CHEMTRADE LOGISTICS INCOME FUND REPORTS 2010 FOURTH QUARTER AND FULL YEAR RESULTS

TORONTO, Feb. 23 /CNW/ - Chemtrade Logistics Income Fund (TSX: CHE.UN) today announced results for the three months and year ended December 31, 2010.   

Cash flow from operating activities for the fourth quarter was $6.2 million (2009:  $25.4 million) and distributable cash after maintenance capital expenditures for the period was $8.5 million, or $0.28 per unit (2009:  $12.7 million, or $0.41 per unit), generated from revenue of $151.3 million (2009:  $132.8 million).  The revenue increase in the quarter reflects the improved demand and volume over last year for sulphuric acid and higher sulphur prices.  EBITDA for the fourth quarter was $16.3 million (2009:  $24.1 million) and net earnings were $11.9 million compared with $12.5 million in the same period in 2009.  

For the year ended December 31, 2010 cash flows from operating activities were $60.5 million (2009:  $41.1 million), and distributable cash after maintenance capital expenditures was $41.0 million (2009:  $44.9 million), or $1.34 per unit (2009:  $1.46 per unit).  EBITDA was $76.4 million (2009:  $81.3 million), and revenue was $558.1 million (2009:  $546.2 million).  Net earnings for the year were $34.9 million (2009:  $46.9 million).  EBITDA in 2010 was lower than in 2009 mainly due to the impact of the Beaumont incident, timing of insurance recoveries related to the Beaumont incidents and lower International results.  The lower level of net earnings in 2010 relative to 2009 reflected unrealized foreign exchange gains of $10.9 million in 2009, whereas a loss of $0.3 million was recorded in 2010.

Mark Davis, President and Chief Executive Officer of Chemtrade, said "Demand for most of our products was higher in 2010 than in 2009 and strengthened as the year progressed.  Demand levels for sulphuric acid, our major product by volume, improved throughout 2010.  The full benefit of these improved conditions is not reflected in our results because of reduced supply from Vale and our Beaumont plant which are two of our major supply sources.  Despite this reduced supply and the resultant increased supply chain costs, distributable cash for 2010 was $1.34 per unit, comfortably ahead of our distributions of $1.20 per unit."  Mr. Davis also noted that during the year Chemtrade enhanced its long term sustainability and strengthened its balance sheet.  Chemtrade's long term agreements with Canfor and ZhongCheng were extended to 2018 and 2016, respectively, and the Fund's balance sheet was strengthened with a successful $90.0 million convertible debenture issue.

Sulphur Products & Performance Chemicals (SPPC) generated revenue of $82.4 million in the fourth quarter compared with $68.6 million in the fourth quarter of 2009.  The increase in revenue reflected significantly higher volume of sulphuric acid and higher prices for sulphur during the quarter, which more than offset the negative impact of the weaker U.S. dollar.  EBITDA for the fourth quarter was $18.4 million, compared with $20.7 million.  The lower EBITDA for the fourth quarter reflected the fact that Beaumont was off-line for approximately half of the fourth quarter, and costs to keep customers supplied continued to be incurred.  As well, insurance recoveries were $5.3 million lower in 2010 than in 2009, when an insurance claim related to the 2008 incident at Beaumont was settled.

Pulp Chemicals reported fourth quarter revenue of $12.9 million compared with $13.4 million in 2009 and EBITDA was $3.8 million, compared with $5.2 million in 2009.  The main reason for the decreases was lower sales volume of sodium chlorate. 

International reported revenue of $56.0 million for the fourth quarter compared with $50.7 million in 2009.  The higher revenue reflected higher prices for sulphur.  EBITDA was $4.5 million in the fourth quarter compared with $16.2 million in 2009.  The fourth quarter of 2009 was exceptionally strong due to customers honouring commitments on certain contacts where they had previously delayed delivery. 

Corporate costs of $10.3 million during the fourth quarter of 2010 were significantly lower than the $18.0 million in the fourth quarter of 2009, which included an accrual of $10.0 million related to LTIP.  In the fourth quarter of 2010, the accrual was $5.8 million lower.  Additionally, during the fourth quarter of 2010, foreign exchange gains were $0.3 million compared with a loss of $1.1 million during the fourth quarter of 2009.

Mr. Davis said, "The strength of our businesses and business model was evident in 2010 as we successfully dealt with significant challenges to our supply base.  At the same time, we continued to strengthen and position the business for continued success.  Demand for our products remains strong early in 2011 and looking forward, we expect prices to continue to slowly increase.  The return of Beaumont to normal production levels will provide us with additional supply, which should be beneficial in an improving market.  With these improved economic and operating conditions, together with our solid balance sheet, we remain confident that the current distribution rate is sustainable."

Distributions

Distributions declared in the fourth quarter totalled $0.30 per unit, comprised of monthly distributions of $0.10 per unit.

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.  These statements are based on a number of material factors and assumptions and involve known and unknown risks and uncertainties that may cause actual results or events to differ materially from those anticipated in such forward-looking statements.  As a result, we cannot guarantee that any forward-looking statement will materialize.  Forward-looking statements in this news release describe the expectations of Chemtrade as of the date of this news release.  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 expected price levels of our products going forward;
  • the certainty and amount of additional supply and Chemtrade's ability to profit therefrom; and
  • the sustainability of the Fund's distribution rate.

Financial outlook information contained in this news 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 news 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 fourth quarter and full year 2010 results will be webcast live on www.chemtradelogistics.com and www.newswire.ca/webcast on Thursday, February 24, 2011 at 10:00 a.m.

# # # #

CHEMTRADE LOGISTICS INCOME FUND
Consolidated Balance Sheets
(in thousands of dollars)

  December 31, 2010   December 31, 2009
       
ASSETS      
       
Current assets      
      Cash and cash equivalents       $ 27,856         $ 19,885
      Accounts receivable (note 4)             85,980               75,748
      Inventories (note 5)             25,136               20,107
      Prepaid expenses and other assets (note 18(b))             2,140               2,284
       
              141,112               118,024
       
Restricted cash (note 7(a))             2,135               2,599
Notes receivable (note 6)             2,487               2,627
Property, plant and equipment (note 7)             141,016               156,960
Other assets (note 16(a))             2,635               2,164
Future tax asset (note 14)             23,052               14,084
Intangibles (note 8)             85,615               108,389
Goodwill (note 8)             87,859               90,630
       
        $ 485,911         $ 495,477
       
LIABILITIES AND UNITHOLDERS' EQUITY      
       
Current liabilities      
      Accounts payable       $ 47,435         $ 42,918
      Accrued and other liabilities (notes 11(g) and 18(b))             50,716               42,920
      Distributions payable             3,067               3,067
      Income taxes payable             2,330               2,855
      Current portion of long-term bank debt (note 9)             75,776               -
       
              179,324               91,760
       
Long-term bank debt (note 9)             -               160,105
Convertible unsecured subordinated debentures
   (note 10)
                              76,964                                 -
Other long-term liabilities (notes 11(g) and 18(b))             11,851               19,075
Post-employment benefits (note 15)             3,951               4,051
Future tax liability (note 14)             12,063               20,082
       
Unitholders' equity                   
      Units (note 11(b))             377,144               377,144
      Contributed surplus (note 11(c))             9,720               9,720
      Equity component of convertible debentures   (note 11(d))             10,151               -
      Deficit             (144,972)               (143,112)
      Accumulated other comprehensive (loss)
      (note 12)
            (50,285)               (43,348)
       
              201,758               200,404
       
Subsequent event (note 21)      
Commitments and contingencies (note 16)      
        $ 485,911         $ 495,477
See accompanying notes to consolidated financial statements.      

CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Earnings
(in thousands of dollars, except per unit amounts) 

  Year ended
December 31, 2010
  Year ended
December 31, 2009
       
Revenue       $ 558,070         $ 546,192
       
Cost of sales and services (excluding depreciation disclosed below)             436,090                                 422,010
       
Gross profit             121,980               124,182
       
Selling, general, administrative and other costs
(note 13)
            45,978               42,863
       
Earnings before the under-noted             76,002               81,319
       
Unrealized foreign exchange loss (gain) and  ineffectiveness of cash flow hedges             275               (10,937)
Debt extinguishment costs (note 9)             699               -
Depreciation and amortization             44,199               44,146
Loss on disposal of property, plant and  equipment             -               79
Net interest and accretion expense (notes 9 and 10)             10,369               8,693
       
Earnings before income taxes             20,460               39,338
       
Income taxes (note 14)                         
      Current             2,537               3,040
      Future             (17,022)               (10,622)
       
              (14,485)               (7,582)
       
Net earnings       $ 34,945         $ 46,920
       
       
Net earnings per unit (note 11(e))      
Basic       $ 1.14         $ 1.52
Diluted       $ 1.14         $ 1.52
       
Cost of sales and services for the year ended December 31, 2010 does not include $21,963 (2009 - $22,412) 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)

    Year ended
December 31, 2010
  Year ended
December 31, 2009
         
Units        
Balance, beginning of year $      377,144        389,932
Re-purchase of units (note 11(c))               -                (12,788)
Balance, end of year $       377,144        377,144
                                   
Contributed surplus        
Balance, beginning of year $      9,720       5,272
Re-purchase of units (note 11(c))               -               4,448
Balance, end of year $      9,720       9,720
         
Equity component of convertible debentures        
Balance, beginning of year $       -        -
Issuance of debentures (notes 10 and 11(d))               10,151               -
Balance, end of year $     10,151         -
         
Deficit        
Balance, beginning of year $      (143,112)        (153,141)
Net earnings               34,945               46,920
Distributions               (36,805)               (36,891)
Balance, end of year $       (144,972)        (143,112)
         
Accumulated other comprehensive (loss) (note 12)        
Balance, beginning of year $       (43,348)        (24,127)
Other comprehensive (loss)               (6,937)                     (19,221)
Balance, end of year $      (50,285)        (43,348)
         
See accompanying notes to consolidated financial statements.        

Consolidated Statements of Comprehensive Income
(in thousands of dollars)

  Year ended
December 31, 2010
  Year ended
December 31,2009
       
Net earnings       $ 34,945         $ 46,920
       
Change in unrealized loss on translation of self-sustaining foreign operations             (8,910)               (21,524)
Change in unrealized loss on derivatives designated as cash flow hedges             564               397
Losses on derivatives designated as cash flow hedges in prior years transferred to net income in the current year             1,409               1,906
Other comprehensive (loss)             (6,937)               (19,221)
       
Comprehensive income       $ 28,008         $ 27,699
       
See accompanying notes to consolidated financial statements.      

CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Cash Flows
(in thousands of dollars)

  Year ended
December 31, 2010
  Year ended
December 31, 2009
Cash provided by (used in):      
       
Operating activities:      
      Net earnings       $ 34,945         $ 46,920
      Items not affecting cash:      
        Depreciation and amortization             44,199               44,146
        Future income taxes             (17,022)               (10,622)
        Accretion expense             1,603               575
        Loss on disposal of property, plant and  equipment             -               79
        Gain on property damage claim (note 4)             (5,317)               (2,671)
        Change in fair value of derivatives and  unrealized foreign exchange loss (gain)             (189)               (9,813)
       
              58,219               68,614
       
Decrease (increase) in working capital             2,298               (27,481)
       
              60,517               41,133
       
Financing activities:      
      Distributions to unitholders             (36,805)               (37,003)
      Re-purchase of units (note 11(c))
-     
              (8,340)
      Re-payment of long-term bank debt             (79,189)  
-     
      Issuance of convertible debentures             90,000               -
      Financing transaction costs             (4,223)               -
      Debt extinguishment costs             (3,217)               -
      (Decrease) increase in other long-term liabilities             (4,045)               6,330
       
              (37,479)               (39,013)
       
Investing activities:      
      Decrease in restricted cash             465               181
      Additions to property, plant and equipment, net of insurance proceeds (note 4)             (15,531)               (24,706)
      Acquisitions (note 7(a))             -               (6,106)
      Proceeds from disposal of property, plant and equipment             -               279
       
              (15,066)               (30,352)
       
Effect of exchange rates on cash held in foreign currencies             (1)               67
       
       
Increase (decrease) in cash and cash equivalents             7,971               (28,165)
             
Cash and cash equivalents - beginning of year             19,885               48,050
       
Cash and cash equivalents - end of year       $ 27,856         $ 19,885
       
Supplemental information:      
      Cash taxes paid       $ 3,062         $ 8,343
      Cash interest paid       $ 8,494         $ 8,901
       
See accompanying notes to consolidated financial statements.      

CHEMTRADE LOGISTICS INCOME FUND
Notes to Consolidated Financial Statements
(in thousands of dollars, except amounts per tonne)

Years ended December 31, 2010 and 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 and Performance Chemicals (SPPC), Pulp Chemicals, International and Corporate.  For additional information regarding the Fund's business segments see note 17.

