346)(2)
-----------------------------------------------------------
Accumulated other
comprehensive
(loss) $ 8,321 $ 247 $ (44,737)
-----------------------------------------------------------
-----------------------------------------------------------
(1) Net of income tax expense of $nil (2008 - $nil).
(2) Net of cumulative income tax recovery of $2,666 (2008 - $898).
7. BUSINESS SEGMENTS:
The Fund operates in four business segments: Sulphur Products &
Performance Chemicals (SPPC), Pulp Chemicals (Pulp), International
(Intl.) and Corporate (Corp.).
SPPC markets, removes and/or produces 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 produces sodium chlorate and crude tall oil. These products are
marketed primarily to Canadian customers.
Intl. provides 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 in the Pacific region.
Corp. is a non-operating segment that provides centralized services
such as treasury, finance, information systems, human resources,
legal and risk management.
Three Months Ended September 30, 2009
---------------------------------------------------------------------
SPPC Pulp Intl. Corp. Total
---------------------------------------------------------------------
Revenue from
external customers $ 77,737 $ 13,760 $ 35,492 $ - $126,989
Earnings before the
under-noted 21,256 4,450 3,160 (7,340) 21,526
Unrealized foreign
exchange gain - - - (6,802) (6,802)
Depreciation and
amortization 8,167 2,358 561 - 11,086
Loss on disposal of
property, plant and
equipment - - 94 - 94
Net interest and
accretion expense 1,706 438 (22) - 2,122
Income tax (recovery)
expense (5,200) - 691 - (4,509)
Net earnings 16,583 1,654 1,836 (538) 19,535
Total assets 230,010 110,021 134,962 (185) 474,808
Goodwill 60,898 - 30,700 - 91,598
Intangibles 74,385 35,544 4,547 - 114,476
Capital expenditures 4,699 143 17 41 4,900
---------------------------------------------------------------------
---------------------------------------------------------------------
Three Months Ended September 30, 2008
---------------------------------------------------------------------
SPPC Pulp Intl. Corp. Total
---------------------------------------------------------------------
Revenue from
external customers $164,617 $ 13,994 $215,360 $ - $393,971
Earnings before the
under-noted 26,193 5,015 9,368 1,118 41,694
Unrealized foreign
exchange loss - - - 3,520 3,520
Depreciation and
amortization 7,223 2,295 375 - 9,893
(Gain) on disposal
of property, plant
and equipment (250) - - - (250)
Net interest and
accretion expense 2,630 1,107 (98) - 3,639
Income tax expense 4,059 - 1,343 - 5,402
Net earnings
(loss) 12,531 1,613 7,748 (2,402) 19,490
Capital expenditures 2,386 198 1,695 661 4,940
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine Months Ended September 30, 2009
---------------------------------------------------------------------
SPPC Pulp Intl. Corp. Total
---------------------------------------------------------------------
Revenue from
external customers $255,340 $ 38,951 $119,145 $ - $413,436
Earnings before the
under-noted 45,622 13,981 11,908 (14,249) 57,262
Unrealized foreign
exchange gain - - - (12,046) (12,046)
Depreciation and
amortization 24,723 7,065 1,735 - 33,523
Loss on disposal of
property, plant and
equipment - - 94 - 94
Net interest and
accretion expense 5,261 1,396 (90) - 6,567
Income tax (recovery)
expense (7,321) - 2,016 - (5,305)
Net earnings (loss) 22,959 5,520 8,153 (2,203) 34,429
Total assets 230,010 110,021 134,962 (185) 474,808
Goodwill 60,898 - 30,700 - 91,598
Intangibles 74,385 35,544 4,547 - 114,476
Capital
expenditures 13,572 351 662 395 14,980
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine Months Ended September 30, 2008
---------------------------------------------------------------------
SPPC Pulp Intl. Corp. Total
---------------------------------------------------------------------
Revenue from
external customers $390,492 $ 43,201 $452,344 $ - $886,037
Earnings before the
under-noted 69,982 15,277 24,434 (14,961) 94,732
Unrealized foreign
exchange loss - - - 4,517 4,517
Depreciation and
amortization 21,799 6,974 1,110 - 29,883
(Gain) on disposal
of property, plant
and equipment (250) - - - (250)
Net interest and
accretion expense 7,609 2,153 (297) - 9,465
Income tax expense 4,254 - 4,072 - 8,326
Net earnings (loss) 36,570 6,150 19,549 (19,478) 42,791
Capital
expenditures 6,650 316 3,793 831 11,590
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 2008
---------------------------------------------------------------------
SPPC Pulp Intl. Corp. Total
---------------------------------------------------------------------
Total assets $367,677 $ 91,687 $195,128 $ 733 $655,225
Goodwill 66,883 - 31,957 - 98,840
Intangibles 91,762 39,597 5,868 - 137,227
---------------------------------------------------------------------
---------------------------------------------------------------------
Geographic segments:
The Fund operates primarily in Canada, the United States and Europe.
