Chemtrade Logistics Income Fund Announces 2009 Fourth Quarter and Annual<br>Results
TORONTO, Feb. 24 /CNW/ - Chemtrade Logistics Income Fund (TSX: CHE.UN) today announced results for the three months and year ended December 31, 2009. Chemtrade generated Distributable cash after maintenance capital expenditures for the year and fourth quarter that comfortably exceeded the Fund's current rate of distributions to Unitholders.
Mark Davis, President and Chief Executive Officer of Chemtrade, said, "We are pleased with the resiliency of our business as evidenced by our 2009 financial results. Similar to many companies, Chemtrade faced difficult economic conditions in 2009. We also faced some supply challenges with our Beaumont plant not resuming full operations until the second quarter and then the cessation of product supply from Vale Inco, a key supplier of sulphur products, since early May. In spite of these challenges, Chemtrade generated distributable cash after maintenance capital expenditures of $1.46 per unit for the year and $0.41 for the quarter, both of which more than adequately covered our annual distribution of $1.20 per unit."
Adjusted cash flow from operating activities for the fourth quarter was $22.1 million (2008: $18.7 million) and Distributable cash after maintenance capital expenditures for the period was $12.7 million, or $0.41 per unit (2008: $11.5 million, or $0.35 per unit), generated from revenue of $132.8 million (2008: $292.8 million). Earnings before interest, income taxes, depreciation and amortization (EBITDA) for the fourth quarter were $24.1 million (2008: $24.2 million) and net earnings were $12.5 million compared with a net loss of $2.5 million in the same period in 2008, which included unrealized foreign exchange losses of $12.2 million. Results for the fourth quarter of 2009 reflected the strong operating performance of the International and Pulp segments. The quarter's aggregate results also include the settlement of the business interruption insurance claim for the incident at the Beaumont plant in August 2008, offset by increased corporate costs. The fourth quarter 2008 results were affected by the Beaumont plant being off-line, and an increase of $3.4 million in the allowance for doubtful accounts.
For the full year, adjusted cash flow from operating activities was $68.7 million (2008: $99.0 million) and Distributable cash after maintenance capital expenditures was $44.9 million (2008: $83.5 million), or $1.46 per unit (2008: $2.50 per unit). EBITDA was $81.3 million (2008: $118.9 million) and net earnings for 2009 were $46.9 million (2008: $40.3 million).
Sulphur Products & Performance Chemicals (SPPC) generated revenue of $68.6 million in the fourth quarter compared with $148.4 million in the fourth quarter of 2008, reflecting lower prices for sulphur and sulphuric acid and lower volumes for most products, particularly lower sulphuric acid volume due to the work stoppage at Vale Inco, Chemtrade's largest supplier of sulphur products. EBITDA was $20.7 million in the fourth quarter compared with $16.5 million in 2008. EBITDA for the fourth quarter included an insurance recovery of $8.6 million relating to the settlement of the Beaumont business interruption claim whereas in the fourth quarter of 2008 Beaumont was off-line because of the incident. Net earnings of $14.2 million in the fourth quarter of 2009 compared with $5.1 million in the fourth quarter of 2008 reflected the higher operating results and lower interest expense and income taxes.
Pulp Chemicals reported improved fourth quarter revenue of $13.4 million compared with $10.2 million in 2008, reflecting increased demand. EBITDA was $5.2 million, compared with $3.4 million in 2008 and net earnings were $2.5 million in the fourth quarter of 2009 compared with $0.6 million earned in the same quarter of 2008.
International reported revenue of $50.7 million for the fourth quarter, compared with $134.2 million in 2008. Although revenue was lower than in 2008 when demand and prices were stronger, the segment benefited from certain contracts where customers who had delayed delivery from earlier in the year honoured their commitments in the fourth quarter. International generated EBITDA for the quarter of $16.2 million compared with $10.5 million last year.
Mr. Davis said, "Chemtrade's 2009 financial results reflected solid operating performances of our underlying businesses under difficult economic conditions and challenging supply issues for our largest volume product. The results demonstrate the ability of our business model and diversity of our earnings to mitigate the impact of adverse factors, and the success of our team in finding solutions that maintained our customer relationships.
"Looking ahead, the economy is on a stronger footing than a year ago. Demand for our products has stabilized and we expect the current level to be sustained or improve during 2010. The supply/demand characteristics for one of our key products, merchant sulphuric acid, are improving. Increased demand and the reduction of the acid supply base are among the positive trends for Chemtrade, though it may take some time for these factors to work their way through the supply chain. We believe these positive trends, together with our strong balance sheet and ample liquidity, are more than sufficient to maintain our distribution rate of $1.20 per unit."
Distributions
Distributions declared in the fourth quarter totalled $0.30 per unit, comprised of monthly distributions of $0.10 per unit declared in October, November and December 2009.
Chemtrade operates a diversified business providing industrial chemicals and services to customers in North America and around the world. Chemtrade is one of the world's largest suppliers of sulphuric acid, liquid sulphur dioxide and sodium hydrosulphite, and a leading processor of spent acid. Chemtrade is also a leading regional supplier of sulphur, sodium chlorate, phosphorous pentasulphide, and zinc oxide.
This news release contains certain statements which may constitute "forward-looking" statements within the meaning of certain securities laws, including the "safe harbour" provisions of the Securities Act (Ontario). The use of any of the words "anticipate", "continue", "estimate", "expect", "expected", "intend", "may", "will", "project", "plan", "should", "believe" and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this news release describe the expectations of Chemtrade as of the date of this news release. Our actual results could be materially different from our expectations if known or unknown risks affect our business, or if our estimates or assumptions turn out to be inaccurate. As a result, we cannot guarantee that any forward-looking statement will materialize. Forward-looking statements do not take into account the effect that transactions or non-recurring items announced or occurring after the statements are made may have on our business. We disclaim any intention or obligation to update any forward-looking statement even if new information becomes available, as a result of future events or for any other reason.
This news release contains forward-looking statements about the objectives, strategies, financial condition, results of operations and businesses of the Fund, including, but not limited to:
- The state of the economy and its effect on the Fund's business and
products.
- The Fund's ability to sustain its current distribution rate.
Financial outlook information contained in this press release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this press release should not be used for purposes other than those for which it is disclosed herein.
Further information can be found in the disclosure documents filed by Chemtrade Logistics Income Fund with the securities regulatory authorities, available at www.sedar.com.
A conference call to review the fourth quarter and full year 2009 results will be webcast live on www.chemtradelogistics.com and www.newswire.ca/webcast on Thursday, February 25, 2010 at 10:00 a.m.
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Balance Sheets
(in thousands of dollars)
December 31, December 31,
2009 2008
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ASSETS
Current assets
Cash and cash equivalents $ 19,885 $ 48,050
Accounts receivable (note 4) 75,748 138,640
Inventories (note 6) 20,107 38,124
Prepaid expenses and other assets (note
18(b)) 2,284 6,259
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118,024 231,073
Restricted cash (note 8(a)) 2,599 -
Notes receivable (note 7) 2,627 3,045
Property, plant and equipment (note 8) 156,960 169,174
Other assets (note 16(a)) 2,164 2,583
Future tax asset (note 14) 14,084 13,283
Intangibles (note 9) 108,389 137,227
Goodwill (note 9) 90,630 98,840
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$ 495,477 $ 655,225
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LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Accounts payable 42,918 122,685
Accrued and other liabilities (notes 11(f)
and 18(b)) 42,920 71,024
Distributions payable 3,067 3,178
Income taxes payable 2,855 8,157
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91,760 205,044
Long-term debt (note 10) 160,105 185,023
Other long-term liabilities (notes 11(f)
and 18(b)) 19,075 12,706
Post-employment benefits (note 15) 4,051 4,238
Future tax liability (note 14) 20,082 30,278
Unitholders' equity
Units (note 11(b)) 377,144 389,932
Contributed surplus (note 11(c)) 9,720 5,272
Deficit (143,112) (153,141)
Accumulated other comprehensive (loss)
(note 12) (43,348) (24,127)
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200,404 217,936
Commitments and contingencies (note 16)
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$ 495,477 $ 655,225
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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 Year ended
December 31, December 31,
2009 2008
-------------------------------------------------------------------------
Revenue $ 546,192 $ 1,178,826
Cost of sales and services (excluding
depreciation disclosed below) 422,010 1,015,945
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Gross profit 124,182 162,881
Selling, general, administrative and other
costs (note 13) 42,863 45,183
Restructuring costs (note 5) - (1,238)
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Earnings before the under-noted 81,319 118,936
Unrealized foreign exchange (gain) loss and
ineffectiveness of cash flow hedges (10,937) 16,712
Depreciation and amortization 44,146 41,123
Loss (gain) on disposal of property, plant
and equipment 79 (250)
Net interest and accretion expense (note 10) 8,693 13,535
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Earnings before income taxes 39,338 47,816
Income taxes (note 14)
Current 3,040 7,613
Future (10,622) (128)
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(7,582) 7,485
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Net earnings $ 46,920 $ 40,331
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Net earnings per unit (note 11(d))
Basic $ 1.52 $ 1.21
Diluted $ 1.52 $ 1.21
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Cost of sales and services for the year ended December 31, 2009 does not
include $22,412 (2008 - $17,020) 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 Year ended
December 31, December 31,
2009 2008
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Units
Balance, beginning of year $ 389,932 $ 412,957
Re-purchase of units (note 11(c)) (12,788) (23,025)
-------------------------------------------------------------------------
Balance, end of year $ 377,144 $ 389,932
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Contributed surplus
Balance, beginning of year $ 5,272 $ -
Re-purchase of units (note 11(c)) 4,448 5,272
-------------------------------------------------------------------------
Balance, end of year $ 9,720 $ 5,272
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-------------------------------------------------------------------------
Deficit
Balance, beginning of year $ (153,141) $ (154,040)
Changes in accounting policies - 474
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Balance, beginning of year, as adjusted (153,141) (153,566)
Net earnings 46,920 40,331
Distributions (36,891) (39,906)
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Balance, end of year $ (143,112) $ (153,141)
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Accumulated other comprehensive income
(loss) (note 12)
Balance, beginning of year $ (24,127) $ (53,305)
Other comprehensive (loss) income (19,221) 29,178
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Balance, end of year $ (43,348) $ (24,127)
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See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(in thousands of dollars)
Year ended Year ended
December 31, December 31,
2009 2008
-------------------------------------------------------------------------
Net earnings $ 46,920 $ 40,331
Change in unrealized loss on translation of
self-sustaining foreign operations (21,524) 33,456
Change in unrealized loss on derivatives
designated as cash flow hedges 397 (4,525)
Losses on derivatives designated as cash
flow hedges in prior years transferred to
net income in the current year 1,906 247
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Other comprehensive (loss) income (19,221) 29,178
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Comprehensive income $ 27,699 $ 69,509
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-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Cash Flows
(in thousands of dollars)
Year ended Year ended
December 31, December 31,
2009 2008
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings $ 46,920 $ 40,331
Items not affecting cash:
Depreciation and amortization 44,146 41,123
Future income taxes (10,622) (128)
Accretion expense 575 664
Loss (gain) on sale of property, plant
and equipment 79 (309)
Gain on settlement of property damage
claim (note 4) (2,671) -
Change in fair value of derivatives and
unrealized foreign exchange (gain) loss (9,813) 17,406
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68,614 99,087
(Increase) decrease in working capital (27,481) 48,817
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41,133 147,904
Financing activities:
Distributions to unitholders (37,003) (40,086)
Re-purchase of units (note 11(c)) (8,340) (17,753)
(Decrease) in operating line of credit - (41,113)
Financing transaction costs - (628)
Increase in other long-term liabilities 6,330 7,590
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(39,013) (91,990)
Investing activities:
Decrease in restricted cash 181 -
Additions to property, plant and equipment,
net of insurance proceeds (note 4) (24,706) (19,828)
Acquisitions (note 8(a)) (6,106) -
Proceeds from disposal of property, plant
and equipment 279 2,787
Notes receivable - (2,523)
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(30,352) (19,564)
Effect of exchange rates on cash held in
foreign currencies 67 (104)
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(Decrease) increase in cash and cash
equivalents (28,165) 36,246
Cash and cash equivalents - beginning of year 48,050 11,804
-------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 19,885 $ 48,050
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Supplemental information:
Cash taxes paid $ 8,343 $ 1,018
Cash interest paid $ 8,901 $ 13,219
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See accompanying notes to consolidated financial statements.