2. RECENT ACCOUNTING PRONOUNCEMENTS:

(a) Convergence to International Financial Reporting Standards:

In February 2008, the Accounting Standards Board of the Canadian Institute of Chartered Accountants (CICA) confirmed that the use of International Financial Reporting Standards (IFRS) established by the International Accounting Standards Board will be required for fiscal years beginning January 1, 2011 for publicly accountable enterprises.  IFRS will replace Canada's current generally accepted accounting principles (GAAP).  The Fund has completed its convergence to IFRS. 

(b) 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.  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.  The Fund will apply these sections prospectively from January 1, 2011 onwards.

3. SIGNIFICANT ACCOUNTING POLICIES:

These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada.

(a) Basis of consolidation:

These consolidated financial statements include the accounts of the Fund and its wholly owned subsidiaries from their respective dates of acquisition.  The principal operating subsidiaries are:  Chemtrade Logistics Inc., Chemtrade Logistics (US), Inc., Chemtrade Aglobis AG (formerly BCT Chemtrade Corporation), Chemtrade Aglobis GmbH (formerly Kemmax GmbH), Ruhrtrans GmbH, Chemtrade Performance Chemicals Canada Inc., Chemtrade Performance Chemicals US, LLC, Chemtrade Pulp Chemicals Limited Partnership, Chemtrade Refinery Services Inc., Chemtrade Phosphorous Specialties L.L.C. and Alliance Specialty Chemicals, Inc.  All significant inter-company balances and transactions have been eliminated for the purposes of these consolidated financial statements.

(b) Cash and cash equivalents:

Cash equivalents are comprised of highly liquid investments having original terms to maturity of 90 days or less when acquired and are valued at fair value.  There were no cash equivalents held at December 31, 2010 and 2009.

(c) Inventories:

Finished goods are valued at the lower of average cost and net realizable value.  Average cost includes 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.  Raw material inventory is recorded at the lower of cost determined on a first-in, first-out basis, and net realizable value.

(d) Property, plant and equipment:

Property, plant and equipment are depreciated on a straight-line basis with buildings depreciated over 5 to 20 years, equipment depreciated over 5 to 15 years, and furniture and other equipment depreciated over three to five years.

Facilities and equipment under construction do not begin to be depreciated until substantially complete and ready for productive use.

(e) Goodwill:

Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values.  Goodwill is allocated as of the date of the business combination to the Fund's reporting units that are expected to benefit from the synergies of the business combination.

Goodwill is not amortized and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.  The impairment test is carried out in two steps.  In the first step, the carrying amount of the reporting unit is compared with its fair value.  When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary.  The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit's goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any.  The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination described in the preceding paragraph, using the fair value of the reporting unit as if it was the purchase price.  When the carrying amount of reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item in the Consolidated Statements of Earnings.

(f) Intangibles:

Intangibles include the estimated value at the date of acquisition of long-term customer and vendor relationships and other intangible assets.  Intangibles associated with these relationships are amortized on a straight-line basis over 6 to 15 years and other intangible assets are amortized on a straight-line basis over five years.

(g) Impairment of long-lived assets:

Long-lived assets, including property, plant and equipment and intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets is measured by comparing the carrying amount of an asset with the estimated undiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

(h) Income taxes:

The Fund uses the asset and liability method of accounting for income taxes.  Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Future tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  A valuation allowance is recorded against a future income tax asset if it is not anticipated that the asset will be realized in the foreseeable future.  The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment.

(i) Post-employment benefits:

The Fund provides health care and pension benefits for certain employees upon retirement.  The Fund accrues these employee future benefits over the periods from the date of hire to the full eligibility date.  The cost of employee future benefits is actuarially determined using the accumulated benefit method pro-rated based on service.  These actuarial valuations are prepared at least every three years, with the most recent one valuing the obligation as at December 31, 2010.

(j) Unit based compensation:

The Fund operates a Total Return Long-Term Incentive Plan (TR LTIP) which grants cash awards based on achieving total Unitholder return.  Total Unitholder return is the aggregate of unit price changes and per unit distributions paid to Unitholders over the performance period.  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 compensation cost accrued during the performance period is not adjusted below zero.  For any forfeiture of awards, accrued compensation costs are adjusted by decreasing compensation costs in the period of forfeiture.

(k) Foreign currency translation:

The accounts of the Fund's foreign operations, whose functional currency is U.S. dollars, are considered to be self-sustaining and are translated into Canadian dollars using the current rate method.  Assets and liabilities are translated at the rates in effect at the balance sheet date and revenue and expenses are translated at average exchange rates for the period.  Gains or losses arising from the translation of the financial statements of self-sustaining foreign operations are deferred in accumulated other comprehensive income (loss) until there is a realized reduction in the net investment.

Transactions in foreign currencies are recorded at the rate in effect at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies have been translated into Canadian dollars at the rate of exchange in effect at the balance sheet date and gains or losses are recognized in earnings.

(l) Revenue recognition:

Revenue from the sale of products is recognized upon shipment to, or receipt by customers, depending on contractual terms.  Revenue earned on processing services is recognized when the services have been rendered in accordance with contractual terms.  Revenue on the sale of certain commodities within the International segment is recorded on a net basis.  In all cases, revenue is only recognized when selling prices have been fixed or are determinable, and collection is reasonably assured.

(m) Asset retirement obligations:

The fair value of estimated asset retirement obligations is recognized when identified and a reasonable estimate of fair value can be made.  The asset retirement cost, equal to the estimated fair value of the asset retirement obligation, is capitalized as part of the cost of the related long-lived asset.  The asset retirement costs are depreciated over the asset's estimated useful life and included in depreciation and amortization expense.  Increases in the asset retirement obligation resulting from the passage of time are recorded as accretion of asset retirement obligation.  Actual expenditures incurred are charged against the accumulated obligation.

At December 31, 2010, $610 (2009 - $606) has been included in other long-term liabilities.

(n) Financial instruments:

Financial instruments are classified into one of these five categories:  held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. 

All financial instruments, including embedded derivatives, are initially recorded on the balance sheet at fair value.  The Fund's own credit risk and the credit risk of the counter-party are taken into account in determining the fair value of financial assets and financial liabilities, including the derivative instruments.  After initial recognition, the financial instruments are measured at their fair values, except for held-to-maturity investments, loans and receivables and other financial liabilities, which are measured at amortized cost.  The effective interest related to the financial liabilities and the gain or loss arising from the change in the fair value of a financial asset or liability classified as held-for-trading is included in net earnings for the period in which it arises.  If a financial asset is classified as available-for-sale, the gain or loss is recognized in other comprehensive income until the financial asset is de-recognized and all cumulative gain or loss is then recognized in net income.

The Fund has classified its cash and cash equivalents, restricted cash and notes receivable as held-for-trading, which are measured at fair value.  Accounts receivable are classified as loans and receivables, which are measured at amortized cost.  Operating line of credit, accounts payable, accrued and other liabilities, distributions payable, current portion of long-term bank debt, long-term bank debt and convertible unsecured subordinated debentures are classified as other financial liabilities, which are measured at amortized cost, using the effective interest method.  The Fund had neither available-for-sale, nor held-to-maturity investments at the year ended December 31, 2010 or 2009. 

Transaction costs that are directly attributable to the acquisition or issuance of financial assets or liabilities are accounted for as part of the respective asset or liability's carrying value at inception.  Transaction costs are expensed to net interest and accretion expense using the effective interest method over the life of the financial asset or liability.  Costs considered as commitment fees paid to financial institutions are recorded in other assets, and amortized on a straight-line basis over the term of the commitment. 

Derivative financial instruments are utilized by the Fund in the management of its foreign currency, commodity commitments and interest rate exposures.  The Fund's policy is not to utilize derivative financial instruments for trading or speculative purposes. The Fund formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions.  The Fund also formally assesses, both at the hedge's inception and on an on-going basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income.  Upon settlement, the cumulative gain or loss is recognized in net earnings.  Any gain or loss in fair value relating to the ineffective portion is recognized immediately in the Consolidated Statements of Earnings in unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges.  All derivative instruments that do not qualify for hedge accounting, or are not designated as a hedge, are recorded as either an asset or liability with changes in fair value recognized in earnings.

Prior to June 29, 2010, the Fund had designated hedge accounting for interest swap arrangements.  As at June 29, 2010, the Fund de-designated its remaining swap arrangements as cash flow hedges.  The Fund's foreign exchange contracts, natural gas forward contracts and commodity forward contracts have not been designated for hedge accounting.

(o) 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.  Significant judgements and estimates include provisions for non-performance of customer and supplier contracts, allowance for doubtful accounts, insurance recoveries, TR LTIP, goodwill and intangibles.

4. INSURANCE CLAIMS:

During the second quarter of 2010, a fire occurred at the Fund's Beaumont, Texas facility. Currently, it is not possible to estimate the amount of income the Fund has lost or the expected amount of recovery the Fund will receive under its business interruption insurance policies and therefore as at December 31, 2010, no receivable for insurance recovery has been recorded. During the year ended December 31, 2010, the Fund received a partial payment of US$3,000 related to its business interruption claim.  The related income has been recorded as a reduction to selling, general, administrative and other costs in the SPPC segment.  Insurance recoveries are recorded when the amount of the recovery has been agreed with the insurer or when payments are received. The Beaumont plant was back on-line in October 2010.

During the second and third quarters of 2010, the Fund wrote-off the value of equipment that was damaged in the fire.  The costs to repair and replace these assets are recoverable under the Fund's property insurance policy.  The Fund anticipates incurring capital expenditures of approximately US$12,600 relating to the repair and replacement of the damaged property at the Beaumont facility.  The Fund has been reimbursed US$7,000 from its insurer related to these costs prior to December 31, 2010 and the balance has been included in Accounts receivable at December 31, 2010.  Since the repair costs to-date have 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 $5,317.  This gain was included in selling, general, administrative and other costs in the SPPC segment.  The Fund also recovered $517 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.

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 settled the property damage and the business interruption insurance claim with its insurer. 

During 2009, the Fund received payments of US$5,500 and recorded a receivable of US$5,140 at December 31, 2009 related to its business interruption claim.  The related income was recorded as a reduction to 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 and replacement of the damaged property at the Beaumont facility.  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 $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.

5. INVENTORIES:    
                                                                                                                           2010 2009 
  Raw materials and work in process  $ 5,328  $ 3,465
  Finished goods   17,222  13,924
  Operating supplies  2,586  2,718
    $ 25,136  $ 20,107

6. NOTES RECEIVABLE:
   


The Fund has invested US$2,500 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.  The investment was made in the form of convertible notes, convertible into 10% of the equity of Meranol.  The notes bear an interest rate of 10% per annum. 

7. PROPERTY, PLANT AND EQUIPMENT:      
    2010   2009
         
  Land $ 3,904   $ 4,102
  Plant and equipment       262,423         270,621
  Facilities and equipment under construction       24,512         19,837
          290,839         294,560
  Accumulated depreciation       (149,823)         (137,600)
  Property, plant and equipment $ 141,016   $ 156,960
         
  Depreciation expense $ 23,639   $ 24,278
  (a) Alliance Specialty Chemicals, Inc.:
   
  On October 2, 2009 the Fund completed the purchase of the outstanding shares of Alliance Specialty Chemicals, Inc. (Alliance) for $6,106 (US$5,630).  The Fund incurred transaction related costs of $150 (US$138).
   
  The acquisition has been accounted for as an acquisition of assets.  These consolidated financial statements reflect the acquired assets at assigned fair values as follows:
   
  Restricted cash        $ 2,781
  Property, plant and equipment        3,325
         
  Consideration paid in cash        $ 6,106
         
  Restricted cash is restricted for reimbursement of significant non-routine maintenance costs at one of the Fund's facilities.  The amount of restricted cash as at December 31, 2010 was $2,135 (2009 - $2,599).

8. INTANGIBLES AND GOODWILL:

Intangibles     2010         2009
           
Intangibles subject to amortization:      
Customer relationships     $ 177,877   $ 198,884
  Vendor relationships           7,731         8,160
  Other           597         631
            186,205         207,675
Accumulated amortization           (100,590)         (99,286)
Intangibles     $ 85,61   $ 108,389
           
Amortization expense $ 20,560   $ 19,868



During the second quarter of 2010, the Fund recorded impairment losses of $2,108 related to its intangible assets. This impairment loss was recorded to depreciation and amortization within the Pulp business segment.These intangible assets were related to certain impaired customer relationships that had been recognized at the time of the acquisition of the business in 2003.

The decrease in goodwill of $2,771 is due to translation of goodwill of foreign operations.

9. LONG-TERM DEBT:

      2010   2009
           
Term bank debt          
US$76,368 (2009 - US$153,138)           $ 75,956         $ 160,948
Less:  Transaction costs                 (180)               (843)
                  75,776               160,105
Less:  Current portion of long-term bank debt                 (75,776)               -
Long-term bank debt           $ -         $ 160,105



During 2010, the Fund utilized a portion of the net proceeds of the convertible unsecured subordinated debentures offering (see Note 10) to repay $79,189 (US$76,770) of its existing long-term debt.  The Fund realized a foreign exchange loss of $215 and wrote-off the remaining transaction costs related to the portion of the long-term debt repaid in the amount of $270, both of which are included in debt extinguishment costs on the Consolidated Statements of Earnings.