Revenue is attributed to customers based on their location.
Revenue
---------------------------------------------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
---------------------------------------------------------------------
Canada $ 30,641 $ 40,511 $ 90,824 $ 108,635
U.S. 60,856 138,100 203,467 325,058
Europe 35,492 215,360 119,145 452,344
---------------------------------------------------------------------
$ 126,989 $ 393,971 $ 413,436 $ 886,037
---------------------------------------------------------------------
---------------------------------------------------------------------
Property, Plant and Equipment, Goodwill and Intangibles
---------------------------------------------------------------------
September 30, December 31,
2009 2008
---------------------------------------------------------------------
Canada $ 112,934 $ 122,318
U.S. 201,585 234,540
Europe 43,822 48,383
---------------------------------------------------------------------
$ 358,341 $ 405,241
---------------------------------------------------------------------
---------------------------------------------------------------------
There were no producers from which the Fund obtained product that
accounted for more than 10% of the Fund's total revenue for the nine
months ended September 30, 2009. For the nine months ended September
30, 2008, the Fund obtained product from a producer that accounted
for 11.7% of the Fund's total revenue. For the nine months ended
September 30, 2009, revenue from a customer accounted for 10.7% of
the Fund's total revenue. There were no customers that accounted for
more than 10% of the Fund's total revenue for the nine months ended
September 30, 2008.
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, 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.
(b) Derivatives and hedging:
The Fund has entered into swap arrangements with its principal
banker, which fix the LIBOR component of its interest rates on
all of its outstanding term debt. In the first quarter of 2009,
the Fund entered into new swap arrangements which fixed the LIBOR
component of its interest rates on all of its term debt until
August 2011. Previously the Fund had interest rate swaps related
to its term debt and operating lines of credit, which fixed the
LIBOR component of its interest rate until August 2010. The Fund
collapsed all of these interest rate swaps upon entering into the
new swap arrangements. Losses are included in accrued and other
liabilities and other long-term liabilities with the offset
included in other comprehensive income, except for the
amortization of the fair value liability of the interest rate
swaps entered into during the first quarter of 2009 as discussed
in note 4 which is included in net interest and accretion
expense. Summarized information related to the interest rate
swaps is as follows:
Weighted
Average Fair Value Fair Value
Effective Loss Loss
Notional Maturity Interest September December
Hedged Item Amount Date Rate 30, 2009 31, 2008
-------------------------------------------------------------------------
U.S. dollar August $7,858 $7,861
term debt US$153,138 2011 4.83% (US$7,339) (US$6,454)
-------------------------------------------------------------------------
U.S. dollar
operating
lines of $1,247
credit N/A N/A N/A $ - (US$1,024)
-------------------------------------------------------------------------
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 September 30, 2009
include future contracts to sell US$1,500, US$8,407, US$635,
C$8,233 and (euro) 688, at weighted average exchange rates of
C$1.18, (euro) 0.79, CHF 1.18, (euro) 0.60 and US$1.46,
respectively, for periods through to May 2010. There are
unrealized losses of $481 (December 31, 2008 - $215) and
unrealized gains of $1,645 (December 31, 2008 - $1,029) from
these contracts at September 30, 2009. Gains are included in
prepaid expenses and other assets, and losses are included in
accrued and other liabilities with the offset included in
unrealized foreign exchange loss relating to the fair value of
the derivatives.
To manage its exposure to changes in the price of natural gas,
the Fund has entered into natural gas forward contracts. The Fund
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 gain of $295 (December 31,
2008 - $1,175) from these forward contracts at September 30,
2009. 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 and the commodity forward
contracts are treated as derivatives and are measured at fair
value. At September 30, 2009 and December 31, 2008, the net
unrealized value of these transactions is not significant.
9. COMPARATIVE FIGURES:
Certain comparative figures have been re-classified in order to
comply with the current period's presentation.
10. SUBSEQUENT EVENT:
Subsequent to September 30, 2009, the Fund entered into an agreement
to purchase the outstanding shares of Alliance Specialty Chemicals,
Inc. for US$5,623. Prior to September 30, 2009, the Fund paid a
refundable deposit of US$2,000, which has been included in Prepaid
expenses and other assets.
CHEMTRADE LOGISTICS INCOME FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2009
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 statements of the Fund for the nine month period ended
The Fund's financial statements are prepared in accordance with accounting principles generally accepted in
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", "expected", "intend", "may", "will", "project", "plan", "should", "believe" and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this MD&A describes the expectations of the Fund as of the date of this MD&A. The Fund's actual results could be materially different from its expectations if known or unknown risks affect its business, or if its estimates or assumptions turn out to be inaccurate. As a result, the Fund 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 the Fund's business. The Fund disclaims 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.