CHEMTRADE LOGISTICS INCOME FUND
Notes to Consolidated Financial Statements
(in thousands of dollars, except amounts per tonne)
December 31, 2009
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1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS:
Chemtrade Logistics Income Fund (the Fund) commenced operations on
July 18, 2001 when it completed an Initial Public Offering and
purchased various assets and related businesses from Marsulex Inc.
The Fund operates in four business segments: Sulphur Products &
Performance Chemicals (SPPC), Pulp Chemicals, International and
Corporate. For additional information regarding the Fund's business
segments see note 17.
2. CHANGES IN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS:
(a) Changes in accounting policies:
(i) Financial instruments disclosures
In May 2009, the Canadian Institute of Chartered Accountants (CICA)
amended Handbook Section 3862, Financial Instruments - Disclosures,
to include additional disclosure requirements about fair market value
measurements for financial instruments and liquidity risk
disclosures. These amendments require a three-level hierarchy that
reflects the significance of the inputs used in making the fair value
measurements. Fair values of assets and liabilities included in
Level 1 are determined by reference to unadjusted quoted prices at
the measurement date for identical assets and liabilities in active
markets. Assets and liabilities in Level 2 include valuations using
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
valuations are based on significant unobservable inputs which are
supported by little or no market activity. This new standard became
effective for the Fund on December 31, 2009, and the related
disclosure is included in note 18(c) to the consolidated financial
statements.
(ii) Goodwill and intangible assets
Effective January 1, 2009, the Fund adopted the recommendations of
the CICA Handbook Section 3064, Goodwill and Intangible Assets.
Section 3064 states that upon their initial identification,
intangible assets are to be recognized as assets if they meet the
definition of an intangible asset and if they satisfy the recognition
criteria contained in the Handbook section. This section also
provides further information on the recognition of internally
generated intangible assets (including research and development
costs).
Section 3064 carries forward the requirements of the old Section
3062, Goodwill and Other Intangible Assets with regards to the
subsequent measurement of intangible assets, goodwill, and
disclosure. The adoption of this section did not have an impact on
the Fund's consolidated financial statements.
(iii) Fair value of financial assets and financial liabilities
Effective January 1, 2009, the Fund adopted the recommendations of
EIC-173, entitled Credit Risk and the Fair Value of Financial Assets
and Financial Liabilities, which provides further information on the
determination of the fair value of financial assets and financial
liabilities under Section 3855, entitled Financial Instruments -
Recognition and Measurement. This EIC states that an entity's own
credit and the credit risk of the counter-party should be taken into
account in determining the fair value of financial assets and
financial liabilities, including derivative instruments. The adoption
of this EIC did not have an impact on the Fund's consolidated
financial statements.
(b) Recent accounting pronouncements:
(i) Convergence to international financial reporting standards (IFRS)
In January 2006, the CICA Accounting Standards Board (AcSB) adopted a
strategic plan for the direction of accounting standards in Canada.
The AcSB has confirmed that accounting standards in Canada for public
companies are to converge with IFRS effective for fiscal periods
beginning on or after January 1, 2011. The Fund has assembled an IFRS
transition team which continues to assess the impact of the
convergence of Canadian GAAP and IFRS, and will implement the new
IFRS standards.
(ii) Business combinations
In January 2009, the CICA issued Handbook Sections 1582, Business
Combinations; 1601, Consolidated Financial Statements; and 1602,
Non-Controlling Interests. These sections replace Handbook Sections
1581, Business Combinations; and 1600, Consolidated Financial
Statements. Section 1582 establishes standards for the accounting for
business combinations that is equivalent to the business combination
accounting standard under IFRS. Section 1582 is applicable for the
Fund's business combinations with acquisition dates on or after
January 1, 2011. Early adoption of this section is permitted.
Sections 1601 and 1602 establish standards for the preparation of
consolidated financial statements and for accounting for a
non-controlling interest in a subsidiary in the consolidated
financial statements subsequent to a business combination. Sections
1601 and 1602 are applicable for the Fund's interim and annual
consolidated financial statements for its fiscal year beginning
January 1, 2011. Early adoption of these sections is also permitted.
If the Fund chooses to early adopt any one of these sections, the
other two sections must also be adopted at the same time. The Fund is
currently evaluating the effect of these new sections on the
consolidated financial statements.
3. 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., BCT
Chemtrade Corporation, 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, 2009 and 2008.
(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 15 to 20 years, equipment
depreciated over 10 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 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, 2007.
(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 are 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, 2009 $606 (2008 - $660) 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 and long-term debt, 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, 2009 or 2008.
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. 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.
The Fund has designated hedge accounting for interest swap
arrangements. 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 and goodwill.
4. INSURANCE CLAIM:
During the third quarter of 2008, an incident occurred at the Fund's
Beaumont, Texas facility, which resulted in property damage and
business interruption. The Fund has settled the property damage and
the business interruption insurance claim with its insurer.
During 2009, the Fund received payments of US$5,500 and has recorded
a receivable of US$5,140 at December 31, 2009 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.
During the fourth quarter of 2008 and the first quarter of 2009, the
Fund incurred capital expenditures of US$9,839 relating to the repair
of damaged property at the Beaumont facility. The Fund has concluded
its property damage claim and has recovered most of its capital
expenditures relating to the repair. Since the repair costs exceeded
the net book value of the damaged assets and because the Fund was
reimbursed the repair costs, the Fund recognized a non-cash gain of
$2,671 at the conclusion of the claim. This gain was included in
selling, general, administrative and other costs in the SPPC segment.
The Fund also recovered $1,097 of costs incurred to preserve the
assets during the repair process. This recovery was included in cost
of sales and services in the SPPC segment where the costs were
originally recorded.
5. RESTRUCTURING COSTS:
During the fourth quarter of 2006, the Fund decided to discontinue
production of powder SHS and costs of $2,706 related to that decision
were recorded in that quarter. Accounting rules prescribe when costs
are to be recorded in such situations and certain costs can only be
recorded when they are incurred. Consequently, the Fund recorded an
additional $1,971 with respect to this decision during 2007. These
costs included a provision for a penalty on a long-term supply
agreement. During 2008, the penalty was waived. As a result, the Fund
reversed the penalty provision previously recorded of $1,238.
6. INVENTORIES:
2009 2008
---------------------------------------------------------------------
Raw materials and work in process $ 3,465 $ 4,487
Finished goods 13,924 30,462
Operating supplies 2,718 3,175
---------------------------------------------------------------------
$ 20,107 $ 38,124
---------------------------------------------------------------------
---------------------------------------------------------------------
7. NOTES RECEIVABLE:
During the second quarter of 2008, the Fund invested $2,523
(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.
8. PROPERTY, PLANT AND EQUIPMENT:
2009 2008
---------------------------------------------------------------------
Land $ 4,102 $ 3,699
Plant and equipment 270,621 278,127
Facilities and equipment under
construction 19,837 17,637
---------------------------------------------------------------------
294,560 299,463
Accumulated depreciation (137,600) (130,289)
---------------------------------------------------------------------
Property, plant and equipment $ 156,960 $ 169,174
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation expense $ 24,278 $ 20,715
---------------------------------------------------------------------
---------------------------------------------------------------------
(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.
(b) Gain on disposal of property:
During 2008, the Fund sold excess vacant land at its site in
Leeds, South Carolina for gross proceeds of US$2,927. As a
result of the sale, the Fund recognized a gain on disposal of
$250 (US$245).
9. INTANGIBLES AND GOODWILL:
Intangibles 2009 2008
---------------------------------------------------------------------
Intangibles subject to amortization:
Customer relationships $ 198,884 $ 214,226
Vendor relationships 8,160 9,431
Other 631 731
---------------------------------------------------------------------
207,675 224,388
Accumulated amortization (99,286) (87,161)
---------------------------------------------------------------------
Intangibles $ 108,389 $ 137,227
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Amortization expense $ 19,868 $ 20,408
---------------------------------------------------------------------
---------------------------------------------------------------------
At the time of the Fund's IPO, it had recorded intangibles of $29,157
related to the Vale Inco Limited (Vale Inco) agreement and these
intangibles were considered to have an indefinite life. When the
agreement with Vale Inco was renewed in the first quarter of 2008,
management revised its estimate of the useful life of the intangibles
to 10 years to coincide with the current term. As a result, the Fund
has begun amortizing these intangibles on a straight-line basis over
10 years beginning January 1, 2008. Consequently, for the year ended
December 31, 2009, the Fund recorded amortization of $2,916 (2008 -
$2,916).
The decrease in goodwill of $8,210 is due to translation of goodwill
of foreign operations.
10. LONG-TERM DEBT:
2009 2008
---------------------------------------------------------------------
Term bank debt
US$153,138 (2008 - US$153,138) $ 160,948 $ 186,522
Less: Transaction costs (843) (1,499)
---------------------------------------------------------------------
Long-term debt $ 160,105 $ 185,023
---------------------------------------------------------------------
---------------------------------------------------------------------
During the third quarter of 2008, under provisions allowed by its
credit agreement, the Fund converted its Canadian dollar denominated
term debt of $57,060 into U.S. dollar term debt and $25,200 of its
outstanding Canadian dollar lines of credit into U.S. dollar lines of
credit.
During the second quarter of 2008, the Fund extended the term of its
senior credit facilities to August 2, 2011. This was a two-year
extension to the original term, on substantially the same terms as
the original agreement. The Fund incurred transaction costs of $628
related to this extension. As the Fund is treating this extension as
a modification of the debt, rather than an extinguishment, these
transaction costs have been added to the remaining unamortized
transaction costs from the pre-existing agreements.
At December 31, 2009, the Fund had senior credit facilities of
$236,626. Borrowings under these facilities may be made in Canadian
or U.S. dollars. The credit facilities are allocated as follows:
$160,948 term loan and $75,678 in revolving credit facilities
(operating lines of credit of US$68,103 ($71,576) as well as bank
overdraft facilities of $2,000 and US$2,000 ($2,102)). The term bank
debt is not due or payable until August 2011. All transaction costs
will be expensed to net interest and accretion expense using the
effective interest method over the life of the debt. Borrowings under
the revolving credit facilities are subject to interest at rates that
vary with LIBOR. 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.
At December 31, 2009, $7,309 of the total facility has been utilized
in the form of standby letters of credit and there are no amounts
outstanding on the operating lines of credit (December 31, 2008 -
$nil).
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. For the year ended December 31, 2009, the
Fund's weighted average effective interest rate on its term debt was
4.83%.