The Fund also collapsed the interest rate swap arrangements related to the portion of its long-term bank debt that was repaid.  As a result of collapsing these arrangements, the Fund had to pay $3,217 to settle the arrangements; however, it recognized a loss of only $214 due to amounts previously recognized in net income.  This loss has been recorded in debt extinguishment costs on the Consolidated Statements of Earnings. 

The Fund's senior credit facilities mature in August 2011.  Borrowings under these facilities may be made in Canadian or U.S. dollars.  The term bank debt facility and the operating lines are secured by a fixed and floating charge on the assets of the Fund and certain of its subsidiaries. 

The bank agreement contains various financial covenants that if not complied with, could result in a restriction on funds available for distribution.

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. The weighted average effective annual interest rate at December 31, 2010 on the Fund's term bank debt was 4.45%.

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.  Prior to June 29, 2010, this value was being amortized on a straight-line basis over the remaining term of the term bank debt in unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges.  As at June 29, 2010, the Fund de-designated its remaining swap arrangements as cash flow hedges. Starting in the third quarter of 2010, the Fund is amortizing the remaining amount in Accumulated Other Comprehensive Income related to the swap arrangements to the Consolidated Statements of Earnings over the remaining term of the swap arrangements.

10. CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES:

During the first quarter of 2010, the Fund entered into an agreement with a syndicate of underwriters to issue $80,000 principal amount of convertible unsecured subordinated debentures (the Debentures).  During the second quarter of 2010, as allowed under provisions of the agreement to issue the Debentures, the underwriters purchased an additional $10,000 principal amount of the Debentures, increasing the aggregate gross proceeds of the public offering to $90,000.  The Fund incurred transaction costs of $4,223, which included the underwriters' fee and other expenses of the offering.

The Debentures bear interest at a rate of 6% per annum and are convertible, at the option of the holder, into units of the Fund at any time prior to the maturity date and may be redeemed by the Fund in certain circumstances.

Upon issuance, the Debentures were separated into liability and equity components based on the respective estimated fair values at the date of issuance.  The fair value of the liability component is estimated based on the present value of future interest and principal payments due under the terms of the Debentures using a discount rate for similar debt instruments without a conversion feature.  The value assigned to the equity component is the estimated fair value ascribed to the holder's option to convert.  Interest expense on the Debentures is determined by applying an effective interest rate to the outstanding liability component.  The difference between actual cash interest accrued and interest expense is accreted to the liability component.

The following table allocates the Debentures between debt and equity:

  Cost of Borrowing Debt Equity Total
         
Convertible debentures 6.0%       $ 79,507       $ 10,493       $ 90,000
Transaction costs (1)(2)               (3,731)             (342)             (4,073)
At issuance               75,776             10,151             85,927
Accretion expense               1,188             -             1,188
As at December 31, 2010         $ 76,964       $ 10,151       $ 87,115

(1) Transaction costs are capitalized and offset with the debt and equity portions of the debentures.  The costs allocated to the debt portion are being amortized over the life of the debentures using the effective interest rate.

(2) Transaction costs offset against the equity portion of the convertible debentures are net of income tax recovery of $150.

For the year ended December 31, 2010, the net interest expense was $5,349, comprised of accrued interest of $4,161 and accretion expense of $1,188.

11. UNITS:

(a)     Authorized:

Unlimited number of units.

(b)     Outstanding:

  Number of
Units
2010
Amount
Number of
Units
2009
Amount
Units        
  Balance - beginning of year 30,670,470       $ 377,144 31,710,410       $ 389,932
  Units re-purchased for cancellation (note 11(c)) -                         - (1,039,940)   (12,788)
Balance - end of year 30,670,470       $ 377,144 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 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.

(d) Equity component of convertible debentures:

As described in Note 10, during the first quarter of 2010, the Fund entered into an agreement to issue $80,000 principal amount of Debentures.  During the second quarter of 2010, as allowed under provisions of the agreement to issue the Debentures, the underwriters purchased an additional $10,000 principal amount of the Debentures, increasing the aggregate gross proceeds of the public offering to $90,000.  The Debentures are convertible, at the option of the holder, into units of the Fund.

For the year ended December 31, 2010, there were no Debentures converted into units.

(e) Net earnings per unit:

Net earnings per unit has been calculated on the basis of the weighted average number of units outstanding.

Numerator
  Year Ended
  December 31, 2010 December 31, 2009
     
Net earnings       $ 34,945       $ 46,920
Net interest and accretion expense
      on convertible debentures (1)
            -             -
Diluted net earnings       $ 34,945       $ 46,920

(1) For the year ended December 31, 2010, the potential conversion of the convertible debentures has not been included as the effect on net earnings per unit would be anti-dilutive.

Denominator
  Year Ended
  December 31, 2010 December 31, 2009
     
Weighted average number of units             30,670,470             30,818,352
Weighted average convertible
      debenture dilutive units (1)
            -             -
Weighted average number of
      diluted units
            30,670,470             30,818,352

(1) For the year ended December 31, 2010, the effect of conversion of the convertible debentures has not been included as the effect on net earnings per unit would be anti-dilutive.

(f) Distributions:

Distributions paid for the year ended December 31, 2010 were $36,805 (2009 - $37,003).  All of the Fund's distributions are discretionary.

(g) Long-term incentive plan:

The Fund operates a 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 year ended December 31, 2010, the Fund recorded an expense of $10,598 (2009 - $12,545) related to the TR LTIP.  As at December 31, 2010 a liability of $21,400 (2009 - $15,979) has been recorded, of which $10,700 (2009 - $5,177) is included in Accrued and other liabilities and $10,700 (2009 - $10,802) is included in Other long-term liabilities.

12. ACCUMULATED OTHER COMPREHENSIVE (LOSS):

The components of accumulated other comprehensive (loss) as at December 31, 2010 and 2009 and other comprehensive (loss) for the year ended were as follows:

Accumulated other comprehensive (loss)   Balance December 31, 2008   Net change   Transferred to net earnings   Balance December 31, 2009   Net change   Transferred to net earnings   Ending balance December 31, 2010
                             
Unrealized (loss) gain on  translation of self- sustaining foreign  operations (note 3(k)) $        (19,411) $        (21,524) $        - $       (40,935) (1) $       (8,910) $       - $       (49,845) (1)
(Loss) gain on  derivatives  designated as cash  flow hedges               (4,716)               397           1,906 (2)               (2,413) (3)               564               1,409 (2)               (440) (3)
Accumulated other  comprehensive (loss) $       (24,127) $        (21,127) $       1,906 $        (43,348) $       (8,346) $        1,409 $        (50,285)

(1) Net of income tax expense of $nil (2009 - $nil).

(2) Ineffectiveness of cash flow hedges and losses on derivatives designated as cash flow hedges in prior years transferred to net earnings in the current year.

(3) Net of cumulative income tax recovery of $237 (2009 - $2,266).

13. SELLING, GENERAL, ADMINISTRATIVE AND OTHER COSTS:

Selling, general, administrative and other costs include a net foreign exchange gain of $1,068 (2009 - $1,809).

14. INCOME TAXES:

The Fund is a mutual fund trust for income tax purposes and will be a specified investment flow-through trust (SIFT) for years commencing after 2010.  As such, prior to January 1, 2011 the Fund is only subject to current income taxes on any taxable income not distributed to Unitholders.  Subsequent to December 31, 2010, the Fund will be subject to current income taxes on any taxable income not distributed to Unitholders and on all taxable income earned from Canadian corporate and flow-through subsidiaries, other than dividends from Canadian corporate subsidiaries distributed to Unitholders.  The Fund will not be subject to tax on income received from non-Canadian subsidiaries distributed to Unitholders. 

Taxable income distributed by the Fund to its Unitholders will be taxable income of those Unitholders.

The provision for income taxes in the consolidated statements of operations and deficit represents an effective rate different than the Canadian corporate statutory rate of 30.6% (2009 - 32.2%).  The differences are as follows:

  2010 2009
     
Earnings before income taxes       $ 20,460       $ 39,338
     
Computed income tax expense at Canadian statutory rate             6,261             12,667
     
Increase (decrease) resulting from:    
   Income of trust taxed directly to unitholders             (10,886)             (15,437)
   Non-deductible goodwill and other intangibles             248             262
   Difference in substantially enacted tax rate             506             285
   International income tax rate differences             (5,611)             (6,506)
   Change in valuation allowance             (4,506)             1,461
   Other             (497)             (314)
Income tax (recovery) expense       $ (14,485)       $ (7,582)

The tax effect of temporary differences of the Fund's corporate subsidiaries that give rise to significant portions of future tax assets and future tax liabilities are presented below:

  2010 2009
     
Non-current future tax assets:    
  Inventories       $ 788       $ 616
  Loss carry forwards             54,829             44,992
  Issuance costs             772             900
  Long-term incentive plan and incentive compensation             6,803             5,135
  Interest             12,670             12,273
  Asset retirement obligations             244             229
  Derivatives             827             1,985
  Allowance for doubtful accounts             1,323             1,803
  Unrealized foreign exchange             2,371             1,545
  Deferred charges             96             -
  Other             843             785
              81,566             70,263
  Valuation allowance             (38,906)             (36,814)
Total future tax assets             42,660             33,449
     
Non-current future tax liabilities:    
  Property, plant and equipment             20,178             23,840
  Intangible assets             10,730             14,829
  Ground lease             763             698
  Deferred charges             -             80
Total future tax liabilities             31,671             39,447
     
Net future tax asset (liability)       $ 10,989       $ (5,998)
     
Classified in the financial statements as:    
  Future non-current tax asset       $ 23,052       $ 14,084
  Future non-current tax liability             (12,063)             (20,082)
Net future tax asset (liability)       $ 10,989       $ (5,998)

In 2010, a valuation allowance recovery of approximately $5,992 was recorded to recognize future tax assets of a Canadian subsidiary.  The Fund has determined that it is more likely than not that the future tax assets will be realized as a result of the finalization of a restructuring plan during 2010.

A valuation allowance has been provided against future tax assets of certain foreign subsidiaries where the Fund has determined that it is more likely than not that those future tax assets will not be realized.  The valuation allowance may be reduced in future periods if the Fund determines that it is more likely than not that all or a portion of those future tax assets will be realized.

Certain corporate subsidiaries of the Fund have losses for income tax purposes that are available to reduce future taxable income.  A valuation allowance has been applied against $55,551 of the losses in one of the U.S. corporate subsidiaries.  The losses expire as follows:

           
2014          $ 2,918
2015           6,410
2022 and thereafter           143,427
          $ 152,755

15. POST-EMPLOYMENT BENEFITS:

The Fund provides certain health care and pension benefits for certain Pulp and International employees upon retirement.  Both the pension and health care benefits are funded on a pay-as-you go basis.

Components of net periodic benefit cost   2010   2009
 Current service cost $      46 $      35
 Interest cost               201               219
 Actuarial loss               331               339
Costs arising in the period               578               593
Differences between costs arising in the period and costs recognized in the period in respect of actuarial loss (gain)               (41)               (87)
Net periodic benefit cost recognized $       537 $        506
         
Weighted average assumptions   2010   2009
 Discount rate   4.90 - 5.80%   5.30 - 7.25%
 Ultimate other medical trend rate   4.50%   4.50%
         
Change in accrued benefit obligation   2010   2009
 Accrued benefit obligation at beginning of year $  3,837 $  3,896
 Current service cost               46               35
 Interest cost               201   219
 Plan amendments               70       41
 Benefits paid               (224)     (263)
 Foreign exchange               (326)    (430)
 Actuarial loss               331        339
Accrued benefit obligation at end of year $  3,935 $  3,837
         
Reconciliation of funded status   2010   2009
 Deficit at end of year $  (3,935) $  (3,837)
 Unamortized past service costs               64              -
 Unamortized net actuarial (gain)               (80)       (214)
Accrued benefit liability $  (3,951) $  (4,051)

Pulp hourly employees participate in the Pulp and Paper Industry Pension Trust Fund, a multi-employer, defined contribution pension plan.  The Plan is funded by employer and employee contributions.  The employer-related expense under this Plan in 2010 was $173 (2009 - $179).

Certain International employees participate in a Swiss multi-employer defined benefit pension plan.  The employer-related expense under this Plan in 2010 was $339 (2009 - $295).

16. COMMITMENTS AND CONTINGENCIES:

(a) Operating leases:

Under the terms of operating leases, the Fund is committed to rental payments as follows:

     
2011     $ 20,221
2012      16,954
2013     12,756
2014     6,536
2015     2,982
2016 and thereafter     11,221
    $ 70,670

The Fund has recorded deferred rent expense of $1,858 (2009 - $1,827) in other assets.

(b) Environmental clean-up costs:

The Fund's operations are subject to numerous laws, regulations and guidelines relating to air emissions, water discharges, solid and hazardous wastes, transportation and handling of hazardous substances and employee health and safety in Canada, the United States and other foreign countries where they operate.  These environmental regulations are continually changing and are generally becoming more restrictive.