This MD&A contains forward-looking statements about the objectives, strategies, financial condition, results of operations and businesses of the Fund including, but not limited to (capitalized terms are as defined in the MD&A):
- all of the risks identified in "RISKS AND UNCERTAINTIES" section;
- all of the forward-looking statements in the "OUTLOOK" section;
- the amount of any TR LTIP payouts;
- the ability to recover amounts from the Fund's insurers in respect of
the Beaumont Incident and the quantum of any such recovery;
- the ability to comply with the new emission limits imposed by the EPA
and the expected cost of compliance;
- the estimated impact of the Canadian/U.S. dollar exchange rate on the
Fund's business;
- the anticipated tax characterization of planned distributions;
- the Fund's ability to renew its term debt at maturity;
- the implementation of planned maintenance capital expenditures, as
well as the cost and timing thereof;
- the use and sufficiency of cash flows from operating activities;
- the potential non-performance of suppliers or customers of the Fund's
International Business and the resulting effect on results; and
- the potential impact of recent accounting pronouncements, including
the timing of the implementation of various steps in connection with
the transition to IFRS.
Financial outlook information contained in the MD&A about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this MD&A should not be used for purposes other than those for which it is disclosed herein.
FINANCIAL HIGHLIGHTS
Three Months Ended Nine Months Ended
------------------ -----------------
($'000 except September September September September
per unit amounts) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Revenue $ 126,989 $ 393,971 $ 413,436 $ 886,037
Net earnings $ 19,535 $ 19,490 $ 34,429 $ 42,791
Net earnings per
unit - Basic $ 0.64 $ 0.58 $ 1.12 $ 1.27
- Diluted $ 0.64 $ 0.58 $ 1.12 $ 1.27
Total assets $ 474,808 $ 656,079 $ 474,808 $ 656,079
Long-term debt $ 162,983 $ 161,489 $ 162,983 $ 161,489
EBITDA(3) $ 21,526 $ 41,694 $ 57,262 $ 94,732
EBITDA per unit(1) $ 0.70 $ 1.24 $ 1.86 $ 2.82
Cash flows from
operating
activities $ 18,876 $ 13,968 $ 15,758 $ 53,722
Cash flows from
operating
activities per
unit(1) $ 0.62 $ 0.42 $ 0.51 $ 1.60
Adjusted cash flows
from operating
activities(3) $ 16,332 $ 33,131 $ 46,542 $ 80,376
Adjusted cash flows
from operating
activities per
unit(1)(3) $ 0.53 $ 0.99 $ 1.51 $ 2.39
Distributable cash
after maintenance
capital
expenditures(3) $ 11,606 $ 29,995 $ 32,222 $ 71,998
Distributable cash
after maintenance
capital
expenditures per
unit(1)(3) $ 0.38 $ 0.89 $ 1.04 $ 2.14
Distributions
declared $ 9,201 $ 10,065 $ 27,690 $ 30,215
Distributions
declared per
unit(2) $ 0.30 $ 0.30 $ 0.90 $ 0.90
Distributions
paid $ 9,201 $ 10,075 $ 27,802 $ 30,225
Distributions paid
per unit(2) $ 0.30 $ 0.30 $ 0.90 $ 0.90
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Based on
weighted average
number of units
outstanding for
the period of: 30,670,470 33,581,852 30,868,188 33,582,572
(2) Based on actual number of units outstanding on record date.
(3) See Non-GAAP Measures.
NON-GAAP MEASURES
EBITDA -
Throughout this MD&A, the term EBITDA is used to describe earnings before any deduction for net interest and accretion expense, taxes, depreciation and amortization and other non-cash charges such as unrealized foreign exchange (gain) loss. 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. EBITDA 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 trusts 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 Nine Months Ended
------------------ -----------------
September September September September
($'000) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Net earnings $ 19,535 $ 19,490 $ 34,429 $ 42,791
Add:
Unrealized
foreign exchange
(gain) loss (6,802) 3,520 (12,046) 4,517
Depreciation and
amortization 11,086 9,893 33,523 29,883
Loss (gain) on
disposal of
property, plant
and equipment 94 (250) 94 (250)
Net interest and
accretion
expense 2,122 3,639 6,567 9,465
Net taxes (4,509) 5,402 (5,305) 8,326
-------------------------------------------------------------------------
EBITDA(1) $ 21,526 $ 41,694 $ 57,262 $ 94,732
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA for the three months and the nine months ended September 30,
2009 includes recoveries of $nil and $nil respectively (2008 -
recoveries of $nil and $1,238 respectively) for restructuring.