Previously the Fund had interest rate swaps related to its term debt
and operating lines of credit, which fixed interest rates until
August 2010. The Fund collapsed all of these interest rate swaps upon
entering into the new interest rate swap arrangements and rolled the
related fair value liability of $9,790 into its new interest rate
swaps. This value will be amortized on a straight-line basis over the
remaining term of the term debt in unrealized foreign exchange (gain)
loss and ineffectiveness of cash flow hedges.
In the third quarter of 2008, the Fund collapsed its swap
arrangements on its Canadian dollar denominated term debt and
recognized a loss of $897 which has been included in net interest and
accretion expense.
11. UNITS:
(a) Authorized:
Unlimited number of units.
(b) Outstanding:
Number of 2009 Number of 2008
Units Amount Units Amount
---------------------------------------------------------------------
Units
Balance -
beginning
of year 31,710,410 $ 389,932 33,582,936 $ 412,957
Units
re-purchased
for
cancellation
(note 11(c)) (1,039,940) (12,788) (1,872,526) (23,025)
---------------------------------------------------------------------
Balance - end
of year 30,670,470 $ 377,144 31,710,410 $ 389,932
---------------------------------------------------------------------
---------------------------------------------------------------------
(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.
During 2008, the Fund purchased 1,872,526 units at an average per
unit price of $9.48 for an aggregate purchase amount of $17,753.
This resulted in $23,025 being recorded as a reduction to the
value of units and $5,272 being recorded as contributed surplus.
(d) Net earnings per unit:
Net earnings per unit has been calculated on the basis of the
weighted average number of units outstanding for the year ended
December 31, 2009 which amounted to 30,818,352 units (2008 -
33,370,769 units).
(e) Distributions:
Distributions paid for the year ended December 31, 2009 were
$37,003 (2008 - $40,086). All of the Fund's distributions are
discretionary.
(f) Long-term incentive plan:
The Fund operates a Total Return Long-Term Incentive Plan (TR
LTIP) which grants cash awards based on achieving total
Unitholder return over a performance period. Total Unitholder
return consists of changes in unit price and distributions paid
to Unitholders. The Fund treats these awards as liabilities with
the value of these liabilities being re-measured at each
reporting period, based upon changes in the intrinsic value of
the awards. Any gains or losses on re-measurement are recorded in
the Consolidated Statements of Earnings, provided that the
aggregate compensation cost accrued during the performance period
is not adjusted below zero. For the year ended December 31, 2009,
the Fund recorded an expense of $12,545 (2008 - $3,165) related
to the TR LTIP. As at December 31, 2009 a liability of $15,979
(2008 - $5,161) has been recorded, of which $5,177 (2008 -
$1,661) is included in Accrued and other liabilities and $10,802
(2008 - $3,500) is included in Other long-term liabilities.
12. ACCUMULATED OTHER COMPREHENSIVE (LOSS):
The components of accumulated other comprehensive (loss) as at
December 31, 2009 and 2008 and other comprehensive income (loss) for
the year ended were as follows:
Accumulated
other Balance Transferred Balance
comprehensive December 31, to net December 31,
(loss) 2007 Net change income 2008
---------------------------------------------------------------------
Unrealized (loss)
gain on
translation of
self-sustaining
foreign
operations
(note 3(k)) $ (52,867) $ 33,456 $ - $(19,411)(1)
(Loss) gain on
derivatives
designated as
cash flow hedges (438) (4,525) 247(2) (4,716)(3)
---------------------------------------------------------------------
Accumulated other
comprehensive
(loss) $ (53,305) $ 28,931 $ 247 $ (24,127)
---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated Ending
other Transferred balance
comprehensive to net December 31,
(loss) Net change income 2009
---------------------------------------------------------
Unrealized (loss)
gain on
translation of
self-sustaining
foreign
operations
(note 3(k)) $ (21,524) $ - $(40,935)(1)
(Loss) gain on
derivatives
designated as
cash flow hedges 397 1,906(4) (2,413)(3)
--------------------------------------------------------
Accumulated other
comprehensive
(loss) $ (21,127) $ 1,906 $ (43,348)
--------------------------------------------------------
--------------------------------------------------------
(1) Net of income tax expense of $nil (2008 - $nil).
(2) Losses on derivatives designated as cash flow hedges in prior
years transferred to net income in the current year.
(3) Net of cumulative income tax recovery of $2,266 (2008 - $3,144).
(4) Ineffectiveness of cash flow hedges.
13. SELLING, GENERAL, ADMINISTRATIVE AND OTHER COSTS:
Selling, general, administrative and other costs include a net
foreign exchange gain of $1,809 (2008 - $3,046).
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. If the Fund's equity capital
grows beyond certain dollar limits prior to January 1, 2011, the Fund
would become a SIFT and would commence in that year being subject to
tax on certain income distributed. The Fund expects that its income
distributed will not be subject to tax prior to 2011 and accordingly
has not provided for future income taxes on its temporary differences
and those of its flow-through subsidiary trust and partnerships
expected to reverse prior to 2011 as it is considered tax exempt for
accounting purposes.
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 32.2% (2008 - 32.5%). The
differences are as follows:
2009 2008
---------------------------------------------------------------------
Earnings before income taxes $ 39,338 $ 47,816
Computed income tax expense at Canadian
statutory rate 12,667 15,540
Increase (decrease) resulting from:
Income of trust taxed directly to unitholders (15,437) (8,486)
Non-deductible goodwill and other intangibles 262 264
Difference in substantially enacted tax rate 285 (14)
International income tax rate differences (6,506) (6,904)
Change in valuation allowance 1,461 7,279
Other (314) (194)
---------------------------------------------------------------------
Income tax (recovery) expense $ (7,582) $ 7,485
---------------------------------------------------------------------
---------------------------------------------------------------------
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:
2009 2008
---------------------------------------------------------------------
Non-current future tax assets:
Inventories $ 616 $ 1,421
Loss carry forwards 44,992 51,339
Issuance costs 900 1,060
Long-term incentive plan and incentive
compensation 5,135 1,464
Interest 12,273 10,398
Asset retirement obligations 229 250
Prepaid expenses 1,985 2,725
Allowance for doubtful accounts 1,803 1,501
Unrealized foreign exchange 1,545 -
Other 785 1,292
---------------------------------------------------------------------
70,263 71,450
Valuation allowance (36,814) (37,117)
---------------------------------------------------------------------
Total future tax assets 33,449 34,333
---------------------------------------------------------------------
---------------------------------------------------------------------
Non-current future tax liabilities:
Property, plant and equipment 23,840 28,372
Intangible assets 14,829 19,192
Unrealized foreign exchange - 3,034
Ground lease 698 725
Deferred charges 80 5
---------------------------------------------------------------------
Total future tax liabilities 39,447 51,328
---------------------------------------------------------------------
---------------------------------------------------------------------
Net future tax liability $ (5,998) $ (16,995)
---------------------------------------------------------------------
---------------------------------------------------------------------
Classified in the financial statements as:
Future non-current tax asset $ 14,084 $ 13,283
Future non-current tax liability (20,082) (30,278)
---------------------------------------------------------------------
Net future tax liability $ (5,998) $ (16,995)
---------------------------------------------------------------------
---------------------------------------------------------------------
A valuation allowance has been provided against future tax assets of
certain Canadian and 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.
The aggregate tax bases of the Fund's assets and liabilities and the
assets and liabilities of its flow-through subsidiaries exceed the
aggregate carrying values by $7,946. In 2008, the aggregate tax bases
exceeded the aggregate carrying values by $6,952. At December 31,
2009 a future tax asset of $1,140 (2008 - $nil) has been recorded
with respect to these temporary differences.
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 $57,776 of the losses in
one of the U.S. corporate subsidiaries. The losses expire as follows:
---------------------------------------------------------------------
2010 $ 1,026
2014 2,918
2015 6,410
2022 and thereafter 132,794
---------------------------------------------------------------------
$ 143,148
---------------------------------------------------------------------
---------------------------------------------------------------------
15. POST-EMPLOYMENT BENEFITS:
The Fund provides certain health care and pension benefits for
certain employees upon retirement of Pulp Chemicals and Kemmax. Both
the pension and health care benefits are funded on a pay-as-you go
basis.
Components of net periodic benefit cost 2009 2008
---------------------------------------------------------------------
Current service cost $ 35 $ 66
Interest cost 219 198
Actuarial (gain) 339 (407)
---------------------------------------------------------------------
Costs arising in the period 593 (143)
Differences between costs arising in the
period and costs recognized in the period in
respect of actuarial gain (350) 87
---------------------------------------------------------------------
Net periodic benefit cost recognized $ 243 $ (56)
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average assumptions 2009 2008
---------------------------------------------------------------------
Discount rate 5.30-7.25% 6.00-7.50%
Ultimate other medical trend rate 4.50% 4.60%
---------------------------------------------------------------------
---------------------------------------------------------------------
Change in accrued benefit obligation 2009 2008
---------------------------------------------------------------------
Accrued benefit obligation at beginning
of year $ 3,896 $ 3,574
Current service cost 35 66
Interest cost 219 198
Plan amendments 41 124
Benefits paid (263) (185)
Foreign exchange (430) 527
Actuarial (gain) 339 (408)
---------------------------------------------------------------------
Accrued benefit obligation at end of year $ 3,837 $ 3,896
---------------------------------------------------------------------
---------------------------------------------------------------------
Reconciliation of funded status 2009 2008
---------------------------------------------------------------------
Deficit at end of year $ (3,837) $ (3,896)
Unamortized net actuarial (gain) loss (214) (342)
---------------------------------------------------------------------
Accrued benefit liability $ (4,051) $ (4,238)
---------------------------------------------------------------------
---------------------------------------------------------------------
Pulp Chemicals 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 2009
was $179 (2008 - $189).
BCT employees participate in a Swiss multi-employer defined benefit
pension plan. The employer related expense under this Plan in 2009
was $295 (2008 - $174).
16. COMMITMENTS AND CONTINGENCIES:
(a) Operating leases:
Under the terms of operating leases, the Fund is committed to
rental payments as follows:
-----------------------------------------------------------------
2010 $ 19,232
2011 13,789
2012 11,174
2013 8,027
2014 2,934
2015 and thereafter 3,186
-----------------------------------------------------------------
$ 58,342
-----------------------------------------------------------------
-----------------------------------------------------------------
The Fund has recorded deferred rent expense of $1,827 (2008 -
$1,898) 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 which, in the opinion of
management, 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.).
SPPC markets, removes and/or produces merchant and regenerated
sulphuric acid, liquid sulphur dioxide, sodium hydrosulphite,
elemental sulphur and phosphorous pentasulphide. These products are
marketed primarily to North American customers.
Pulp produces sodium chlorate and crude tall oil. These products are
marketed primarily to Canadian customers.
Intl. provides removal and marketing services for elemental sulphur
and sulphuric acid. These products are marketed to customers in
Europe, the Mediterranean, North Africa, Central and South America,
North America, as well as in the Pacific region.
Corp. is a non-operating segment that provides centralized services
such as treasury, finance, information systems, human resources,
legal and risk management.
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) - - - (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
---------------------------------------------------------------------
---------------------------------------------------------------------
Year Ended December 31, 2008
---------------------------------------------------------------------
SPPC Pulp Intl. Corp. Total
---------------------------------------------------------------------
Revenue from
external
customers $538,930 $ 53,354 $586,542 $ - $1,178,826
Earnings before
the under-noted 86,477 18,635 34,884 (21,060) 118,936
Unrealized foreign
exchange loss - - - 16,712 16,712
Depreciation and
amortization 30,350 9,156 1,617 - 41,123
(Gain) on disposal
of property, plant
and equipment (250) - - - (250)
Net interest and
accretion expense 11,235 2,700 (400) - 13,535
Income taxes 3,497 - 3,988 - 7,485
Net earnings 41,645 6,779 29,679 (37,772) 40,331
Total assets 367,677 91,687 195,128 733 655,225
Goodwill 66,883 - 31,957 - 98,840
Intangibles 91,762 39,597 5,868 - 137,227
Capital
expenditures 13,628 906 4,472 822 19,828
---------------------------------------------------------------------
---------------------------------------------------------------------
Geographic segments:
The Fund operates primarily in Canada, the United States and Europe.