The Fund owns a number of sites as a result of the acquisitions of certain businesses.  Subject to certain limitations, the Fund has been indemnified by the vendors for any remediation costs or environmental actions that may arise as a result of conditions existing at the time of acquisition of these sites and consequently the Fund has not accrued any amount in this respect.  Environmental assessments were conducted prior to the purchase of the sites as a basis to, among other things, evaluate indemnity protections and, where applicable, to verify the appropriateness of estimates for remediation costs.

(c) Other claims:

The Fund is involved in certain claims arising from the ordinary course and conduct of its business.  In the opinion of management, these claims will not have a material impact upon the financial position of the Fund.  The Fund has received indemnities from the vendors with respect to claims arising prior to the related acquisitions.

17. BUSINESS SEGMENTS:

The Fund operates in four business segments:  Sulphur Products and Performance Chemicals (SPPC), Pulp Chemicals (Pulp), International (Intl) and Corporate (Corp).

Sulphur Products and Performance Chemicals 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 Chemicals produces sodium chlorate and crude tall oil.  These products are marketed primarily to Canadian customers. 

International 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.

Corporate is a non-operating segment that provides centralized services such as treasury, finance, information systems, human resources, legal and risk management. 

Year Ended December 31, 2010

    SPPC   Pulp   Intl   Corp   Total
                     
Revenue from external customers   $ 321,647   $48,345   $188,078   $ -   $558,070
                     
Earnings before the under-noted   65,192   16,545   25,409   (31,144)   76,002
Unrealized foreign exchange loss (gain) and ineffectiveness of cash flow hedges   -   -   -   275   275
Debt extinguishment costs   -   -   -   699   699
Depreciation and amortization   31,695   10,577   1,927   -   44,199
Net interest and accretion expense   4,990   405   90   4,884   10,369
Income taxes   (15,516)   -   2,793   (1,762)   (14,485)
                     
Net earnings   44,023   5,563   20,599   (35,240)   34,945
                     
Total assets   241,710   73,718   167,278   3,205   485,911
                     
Goodwill   57,806   -   30,053   -   87,859
                     
Intangibles   54,754   27,583   3,278   -   85,615
                     
Capital expenditures   13,867   1,027   523   114   15,531

Year Ended December 31, 2009

    SPPC   Pulp   Intl   Corp   Total
                     
Revenue from external customers   $ 323,928   $52,386   $169,878   $ -   $546,192
                     
Earnings before the under-noted   66,334   19,161   28,083   (32,259)   81,319
Unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges   -   -   -   (10,937)   (10,937)
Depreciation and amortization   32,585   9,328   2,233   -   44,146
Loss on disposal of property, plant and equipment   -   -   79   -   79
Net interest and accretion expense   6,978   1,832   (116)   (1)   8,693
Income taxes   (10,404)   -   3,962   (1,140)   (7,582)
                     
Net earnings   37,175   8,001   21,925   (20,181)   46,920
                     
Total assets   241,940   103,821   148,512   1,204   495,477
                     
Goodwill   60,097   -   30,533   -   90,630
                     
Intangibles   69,934   34,192   4,263   -   108,389
                     
Capital expenditures   21,964   1,404   673   665   24,706

Geographic segments:

The Fund operates primarily in Canada, the United States and Europe.  Revenue is attributed to customers based on location of customer.

                 
    Revenue
Year Ended December 31, 2010
  Property, Plant and Equipment, Goodwill and Other Intangibles
December 31, 2010
  Revenue
Year Ended December 31, 2009
  Property, Plant and Equipment, Goodwill and Other Intangibles
December 31, 2009
                 
Canada         $ 113,895         $ 97,137         $ 119,875         $ 110,876
                 
United States               256,097               176,928               256,439               202,174
                 
Europe               188,078               40,425               169,878               42,929
                 
          $ 558,070         $ 314,490         $ 546,192         $ 355,979

For the year ended December 31, 2010, revenue from a customer accounted for 10.7% (2009 - 10.2%) of the Fund's total revenue. 

18. FINANCIAL INSTRUMENTS:

(a) Categories of financial assets and liabilities:

The following table summarizes information regarding the carrying values of the Fund's financial instruments:

            2010   2009
                 
Held for trading                
      Cash and cash equivalents   $ 27,856   $ 19,885
      Restricted cash         2,135         2,599
      Notes receivable         2,487         2,627
      Derivative instruments - gain / (loss)         (2,461)         1,007
                 
Loans and receivables                
      Accounts receivable                 85,980         75,748
             
Other financial liabilities            
      Accounts payable         47,435         42,918
      Accrued and other liabilities         50,716         42,920
      Distributions payable         3,067         3,067
      Derivatives designated as cash flow hedges - gain / (loss)         -         (6,677)
      Current portion of long-term bank debt             75,776         -
      Long-term bank debt             -         160,105
      Convertible unsecured subordinated debentures         76,964         -

(b) Derivatives and hedging:

                     
    Notional Amount   2010   Notional Amount   2009
Fair Value Fair Value
Asset Liability Asset Liability
Cash flow hedges                    
      Interest rate swaps   US$         $ -       $ -   US$153,138         $ -       $ 6,677
                                               
Derivatives not designated
in a formal hedging relationship
      Interest rate swaps   US$76,368               -             1,444   -               -             -
   Foreign exchange contracts (1)   -               3             1,020   -               1,166             159
   Commodity forward contracts (2)   N/A               514             514   N/A               148             148
Total             $ 517       $ 2,978             $ 1,314       $ 6,984
                     
Current             $ 517       $ 2,978             $ 1,314       $ 307
Non-current                   -             -                   -             6,677
Total             $ 517       $ 2,978             $ 1,314       $ 6,984

(1) See below for notional amounts.

(2) Includes commitments to buy and sell commodities and commodity forward contracts related to those commitments.

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 until August 2011. During the year ended December 31, 2010, the Fund collapsed a portion of its swap arrangements. Losses are included in accrued and other liabilities and prior to June 29, 2010 the offset was 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 which was included in unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges. As at June 29, 2010, the Fund de-designated its remaining swap arrangements as cash flow hedges. Starting in the third quarter of 2010, all changes in the fair market value of the swap arrangements have been recorded in the Consolidated Statements of Earnings. In addition, the Fund is amortizing the remaining amount in Accumulated Other Comprehensive Income related to the swap arrangements to the Consolidated Statements of Earnings over the remaining term of the swap arrangements.

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 December 31, 2010 include future contracts to sell C$7,602, €3,482 and US$212 at weighted average exchange rates of €0.65, US$1.32 and CHF 0.94, respectively, for periods through to January 2011.

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 December 31, 2010 and December 31, 2009, the net unrealized value of these transactions is not significant.

(c) 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 amounts of restricted cash and notes receivable approximate their fair values.  The carrying amount of the current portion of long-term bank debt, excluding transaction costs, approximates fair value as the debt accrues interest at prevailing market rates.

For fair value estimates relating to derivatives (described above), the Fund classifies its fair value measurements within a fair value hierarchy, which reflects the significance of the inputs used in making the measurements as defined in CICA Handbook section 3862, Financial Instruments - Disclosures.

Level 1 - Unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Significant unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund's derivative financial instruments carried at fair value:

  Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
                 
Derivatives designated as held for trading              
Foreign exchange contracts       $  -       $  (1,017)       $  -   $  (1,017)
Interest rate swap arrangements       $  -       $  (1,444)       $  -   $  (1,444)
Total       $  -       $  (2,461)       $  -   $  (2,461)

The fair value of the foreign exchange contracts is the difference between the forward exchange rate and the contract rate.  The fair value of the interest rate swap arrangements is the difference between the forward interest rates and the contract rates discounted.  All of the Fund's derivative financial instruments are classified within Level 2 because they are based on rates quoted by banks and other public data sources.

(d) 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 Fund's financial liabilities recorded in accounts payable, accrued and other liabilities, distributions payable and income taxes payable are generally due within one year.  The undiscounted cash flow requirements for long-term financial liabilities as at December 31, 2010 are as follows:

  Total Less Than
1 Year
1-3 Years 4-5 Years After
5 Years
Term Debt       $ 75,956       $ 75,956       $ -       $ -       $ -
Convertible Unsecured Subordinated Debentures             90,000             -             -             -             90,000
Interest on Term Debt             1,971             1,971             -             -             -
Interest on Convertible Unsecured Subordinated Debentures             33,750             5,400             10,800             10,800             6,750
Total Financial Liabilities       $ 201,677       $ 83,327       $ 10,800       $ 10,800       $ 96,750

(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 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 would have an impact on Distributable cash after maintenance capital expenditures of less than $100 per annum. 

On an unhedged basis, the Fund also currently estimates that a one-cent change in the exchange rate would have an impact on the translation of the net earnings of its U.S. currency based subsidiaries of less than $200 per annum. 

(b)     Interest rate risk:

The Fund has a credit facility with long-term bank debt and operating lines of credit which bear variable rates of interest.  As at December 31, 2010, on an unhedged basis, a change in interest rates of 1% per annum would have an impact of approximately $800 on the Fund's net earnings per annum.  As at December 31, 2010, the Fund had fixed interest rates on 100% of its total long-term bank debt, until August 2011.

(c)     Other price risks:

Sulphuric acid pricing -

A change in realized sulphuric acid pricing, net of freight, of $1 per tonne, would have had an impact in the year on revenues in North America of approximately $1,000.  In any specific period, the exact impact would 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.  It is difficult to reliably estimate the impact of price changes on earnings as this depends upon the volume subject to risk-sharing supply contracts and changes in sulphur costs for manufactured sulphuric acid.  These factors lessen the impact of price changes on earnings relative to revenue.

Sulphur costs -

The Fund uses sulphur in the manufacturing of several of its products in North America, including sulphuric acid.  At current operating levels, an increase of $1 per tonne would have an impact of approximately $130 on cost of sales for the year.  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.

19. 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 related to 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, convertible unsecured subordinated debentures and long-term bank debt.  The long-term bank debt requires payment in August 2011, however, the Fund intends to renew its long-term bank debt prior to maturity.  The convertible unsecured subordinated debentures do not mature until March 2017.

The Fund's approach is 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 December 31, 2010 and December 31, 2009, the Fund was in compliance with the above covenants.

There were no changes in the Fund's approach to managing capital during the period.

20. COMPARATIVE FIGURES:

Certain comparative figures have been re-classified in order to comply with the current period's presentation.

21. SUBSEQUENT EVENT:

Subsequent to December 31, 2010, the Fund undertook a corporate restructuring related to its subsidiaries.  As part of this restructuring, the Fund's U.S. subsidiaries repaid the remaining long-term bank debt of US$76,368 and its Canadian subsidiaries borrowed US$76,368 pursuant to an amendment to the existing credit agreement.

CHEMTRADE LOGISTICS INCOME FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2010

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 audited consolidated financial statements of the Fund for the year ended December 31, 2010.

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", "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 describe 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 and the amounts to be accrued under the TR LTIP;
  • with respect to the 2010 Beaumont incident, the amount of income lost, the ability to recover and the quantum of any recovery from the Fund's insurers and the amount of capital expenditures to repair and replace the damaged property;
  • 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 types and amounts of earnings from the Fund's Canadian subsidiaries;
  • the effect of the SIFT rules on the Fund and any requirement to pay tax as a result;
  • the ability of distributions to qualify as a taxable Canadian dividend or foreign source income and the percentages thereof to so qualify;
  • 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 impact of recent accounting pronouncements; and
  • with respect to IFRS, the Transition Date impact of IFRS1 and policy choices made.