Cash Flow -
The following table is derived from, and should be read in conjunction with, the consolidated statement of cash flows. Management believes this supplementary disclosure provides useful additional information related to the cash flows of the Fund including the amount of cash available for distribution to Unitholders, repayment of debt and other investing activities. Certain sub-totals presented within the cash flows table below, such as "Adjusted cash flows from operating activities", "Distributable cash after maintenance capital expenditure" and "Distributable cash after all capital expenditure", are not defined terms under Canadian GAAP. These sub-totals are used by management as measures of internal performance and as a supplement to the consolidated statement of cash flows. Investors are cautioned that these measures should not be construed as an alternative to using net income as a measure of profitability or as an alternative to the GAAP consolidated statement of cash flows. Further, the Fund's method of calculating each measure may not be comparable to calculations used by other income trusts bearing the same description.
Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
($'000) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Cash flows from
operating
activities $ 18,876 $ 13,968 $ 15,758 $ 53,722
Add (deduct):
Changes in non-cash
working capital and
other items (2,544) 19,163 30,784 26,654
-------------------------------------------------------------------------
Adjusted cash flows
from operating
activities 16,332 33,131 46,542 80,376
Less:
Maintenance capital
expenditure 4,726 3,136 14,320 8,378
-------------------------------------------------------------------------
Distributable cash
after maintenance
capital expenditure 11,606 29,995 32,222 71,998
Less:
Non-maintenance
capital
expenditure(1) 174 1,804 660 3,212
-------------------------------------------------------------------------
Distributable cash
after all capital
expenditure 11,432 28,191 31,562 68,786
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 third quarter of 2009 was
The Fund's net earnings and EBITDA for the third quarter of 2009 were
Results of Operations by Business Segment
SPPC -
Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
($'000) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Revenue $ 77,737 $ 164,617 $ 255,340 $ 390,492
Earnings before the
under-noted (EBITDA) 21,256 26,193 45,622 69,982
Depreciation and
amortization 8,167 7,223 24,723 21,799
Gain on disposal
of property - (250) - (250)
Net interest and
accretion expense 1,706 2,630 5,261 7,609
Income tax (recovery)
expense (5,200) 4,059 (7,321) 4,254
-------------------------------------------------------------------------
Net earnings $ 16,583 $ 12,531 $ 22,959 $ 36,750
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SPPC manufactures and distributes sulphuric acid and other sulphur-based products to an extensive customer base in
For the third quarter of 2009, SPPC generated revenue of
Depreciation and amortization for the first nine months of 2009 were higher than the same period of 2008 due to capital additions. Net interest expenses were lower in the first nine months of 2009 due mainly to lower usage of operating lines of credit. Finally, results for 2008 were positively impacted by the recording of a recovery of
Pulp Chemicals -
Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
($'000) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Revenue $ 13,760 $ 13,994 $ 38,951 $ 43,201
Earnings before the
under-noted (EBITDA) 4,450 5,015 13,981 15,277
Depreciation and
amortization 2,358 2,295 7,065 6,974
Net interest and
accretion expense 438 1,107 1,396 2,153
-------------------------------------------------------------------------
Net earnings $ 1,654 $ 1,613 $ 5,520 $ 6,150
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
Third quarter 2009 Pulp Chemicals revenue was similar to the level achieved during the same period in 2008. EBITDA for the third quarter of 2009 was lower than 2008 mainly due to an increase in the allowance for doubtful accounts. Revenue during the first nine months of 2009 was
International -
Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
($'000) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Revenue $ 35,492 $ 215,360 $ 119,145 $ 452,344
Earnings before the
under-noted (EBITDA) 3,160 9,368 11,908 24,434
Depreciation and
amortization 561 375 1,735 1,110
Loss on disposal of
property, plant and
equipment 94 - 94 -
Net interest income (22) (98) (90) (297)
Income tax expense 691 1,343 2,016 4,072
-------------------------------------------------------------------------
Net earnings $ 1,836 $ 7,748 $ 8,153 $ 19,549
-------------------------------------------------------------------------
-------------------------------------------------------------------------
International provides removal and marketing services for elemental sulphur and sulphuric acid. These products are marketed to customers globally.
Revenue for the third quarter and first nine months of 2009 were substantially lower than the same periods of 2008. This was mainly due to lower prices for sulphur and sulphuric acid, reflecting reduced global demand for these commodities. This decline resulted in lower net earnings and EBITDA in 2009 relative to 2008. Also, during 2008, certain product that was not committed to specific customers resulted in extremely high margins due to the high market prices then prevailing.