Revenue is attributed to customers based on location of customer.
---------------------------------------------------------------------
Property, Property,
Plant and Plant and
Equipment, Equipment,
Goodwill Goodwill
Revenue and Other Revenue and Other
Year ended Intangibles Year ended Intangibles
December 31, December 31, December 31, December 31,
2009 2009 2008 2008
---------------------------------------------------------------------
Canada $ 119,875 $ 110,876 $ 144,927 $ 122,318
USA and other 256,439 202,174 447,357 234,540
Europe 169,878 42,929 586,542 48,383
---------------------------------------------------------------------
$ 546,192 $ 355,979 $1,178,826 $ 405,241
---------------------------------------------------------------------
---------------------------------------------------------------------
There were no producers from which the Fund obtained product that
accounted for more than 10% of the Fund's total revenue in 2009. In
2008, the Fund obtained product from a producer that accounted for
13.2% of the Fund's total revenue. In 2009, revenue from a customer
accounted for 10.2% of the Fund's total revenue. There were no
customers that accounted for more than 10% of the Fund's total
revenue in 2008.
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:
2009 2008
-----------------------------------------------------------------
Held for trading
Cash and cash equivalents $ 19,885 $ 48,050
Restricted cash 2,599 -
Notes receivable 2,627 3,045
Derivatives designated as held for
trading - gain / (loss) 1,007 742
Loans and receivables
Accounts receivable 75,748 138,640
Other financial liabilities
Accounts payable 42,918 122,685
Accrued and other liabilities 42,920 71,024
Distributions payable 3,067 3,178
Derivatives designated as cash flow
hedges - gain / (loss) (6,677) (7,861)
Long-term debt 160,105 185,023
-----------------------------------------------------------------
-----------------------------------------------------------------
(b) Derivatives and hedging:
-----------------------------------------------------------------
2009 2008
Fair Value Fair Value
Notional Liabil- Notional Liabil-
Amount Asset ity Amount Asset ity
-----------------------------------------------------------------
Cash flow
hedges
Interest
rate
swaps US$153,138 $ - $ 6,677 US$155,828 $ - $ 7,861
Derivatives
not
designated
in a formal
hedging
relationship
Interest
rate swaps - - - US$34,456 - 1,247
Foreign
exchange
contracts(1) - 1,166 159 - 1,029 215
Commodity
forward
contracts(2) N/A 148 148 N/A 1,246 71
-----------------------------------------------------------------
Total $ 1,314 $ 6,984 $ 2,275 $ 9,394
-----------------------------------------------------------------
-----------------------------------------------------------------
Current $ 1,314 $ 307 $ 2,275 $ 2,978
Non-current - 6,677 - 6,416
-----------------------------------------------------------------
Total $ 1,314 $ 6,984 $ 2,275 $ 9,394
-----------------------------------------------------------------
-----------------------------------------------------------------
(1) See below for notional amounts.
(2) Includes natural gas forward contracts, 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. In the first quarter of 2009,
the Fund entered into new swap arrangements which fixed the LIBOR
component of its interest rates on all of its term debt until
August 2011. Previously the Fund had interest rate swaps related
to its term debt and operating lines of credit, which fixed the
LIBOR component of its interest rate until August 2010. The Fund
collapsed all of these interest rate swaps upon entering into the
new swap arrangements. Losses are included in accrued and other
liabilities and other long-term liabilities with the offset
included in other comprehensive income, except for the
amortization of the fair value liability of the interest rate
swaps entered into during the first quarter of 2009 as discussed
in note 10 which is included in unrealized foreign exchange
(gain) loss and ineffectiveness of cash flow hedges.
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, 2009
include future contracts to sell US$8,407, C$7,602 and
(euro)1,416 at weighted average exchange rates of (euro)0.79,
(euro)0.65 and US$1.43, respectively, for periods through to
January 2011.
To manage its exposure to changes in the price of natural gas,
the Fund has entered into natural gas forward contracts. The
Fund sells specific quantities of natural gas at pre-determined
dates on indices, which are matched with the anticipated
operational cash flows.
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, 2009 and December 31, 2008, 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, restricted cash, notes receivable, accounts payable,
accrued and other liabilities and distributions payable
approximate their fair values because of the short-term maturity
of these financial instruments. The carrying amount of long-term
debt, excluding transaction costs, approximates fair value as the
debt accrues interest at prevailing market rates.
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,
2009 in valuing the Fund's derivative financial instruments
carried at fair value:
Quoted
prices
in active
markets Significant
for other Significant
identical observable unobservable
assets inputs inputs
(Level 1) (Level 2) (Level 3) Total
-----------------------------------------------------------------
Derivatives
designated as
held for trading
Foreign exchange
contracts $ - $ 1,007 $ - $ 1,007
Natural gas
forward contracts - - - -
-----------------------------------------------------------------
Total $ - $ 1,007 $ - $ 1,007
-----------------------------------------------------------------
-----------------------------------------------------------------
Derivatives
designated as
cash flow hedges
Interest rate swap
arrangements $ - $ (6,677) $ - $ (6,677)
-----------------------------------------------------------------
Total $ - $ (6,677) $ - $ (6,677)
-----------------------------------------------------------------
-----------------------------------------------------------------
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 natural gas forward contracts is the
difference between the forward natural gas 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, 2009 are as follows:
Less
Than 1-3 4-5 After
Total 1 Year Years Years 5 Years
---------------------------------------------------------------
Long-Term
Debt
(note 10) $ 160,948 $ - $ 160,948 $ - $ -
Interest on
Long-Term
Debt 12,302 7,770 4,532 - -
---------------------------------------------------------------
Total
Financial
Liabilit-
ies $ 173,250 $ 7,770 $ 165,480 $ - $ -
---------------------------------------------------------------
---------------------------------------------------------------
(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 of 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. A one-cent change in
the exchange rate would also have an impact of approximately
$500 on the Fund's net earnings because of its U.S. dollar
denominated long-term debt.
(b) Interest rate risk
The Fund has a credit facility with long-term debt and
operating lines of credit which bear variable rates of
interest. As at December 31, 2009, on an unhedged basis, a
change in interest rates of 1% per annum would have an impact
of approximately $1,600 on the Fund's net earnings per annum.
As at December 31, 2009, the Fund had fixed interest rates on
100% of its total long-term 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 an impact in the year on revenues in
North America of approximately $800. Typically, given the risk-
sharing aspect of a key supply contract, the impact of price
changes on earnings would have ranged from $300 to $350. In any
specific period, the exact impact would also depend upon the
volume that is subject to sales contracts where pricing has
been fixed for a period of time. The magnitude of realized
price changes also depends upon regional market dynamics.
Sulphur costs -
The Fund uses sulphur in the manufacturing of several of its
products in North America, including sulphuric acid. At current
operating levels, an increase of $1 per tonne would have an
impact of approximately $120 for the year, with approximately
82% of this related to the production of sulphuric acid. It is
important to note that a change in the cost of sulphur is
likely to lead to a change in the price for sulphuric acid as
this is a key input cost in the manufacturing of sulphuric
acid. Thus, the net impact on earnings of changes in sulphur
costs would depend upon changes in sulphuric acid pricing.
Increasingly, the pricing of sulphuric acid is being adjusted
for changes in sulphur costs and consequently future changes in
the cost of sulphur are expected to be offset by changes in
sulphuric acid pricing.
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 and
long-term debt. The long-term debt does not require payment until
August 2011.
The Fund intends to maintain a flexible capital structure consistent
with the objectives stated above and to respond to changes in
economic conditions and the risk characteristics of underlying
assets. In order to maintain or adjust its capital structure, the
Fund may purchase units for cancellation, issue new units, raise debt
(secured, unsecured, convertible and/or other types of available debt
instruments) or refinance existing debt with different
characteristics.
The Fund utilizes annual capital and operating expenditure budgets to
facilitate the management of its capital requirement. These budgets
are approved by the Board of Trustees. Budgets are updated if there
are significant changes in the fundamental underlying assumptions
during a period.
The Fund is subject to certain covenants on its credit facilities,
which include a debt to EBITDA ratio (as both terms are defined in
the credit agreement) and an interest coverage ratio. The Fund
monitors these ratios and reports them to its lenders on a quarterly
basis. As at December 31, 2009 and December 31, 2008, 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.
CHEMTRADE LOGISTICS INCOME FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2009
The information in this Management's Discussion and Analysis, or MD&A, is intended to assist the reader in the understanding and assessment of the trends and significant changes in the results of operations and financial condition of Chemtrade Logistics Income Fund. Throughout this MD&A, the term the "Fund" refers to Chemtrade Logistics Income Fund and its consolidated subsidiaries. The terms "we", "us" or "our" similarly refers to the Fund. This MD&A should be read in conjunction with the audited consolidated financial statements of the Fund for the year ended December 31, 2009.
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;
- the ability to comply with the new emission limits imposed by the EPA and the expected cost of compliance;
- the estimated impact of the Canadian/U.S. dollar exchange rate on the Fund's business;
- the anticipated tax characterization of planned distributions;
- the Fund's ability to renew its term debt at maturity;
- the use and sufficiency of cash flows from operating activities; and
- the potential impact of recent accounting pronouncements, including the timing of the implementation of various steps in connection with the transition to IFRS.
Financial outlook information contained in the MD&A about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this MD&A should not be used for purposes other than those for which it is disclosed herein.
FINANCIAL HIGHLIGHTS
Three Months Ended Year Ended
($'000 except ------------------ ----------
per unit December December December December December
amounts) 31, 2009 31, 2008 31, 2009 31, 2008 31, 2007
-------------------------------------------------------------------------
Revenue $ 132,756 $ 292,789 $ 546,192 $1,178,826 $ 546,636
Net earnings
(loss)(4) $ 12,491 $ (2,460) $ 46,920 $ 40,331 $ 20,596
Net earnings
(loss) per
unit
- Basic $ 0.41 $ (0.08) $ 1.52 $ 1.21 $ 0.61
- Diluted(5) $ 0.41 $ (0.08) $ 1.52 $ 1.21 $ 0.61
Total
assets(4) $ 495,477 $ 655,225 $ 495,477 $ 655,225 $ 510,575
Long-term
debt $ 160,105 $ 185,023 $ 160,105 $ 185,023 $ 155,206
EBITDA(3) $ 24,057 $ 24,204 $ 81,319 $ 118,936 $ 68,644
EBITDA per
unit(1)(3) $ 0.78 $ 0.74 $ 2.64 $ 3.56 $ 2.04
Cash flows from
operating
activities $ 25,375 $ 94,182 $ 41,133 $ 147,904 $ 47,742
Cash flows from
operating
activities
per unit(1) $ 0.83 $ 2.88 $ 1.33 $ 4.43 $ 1.42
Adjusted cash
flows from
operating
activit-
ies(3) $ 22,139 $ 18,667 $ 68,681 $ 99,043 $ 54,351
Adjusted cash
flows from
operating
activities per
unit(1)(3) $ 0.72 $ 0.57 $ 2.23 $ 2.97 $ 1.62
Distributable
cash after
maintenance
capital expe-
nditures(3) $ 12,678 $ 11,490 $ 44,900 $ 83,488 $ 47,501
Distributable
cash after
maintenance
capital
expenditures
per
unit(1)(3) $ 0.41 $ 0.35 $ 1.46 $ 2.50 $ 1.41
Distributions
declared $ 9,201 $ 9,691 $ 36,891 $ 39,906 $ 40,299
Distributions
declared per
unit(2) $ 0.30 $ 0.30 $ 1.20 $ 1.20 $ 1.20
Distributions
paid $ 9,201 $ 9,861 $ 37,003 $ 40,086 $ 40,971
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 32,738,881 30,818,352 33,370,769 33,582,848
(2) Based on actual number of units
outstanding on record date.