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 Year Ended
($'000 except per unit amounts) December 31,
2010
December 31, 2009 December 31, 2010 December 31, 2009 December 31, 2008
           
Revenue       $  151,287       $ 132,756       $  558,070       $  546,192       $ 1,178,826
           
Net earnings       $  11,876       $ 12,491       $  34,945       $ 46,920       $ 40,331
           
Net earnings per unit                     
 - Basic       $ 0.39       $ 0.41       $ 1.14       $ 1.52       $ 1.21

- Diluted

      $ 0.37       $ 0.41       $ 1.14       $ 1.52       $ 1.21
           
Total assets       $  485,911       $ 495,477       $  485,911       $ 495,477       $ 655,225
           
Current portion of long-term bank debt       $ 75,776       $ -       $ 75,776       $ -       $ -
           
Long-term bank debt       $  -       $ 160,105       $  -       $ 160,105       $ 185,023
           
Convertible unsecured subordinated  debentures       $  76,964       $ -       $  76,964       $ -       $ -
           
EBITDA (3)       $  16,298       $ 24,057       $  76,002       $ 81,319       $ 118,936
EBITDA per unit (1)(3)       $ 0.53       $ 0.78       $ 2.48       $ 2.64       $ 3.56
           
Cash flows from operating activities       $  6,218       $ 25,375       $  60,517       $ 41,133       $ 147,904
Cash flows from operating activities per unit (1)       $ 0.20       $ 0.83       $ 1.97       $ 1.33       $ 4.43
           
Adjusted cash flows from operating activities (3)       $ 14,373       $ 22,139       $ 55,756       $ 68,681       $ 99,043
Adjusted cash flows from operating activities per unit (1)(3)       $ 0.47       $ 0.72       $ 1.82       $ 2.23       $ 2.97
           
Distributable cash after maintenance capital expenditures (3)       $ 8,458       $ 12,678       $ 40,994       $ 44,900       $ 83,488
Distributable cash after maintenance capital expenditures per unit (1)(3)       $ 0.28       $ 0.41       $ 1.34       $ 1.46       $ 2.50
           
Distributions declared       $ 9,202       $ 9,201       $ 36,805       $ 36,891       $ 39,906
Distributions declared per unit (2)       $ 0.30       $ 0.30       $ 1.20       $ 1.20       $ 1.20
           
Distributions paid       $ 9,202       $ 9,201       $ 36,805       $ 37,003       $ 40,086
Distributions paid per unit (2)       $ 0.30       $ 0.30       $ 1.20       $ 1.20       $ 1.20
           
(1) Based on weighted average number of units outstanding for the period of:    30,670,470 30,670,470 30,670,470 30,818,352 33,370,769
           
(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 charges such as unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges.  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 Year Ended
($'000) December 31, 2010 December 31, 2009 December 31, 2010 December 31, 2009 December 31, 2008
           
Net earnings       $ 11,876       $ 12,491       $ 34,945       $ 46,920       $ 40,331
      Add:          
  Unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges             (96)             1,109             275             (10,937)             16,712
       Debt extinguishment costs             -             -             699             -             -
  Depreciation and amortization             9,357             10,623             44,199             44,146             41,123
  Loss (gain) on disposal of property, plant and equipment             -             (15)             -             79             (250)
  Net interest and accretion expense             2,388             2,126             10,369             8,693             13,535
       Net taxes             (7,227)             (2,277)             (14,485)             (7,582)             7,485
EBITDA       16,298       $ 24,057       $ 76,002       $ 81,319       $ 118,936

Cash Flow -

The following table is derived from, and should be read in conjunction with, the Consolidated Statements 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 Year Ended
($'000) December 31, 2010 December 31, 2009 December 31, 2010 December 31, 2009 December 31,
2008
           
Cash flows from operating activities       $ 6,218       $ 25,375       $ 60,517       $ 41,133       $ 147,904
           
Add (deduct):          
Changes in non-cash working capital and other items             8,155             (3,236)             (4,761)             27,548             (48,861)
Adjusted cash flows from operating activities             14,373             22,139             55,756             68,681             99,043
           
Less:          
Maintenance capital expenditure             5,915             9,461             14,762             23,781             15,555
Distributable cash after maintenance capital expenditure             8,458             12,678             40,994             44,900             83,488
           
Less:          
Non-maintenance capital expenditure (1)             222             265             769             925             4,273
Distributable cash after all capital expenditure             8,236             12,413             40,225             43,975             79,215
           
           
(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 fourth quarter of 2010 was $151.3 million, compared with consolidated revenue of $132.8 million recorded in the fourth quarter of 2009. Consolidated revenue for the years ended December 31, 2010 and 2009 were $558.1 million and $546.2 million respectively.  The main reason for the quarterly and annual increases was higher volume of sulphuric acid in the SPPC segment and higher prices for sulphur realized in the International and SPPC segments. 

The Fund's net earnings and EBITDA for the fourth quarter of 2010 were $11.9 million and $16.3 million respectively compared to net earnings and EBITDA for the fourth quarter of 2009 of $12.5 million and $24.1 million respectively.  The main reason for the reduced EBITDA and earnings realized in the fourth quarter of 2010 was the lower results earned in the International segment relative to the fourth quarter of 2009 when earnings were exceptionally high.  These lower results were partially offset by increased income tax recoveries within the SPPC segment in the fourth quarter of 2010.

Net earnings and EBITDA for 2010 were $34.9 million and $76.0 million respectively.  Comparable net earnings and EBITDA for 2009 were $46.9 million and $81.3 million respectively.  EBITDA in 2010 was lower than 2009 mainly due to the impact of the Beaumont incident, timing of insurance recoveries related to the Beaumont incidents (as described in the BEAUMONT INCIDENTS section) and lower International results.  Net earnings were also affected by unrealized foreign exchange gains as a gain of $10.9 million was recorded in 2009, whereas a loss of $0.3 million was recorded in 2010.  Higher income tax recoveries within the SPPC segment during 2010 further affected net earnings.   

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

SPPC -

  Three Months Ended Year Ended
($'000) December 31, 2010 December 31, 2009 December 31, 2010 December 31, 2009
         
Revenue       $ 82,390       $ 68,588       $ 321,647       $ 323,928
         
Earnings before the under-noted (EBITDA)             18,358             20,712             65,192             66,334
Depreciation and amortization             (7,028)             (7,862)             (31,695)             (32,585)
Net interest and accretion expense             (967)             (1,717)             (4,990)             (6,978)
Income tax recovery             7,568             3,083             15,516             10,404
         
Net earnings       $ 17,931       $ 14,216       $ 44,023       $ 37,175

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, which is sold to the pulp and paper industry and to a lesser extent, to the textile industry.

For the fourth quarter of 2010, SPPC generated revenue of $82.4 million, compared with revenue of $68.6 million for the fourth quarter of 2009.  The main reasons for the increase in revenue were the significantly higher volumes of acid and the higher prices for sulphur experienced during the fourth quarter of 2010 relative to 2009.  These factors more than offset the negative impact of the weaker U.S. dollar on U.S. dollar denominated revenue.  In the fourth quarter of 2010, EBITDA was lower than the same period of 2009 by $2.3 million, while net earnings in the fourth quarter were higher than the same period of 2009 by $3.7 million.  The main reason for the lower EBITDA was the effect of the Beaumont incidents (as described in the BEAUMONT INCIDENTS section), as the Beaumont plant remained off-line for part of the fourth quarter of 2010 and increased costs were incurred to ensure that customer operations were not disrupted.  Also, results for the fourth quarter of 2010 had $5.3 million lower insurance recoveries than the fourth quarter of 2009 when the insurance claims from the 2008 Beaumont incident were settled with the insurer.  This was partially offset by generally improved results from most SPPC products and in particular from acid.  The decrease in EBITDA was more than offset by a reduction in interest expense and income taxes resulting in an increase in net earnings relative to the fourth quarter of 2009.

For the year ended December 31, 2010, SPPC generated revenues of $321.6 million, a decrease of $2.3 million from the level achieved during 2009.  This was mainly due to the impact of the weaker U.S. dollar on U.S. dollar denominated revenue, as this more than offset the effect of higher acid volumes and higher sulphur prices realized in 2010 relative to 2009.  For the year ended December 31, 2010, EBITDA was lower than 2009 by $1.1 million.  The main reason for the lower EBITDA was the impact of the Beaumont incidents (as described in the BEAUMONT INCIDENTS section) as the Beaumont plant was off-line for approximately half of 2010 vs. only part of the first quarter in 2009.  Additionally, 2009 EBITDA included $13.5 million with respect to insurance recoveries from the 2008 incident compared with $8.3 million in 2010.  The full impact of this is not noticeable from overall results as most SPPC products generated higher margins in 2010 relative to 2009. 2010 net earnings were higher than 2009 by $6.8 million, as lower income tax and lower interest expense more than offset the impact of reduced EBITDA.

Net interest expenses were lower in the fourth quarter and for the year ended December 31, 2010 due mainly to the repayment of long-term bank debt.  See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities.

The higher income tax recoveries during the fourth quarter of 2010 and the year ended December 31, 2010 is due mainly to a valuation allowance recovery of $6.0 million (as described in INCOME TAXES) which was partially offset by lower tax recoveries due to lower taxable losses in certain foreign corporate subsidiaries compared to the same periods of 2009.

Pulp Chemicals -

  Three Months Ended Year Ended
($'000) December 31, 2010 December 31, 2009 December 31, 2010 December 31, 2009
         
Revenue       $ 12,869       $ 13,435       $ 48,345       $ 52,386
         
Earnings before the under-noted (EBITDA)             3,760             5,180             16,545             19,161
Depreciation and amortization             (1,840)             (2,263)             (10,577)             (9,328)
Net interest and accretion expense             -             (436)             (405)             (1,832)
         
Net earnings       $ 1,920       $ 2,481       $ 5,563       $ 8,001

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.

Fourth quarter 2010 Pulp Chemicals revenue was $0.6 million lower than the level achieved during the fourth quarter of 2009, mainly due to lower sales volume of sodium chlorate.  Reduced volume was also a key factor in revenue for the year ended December 31, 2010 being $4.0 million lower than 2009.  EBITDA and net earnings during the fourth quarter and for the year ended December 31, 2010 were negatively impacted by the lower volume relative to the same periods of 2009 resulting in a reduction of $1.4 million and $2.6 million, respectively.  The reduction in EBITDA for the full year relative to 2009 was mitigated by lower costs. 

Depreciation and amortization for the year ended December 31, 2010 was higher than 2009 due to impairment charges recorded in the value of intangible assets during the second quarter of 2010.  These intangible assets relate to certain customer relationships and had been recognized at the time of the acquisition of this business in 2003.  Depreciation and amortization for the fourth quarter was lower than the fourth quarter of 2009 as the impairment charges recorded during the second quarter of 2010 reduced the net book value to be amortized going forward. 

Net interest expenses were lower in the fourth quarter and year ended December 31, 2010 due mainly to the repayment of long-term bank debt.  See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities.

International -

  Three Months Ended Year Ended
($'000) December 31, 2010 December 31, 2009 December 31, 2010 December 31, 2009
         
Revenue       $ 56,028       $ 50,733       $ 188,078       $ 169,878
         
Earnings before the under-noted (EBITDA)             4,486             16,175             25,409             28,083
Depreciation and amortization             (489)             (498)             (1,927)             (2,233)
Gain (loss) on disposal of property, plant and equipment             -             15             -             (79)
Net interest (expense) income             (14)             26             (90)             116
Income tax expense             (412)             (1,946)             (2,793)             (3,962)
         
Net earnings       3,571       $ 13,772       $ 20,599       $ 21,925

International operations provide removal and marketing services for elemental sulphur and sulphuric acid.  These products are marketed to customers globally.

Revenue for the fourth quarter and year ended December 31, 2010 were higher than the same periods of 2009, mainly due to higher prices for sulphur.  Net earnings and EBITDA during the fourth quarter of 2010 were significantly lower than the fourth quarter of 2009, which was exceptionally strong due to customers' honouring commitments on certain contracts where they had previously delayed delivery.  Although 2010 was a very strong year for the International segment, net earnings and EBITDA were lower than 2009 by $1.3 million and $2.7 million, respectively. 

Corporate -

  Three Months Ended Year Ended
($'000) December 31, 2010 December 31, 2009 December 31, 2010 December 31, 2009
         
Cost of services       $ 10,306       $ 18,010       $ 31,144       $ 32,259
         
Loss before the under-noted (EBITDA)             (10,306)             (18,010)             (31,144)             (32,259)
Unrealized foreign exchange gain (loss) and ineffectiveness of cash flow hedges             96             (1,109)             (275)             10,937
Debt extinguishment costs             -             -             (699)             -
Net interest and accretion expense             (1,407)             1             (4,884)             1
Income tax recovery             71             1,140             1,762             1,140
         
Net loss       $ (11,546)       $ (17,978)       $ (35,240)       $ (20,181)

The Corporate segment includes the administrative costs of corporate activities such as treasury, finance, information technology, human resources, legal and risk management, which are not directly allocable to an operating segment. 

For the fourth quarter, costs of services were $7.7 million lower than the fourth quarter of 2009 due to $5.8 million lower accruals for the Fund's Total Return Long-Term Incentive Plan (TR LTIP) and due to higher realized foreign exchange gains.  The fourth quarter of 2010 includes $0.3 million of gains, whereas $1.1 million of losses were incurred during the fourth quarter of 2009. 

For the year ended December 31, 2010, the main reason for the $1.1 million decrease in cost of services relative to 2009 was $1.9 million lower TR LTIP accruals. There were a few other items which largely offset each other.  2009 costs included losses of $1.1 million related to natural gas swaps whereas there were no natural gas swaps in 2010.  2010 had $1.2 million lower realized foreign exchange gains compared with 2009. 

The comments on TR LTIP expenses relate to the 2008-2010, 2009-2011 and 2010-2012 TR LTIPs.  The 2008-2010, 2009-2011 and 2010-2012 TR LTIP payouts are payable at the beginning of 2011, 2012 and 2013 respectively and will be based upon Total 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 TR LTIP expenses that will be recordable in any period as it is based upon future distributions and changes in unit value.

The Corporate segment includes unrealized foreign exchange gains and losses on the translation of U.S. dollar denominated debt, which are a result of the changes in the Canadian dollar relative to the U.S. dollar during 2010 and 2009.  This exchange rate fluctuation also resulted in unrealized foreign exchange gains and losses on the translation of U.S. dollar denominated assets in self-sustaining foreign operations.  However, in accordance with accounting rules, those gains and losses are shown in other comprehensive income rather than in earnings.