Corporate -
Three Months Ended Nine Months Ended
------------------ -----------------
September September September September
($'000) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Cost of services
(recoveries) $ 7,340 $ (1,118) $ 14,249 $ 14,961
Loss before the
under-noted (EBITDA) (7,340) 1,118 (14,249) (14,961)
Unrealized foreign
exchange (gain) loss (6,802) 3,520 (12,046) 4,517
-------------------------------------------------------------------------
Net earnings (loss) $ (538) $ (2,402) $ (2,203) $ (19,478)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Corporate segment includes the administrative costs of corporate activities which are not directly allocable to an operating segment, such as treasury, finance, information technology, human resources, legal and risk management.
For the third quarter of 2009, corporate costs, excluding unrealized foreign exchange gains were
For the first nine months of 2009, the main reason for the
The comments on TR LTIP expenses relate to the 2007, 2008 and 2009 TR LTIP. Awards under the 2007, 2008 and 2009 TR LTIP are payable at the beginning of 2010, 2011 and 2012 respectively. At the end of the third quarter of 2009,
The Corporate segment includes large unrealized foreign exchange gains on the translation of U.S. dollar denominated debt, which were a result of the sharp appreciation in the Canadian dollar relative to the U.S. dollar during the third quarter of 2009. This exchange rate fluctuation also resulted in large unrealized foreign exchange losses on the translation of U.S. dollar denominated assets. However, in accordance with accounting rules, those losses are required to be shown in the Consolidated Statements of Comprehensive Income rather than in the Consolidated Statements of Earnings.
RESTRUCTURING
During the fourth quarter of 2006, the Fund decided to discontinue production of powder SHS and costs of
BEAUMONT INCIDENT
During the third quarter of 2008, an explosion occurred at the Fund's Beaumont, Texas facility which resulted in property damage as well as business interruption. After a lengthy period of repairs, the plant was operational during the first quarter of 2009. During the first six months of 2009, the Fund incurred operational, legal and consulting costs relating to this incident.
During the fourth quarter of 2008 and the first quarter of 2009, the Fund incurred capital expenditures relating to the repair of damaged property at the Beaumont facility. Since these costs are recoverable under the Fund's property insurance policy, the Fund had set up a receivable of US$9.8 million with respect to these costs. Subsequent to the end of the third quarter of 2009, the Fund concluded its property damage claim and recovered most of its capital expenditures relating to the repair. Since the repair costs exceeded the net book value of the damaged assets and because the Fund was reimbursed the repair costs, the Fund recognized a non-cash gain of
The Fund is also pursuing insurance claims for losses due to the ensuing business interruption. During the second quarter of 2009, the Fund received an interim payment from its insurer of US$2.5 million with respect to the business interruption loss. The Fund applied US$0.5 million of this receipt towards a receivable that had been previously recorded and the balance was included in selling, general, administrative and other costs in the SPPC segment. It is currently difficult to estimate the aggregate amount that will be recovered with respect to the business interruption and the Fund does not currently intend to record further recoveries until the amount of the recovery is determined and virtually certain of being recovered.
U.S. ENVIRONMENTAL PROTECTION AGENCY (EPA) SETTLEMENT
In
FOREIGN EXCHANGE
The Fund has operating subsidiaries that are based in the U.S. In addition, BCT Chemtrade Corporation, the Fund's international subsidiary, uses the U.S. dollar as its measurement 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 currently estimates that on an unhedged basis, a
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. Contracts in place at
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 is recorded at fair market value at the period end and included with prepaid expenses and other assets or accrued and other liabilities on the balance sheet. The resultant non-cash charge or gain is reported as unrealized foreign exchange (gain) loss. 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 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
NET INTEREST AND ACCRETION EXPENSE
Net interest and accretion expense was
Interest expense in 2009 was lower than 2008 mainly due to lower levels of borrowing on the Fund's operating lines of credit and due to lower interest rates experienced during 2009 relative to 2008.
The weighted average effective annual interest rate at
During the third quarter and first nine months of 2009 the Fund recorded accretion expense of
INCOME TAXES
Current income tax expense was
The decrease in future tax asset of
The decrease in future tax liability of
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 and the nine months ended
Three Months Nine Months
Ended Ended Year Ended Year Ended
September September December December
($'000) 30, 2009 30, 2009 31, 2008 31, 2007(1)
-------------------------------------------------------------------------
Cash flows from
operating activities $ 18,876 $ 15,758 $ 147,905 $ 47,742
Net earnings 19,535 34,429 40,331 20,596
Distributions paid
during period 9,201 27,802 40,086 40,971
Excess (shortfall) of
cash flows from
operating activities
over cash distributions
paid 9,675 (12,044) 107,819 6,771
Excess (shortfall) of
net earnings over
cash distributions paid 10,334 6,627 245 (20,375)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 and foreign exchange gains and losses.