(3) See NON-GAAP MEASURES.
(4) For the year ended December 31, 2007, net earnings and total assets
have been adjusted as a result of adopting CICA Handbook Section
3031, Inventories on a retrospective basis. The adjustment did not
have a material impact on net earnings per unit (basic and diluted).
(5) There were no dilutive common shares which impacted diluted net
earnings (loss) per unit.
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 funds or companies, and accordingly may not be comparable to similar measures presented by other organizations. A reconciliation of EBITDA to net earnings follows:
Three Months Ended Year Ended
------------------ ----------
December December December December December
($'000) 31, 2009 31, 2008 31, 2009 31, 2008 31, 2007
-------------------------------------------------------------------------
Net earnings
(loss) $ 12,491 $ (2,460) $ 46,920 $ 40,331 $ 20,596
Add:
Unrealized
foreign
exchange
loss (gain)
and ineffect-
iveness of
cash flow
hedges 1,109 12,195 (10,937) 16,712 (776)
Depreciation
and amortiz-
ation 10,623 11,240 44,146 41,123 38,713
(Gain) loss
on disposal
of property,
plant and
equipment (15) - 79 (250) -
Net interest
and
accretion
expense 2,126 4,070 8,693 13,535 12,633
Net taxes (2,277) (841) (7,582) 7,485 (2,480)
Minority
interest - - - - (22)
-------------------------------------------------------------------------
EBITDA(1) $ 24,057 $ 24,204 $ 81,319 $ 118,936 $ 68,664
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA for the three months and year ended December 31, 2009
includes recoveries of $nil and $nil respectively (2008 recoveries
of $nil and $1,238 respectively) for restructuring. EBITDA for
the year ended December 31, 2007 included charges of $1,971 for
restructuring.
Cash Flow -
The following table is derived from, and should be read in conjunction with, the consolidated statement of cash flows. Management believes this supplementary disclosure provides useful additional information related to the cash flows of the Fund including the amount of cash available for distribution to Unitholders, repayment of debt and other investing activities. Certain sub-totals presented within the cash flows table below, such as "Adjusted cash flows from operating activities", "Distributable cash after maintenance capital expenditure" and "Distributable cash after all capital expenditure", are not defined terms under Canadian GAAP. These sub-totals are used by management as measures of internal performance and as a supplement to the consolidated statement of cash flows. Investors are cautioned that these measures should not be construed as an alternative to using net income as a measure of profitability or as an alternative to the GAAP consolidated statement of cash flows. Further, the Fund's method of calculating each measure may not be comparable to calculations used by other income trusts bearing the same description.
Three Months Ended Year Ended
------------------ ----------
December December December December December
($'000) 31, 2009 31, 2008 31, 2009 31, 2008 31, 2007
-------------------------------------------------------------------------
Cash flows from
operating
activities $ 25,375 $ 94,182 $ 41,133 $ 147,904 $ 47,742
Add (deduct):
Changes in
non-cash
working
capital and
other items (3,236) (75,515) 27,548 (48,861) 6,609
-------------------------------------------------------------------------
Adjusted cash
flows from
operating
activities 22,139 18,667 68,681 99,043 54,351
Less:
Maintenance
capital
expenditure 9,461 7,177 23,781 15,555 6,850
-------------------------------------------------------------------------
Distributable
cash after
maintenance
capital
expenditure 12,678 11,490 44,900 83,488 47,501
Less:
Non-maintenance
capital
expenditure(1) 265 1,061 925 4,273 2,216
-------------------------------------------------------------------------
Distributable
cash after all
capital
expenditure 12,413 10,429 43,975 79,215 45,285
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 2009 was $132.8 million, compared with consolidated revenue of $292.8 million recorded in the fourth quarter of 2008. Consolidated revenue for the years ended December 31, 2009 and 2008 were $546.2 million and $1.2 billion respectively. The main reason for the quarterly and annual declines was lower prices for sulphur and sulphuric acid in the International and SPPC segments. Additionally, most product lines experienced lower volumes owing to a general reduction in demand, driven by the global economic conditions prevalent through most of 2009 and a labour disruption at the Fund's largest supplier of sulphur products that started half-way through 2009.
The Fund's net earnings and EBITDA for the fourth quarter of 2009 were $12.5 million and $24.1 million respectively compared to net loss and EBITDA for the fourth quarter of 2008 of $2.5 million and $24.2 million respectively. EBITDA for the fourth quarter of 2009 was similar to the same quarter of 2008. The negative impact of lower volume and prices for most product lines and unusually high accruals for the Fund's Total Return Long-Term Incentive Plan (TR LTIP), was offset by strong performance in the International segment and the settlement of the business interruption insurance claim (more fully described in the BEAUMONT INCIDENT section) during the fourth quarter of 2009. Net earnings for the fourth quarter of 2009 were significantly higher than the same quarter of 2008 primarily due to the high unrealized foreign exchange loss recorded in 2008. These unrealized foreign exchange gains and losses relate to the translation of the Fund's long-term debt which is denominated in U.S. dollars.
Net earnings and EBITDA for 2009 were $46.9 million and $81.3 million respectively. Comparable net earnings and EBITDA for 2008 were $40.3 million and $118.9 million respectively. EBITDA in 2009 was lower than the same period of 2008 due to significantly lower results in SPPC and International, reflecting the weak economic conditions prevalent through most of 2009. The positive impact of the insurance recovery was partially offset by higher TR LTIP accruals during 2009. Despite EBITDA in 2009 being lower that 2008, 2009 earnings were stronger than 2008. This was mainly due to unrealized foreign exchange gains recorded during 2009 compared with large unrealized foreign exchange losses during 2008.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
SPPC -
Three Months Ended Year Ended
------------------ ----------
December December December December
($'000) 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Revenue $ 68,588 $ 148,438 $ 323,928 $ 538,930
Earnings before the
under-noted (EBITDA) 20,712 16,495 66,334 86,477
Depreciation and
amortization 7,862 8,551 32,585 30,350
Gain on disposal of
property - - - (250)
Net interest and
accretion expense 1,717 3,626 6,978 11,235
Income tax (recovery)
expense (3,083) (757) (10,404) 3,497
-------------------------------------------------------------------------
Net earnings $ 14,216 $ 5,075 $ 37,175 $ 41,645
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 2009, SPPC generated revenue of $68.6 million, compared with revenue of $148.4 million for the fourth quarter of 2008. The main reason for the decline in revenue was lower realized pricing for sulphur and sulphuric acid. Additionally, sales volumes for most products in 2009 were lower than 2008, reflecting weaker demand and the labour disruption at the Fund's largest supplier of sulphur products. Results were also negatively impacted by lower margins realized on sulphuric acid, as market conditions in 2009 were less buoyant than in 2008. The negative impact of reduced acid profitability was partially offset by improved results in the SHS product line, where lower costs more than compensated for reduced volumes. 2009 fourth quarter results also benefited from the inclusion of an insurance recovery of $8.6 million with respect to the conclusion of the Fund's business interruption claim relating to the incident at the Beaumont plant in 2008 (more fully described in the BEAUMONT INCIDENT section), whereas during the fourth quarter of 2008, the Beaumont plant was off-line as result of this incident. Consequently, EBITDA generated during the fourth quarter of 2009 was $4.2 million higher than the same quarter of 2008. Net earnings showed an even stronger improvement due to lower income taxes and interest expense in 2009 relative to 2008.
For the year ended December 31, 2009, SPPC generated revenues of $323.9 million, a decrease of approximately 40% from the level achieved during 2008. The decrease in 2009 revenue is principally the result of lower prices for acid and sulphur and lower volume for acid, reflecting the generally weak economic conditions prevalent through most of 2009 and the labour disruption at the Fund's largest supplier of sulphur products. 2009 EBITDA includes $13.5 million with respect to the settlement of the property damage and business interruption insurance claims (more fully described in the BEAUMONT INCIDENT section). The insurance recovery was not enough to fully offset the impact of the reduced acid profitability, resulting in a reduction in SPPC's EBITDA of $20.2 million in 2009 relative to 2008. Earnings in 2009 were only $4.1 million lower than 2008 as income taxes in 2009 were significantly lower than 2008 and also due to lower interest expenses.
The lower income tax expense during the fourth quarter and year ended December 31, 2009 is due mainly to lower income in higher tax rate jurisdictions and the decrease in the taxable temporary differences between the accounting carrying amount and the tax basis of assets associated with certain Canadian and foreign corporate subsidiaries.
Pulp Chemicals -
Three Months Ended Year Ended
------------------ ----------
December December December December
($'000) 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Revenue $ 13,435 $ 10,153 $ 52,386 $ 53,354
Earnings before the
under-noted (EBITDA) 5,180 3,358 19,161 18,635
Depreciation and
amortization 2,263 2,182 9,328 9,156
Net interest and
accretion expense 436 547 1,832 2,700
-------------------------------------------------------------------------
Net earnings $ 2,481 $ 629 $ 8,001 $ 6,779
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 2009 Pulp Chemicals revenue was $3.3 million higher than the level achieved during the fourth quarter of 2008. The main reason for the increase was due to increased customer demand relative to the fourth quarter of 2008 when a large customer decided to take downtime. This was also the primary reason for the improvement in EBITDA and net earnings generated during the fourth quarter of 2009 relative to the same quarter of 2008.
Revenue for 2009 was similar to 2008. EBITDA for 2009 was slightly higher than 2008 due to lower costs. Net earnings in 2009 showed an even stronger improvement over 2008 as interest costs were lower, due to lower interest rates in 2009.
International -
Three Months Ended Year Ended
------------------ ----------
December December December December
($'000) 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Revenue $ 50,733 $ 134,198 $ 169,878 $ 586,542
Earnings before the
under-noted (EBITDA) 16,175 10,450 28,083 34,884
Depreciation and
amortization 498 507 2,233 1,617
(Gain) loss on disposal
of property, plant and
equipment (15) - 79 -
Net interest income (26) (103) (116) (400)
Income tax expense
(recovery) 1,946 (84) 3,962 3,988
-------------------------------------------------------------------------
Net earnings $ 13,772 $ 10,130 $ 21,925 $ 29,679
-------------------------------------------------------------------------
-------------------------------------------------------------------------
International operations provide removal and marketing services for elemental sulphur and sulphuric acid. These products are marketed to customers globally.
During the fourth quarter of 2009, International's revenue was $50.7 million compared with $134.2 million for the same period of 2008. For 2009, International's revenue decreased by $416.7 million from the level of $586.5 million achieved during 2008. The decrease in revenues is primarily due to significantly lower prices for acid and sulphur in global markets. The very significant drop in revenues in 2009 relative to 2008 did not have a proportionate effect on EBITDA, as cost of sales were significantly lower as well.