Also included in unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges is the ineffectiveness of the Fund's cash flow hedges entered into in the first quarter of 2009 up to June 29, 2010.  See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities - Financial Instruments for more detail.

Debt extinguishment costs for the fourth quarter and year ended December 31, 2010 of $nil and $0.7 million respectively relate to the repayment of a portion of the Fund's long-term debt which is more fully described in LIQUIDITY AND CAPITAL RESOURCES - Financing Activities.  The impact on Distributable cash after maintenance capital expenditure was more significant, as the cash component of this cost was $nil million and $3.2 million during the fourth quarter and year ended December 31, 2010 respectively.

Net interest and accretion expense for the fourth quarter and year ended December 31, 2010 was $1.4 million and $4.9 million respectively.  For the fourth quarter and year ended December 31, 2010, $1.7 million and $5.3 million respectively, relates to the convertible debentures issued during the first quarter of 2010.  These expenses were partially offset by recoveries of $0.3 million and $0.5 million during the fourth quarter and year ended December 31, 2010 respectively, related to changes in the fair value of the Fund's interest rate swaps from June 29, 2010 to the end of the fourth quarter.  See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities.

The income tax recoveries of $0.1 million and $1.8 million during the fourth quarter and year ended December 31, 2010 respectively, represent future taxes related to deductible temporary differences of certain flow-through subsidiaries.

BEAUMONT INCIDENTS

During the second quarter of 2010, a fire occurred at the Fund's Beaumont, Texas facility. Currently, it is not possible to accurately estimate the expected amount of recovery the Fund will receive under its business interruption insurance policies. During the year ended December 31, 2010, the Fund received a partial payment of US$3.0 million related to its business interruption claim.  The related income has been recorded as a reduction to selling, general, administrative and other costs in the SPPC segment.  Any additional insurance recoveries will be recorded when the amount of the recovery has been agreed with the insurer or when payments are received. The Beaumont plant was back on-line in October 2010.

During the second and third quarters of 2010, the Fund wrote-off the value of equipment that was damaged in the fire.  The costs to repair and replace these assets are recoverable under the Fund's property insurance policy.  The Fund anticipates incurring capital expenditures of US$12.6 million relating to the repair and replacement of damaged property at the Beaumont facility.  The Fund has been reimbursed US$7.0 million from its insurer related to these costs prior to December 31, 2010 and the balance has been included in Accounts receivable at December 31, 2010.  Since the repair costs to-date have 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 $5.3 million.  This gain was included in selling, general, administrative and other costs in the SPPC segment.  The Fund also recovered $0.5 million 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.

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 settled the property damage and the business interruption insurance claim with its insurer. 

During 2009, the Fund received payments of US$5.5 million and recorded a receivable of US$5.1 million at December 31, 2009 related to its business interruption claim.  The related income was recorded as a reduction to 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$9.8 million relating to the repair and replacement of damaged property at the Beaumont facility.  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 $2.7 million 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 $1.1 million 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.

U.S. ENVIRONMENTAL PROTECTION AGENCY (EPA) SETTLEMENT

In January 2009, the Fund reached a settlement with the EPA and certain States, whereby new emission limitations were established at each of its five sulphuric acid manufacturing facilities.  The agreement with Chemtrade arose from a broader EPA initiative regarding the domestic sulphuric acid manufacturing industry.  Chemtrade's plants have met or will meet these stricter limits by various agreed dates ranging from December 2009 to December 2012.  Chemtrade anticipates that these compliance actions will cost approximately US$6.0 million in respect of four facilities, most of which will be spent to bring its Riverton, Wyoming facility into compliance with the new limits by December 2012.  Chemtrade is in compliance with these requirements and remains confident that it will fulfill its obligations under this agreement.  Because of Chemtrade's existing overall levels of control, the civil penalty paid by Chemtrade was not material and it was recorded in 2008.  Certain additional funds and penalties will be expended in respect of Chemtrade's Cairo facility, but those costs will be paid for by Marsulex Inc., pursuant to an indemnity agreement between the two companies.

FOREIGN EXCHANGE

The Fund has non-Canadian operating subsidiaries that use the U.S. dollar as their 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 $0.01 increase in the Canadian/U.S. dollar exchange rate reduces Distributable cash after maintenance capital expenditures by less than $0.1 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.  Contracts in place at December 31, 2010 include future contracts to sell US$0.2 million, C$7.6 million and €3.5 million at weighted average exchange rates of CHF 0.94, €0.65 and US$1.32, respectively, for periods through to January 2011.  There are unrealized losses of $1.0 million from these contracts at December 31, 2010.

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 loss (gain).  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.  Realized foreign exchange gains and losses are included in selling, general, administrative and other costs.

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, 2009 were a result of changes in the Canadian/U.S. dollar exchange rate between December 31, 2009 and December 31, 2010.  Until the first quarter of 2010, when it was repaid, the Fund's Canadian based operations had all its term debt denominated in U.S. dollars.  The gains or losses arising from the translation of these loans were recorded on the Consolidated Statements of Earnings as unrealized foreign exchange (gain) loss.  The rate of exchange used to translate U.S. denominated balances has changed from a rate of US$1.00 = $1.05 at December 31, 2009 to US$1.00 = $1.00 at December 31, 2010.  See RISKS AND UNCERTAINTIES for additional comments on foreign exchange.

NET INTEREST AND ACCRETION EXPENSE

Net interest and accretion expense was $2.4 million in the fourth quarter of 2010 compared with $2.1 million in the fourth quarter of 2009.  Net interest and accretion expense was $10.4 million in 2010 compared with $8.7 million in 2009. 

Interest expense in 2010 was higher than 2009 mainly due to the interest rate on the convertible debentures that were issued during the first and second quarters of 2010 being higher than the interest rate on the term bank debt which was partially repaid during the first and second quarters of 2010.  The annual interest rate at December 31, 2010 on the Fund's convertible debentures was 6.0%.  The weighted average effective annual interest rate at December 31, 2010 on the Fund's term bank debt was 4.45% (December 31, 2009 - 4.83%).  See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities - Financial Instruments for information concerning swap arrangements.

On June 29, 2010, the Fund de-designated its remaining interest rate swap arrangements as cash flow hedges.  Since June 29, 2010, all changes in the fair market value of the swap arrangements have been recorded in net interest and accretion expense.  During the fourth quarter and year ended December 31, 2010, the expense recorded related to these changes in fair market value was a recovery of $0.3 million and $0.5 million respectively.  See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities - Financial Instruments for information concerning swap arrangements.

During the fourth quarter and year ended December 31, 2010 the Fund recorded accretion expense of $0.5 million and $1.6 million, respectively, compared to $0.1 million and $0.6 million during the fourth quarter and year ended December 31, 2009.  The higher accretion expense is due to the accretion on the convertible debentures issued during the first and second quarters of 2010.

INCOME TAXES

Current income tax expense was a recovery of $0.5 million and an expense of $2.5 million for the fourth quarter and year ended December 31, 2010 respectively, compared with expenses of $0.2 million and $3.0 million for the fourth quarter and year ended December 31, 2009 respectively.  The future income tax recovery was $6.7 million and $17.0 million for the fourth quarter and year ended December 31, 2010 compared to the future income tax recovery of $2.5 million and $10.6 million for the fourth quarter and year ended December 31, 2009 respectively.  The effective tax rates for the fourth quarter and year ended December 31, 2010 differ from the statutory tax rate of 30.6% primarily due to the operating losses in high tax rate jurisdictions and operating profits in low tax rate jurisdictions and flow-through entities.

In addition, in 2010 a valuation allowance recovery of approximately $6.0 million was recorded to recognize future tax assets of a Canadian subsidiary since the Fund has determined that it is more likely than not that the future tax assets will be realized as a result of the finalization of certain restructuring plans during 2010.

The increase in future tax asset of $9.0 million at December 31, 2010 relative to December 31, 2009 is the result of increased tax loss carry-forwards, net of valuation allowances, and other deductible temporary differences, net of valuation allowances, available in certain Canadian and foreign corporate subsidiaries.

The decrease in future tax liability of $8.0 million at December 31, 2010 relative to December 31, 2009 is the result of the decrease in the taxable temporary differences between the accounting carrying amount and the tax basis of assets associated with certain Canadian and foreign corporate subsidiaries.

The Fund is a mutual fund trust for income tax purposes and will be a specified investment flow-through (SIFT) trust for years commencing after 2010. Subsequent to December 31, 2010, a SIFT trust will be subject to current income taxes on any taxable income not distributed to Unitholders and on all taxable income earned from Canadian corporate and flow-through subsidiaries (other than dividends) that is distributed to Unitholders. Income received by a SIFT trust directly from non-Canadian subsidiaries is not subject to tax under the SIFT rules.

Based on the Fund's current portfolio of assets, it is expected that no income will be earned from Canadian flow-through subsidiaries and only dividends will be earned from Canadian corporate subsidiaries. Consequently, the Fund will not earn income that is subject to tax under the SIFT rules. It is expected that greater than 50 percent of the Fund's distribution for tax purposes will be treated as eligible dividends from a Canadian corporation.

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 month period ended December 31, 2010 and for the years ended December 31, 2010, 2009 and 2008.

($'000) Three Months
Ended
December 31, 2010
Year Ended December 31,
2010
Year Ended December 31,
2009
Year Ended
December 31, 2008
         
Cash flows from operating activities       $ 6,218       $ 60,517       $ 41,133       $ 147,904
Net earnings             11,876             34,945             46,920             40,331
Distributions paid during period             9,202             36,805             37,003             40,086
(Shortfall) excess of cash flows from operating activities over cash distributions paid             (2,984)             23,712             4,130             107,818
Excess (shortfall) of net earnings over cash distributions paid       $ 2,674       $ (1,860)       $ 9,917       $ 245
         

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 three months ended December 31, 2010, distributions to Unitholders exceeded cash flows from operating activities mainly due to an increase in working capital.  The additional distribution was funded by existing cash balances.

Distributions -

Distributions to Unitholders for the three months ended December 31, 2010 were declared as follows:

Record Date Payment Date Distribution
Per Unit
Total
($'000)
Three months ended December 31:      
  October 29, 2010 November 30, 2010       $ 0.10       $ 3,067
  November 30, 2010 December 31, 2010             0.10             3,067
  December 31, 2010 January 31, 2011             0.10             3,068
    Sub-Total         $ 0.30       $ 9,202
       
Nine months ended September 30         $ 0.90       $ 27,603
       
Total for the year ended December 31         $ 1.20       $ 36,805

Distributions declared in the three months ended December 31, 2009 were as follows:

Record Date Payment Date Distribution
Per Unit
Total
($'000)
Three months ended December 31:      
  October 30, 2009 November 30, 2009       $ 0.10       $ 3,067
  November 30, 2009 December 31, 2009             0.10             3,067
  December 31, 2009 January 29, 2010             0.10             3,067
    Sub-Total         $ 0.30       $ 9,201
       
Nine months ended September 30         $ 0.90       $ 27,690
       
Total for the year ended December 31         $ 1.20       $ 36,891

Treatment of the Fund's distributions for Canadian Income Tax purposes for 2009 and 2010 is as follows:

  Other Income Foreign Non-Business
Income
Total
2009 74.8% 25.2% 100.0%
2010 73.4% 26.6% 100.0%

From 2011 onwards, it is expected that greater than 50 percent of the Fund's distribution for tax purposes will be treated as eligible dividends from a Canadian corporation and the remainder will be treated as foreign source income when determining the taxable income of a Canadian Unitholder. See INCOME TAXES.

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, convertible unsecured subordinated debentures and operating lines of credit.  The cash flow of the Fund is required to fund distributions to Unitholders, capital expenditures and payment of interest.  The Fund intends to renew its term debt prior to maturity.

Cash Flow from Operating Activities

Cash flow from operating activities for the fourth quarter of 2010 was $6.2 million, a decrease of $19.2 million from the level generated during the fourth quarter of 2009.  The decrease was mainly due to an increase in working capital during the fourth quarter of 2010 compared with a decrease in working capital during the fourth quarter of 2009.  Also, earnings during the fourth quarter of 2010 were lower than the fourth quarter of 2009.  

For the year ended December 31, 2010, cash flow from operating activities was $60.5 million, an increase of approximately $19.4 million from the level achieved in 2009.  The main reason for this difference is the significant increase in working capital during 2009, when working capital increased by $27.5 million whereas it decreased by $2.3 million in 2010. 

Financing Activities

During the first quarter of 2010, the Fund entered into an agreement with a syndicate of underwriters to issue $80.0 million principal amount of convertible unsecured subordinated debentures (the Debentures).  During the second quarter of 2010, as allowed under provisions of the agreement to issue the Debentures, the underwriters purchased an additional $10.0 million principal amount of the Debentures, increasing the aggregate gross proceeds of the public offering to $90.0 million.  The Fund incurred transaction costs of $4.2 million, which included the underwriters' fee and other expenses of the offering.