For the nine months ended
Distributions -
Distributions to Unitholders for the three months ended
Distribution Total
Record Date Payment Date Per Unit ($'000)
-------------------------------------------------------------------------
Three months ended
September 30:
July 31, 2009 August 31, 2009 $ 0.10 $ 3,067
August 31, 2009 September 30, 2009 0.10 3,067
September 30, 2009 October 30, 2009 0.10 3,067
-------------------------------------------------------------------------
Sub-Total $ 0.30 $ 9,201
Six months ended June 30 $ 0.60 $ 18,489
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total for nine months ended September 30 $ 0.90 $ 27,690
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions declared in the three months ended September 30, 2008 were
as follows:
Distribution Total
Record Date Payment Date Per Unit ($'000)
-------------------------------------------------------------------------
Three months ended
September 30:
July 31, 2008 August 29, 2008 $ 0.10 $ 3,358
August 29, 2008 September 30, 2008 0.10 3,358
September 30, 2008 October 31, 2008 0.10 3,349
-------------------------------------------------------------------------
Sub-Total $ 0.30 $ 10,065
Six months ended June 30 $ 0.60 $ 20,150
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total for nine months ended September 30 $ 0.90 $ 30,215
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Treatment of the Fund's distributions for Canadian income tax purposes for
2008 and 2009 is as follows:
Foreign
Non-Business
Other Income Income Total
-------------------------------------------------------------------------
2008 76.6% 23.4% 100.0%
2009(1) 74.0% 26.0% 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Represents anticipated tax characterization of planned distributions.
The actual tax treatment of 2009 distributions will be determined by
February 28, 2010.
LIQUIDITY AND CAPITAL RESOURCES
The Fund's distributions to Unitholders are sourced entirely from its investments in operating subsidiary companies. The Fund's investments are financed by trust units held by Unitholders, term debt and operating lines of credit. The cash flow of the Fund is required to fund distributions to Unitholders, capital expenditures and payment of interest on term debt as well as the repurchase of units under the Normal Course Issuer Bid as discussed below. The Fund intends to renew its long-term debt prior to maturity.
Cash Flow from Operating Activities
-----------------------------------
Cash flow from operating activities for the third quarter of 2009 was
For the first nine months of 2009, cash flow from operating activities was
Financing Activities
--------------------
Distributions to Unitholders during the third quarter and first nine months of 2009 were
Normal Course Issuer Bid -
From
During the nine months ended
During 2008, the Fund purchased 1,872,526 units at an average per unit price of
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 term debt. In the first quarter of 2009, the Fund entered into new swap arrangements which will fix interest rates on all of its term debt until
During the third quarter of 2008, under provisions allowed by its credit agreement, the Fund converted its Canadian dollar denominated term debt into U.S. dollar term debt and
Also in the third quarter of 2008, the Fund collapsed its swap arrangements on its Canadian dollar denominated term debt and recognized a loss of
During the second quarter of 2008, the Fund extended its senior credit facilities with its principal bankers to
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
Investing Activities
--------------------
Investment in capital expenditures was
Investment in non-maintenance capital expenditures was
During the third quarter of 2008, the Fund sold excess vacant land at its site in
During the second quarter of 2008, the Fund invested US$2.5 million in Meranol S.A.C.I. (Meranol). Meranol is based in
Cash Balances -
At
Future Liquidity -
The future liquidity of the Fund will be primarily dependant on cash flows of its operating subsidiaries. These cash flows will be used to finance ongoing expenditures, including maintenance capital, distributions to Unitholders and normal course financial commitments. Cash flows are sensitive to changes in volume, sales prices and input costs and any changes in these may impact future liquidity. Management believes that cash flows from operating activities will be sufficient for the Fund to meet future obligations and commitments that arise in the normal course of business activities.