International net earnings and EBITDA during the fourth quarter of 2009 was higher than 2008 as a result of certain contracts where customers who had delayed delivery from earlier in the year honoured their commitments in the fourth quarter. Although 2009 was a very strong year for the International segment, EBITDA and earnings were lower than 2008 when global conditions for sulphur and acid were exceptionally favourable.
Corporate -
Three Months Ended Year Ended
------------------ ----------
December December December December
($'000) 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Cost of services $ 18,010 $ 6,098 $ 32,259 $ 21,060
Loss before the
under-noted (EBITDA) (18,010) (6,098) (32,259) (21,060)
Unrealized foreign
exchange loss (gain)
and ineffectiveness of
cash flow hedges 1,109 12,195 (10,937) 16,712
Net interest and
accretion expense (1) - (1) -
Income tax recovery (1,140) - (1,140) -
-------------------------------------------------------------------------
Net loss $ (17,978) $ (18,293) $ (20,181) $(37,772)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 of 2009, corporate costs, excluding unrealized foreign exchange gains and losses, were $11.9 million higher than 2008. The main reason for the higher expense in 2009 was an accrual of $10.0 million with respect to the Fund's Total Return Long-Term Incentive Plan (TR LTIP) because of the increased unit price, compared with a net reversal of $0.6 million in the fourth quarter of 2008. Relative to the fourth quarter of 2008, the fourth quarter of 2009 was negatively impacted by $3.1 million, due to unrealized natural gas losses and realized foreign exchange losses. This was partially offset by lower bad debt expenses in the fourth quarter of 2009 relative to the same quarter of 2008, when the expenses were high due to expected losses in connection with two customers who later filed for Chapter 11 re-organization.
For the year ended December 31, 2009, the main reason for the $11.2 million increase in corporate costs relative to the year ended December 31, 2008 was also the Fund's TR LTIP. During 2009, TR LTIP accruals were $9.4 million higher than 2008. Additionally, during 2009, unrealized losses on natural gas swaps were $1.8 million higher than 2008, and realized foreign exchange gains were lower than 2008 by $1.4 million. This was partially offset by lower bad debt provisions in 2009 relative to 2008 as described above.
The comments on TR LTIP expenses relate to the 2007, 2008 and 2009 TR LTIP. Awards under the 2007, 2008 and 2009 TR LTIP are payable at the beginning of 2010, 2011 and 2012 respectively. At the end of 2009, $16.0 million has been accrued with respect to these Plans, although the actual payouts 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 large unrealized foreign exchange gains on the translation of U.S. dollar denominated debt, which were a result of the sharp appreciation in the Canadian dollar relative to the U.S. dollar during 2009. This exchange rate fluctuation also resulted in large unrealized foreign exchange losses on the translation of U.S. dollar denominated assets. However, in accordance with accounting rules, those losses are required to be shown in the other comprehensive income rather than in earnings.
Also included in unrealized foreign exchange (loss) gain and ineffectiveness of cash flow hedges is the ineffectiveness of the Fund's cash flow hedges entered into in the first quarter of 2009 (see Liquidity and CAPITAL RESOURCES - Financing Activities - Financial Instruments for more detail).
The income tax recovery of $1.1 million represents future taxes related to deductible temporary differences of certain flow-through subsidiaries expected to reverse subsequent to 2010.
RESTRUCTURING
During the fourth quarter of 2006, the Fund decided to discontinue production of powder SHS and costs of $2.7 million related to that decision were recorded in that quarter. The Fund recorded an additional $2.0 million of costs related to this decision during 2007. These costs included a provision for a penalty on a long-term supply agreement. During 2008, the penalty was waived. As a result, the Fund reversed the penalty provision previously recorded of $1.2 million.
BEAUMONT INCIDENT
During the third quarter of 2008, an explosion occurred at the Fund's Beaumont, Texas facility which resulted in property damage as well as business interruption. After a lengthy period of repairs, the plant was operational during the first quarter of 2009. During the first six months of 2009, the Fund incurred operational, legal and consulting costs relating to this incident.
During the fourth quarter of 2008 and the first quarter of 2009, the Fund incurred capital expenditures relating to the repair of damaged property at the Beaumont facility. During 2009, the Fund concluded its property damage claim and recovered US$9.8 million 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.
During 2009, the Fund also concluded its insurance claims for losses due to the ensuing business interruption and received payments of US$5.5 million. Since the claim was concluded towards the end of 2009, the Fund did not receive the entire proceeds from this settlement and as at December 31, 2009 the Fund has a receivable from its insurer of US$5.1 million with respect to the remainder of the claim.
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 are required to 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 operating subsidiaries that are based in the U.S. In addition, BCT Chemtrade Corporation, the Fund's international subsidiary, uses the U.S. dollar as its measurement currency. As the Fund reports in Canadian dollars, its reported earnings are exposed to fluctuations in the Canadian/U.S. dollar exchange rate. The Fund currently estimates that on an unhedged basis, a $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, 2009 include future contracts to sell US$8.4 million, C$7.6 million and (euro)1.4 million at weighted average exchange rates of (euro)0.79, (euro)0.65 and US$1.43, respectively, for periods through to January 2011. There are unrealized losses of $0.2 million and unrealized gains of $1.2 million from these contracts at December 31, 2009.
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.
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, 2008 were a result of changes in the Canadian/U.S. dollar exchange rate between December 31, 2008 and December 31, 2009. The Fund's Canadian based operations have all its term debt denominated in U.S. dollars. The gains or losses arising from the translation of these loans are 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 = $1.22 at December 31, 2008 to US$1.00 = $1.05 at December 31, 2009. See Risks and Uncertainties for additional comments on foreign exchange.
NET INTEREST AND ACCRETION EXPENSE
Net interest and accretion expense was $2.1 million in the fourth quarter of 2009 compared with $4.1 million in the fourth quarter of 2008. Net interest and accretion expense was $8.7 million for 2009 compared with $13.5 million for 2008.
Interest expense in 2009 was lower than 2008 mainly due to lower levels of borrowing on the Fund's operating lines of credit and due to lower interest rates experienced during 2009 relative to 2008.
The weighted average effective annual interest rate at December 31, 2009 was 4.83% (2008 - 5.19%). See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities - Financial Instruments for information concerning swap arrangements.
During the fourth quarter and 2009, the Fund recorded accretion expense of $0.1 million and $0.6 million respectively compared with $0.1 million and $0.7 million for the fourth quarter and 2008 respectively. This accretion is due to the amortization of transaction costs related to the Fund's borrowings.
INCOME TAXES
Current income tax expense was $0.2 million for the fourth quarter of 2009 and $3.0 million for the year ended December 31, 2009, compared with $2.2 million and $7.6 million for the fourth quarter and year ended December 31, 2008 respectively. The future income tax recovery was $2.5 million for the fourth quarter of 2009 and $10.6 million for the year ended December 31, 2009, compared to the future income tax recovery of $3.0 million for the fourth quarter of 2008 and $0.1 million for the year ended December 31, 2008. The effective tax rates for the fourth quarter and year ended December 31, 2009 differ from the statutory tax rate of 32.2% primarily due to the operating losses in high tax rate jurisdictions and operating profits in low tax rate jurisdictions and flow-through entities.
The increase in future tax asset of $0.8 million at December 31, 2009 relative to December 31, 2008 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 $10.2 million at December 31, 2009 relative to December 31, 2008 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.
At December 31, 2009, the Fund has $7.9 million of deductible temporary differences related to certain flow-through subsidiaries compared with $7.0 million for 2008. The Fund has recorded $1.1 million for future taxes related to the portion of these deductible temporary differences that are expected to reverse after 2011.
EXCESS CASH FLOWS AND NET INCOME OVER DISTRIBUTIONS PAID
The following table presents excess cash flows from operating activities and net income over distributions paid for the three month period ended December 31, 2009 and for the years ended December 31, 2009, 2008 and 2007.
Three Months
Ended Year Ended Year Ended Year Ended
December December December December
($'000) 31, 2009 31, 2009 31, 2008 31, 2007(1)
-------------------------------------------------------------------------
Cash flows from
operating activities $ 25,375 $ 41,133 $ 147,904 $ 47,742
Net earnings 12,491 46,920 40,331 20,596
Distributions paid
during period 9,201 37,003 40,086 40,971
Excess of cash flows
from operating
activities over cash
distributions paid 16,174 4,130 107,818 6,771
Excess (shortfall) of
net income over cash
distributions paid $ 3,290 $ 9,917 $ 245 $( 20,375)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the year ended December 31, 2007 net earnings has been adjusted
as a result of adopting CICA Handbook Section 3031, Inventories on a
retrospective basis.
The Fund considers the amount of cash generated by the business in determining the amount of distributions payable to its Unitholders. In general, the Fund does not take into account quarterly working capital fluctuations as these tend to be temporary in nature. The Fund does not generally consider net income in setting the level of distributions as this is a non-cash metric and is not reflective of the level of cash flow that the Fund can generate. This divergence is particularly relevant for the Fund as it has a relatively high level of depreciation and amortization expenses and foreign exchange gains and losses.
Distributions -
Distributions to Unitholders for the three months ended December 31, 2009 were declared as follows:
Distribution Total
Record Date Payment Date Per Unit ($'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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions declared in the three months ended December 31, 2008 were as follows:
Distribution Total
Record Date Payment Date Per Unit ($'000)
-------------------------------------------------------------------------
Three months ended December 31:
October 31, 2008 November 28, 2008 $ 0.10 $ 3,277
November 30, 2008 December 31, 2008 0.10 3,236
December 31, 2008 January 30, 2009 0.10 3,178
-------------------------------------------------------------------------
Sub-Total $ 0.30 $ 9,691
Nine months ended September 30 $ 0.90 $ 30,215
-------------------------------------------------------------------------
Total for the year ended December 31 $ 1.20 $ 39,906
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Treatment of the Fund's distributions for Canadian Income Tax purposes for 2008 and 2009 is as follows:
Foreign
Non-Business
Other Income Income Total
-------------------------------------------------------------------------
2008 76.6% 23.4% 100.0%
2009(1) 75.0% 25.0% 100.0%
-------------------------------------------------------------------------
(1) Represents anticipated tax characterization of planned distributions.
The actual tax treatment of 2009 distributions will be determined by
February 28, 2010.
LIQUIDITY AND CAPITAL RESOURCES
The Fund's distributions to Unitholders are sourced entirely from its investments in operating subsidiary companies. The Fund's investments are financed by trust units held by Unitholders, long-term debt and operating lines of credit. The cash flow of the Fund is required to fund distributions to Unitholders, capital expenditures and payment of interest on term debt as well as the re-purchase of units under the Normal Course Issuer Bid as discussed below. The Fund intends to renew its long-term debt prior to maturity.
Cash Flow from Operating Activities
-----------------------------------
Cash flow from operating activities for the fourth quarter of 2009 was $25.4 million, a decrease of $68.8 million from the level generated during the fourth quarter of 2008. The main reason for this difference is the significant reduction in working capital during the fourth quarter of 2008, when working capital decreased by $75.4 million. The decrease during the fourth quarter of 2008 was primarily due to reductions in the International segment as a result of significantly lower prices for sulphur and acid towards the end of 2008.
For 2009, cash flow from operating activities was $41.1 million, a decrease of approximately $106.8 million from the level achieved in 2008. The decrease in cash flow is due to an increase in working capital of $27.4 million in 2009 whereas in 2008, working capital decreased by $48.8 million. Working capital at the end of 2008 was negative and it had been anticipated that it would increase to positive levels during 2009. The remainder of the decrease is due to a reduction in the levels of earnings generated by SPPC and International segments in 2009 relative to 2008, as described above.