The Fund utilized a portion of the net proceeds of the offering to repay $79.2 million (US$76.8 million) of its existing long-term debt.  The Fund realized a foreign exchange loss of $0.2 million and wrote-off the remaining transaction costs related to the portion of the long-term debt repaid in the amount of $0.3 million, both of which are included in debt extinguishment costs on the Consolidated Statements of Earnings.

The Fund also collapsed the interest rate swap arrangements related to the portion of its long-term debt that was repaid.  As a result of collapsing these arrangements, the Fund had to pay $3.2 million to settle the arrangements; however, it recognized a loss of only $0.2 million due to amounts previously recognized in net income.  This loss has been recorded in debt extinguishment costs on the Consolidated Statements of Earnings.

Distributions to Unitholders during the fourth quarter of 2010 were similar to the fourth quarter of 2009.  Distributions to Unitholders during the year ended December 31, 2010 were $0.2 million lower than the year ended December 31, 2009.  These decreased distributions were due to lower units outstanding as a result of the buy back and cancellation of units by the Fund pursuant to a normal course issuer bid commenced in September 2008 (as explained in Normal Course Issuer Bid below).

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 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 $8.3 million.  This resulted in $12.8 million being recorded as a reduction to the value of units and $4.4 million being recorded as contributed surplus.

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 August 2011.  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 swap arrangements and rolled the related fair value liability of $9.8 million into its new interest rate swaps.  This value was being amortized on a straight-line basis over the remaining term of the term debt in unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges.  As described above, during the first and second quarters of 2010, the Fund collapsed a portion of the swap arrangements when the corresponding debt was repaid and recognized a loss of $0.7 million.  As at June 29, 2010, the Fund de-designated its remaining swap arrangements as cash flow hedges.  Starting in the third quarter of 2010, all changes in the fair market value of the swap arrangements will be recorded in the Consolidated Statements of Earnings.  In addition, the Fund will amortize the remaining amount in Accumulated Other Comprehensive Income related to the swap arrangements to the Consolidated Statements of Earnings over the remaining term of the swap arrangements.  The weighted average effective interest rate under the remaining swap arrangements is 4.45%.  At December 31, 2010, the fair value of the above noted agreements was a liability of $1.4 million (US$1.4 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.

Investing Activities

Investment in capital expenditures was $6.1 million in the fourth quarter of 2010, compared with $9.7 million in the fourth quarter of 2009.  These amounts include $5.9 million in the fourth quarter of 2010 and $9.5 million in the fourth quarter of 2009 for maintenance capital requirements.  Investment in capital expenditures was $15.6 million for 2010, compared with $24.7 million in 2009.  These amounts include $14.8 million in 2010 and $23.8 million in 2009 for maintenance capital requirements.  The Fund anticipates that investment in maintenance capital expenditures in 2011 will be approximately $20.0 million.

Investment in non-maintenance capital expenditures was $0.2 million during the fourth quarter of 2010 compared to approximately $0.3 million during the fourth quarter of 2009.  Investment in non-maintenance capital expenditures was $0.8 million during 2010, compared with $0.9 million during 2009.  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.

During the fourth quarter of 2009, the Fund completed the purchase of the outstanding shares of Alliance Specialty Chemicals, Inc. for $6.1 million (US$5.6 million). The Fund incurred transaction related costs of $0.2 million (US$0.1 million).

Cash Balances -

At December 31, 2010 the Fund had net cash balances of $27.9 million and working capital of $12.8 million.  Comparable numbers for December 31, 2009 were $19.9 million and working capital of $9.4 million, respectively.  The Fund defines working capital to exclude cash, operating line of credit, distributions payable and current portion of long-term bank debt.  Cash generated by the Fund will be used to fund cash distributions to Unitholders, capital requirements, interest, general corporate purposes 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 on-going 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 December 31, 2010, the Fund had senior credit facilities of $147.7 million, consisting of a term loan of $76.0 million and a revolving credit facility of $71.7 million.  The term bank debt is not due or payable until August 2011.  At December 31, 2010, the Fund had nothing drawn on its operating lines of credit, and had committed a total of $10.4 million of its revolving credit facility towards standby letter of credits.  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. 

At December 31, 2010, the Fund had convertible debentures of $90.0 million outstanding which mature on March 31, 2017.

Subsequent to December 31, 2010, the Fund undertook a corporate restructuring related to its subsidiaries.  As part of this restructuring, the Fund's U.S. subsidiaries repaid the remaining long-term bank debt of US$76.4 million and its Canadian subsidiaries borrowed US$76.4 million pursuant to an amendment to the existing credit agreement.

Debt Covenants -

As at December 31, 2010, the Fund was compliant with all debt covenants contained in its credit facility and its convertible debenture indentures.

Summary of Quarterly Results

  Three Months Ended
($'000) March 31,
2010
June 30,
2010
September 30,
2010
December 31,
2010
         
Revenue       $ 126,824       $ 137,406       $ 142,553       $ 151,287
Cost of sales and services             89,658             110,624             113,778             122,030
Gross profit             37,166             26,782             28,775             29,257
Selling, general, administrative and other costs             12,689             11,806             8,524             12,959
Earnings before the under-noted             24,477             14,976             20,251             16,298
Unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges             (414)             1,685             (900)             (96)
Debt extinguishment costs             571             128             -             -
Depreciation and amortization             10,813             14,419             9,610             9,357
Net interest and accretion expense             2,264             3,011             2,706             2,388
Income taxes (net)             (2,566)             (3,174)             (1,518)             (7,227)
         
Net earnings (loss)       $ 13,809       $ (1,093)       $ 10,353       $ 11,876

  Three Months Ended
($'000) March 31,
2009
June 30,
2009
September 30,
2009
December 31,
2009
         
Revenue       $ 161,823       $ 124,624       $ 126,989       $ 132,756
Cost of sales and services             137,522             96,539             95,660             92,289
Gross profit             24,301             28,085             31,329             40,467
Selling, general, administrative and other costs             6,025             10,625             9,803             16,410
Earnings before the under-noted             18,276             17,460             21,526             24,057
Unrealized foreign exchange loss (gain) and ineffectiveness of cash flow hedges             3,903             (9,147)             (6,802)             1,109
Depreciation and amortization             11,165             11,272             11,086             10,623
Loss (gain) on disposal of property, plant and equipment             -             -             94             (15)
Net interest and accretion expense             2,103             2,342             2,122             2,126
Income taxes (net)             (216)             (580)             (4,509)             (2,277)
                      
Net earnings       $ 1,321       $ 13,573       $ 19,535       $ 12,491
 

In general, there is limited impact of seasonality on financial results.  Below are some of the key items that significantly impacted financial results over the last eight quarters.

During 2009, prices for sulphuric acid and sulphur were declining relative to the record highs realized during 2008. In addition to these lower prices, 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 lower prices for sulphuric acid in the International and SPPC segments continued into the first and second quarters of 2010.  During the third and fourth quarters of 2010, sales volumes started to increase, particularly in the International and SPPC segments.  Sulphur prices in the International and SPPC segments also increased in the third and fourth quarters of 2010.  In 2010, the stronger Canadian dollar relative to the U.S. dollar also negatively impacted U.S. dollar denominated revenues. 

Earnings for the fourth quarter of 2009 and the first quarter of 2010 were high primarily due to strong results from the International segment, where customers who had delayed delivery from earlier in 2009 honoured their commitments in these quarters.  Depreciation and amortization during the second quarter of 2010 was high due to impairment losses recorded in the value of intangible assets relating to certain customer relationships.  This negatively impacted earnings for this quarter. 

S,G&A during the first quarter of 2009 were low as they included a reversal of $3.4 million with respect to the TR LTIP owing to a reduction in the Fund's unit value.  S,G&A during the fourth quarter of 2009 were high as they included an accrual of $10.0 million relating to the Fund's TR LTIP, caused by an appreciation in the Fund's unit value, and high unrealized natural gas losses and realized foreign exchange losses.  These additional expenses were partially offset by business interruption insurance claim recoveries booked in the quarter.  S,G&A during the first quarter of 2010 were high as they included an accrual of $2.2 million relating to the Fund's TR LTIP, also caused by an appreciation in the Fund's unit value.  S,G&A during the third quarter of 2010 were low as they included a non-cash insurance gain of $5.1 million, which was partially offset by an accrual of $2.6 million relating to the Fund's TR LTIP.  S,G&A during the fourth quarter of 2010 were high as they included an accrual of $4.2 million relating to the Fund's TR LTIP, which was partially offset by insurance gains of US$3.0 million.

Unrealized foreign exchange losses were higher during 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 in self-sustaining foreign operations, but accounting rules require that those be recorded in other comprehensive income.  During the second, third and fourth quarters of 2009 and the first quarter of 2010, the Canadian dollar strengthened relative to the U.S. dollar, thereby causing an unrealized foreign exchange gain on the Fund's long-term debt.  However, the gain during the fourth quarter of 2009 was more than offset by ineffectiveness booked related to the initial fair value liability on the Fund's interest rate swap arrangements entered into during the first quarter of 2009.

OUTSTANDING SECURITIES OF THE FUND

At February 23, 2011, the Fund had 30,670,470 units outstanding (December 31, 2010 - 30,670,470) and 90,000 convertible unsecured subordinated debentures (December 31, 2010 - 90,000). 

CONTRACTUAL OBLIGATIONS

Information concerning contractual obligations is shown below:

Contractual Obligations
($'000)
Total Less Than
1 Year
1-3 Years 4-5 Years After
5 Years
Term Debt       $ 75,956       $ 75,956       $ -       $ -       $ -
Convertible Unsecured Subordinated Debentures             90,000             -             -             -             90,000
Operating Leases             70,670             20,221             29,710             9,518             11,221
Interest on Term Debt             1,971             1,971             -             -             -
Interest on Convertible Unsecured Subordinated Debentures             33,750             5,400             10,800             10,800             6,750
Total Contractual Obligations       $ 272,347       $ 103,548       $ 40,510       $ 20,318       $ 107,971

RISKS AND UNCERTAINTIES

The Fund is one of the world's largest suppliers of sulphuric acid (acid), liquid sulphur dioxide (SO2) 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 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.  For a more detailed discussion of the Fund's risks, please refer to the RISK FACTORS section of the most recently filed Annual Information Form.

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.

The Fund's Board of Trustees periodically reviews a framework identifying the principal risks of the Fund's business, and ensures the implementation of appropriate systems to manage these risks.  The Audit Committee reviews major operations and financial risks, the systems implemented to monitor those risks and the strategies in place to manage those risks.  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 Relationship -

Vale Limited (Vale) is the Fund's largest sulphur products supplier.  Effective January 1, 2008, the Fund renewed its agreement with Vale for the marketing of all sulphur by-products produced by the Vale smelter in Sudbury, Ontario.  This 10-year contract contains similar terms to the prior agreements between the parties.  For the year ended December 31, 2010, this supply source accounted for approximately 9% 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 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 would have an impact on Distributable cash after maintenance capital expenditures of less than $0.1 million per annum.

On an unhedged basis, the Fund also currently estimates that a one-cent change in the exchange rate would have an impact on the translation of the net earnings of its U.S. currency based subsidiaries of less than $0.2 million per annum. 

Interest Rates -

The Fund has a credit facility with term debt and operating lines of credit which bear variable rates of interest.  As at December 31, 2010, on an unhedged basis, a change in interest rates of 1% per annum would have an impact on net earnings of approximately $0.8 million per annum.  As at December 31, 2010, the Fund had fixed interest rates on its term debt until August 2011.

Sulphuric Acid Pricing -

A change in realized sulphuric acid pricing, net of freight, of $1 per tonne, would have had an impact in the year on revenues in North America of approximately $1.2 million.  In any specific period, the exact impact would 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.  It is difficult to reliably estimate the impact of price changes on earnings as this depends upon the volume subject to risk-sharing supply contracts and changes in sulphur costs for manufactured sulphuric acid.  These factors lessen the impact of price changes on earnings relative to revenue.

Sulphur Costs -

The Fund uses sulphur in the manufacturing of several of its products in North America, including sulphuric acid.  At current operating levels, an increase of $1 per tonne would have an impact of approximately $0.1 million on cost of sales for the year.  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.

Sodium Chlorate Pricing -

Approximately 70% 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 2012 to 2015.  The Fund's operations could be disrupted if new collective bargaining agreements are not concluded prior to their expiry dates. 

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements 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.  Significant judgements and estimates include provisions for non-performance of customer and supplier contracts, allowance for doubtful accounts, insurance recoveries, TR LTIP, goodwill and intangibles.

RECENT ACCOUNTING PRONOUNCEMENTS

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.  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.  The Fund will apply these sections prospectively from January 1, 2011 onwards.