Capital Resources -
At
Debt Covenants -
As at
SUMMARY OF QUARTERLY RESULTS
Three Months Ended
------------------
September June March December
($'000) 30, 2009 30, 2009 31, 2009 31, 2008
-------------------------------------------------------------------------
Revenue $ 126,989 $ 124,624 $ 161,823 $ 292,789
Cost of sales and
services 95,660 96,539 137,522 255,955
-------------------------------------------------------------------------
Gross profit 31,329 28,085 24,301 36,834
Selling, general,
administrative and
other costs 9,803 10,625 6,025 12,630
-------------------------------------------------------------------------
Earnings before the
under-noted 21,526 17,460 18,276 24,204
Unrealized foreign
exchange (gain) loss (6,802) (9,147) 3,903 12,195
Depreciation and
amortization 11,086 11,272 11,165 11,240
Loss on disposal of
property, plant and
equipment 94 - - -
Net interest and
accretion expense 2,122 2,342 2,103 4,070
Income taxes (net) (4,509) (580) (216) (841)
-------------------------------------------------------------------------
Net earnings (loss) $ 19,535 $ 13,573 $ 1,321 $ (2,460)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended
------------------
September June March December
($'000) 30, 2008 30, 2008 31, 2008(1) 31, 2007(1)
-------------------------------------------------------------------------
Revenue $ 393,971 $ 274,276 $ 217,790 $ 144,580
Cost of sales and
services 346,615 230,432 182,943 110,772
-------------------------------------------------------------------------
Gross profit 47,356 43,844 34,847 33,808
Selling, general,
administrative and
other costs 5,662 13,558 13,333 10,766
Restructuring costs - - (1,238) -
-------------------------------------------------------------------------
Earnings before the
under-noted 41,694 30,286 22,752 23,042
Unrealized foreign
exchange loss (gain) 3,520 446 551 296
Depreciation and
amortization 9,893 10,145 9,845 9,051
Gain on disposal
of property (250) - - -
Net interest and
accretion expense 3,639 2,795 3,031 3,050
Income taxes (net) 5,402 3,053 (129) 1,552
Minority interest - - - (15)
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Net earnings $ 19,490 $ 13,847 $ 9,454 $ 9,108
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(1) Depreciation and amortization and net earnings have been adjusted as
a result of adopting CICA Handbook Section 3031, Inventories on a
retrospective basis.
Revenues for every quarter during 2008 were high due to exceptionally strong market conditions for sulphuric acid and sulphur. These were particularly noticeable in the International segment. Revenues during the fourth quarter of 2008 started to decline as prices for sulphuric acid and sulphur started to decline in the International markets. During the first three quarters of 2009, revenue was also negatively impacted by generally weaker demand for most products and because the Beaumont plant was off-line for part of the first quarter resulting in lower sales volume.
The strong conditions during 2008 resulted in higher earnings. The effect was less pronounced in the fourth quarter of 2008 when the Fund's largest plant located in Beaumont was off-line for the entire quarter (as described in the BEAUMONT INCIDENT section).
Selling, general, administrative and other costs (S,G&A) during the first quarter of 2008 were high as they included an accrual of
Unrealized foreign exchange losses were higher commencing with the third quarter of 2008 up to and including the first quarter of 2009 due to the impact of the weaker Canadian dollar relative to the U.S. dollar on the Fund's long-term debt which is U.S. dollar denominated. There was a corresponding unrealized gain on the Fund's U.S. dollar denominated assets, but accounting rules require that those be recorded in other comprehensive income. During the second and third quarters of 2009, the Canadian dollar strengthened relative to the U.S. dollar, thereby causing an unrealized foreign exchange gain on the Fund's long-term debt.
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
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Long-Term Debt $ 163,965 $ - $ 163,965 $ - $ -
Operating
Leases 53,741 6,876 26,326 15,620 4,919
Interest on
Long-Term Debt 14,511 7,915 6,596 - -
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Total
Contractual
Obligations $ 232,217 $ 14,791 $ 196,887 $ 15,620 $ 4,919
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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. The Fund faces various risks associated with its business. These risks include, amongst others, a general reduction in demand for its products, 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
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.
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.
Dependence on Vale Inco Relationship -
Vale Inco Limited (Vale Inco) is the Fund's largest sulphur products supplier. Effective
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 after maintenance capital expenditures 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 on Distributable cash after maintenance capital expenditures of less than
Since certain Canadian entities within the group have U.S. dollar denominated debt, unrealized gains and losses on the periodic translation of this debt are recorded in the Consolidated Statements of Earnings. However, because these are unrealized they will not affect Distributable cash after maintenance capital expenditures.
Interest Rates -
The Fund has a credit facility with term debt and operating lines of credit which bear variable rates of interest. As at
Sulphuric Acid Pricing -
A change in sulphuric acid pricing, net of freight, of
Sulphur Costs -
The Fund uses sulphur in the manufacturing of several of its products, including sulphuric acid. At current operating levels, an increase of
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.
Labour Relations -
The Fund has several collective bargaining agreements and expiry dates range from 2010 to 2014. The Fund's operations could be disrupted if new collective bargaining agreements are not concluded prior to their expiry dates.
Critical Accounting Policies
The Fund's accounting policies are described in Note 3 to the consolidated financial statements for the year ended
Use of Estimates -
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of revenue and expenses during the period. Actual results could differ from those estimates.
The pricing volatility that has been experienced in the Fund's International business could result in future results being affected by the non-performance of suppliers or customers. To the extent that such non-performance is likely, the Fund has made adequate provisions.