Financing Activities
--------------------
Distributions to Unitholders during the quarter and year ended December 31, 2009 were $0.7 million and $3.1 million lower than the quarter and year-ended December 31, 2008 respectively. 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 the 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 year ended December 31, 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.
During 2008, the Fund purchased 1,872,526 units at an average per unit price of $9.48 for an aggregate purchase amount of $17.8 million. This resulted in $23.0 million being recorded as a reduction to the value of units and $5.3 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 will be 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. The weighted average effective interest rate under the new swap arrangements is 4.83%. At December 31, 2009, the fair value of the above noted agreements was a liability of $6.7 million (US$6.4 million). See comments under Net Interest and Accretion Expense for comments on these rates.
During the third quarter of 2008, under provisions allowed by its credit agreement, the Fund converted its Canadian dollar denominated term debt into U.S. dollar term debt and $25.2 million of its outstanding Canadian dollar lines of credit into U.S. dollar lines of credit.
Also in the third quarter of 2008, the Fund collapsed its swap arrangements on its Canadian dollar denominated term debt and recognized a loss of $0.9 million which was included in net interest and accretion expense.
During the second quarter of 2008, the Fund extended its senior credit facilities with its principal bankers to August 2, 2011. This was a two-year extension on substantially the same terms as the then existing agreement. The Fund incurred transaction costs of $0.6 million related to this extension. As the Fund treated this extension as a modification of the debt, rather than an extinguishment, these transaction costs were added to the remaining unamortized transaction costs from the pre-existing agreements. These transaction costs will be recorded as net interest and accretion expense using the effective interest method over the life of the extended debt.
See RESULTS OF OPERATIONS BY BUSINESS SEGMENT - Foreign Exchange for additional comments on hedging.
To manage its exposure to changes in the price of natural gas, the Fund has entered into natural gas forward contracts. The Fund buys and sells specific quantities of natural gas at pre-determined dates on indices which are matched with the anticipated operational cash flows. At December 31, 2009, there were no outstanding contracts. These contracts are accounted for as derivatives with gains or losses recorded in selling, general, administrative and other costs.
Investing Activities
--------------------
Investment in capital expenditures was $9.7 million in the fourth quarter of 2009, compared with $8.2 million in the fourth quarter of 2008. These amounts include $9.5 million in the fourth quarter of 2009 and $7.2 million in the fourth quarter of 2008 for maintenance capital requirements. Investment in capital expenditures for 2009 was $24.7 million compared with $19.8 million for 2008. The maintenance capital expenditure components were $23.8 million for 2009 and $15.6 million for 2008.
Investment in non-maintenance capital expenditures were $0.3 million and $0.9 million during the fourth quarter and 2009 respectively compared with $1.1 million and $4.3 million during the fourth quarter and 2008 respectively. 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).
During the third quarter of 2008, the Fund sold excess vacant land at its site in Leeds, South Carolina for US$2.9 million. As a result of the sale, the Fund has recognized a gain on disposal of $0.3 million (US$0.2 million).
During the second quarter of 2008, the Fund invested US$2.5 million in Meranol S.A.C.I. (Meranol). Meranol is based in Buenos Aires, Argentina and is a leading Argentine producer of sulphuric acid and other sulphur products. 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.
Cash Balances -
At December 31, 2009 the Fund had net cash balances of $19.9 million and working capital of $9.4 million. Comparable numbers for December 31, 2008 were $48.1 million and negative working capital of $18.8 million, respectively. The Fund defines working capital to exclude cash, operating line of credit, distributions payable and current portion of long-term debt. Cash generated by the Fund will be used to fund cash distributions to Unitholders, capital requirements, interest, 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, 2009, the Fund had senior credit facilities of $236.6 million, consisting of a term loan of $160.9 million and a revolving credit facility of $75.7 million. The term bank debt, which is fully drawn, is not due or payable until August 2011. At December 31, 2009, the Fund had nothing drawn on its operating lines of credit and had committed a total of $7.3 million of its revolving credit facility towards standby letter of credits. Subject to certain limits set out in the credit agreement, the credit facilities may be used to finance working capital, fund acquisitions, invest in capital assets, buy back units and pay distributions to Unitholders.
Debt Covenants -
As at December 31, 2009, the Fund was compliant with all debt covenants contained in its credit facility.
SUMMARY OF QUARTERLY RESULTS
Three Months Ended
------------------
March 31, June 30, September 30, December 31,
($'000) 2009 2009 2009 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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended
------------------
March 31, June 30, September 30, December 31,
($'000) 2008 2008 2008 2008
-------------------------------------------------------------------------
Revenue $ 217,790 $ 274,276 $ 393,971 $ 292,789
Cost of sales and
services 182,943 230,432 346,615 255,955
-------------------------------------------------------------------------
Gross profit 34,847 43,844 47,356 36,834
Selling, general,
administrative
and other costs 13,333 13,558 5,662 12,630
Restructuring
costs (1,238) - - -
-------------------------------------------------------------------------
Earnings before
the under-noted 22,752 30,286 41,694 24,204
Unrealized
foreign exchange
loss 551 446 3,520 12,195
Depreciation and
amortization 9,845 10,145 9,893 11,240
Gain on disposal
of property - - (250) -
Net interest and
accretion expense 3,031 2,795 3,639 4,070
Income taxes (net) (129) 3,053 5,402 (841)
-------------------------------------------------------------------------
Net earnings (loss)$ 9,454 $ 13,847 $ 19,490 $ (2,460)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenues for every quarter during 2008 were high due to exceptionally strong market conditions for sulphuric acid and sulphur. These were particularly noticeable in the International segment. Revenues during the fourth quarter of 2008 started to decline as prices for sulphuric acid and sulphur started to decline in the International markets. During 2009, 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 strong conditions during 2008 resulted in higher earnings. The effect was less pronounced in the fourth quarter of 2008 when the Fund's largest plant located in Beaumont was off-line for the entire quarter (as described in the BEAUMONT INCIDENT section).
Selling, general, administrative and other costs (S,G&A) during the first quarter of 2008 were high as they included an accrual of $4.1 million relating to the Fund's TR LTIP, caused by an appreciation in the Fund's unit value. S,G&A for the second quarter of 2008 were high as they included unrealized mark-to-market losses of $1.5 million on natural gas forward contracts. S,G&A during the third quarter of 2008 were low as they included lower TR LTIP accruals. S,G&A for the fourth quarter of 2008 were high as they include an increase of $3.4 million in the allowance for doubtful accounts. The increase was mainly due to a provision for expected losses in connection with two customers, who then filed for re-organization under Chapter 11 of the U.S. Bankruptcy Code in January 2009. 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. Finally, S,G&A during the fourth quarter of 2009 were high as they included an accrual of $10.0 million relating to the Fund's TR LTIP, caused by an appreciation in the Fund's unit value, and high unrealized natural gas losses and realized foreign exchange losses. These additional expenses were partially offset by business interruption insurance claim recoveries booked in the quarter.
Unrealized foreign exchange losses were higher commencing with the third quarter of 2008 up to and including the first quarter of 2009 due to the impact of the weaker Canadian dollar relative to the U.S. dollar on the Fund's long-term debt which is U.S. dollar denominated. There was a corresponding unrealized gain on the Fund's U.S. dollar denominated assets, but accounting rules require that those be recorded in other comprehensive income. During the second, third and fourth quarters of 2009, the Canadian dollar strengthened relative to the U.S. dollar, thereby causing an unrealized foreign exchange gain on the Fund's long-term debt. However, the gain during the fourth quarter of 2009 was more than offset by ineffectiveness booked related to the initial fair value liability on the Fund's interest rate swap arrangements entered into during the first quarter of 2009.
CONTRACTUAL OBLIGATIONS
Information concerning contractual obligations is shown below:
Contractual
Obligations Less Than 1-3 4-5 After
($'000) Total 1 Year Years Years 5 Years
-------------------------------------------------------------------------
Long-Term Debt $ 160,948 $ - $ 160,948 $ - $ -
Operating
Leases 58,342 19,232 24,963 10,961 3,186
Interest on
Long-Term Debt 12,302 7,770 4,532 - -
-------------------------------------------------------------------------
Total
Contractual
Obligations $ 231,592 $ 27,002 $ 190,443 $ 10,961 $ 3,186
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RISKS AND UNCERTAINTIES
The Fund is one of the world's largest suppliers of sulphuric acid (acid), liquid sulphur dioxide (SO(2)) and sodium hydrosulphite (SHS) and a leading processor of spent acid, particularly in the U.S. Gulf Coast region. The Fund is also a leading regional supplier of sulphur, sodium chlorate and phosphorus pentasulphide, and also produces zinc oxide at three North American locations. The Fund faces various risks associated with its business. These risks include, amongst others, a general reduction in demand for its products, the loss of a portion of its customer base, the interruption of the supply of sulphur-based products or raw materials, price fluctuations in the products sold and/or raw materials purchased, industry over-capacity, acquisition integration and operational and product hazard risks associated with the nature of its business. The Fund imports key raw materials and products from overseas and as such has additional risks associated with the sourcing activity. The Fund makes extensive use of the railway system to transport material within North America. Certain locations are serviced by a sole carrier and thus a disruption in service could have a significant negative impact on results. In addition, the Fund sells a significant portion of its major products to large customers. While many of these customers are under contract, there can be no assurance that these contracts will be renewed. As the Fund's business is international in nature, it is exposed to foreign exchange risks related to the payment of dividends and other transactions by its foreign subsidiaries.
The Fund manages the risks associated with its customer base and sales price by seeking to obtain contractual protection to mitigate these risks. The Fund also seeks to differentiate its products and services with customers to mitigate price fluctuations and uses its scale to obtain beneficial raw material contracts.
All members of the Fund's senior management team were involved in an enterprise-wide business risk assessment, which included a review of the North American and international operations. Key risks were identified and prioritized for review and the development of action plans. This enterprise-wide risk review process will be an on-going aspect of the Fund's risk management program. In addition, the Fund maintains an extensive insurance program which includes general liability and environmental coverage.
Credit Risk -
Credit risk arises from the non-performance by counter-parties of contractual financial obligations. The Fund manages credit risk for trade and other receivables through established credit monitoring activities. The Fund does not have a significant concentration of credit risk with any single counter-party or group of counter-parties. The primary counter-parties related to the foreign exchange forward contracts, commodity price contracts and interest rate swaps carry investment grade ratings. The Fund's maximum exposure to credit risk at the reporting date is the carrying value of its receivables and derivative assets.
Dependence on Vale Inco Relationship -
Vale Inco Limited (Vale Inco) is the Fund's largest sulphur products supplier. Effective January 1, 2008, the Fund renewed its agreement with Vale Inco for the marketing of all sulphur by-products produced by the Vale Inco smelter in Sudbury, Ontario. This 10-year contract contains similar terms to the prior agreements between the parties. For the year ended December 31, 2009, this supply source accounted for approximately 7% of the Fund's revenues. Vale Inco had a significant collective bargaining agreement which expired on May 31, 2009. The Vale Inco union and management were unable to reach an agreement and a strike commenced on July 13, 2009. Although the strike continues, partial production commenced in January 2010. The Fund's ability to continue supplying its customers could be affected depending upon the duration of the labour disruption, the availability of other sources of product supply and demand levels. Currently the Fund does not expect any disruption to its customers.
Exchange Rates -
The Fund is exposed to fluctuations in the exchange rate of the U.S. dollar relative to the Canadian dollar, as a portion of the Fund's Distributable cash after maintenance capital expenditures is earned in U.S. dollars. On an unhedged basis, the Fund currently estimates that a one-cent change in the exchange rate will have an impact on Distributable cash after maintenance capital expenditures of less than $0.1 million per annum.