Convergence to International Financial Reporting Standards (IFRS) -

In February 2008, the Canadian Accounting Standards Board (AcSB) announced that 2011 is the changeover date for publicly accountable companies to use IFRS, replacing Canada's own GAAP. The changeover date applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. For the Fund, the transition date of January 1, 2010 (Transition Date) will require the re-statement for comparative purposes of amounts reported by the Fund for the year ended December 31, 2010.  The following outlines the Fund's IFRS conversion plan.

The Fund's IFRS Changeover Plan: Assessment as of December 31, 2010:

Key Activity Milestones Status / Deadlines
IFRS Conversion Scoping Phase Review of current standards vs. IFRS.  Identification of significant differences. 
Assessment of available resources.
Assignment and training of cross-functional and core team.
Monitoring of changes to Canadian GAAP and IFRS, and their impact to the Fund.
The review and determination of financial impact is substantially complete.
Changes to Canadian GAAP and IFRS were assessed, and changes to processes were made accordingly.
Decisions on Accounting Policies and IFRS1 Formal review of differences in each area with the core team and members of cross-functional team as required. 
Assessment of differences between IFRS and the Fund's current practices. 
Decision on accounting policy choices and IFRS1 for each assessed area.
All review sessions have been completed.
All IFRS1 and accounting policy choice decisions have been made.
Information Technology Evaluation Identification of IT requirements, both hardware and software, for IFRS conversion.
Development of implementation plan for new or upgraded software and any additional hardware required.
The Fund has upgraded its ERP software and is prepared for the adoption of IFRS.
Control Environment: 
Internal Control Over Financial Reporting and Disclosure Controls and Procedures
Review and assessment of impact of accounting policy choices and changes relating to IFRS conversion. 
Update of internal control testing procedures and documentation for all accounting policy choices and changes.
Implementation of appropriate changes:
▪ MD&A Disclosure Requirements
▪ Key Performance Indicators
▪ Investor Relations Communication Process
Appropriate changes to ensure the integrity of internal control over financial reporting and disclosure controls, and procedures have been made based on IFRS accounting policy decisions and IFRS1 choices.
Financial Statement Preparation Identification of transactions impacted by IFRS conversion.
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. 
Skeleton financial statements have been developed.
Financial Impact Analysis for Transactional Areas Analysis of differences between Canadian GAAP and IFRS that was completed will be quantified.  Senior Management to review and sign-off.  Quantification of differences between Canadian GAAP and IFRS is substantially complete.
Business Activities Impact Identification of impacts on business activities to be completed. Assessments and identifications of impacts of the conversion to IFRS have been completed.

Impact of Adoption of IFRS

IFRS are premised on a conceptual framework similar to Canadian GAAP, however, significant differences exist in certain matters of recognition, measurement and disclosure.  The following disclosure highlights areas in which adjustments are required to be made on adoption of IFRS in order to provide an opening balance sheet and the significant accounting policies required or expected to be applied by the Fund subsequent to adoption of IFRS that will be significantly different from the Fund's current accounting policies.  Quantification of adjustments are substantially complete and are disclosed below.  The Fund is in the process of finalizing the impact of IAS12 Income Taxes

IFRS1 - First Time Adoption of International Financial Reporting Standards

The Fund's adoption of IFRS will require the application of IFRS1 First Time Adoption of International Financial Reporting Standards (IFRS1), which provides guidance for an entity's initial adoption of IFRS.  IFRS1 generally requires that an entity apply all IFRS effective at the end of its first IFRS reporting period retrospectively.  However, IFRS1 does require certain mandatory exceptions and limited optional exemptions in specified areas of certain standards from this general requirement.  The following are the optional exemptions available under IFRS1 significant to the Fund.

Property, Plant and Equipment - IFRS1 provides a choice between measuring property, plant and equipment at its fair value at the date of transition and using those amounts as deemed cost or using the historical valuation.  The Fund will continue to apply the cost model for property, plant and equipment and will not re-state property, plant and equipment to fair value under IFRS.  The Fund will use the historical bases under Canadian GAAP as this approximates the historical cost under IFRS at the Transition Date.  Therefore, an adjustment to the opening balance sheet on the Transition Date will not be required.

Borrowing Costs - IFRS1 allows an entity to choose the date to apply capitalization of borrowing costs relating to all qualifying assets.  This date is either the later of January 1, 2009 or the date of transition to IFRS; or an earlier date.  The Fund has elected to prospectively apply the capitalization of borrowing costs relating to all qualifying assets from January 1, 2010 onwards.  Therefore, an adjustment to the opening balance sheet on the Transition Date will not be required.

Business Combinations - IFRS1 allows for the guidance under IFRS3 Business Combinations to be applied retrospectively or prospectively.  Retrospective application would require that the Fund re-state all business combinations that occurred prior to the Transition Date.  The Fund will elect to not retrospectively apply IFRS3 to business combinations that occurred prior to the Transition Date.  Therefore, an adjustment to the opening balance sheet on the Transition Date will not be required.

Cumulative Translation Differences - IAS21 The Effects of Changes in Foreign Exchange Rates requires an entity to determine the translation differences in accordance with IFRS from the date on which a foreign subsidiary was formed or acquired.  IFRS1 permits cumulative translation gains and losses recorded in accumulated other comprehensive income to be re-set to zero at the Transition Date.  The Fund will elect to re-set all cumulative translation gains and losses to zero in opening retained earnings at the Transition Date.  The Fund had cumulative translation losses of $40.9 million at December 31, 2009, therefore on the Transition Date, Deficit will increase by $40.9 million and Accumulated other comprehensive (loss) will decrease by $40.9 million.

Post-Employment Benefits - Under IAS19 Employee Benefits, an entity may elect to use a "corridor" approach that leaves some actuarial gains and losses unrecognized.  Under IFRS1, a first time adopter may elect to recognize into retained earnings all cumulative actuarial gains and losses at the date of transition of IFRS.  If a first time adopter uses this election, it shall apply the election to all defined benefit plans. However, this election can be used even if the entity uses the corridor approach for subsequent actuarial gains and losses.  The Fund will elect to recognize all actuarial gains and losses at the Transition Date.  The Fund had an unamortized net actuarial gain of $0.2 million at December 31, 2009, therefore on the Transition Date, Deficit and Post-Employment Benefits will both decrease by $0.2 million.

IFRS1 allows for certain other optional exemptions; however, the exemptions are not significant to the Fund's adoption of IFRS.

Ongoing IFRS to Canadian GAAP Differences

Property, Plant and Equipment

Componentization - Componentization requirements under IFRS are more explicit than Canadian GAAP.  Component accounting is required for significant parts and also required if the useful life and/or depreciation method is different for the significant part than for the remainder of the asset.  This requirement will have an impact on the Fund's property, plant and equipment values.  The impact to the Fund's financial statements on the Transition Date will be a decrease in Property, plant and equipment of $1.8 million and an increase in Deficit of $1.8 million.

Borrowing Costs - Under IFRS, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are capitalized as part of the cost of the qualifying asset.  Under Canadian GAAP the Fund does not capitalize borrowing costs.  The Fund has assessed the impact of the IAS23 requirements and has concluded that the impact of this requirement is not material.

Share-Based Payments

IFRS2 Share-based Payment requires the Fund's TR LTIP accrual to be calculated based on a fair value approach.  Under Canadian GAAP the accrual for TR LTIP is calculated based on an intrinsic value approach.  This change in valuation method will have an impact on its Accrued and Other Liabilities, Other Long-Term Liabilities and Selling, General, Administrative and Other Costs.  The Fund's TR LTIP accrual as at December 31, 2009 was $16.0 million.  Under the fair value approach, the TR LTIP accrual will be $11.8 million resulting in a decrease of $4.1 million in Other Long-Term Liabilities and a decrease in Deficit of $4.1 million at the Transition Date.

Although there is a strong correlation between TR LTIP expense calculated under IFRS and under Canadian GAAP, the Fund expects that the expense under IFRS will be generally less volatile than under Canadian GAAP, as it has lower sensitivity to short-term fluctuations in unit price and considers volatility over a longer period of time.

Post-Employment Benefits

As permitted under IAS19 Employee Benefits, the Fund will choose to recognize actuarial gains and losses directly in other comprehensive income rather than through profit and loss.  The effect of actuarial gains and losses will no longer affect net income under the Fund's accounting policy choice; however, equity is expected to be subject to variability as the effects of actuarial gains and losses will be recognized immediately, rather than being deferred and amortized over a period of time.

In addition, IAS19 Employee Benefits requires that multi-employer plans be categorized as defined benefit plans or defined contribution plans.  If a multi-employer plan is categorized as a defined benefit plan, it must be accounted for as any other defined benefit plan under IFRS.  Certain Pulp employees participate in the Pulp and Paper Industry Pension Trust Fund, a multi-employer plan.  The Fund has concluded that this plan is a defined contribution plan, therefore no adjustment is required at the Transition Date.  Certain International employees participate in a Swiss multi-employer plan.  The Fund has concluded that this plan is a defined benefit plan, and upon transition to IFRS, will recognize plan assets and plan liabilities on its balance sheet.  The Fund had a net defined benefit liability of $0.3 million as at the Transition Date, therefore on the Transition Date, Deficit and Post-Employment Benefits will both increase by $0.3 million.

Deferred Income Taxes

IAS12 Income Taxes is fundamentally similar to accounting for income taxes under Canadian GAAP except for a number of detailed requirements and applications. 

In circumstances where the tax rate varies depending on whether net earnings are distributed to Unitholders or retained within an entity, IAS12 stipulates that the rate to be used for the purposes of measuring both current and deferred tax assets and liabilities is the tax rate applicable to undistributed earnings.  Any income tax consequences of a distribution should only be accounted for in the period when a distribution is recognized as a liability in the financial statements.  The impact is that deferred tax assets and liabilities of the Fund, excluding those in its corporate subsidiaries, will be measured using the highest marginal tax rate for individuals, or approximately 46.4%.

Under IFRS, if a company's functional currency is different from the currency used to determine taxable profit or loss, then changes in the exchange rate will give rise to temporary differences that result in recognized deferred tax assets or liabilities with respect to non-monetary assets. 

Other differences in deferred income taxes arose due to the transition to IFRS with respect to accounting standards other than income taxes. 

The Fund is currently in the process of finalizing the total impact of these changes.

Transaction Costs

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.  Upon transition to IFRS, the Fund had unamortized transaction costs in the amount of $0.2 million relating to this term debt.  Under Canadian GAAP, the Fund treated this restructuring as a modification of the debt and did not write-off the remaining transaction costs.  However, per IAS39, where the denomination of the original liability is changed to a different currency, such restructuring is treated as an extinguishment of the original debt.  As such, the unamortized transaction costs will be written off on the Transition Date, resulting in an increase in long-term bank debt and Deficit of $0.2 million.

Impairment of Assets

The Fund has undergone a Goodwill impairment test, as of the Transition Date, in accordance with the guidelines set forth in IAS36.  The Fund has determined that there is no impairment to its Goodwill as a result of the transition to IFRS.

Units

The Fund's trust units have been under review to determine if they would be classified under IFRS as equity or liability on the balance sheet.  After a detailed analysis and review of the Fund's Declaration of Trust, the Fund has determined that its trust units would continue to be classified as equity under IFRS.  Therefore, an adjustment to the opening balance sheet on the Transition Date will not be required.

Convertible Debentures

Under Canadian GAAP, the Fund's convertible debentures were treated as a compound instrument with a debt and equity component.  The debt component was measured at amortized cost using the effective interest rate method, while the equity component was measured at the issue date using the residual method with no future changes in value recognized.  Under IFRS, the Fund has concluded that these convertible debentures do not have an equity component.  The Fund has elected to designate the entire instrument as a financial liability at fair value through profit or loss.  As the Fund's convertible debentures were not issued until the first quarter of 2010, an adjustment to the opening balance sheet on the Transition Date will not be required.

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 December 31, 2010 through inquiry, review and testing.  The Chief Executive Officer and the Chief Financial Officer have concluded that, as at December 31, 2010, the Fund's disclosure control procedures were effective. 

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.  The Fund retained an independent third party consultant to assist in the assessment of its internal control procedures. 

The Fund's management, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting and evaluating its effectiveness.  Management has used The Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework to evaluate the effectiveness of the Fund's internal control over financial reporting as of December 31, 2010.  Based on this evaluation, management has concluded that as at December 31, 2010, the Fund's internal controls over financial reporting were effective.  There have been no changes to the design of internal controls over financial reporting that occurred during the year ended December 31, 2010 that have materially affected or are likely to materially affect the internal controls over financial reporting.

OUTLOOK

Demand levels for our products, particularly acid, appear to be firm and we are benefiting from increased pricing. We expect this to positively impact our results, despite the risk/reward sharing aspects of some of our contracts and the increased cost of certain raw materials, particularly sulphur. From a supply perspective, we anticipate volume levels to be higher than 2010 as the Beaumont plant is fully operational.

The nature of our business model, combined with our strong balance sheet, is 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.

February 23, 2011

For further information:

Mark Davis      Rohit Bhardwaj
President and CEO     Vice-President, Finance and CFO
Tel:  (416) 496-4176     Tel: (416) 496-4177


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