Goodwill and Intangible Assets -
Effective
Section 3064 carries forward the requirements of the old Section 3062, Goodwill and Other Intangible Assets with regards to the subsequent measurement of intangible assets, goodwill, and disclosure. The adoption of this section did not have an impact on the Fund's consolidated financial statements.
Fair Value of Financial Assets and Financial Liabilities -
Effective
RECENT ACCOUNTING PRONOUNCEMENTS
Convergence to International Financial Reporting Standards (IFRS) -
In 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting requirements for Canadian publicly accountable entities. The AcSB strategic plan outlines the convergence of Canadian GAAP with International Financial Reporting Standards (IFRS) over an expected five year transitional period. In
The Fund's IFRS Changeover Plan: Assessment as of September 2009:
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Key Activity Milestones Status/Deadlines
-------------------------------------------------------------------------
IFRS Conversion Scoping Review of current The review is complete
Phase standards vs. IFRS. and the determination
Identification of of financial impact
significant differences. is in progress.
Assessment of available Changes to Canadian
resources. GAAP and IFRS are
monitored and assessed
Assignment and training on an ongoing basis.
of cross-functional and
core team.
Monitoring of changes
to Canadian GAAP and
IFRS and their impact
to the Fund.
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Decisions on Accounting Formal review of Most review sessions
Policies and IFRS1 differences in each have been completed.
area with the core
team and members of Some IFRS1 and
cross-functional team accounting policy
as required. choice decisions made.
Assessment of The Fund will continue
differences between review sessions
IFRS and the Fund's through 2009.
current practices.
Decision on accounting
policy choices and
IFRS1 for each
assessed area.
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Information Technology Identification of IT The Fund has upgraded
Evaluation requirements, both its ERP software in
hardware and software, readiness for IFRS and
for IFRS conversion. believes that minimal
further IT changes
Development of will be required.
implementation plan
for new or upgraded
software and any
additional hardware
required.
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Control Environment: Review and assessment As the Fund completes
Internal Control Over of impact of accounting reviews and
Financial Reporting policy choices and assessments of
and Disclosure changes relating to accounting sections
Controls and Procedures IFRS conversion. and makes decisions
on accounting policies
Update of internal and IFRS1 choices,
control testing appropriate changes to
procedures and ensure the integrity
documentation for all of internal control
accounting policy over financial
choices and changes. reporting and
disclosure controls
Implementation of and procedures are
appropriate changes: being made.
- MD&A Disclosure
Requirements
- Key Performance
Indicators
- Investor Relations
Communication
Process
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Financial Statement Identification of Skeleton financial
Preparation transactions impacted statements will be
by IFRS conversion. developed in 2010.
An assessment of these
transactions,
appropriate changes
and re-mapping will
be completed.
The assessment and
re-mapping will form
the skeleton of the
IFRS compliant
financial statements.
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Financial Impact Analysis of Quantification of
Analysis for differences between differences between
Transactional Areas Canadian GAAP and IFRS Canadian GAAP and IFRS
that was completed will be completed
will be quantified. during 2010.
Senior Management and
external auditors to
review and sign-off.
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Business Activities Identification of Assessments and
Impact impacts on business identifications of
activities to be impacts of the
completed. conversion to IFRS
are underway.
Completion of any
re-negotiations. Identification of
impacts is to be
completed during 2010
and any necessary
re-negotiations are
to be completed during
that period.
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Business Combinations -
In
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL
REPORTING
The Fund maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Fund publicly files is recorded, processed, summarized and reported within a timely manner and that such information is accumulated and communicated to the Fund's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer have evaluated the Fund's disclosure controls procedures as of
The Fund also maintains a system of internal controls over financial reporting designed under the supervision of the Fund's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. There have been no changes in the Fund's systems of internal controls over financial reporting that would materially affect, or are reasonably likely to materially affect, the Fund's internal controls over financial reporting.
OUTLOOK
Demand for our products appears to have stabilized, albeit at lower levels than 2008. We are well positioned to benefit from an increase in demand, although in the current economic environment it remains difficult to accurately forecast demand levels. We continue to obtain sulphuric acid from alternate sources, as Vale Inco, our largest supplier of sulphuric acid is undergoing a labour disruption. Currently we do not expect this event to cause any disruption in our ability to supply our customers.
Our business model and some of our contracts mitigate the effects of certain commodity movements. However, a sustained decrease in demand similar to that seen in the first nine months of the year has adversely affected Chemtrade and will continue to do so to the extent it persists. We continue to maintain a healthy balance sheet and ample liquidity. The nature of our business model as demonstrated by the strength of our businesses even in times of low demand and price volatility, coupled with our strong balance sheet, are more than sufficient to sustain our current distribution rate.
OTHER
Additional information concerning the Fund, including the Annual Information Form, is filed on SEDAR and can be accessed at www.sedar.com.