Since certain Canadian entities within the group have U.S. dollar denominated debt, unrealized gains and losses on the periodic translation of this debt will be recorded in the Consolidated Statements of Earnings. However, because these are unrealized they will not affect Distributable cash after maintenance capital expenditures.
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. A one-cent change in the exchange rate would also have an impact of approximately $0.5 million on the Fund's net earnings because of its U.S. dollar denominated long-term debt.
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, 2009, on an unhedged basis, a change in interest rates of 1% per annum would have an impact of approximately $1.6 million on the Fund's net earnings per annum. As at December 31, 2009, the Fund had fixed interest rates on all of its term debt, until August 2011.
Sulphuric Acid Pricing -
A change in sulphuric acid pricing, net of freight, of $1 per tonne, would have an impact on annual revenues in North America of approximately $1.1 million. However, given the risk-sharing aspect of a key supply contract, the impact on EBITDA would range from $0.5 million to $0.6 million. In any specific period, the exact impact would also depend upon the volume that is subject to sales contracts where pricing has been fixed for a period of time. The magnitude of realized price changes also depends upon regional market dynamics.
Sulphur Costs -
The Fund uses sulphur in the manufacturing of several of its products, including sulphuric acid. At current operating levels, an increase of $1 per tonne would have an impact of approximately $0.1 million per annum. It is important to note that a change in the cost of sulphur may lead to a change in the price for sulphuric acid as this is a key input cost in the manufacturing of sulphuric acid. Thus, the net impact of changes in sulphur costs would depend upon changes in sulphuric acid pricing.
Sodium Chlorate Pricing -
Approximately 65% of the Fund's sodium chlorate sales are to Canfor Pulp Limited Partnership on a long-term contract, whereby selling price is adjusted based on changes in virtually all variable costs. Thus, the Fund's exposure to changes in market prices of sodium chlorate is limited to the remainder of its output.
Other Input Costs -
There are several other large input costs, such as natural gas, zinc, salt and electricity, but in most cases there are contractual arrangements with customers, or other offsets within the business, which mitigate the exposure to changes in these costs.
Labour Relations -
The Fund has several collective bargaining agreements and expiry dates range from 2010 to 2014. The Fund's operations could be disrupted if new collective bargaining agreements are not concluded prior to their expiry dates.
CRITICAL ACCOUNTING POLICIES
The Fund's accounting policies are described in note 3 to the consolidated financial statements for the year ended December 31, 2009.
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 and goodwill.
Financial Instruments -
In May 2009, the Canadian Institute of Chartered Accountants (CICA) amended Handbook Section 3862, Financial Instruments - Disclosures, to include additional disclosure requirements about fair market value measurements for financial instruments and liquidity risk disclosures. These amendments require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. Fair values of assets and liabilities included in Level 1 are determined by reference to unadjusted quoted prices at the measurement date for identical assets and liabilities in active markets. Assets and liabilities in Level 2 include valuations using 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 valuations are based on significant unobservable inputs which are supported by little or no market activity. This new standard became effective for the Fund on December 31, 2009, and the related disclosure is included in note 18(c) to the consolidated financial statements.
Goodwill and Intangible Assets -
Effective January 1, 2009, the Fund adopted the recommendations of the CICA Handbook Section 3064, Goodwill and Intangible Assets. Section 3064 states that upon their initial identification, intangible assets are to be recognized as assets if they meet the definition of an intangible asset and if they satisfy the recognition criteria contained in the Handbook section. This section also provides further information on the recognition of internally generated intangible assets (including research and development costs).
Section 3064 carries forward the requirements of the old Section 3062, Goodwill and Other Intangible Assets with regards to the subsequent measurement of intangible assets, goodwill, and disclosure. The adoption of this section did not have an impact on the Fund's consolidated financial statements.
Fair Value of Financial Assets and Financial Liabilities -
Effective January 1, 2009, the Fund adopted the recommendations of EIC-173, entitled Credit Risk and the Fair Value of Financial Assets and Financial Liabilities, which provides further information on the determination of the fair value of financial assets and financial liabilities under Section 3855, entitled Financial Instruments - Recognition and Measurement. This EIC states that an entity's own credit and the credit risk of the counter-party should be taken into account in determining the fair value of financial assets and financial liabilities, including derivative instruments. The adoption of this EIC did not have an impact on the Fund's consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Convergence to International Financial Reporting Standards -
In 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting requirements for Canadian publicly accountable entities. The AcSB strategic plan outlines the convergence of Canadian GAAP with International Financial Reporting Standards (IFRS) over an expected five-year transitional period. In February 2008 the 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, 2011 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, 2009:
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Key Activity Milestones Status/Deadlines
-------------------------------------------------------------------------
IFRS Conversion Scoping Review of current The review is complete
Phase standards vs. IFRS. and the determination
Identification of of financial impact is
significant in progress.
differences.
Changes to Canadian
Assessment of GAAP and IFRS are
available resources. monitored and assessed
on an on-going basis.
Assignment and training
of cross-functional
and core team.
Monitoring of changes
to Canadian GAAP and
IFRS and their impact
to the Fund.
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Decisions on Accounting Formal review of All review sessions
Policies and IFRS1 differences in each have been completed.
area with the core team
and members of Substantially all IFRS1
cross-functional team and accounting policy
as required. choice decisions made.
Assessment of
differences between
IFRS and the Fund's
current practices.
Decision on accounting
policy choices and
IFRS1 for each
assessed area.
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Information Technology Identification of IT The Fund has upgraded
Evaluation requirements, both its ERP software in
hardware and software, readiness for IFRS and
for IFRS conversion. believes that minimal
further IT changes
Development of will be required.
implementation plan for
new or upgraded
software and any
additional hardware
required.
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Control Environment: Review and assessment As the Fund completes
Internal Control Over of impact of accounting reviews and
Financial Reporting policy choices and assessments of
and Disclosure changes relating to IFRS accounting sections
Controls and conversion. and makes decisions
Procedures on accounting policies
Update of internal and IFRS1 choices,
control testing appropriate changes
procedures and to ensure the
documentation for all integrity of internal
accounting policy control over financial
choices and changes. reporting and
disclosure controls
Implementation of and procedures are
appropriate changes: being made.
- MD&A Disclosure
Requirements
- Key Performance
Indicators
- Investor Relations
Communication
Process
-------------------------------------------------------------------------
Financial Statement Identification of Skeleton financial
Preparation transactions impacted statements will be
by IFRS conversion. developed in 2010.
An assessment of these
transactions,
appropriate changes
and re-mapping will be
completed.
The assessment and
re-mapping will form
the skeleton of the
IFRS compliant
financial statements.
-------------------------------------------------------------------------
Financial Impact Analysis of Quantification of
Analysis for differences between differences between
Transactional Areas Canadian GAAP and IFRS Canadian GAAP and IFRS
that was completed will be completed
will be quantified. during 2010.
Senior Management and
external auditors to
review and sign-off.
-------------------------------------------------------------------------
Business Activities Identification of Assessments and
Impact impacts on business identifications of
activities to be impacts of the
completed. conversion to IFRS are
underway.
Completion of any
re-negotiations. Identification of
impacts is to be
completed during 2010
and any necessary
re-negotiations are to
be completed during
that period.
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International Financial Reporting Standards
-------------------------------------------
The Accounting Standards Board (AcSB) confirmed in February 2008 that International Financial Reporting Standards (IFRS) will replace Canadian GAAP for publicly accountable enterprises for financial periods beginning on and after January 1, 2011.
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.
IFRS1 - First Time Adoption of International Financial Reporting Standards
The Funds 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.
Deemed Cost - 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 under the prior GAAP. The Fund will continue to apply the cost model for property, plant and equipment and will not restate property, plant and equipment to fair value under IFRS. The Fund will use the historical bases under Canadian GAAP as deemed cost under IFRS at the Transition Date.
Business Combinations - IFRS1 allows for the guidance under IFRS3, Business Combinations to be applied retrospectively. Retrospective application would require that the Fund restate all business combinations occurred prior to the Transition Date. The Fund will not elect to retrospectively apply IFRS3 to business combinations that occurred prior to the Transition Date.
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 subsidiary was formed or acquired. IFRS1 permits cumulative translation gains and losses to be reset to zero at the Transition Date. The Fund will elect to reset all cumulative translation gains and losses to zero in opening retained earnings at the Transition Date.
IFRS1 allows for certain other optional exemptions; however, the Fund does not expect such exemptions to be significant to its adoption of IFRS.
Impact of IFRS on the Balance Sheet
The Fund is currently in the process of assessing the impact of IFRS1 on its January 1, 2010 balance sheet.
On-going 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 from the remainder of the asset. This requirement will have an impact on the Fund's property, plant and equipment values. The Fund is currently in the process of assessing this impact.
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. IAS23 is more explicit than Canadian GAAP and the Fund does not capitalize borrowing costs under Canadian GAAP. The Fund is currently in the process of assessing the impact of the IAS21 requirements.
Intangibles
-----------
IAS38 explicitly restricts an intangible asset's useful life to the shorter of the economic factors and legal factors. The Fund expects the value of intangibles to be reduced. However, it is still in the process of assessing the amount of the impact.
Share-Based Payments
--------------------
IFRS2 will require 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. The Fund expects that 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 is currently in the process of assessing the impact of this change.
Business Combinations -
In January 2009, the CICA issued Handbook Sections 1582, Business Combinations; 1601, Consolidated Financial Statements; and 1602, Non-Controlling Interests. These sections replace Handbook Sections 1581, Business Combinations; and 1600, Consolidated Financial Statements. Section 1582 establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under IFRS. Section 1582 is applicable for the Fund's business combinations with acquisition dates on or after January 1, 2011. Early adoption of this section is permitted. Sections 1601 and 1602 establish standards for the preparation of consolidated financial statements and for accounting for a non-controlling interest in a subsidiary in the consolidated financial statements subsequent to a business combination. Sections 1601 and 1602 are applicable for the Fund's interim and annual consolidated financial statements for its fiscal year beginning January 1, 2011. Early adoption of these sections is also permitted. If the Fund chooses to early adopt any one of these sections, the other two sections must also be adopted at the same time. The Fund is currently evaluating the effect of these new sections on the consolidated financial statements.
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, 2009 through inquiry, review and testing. The Chief Executive Officer and the Chief Financial Officer have concluded that, as at December 31, 2009, 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, 2009. Based on this evaluation, management has concluded that as at December 31, 2009, the Fund's internal controls over financial reporting were effective.
OUTLOOK
Demand for our products has stabilized, albeit at lower levels than 2008. We anticipate this demand level will be sustained or improve during 2010. The supply/demand characteristics for one of our key products, acid, is improving. We are well positioned to benefit from any increase in demand. Additionally Vale Inco, our largest supplier of acid, has resumed partial production which will simplify our supply chain logistics. The effects of the lower levels of economic activity seen in 2009 may continue to adversely affect Chemtrade and its customers as it will take some time for the full effect of the economic recovery to work its way through the entire supply chain.
We continue to maintain a healthy balance sheet and ample liquidity. The nature of our business model as demonstrated by the strength of our businesses even in times of low demand, coupled with our strong balance sheet are more than sufficient to sustain our current distribution rate.
OTHER
Additional information concerning the Fund, including the Annual Information Form, is filed on SEDAR and can be accessed at www.sedar.com.
February 24, 2010
For further information: Mark Davis, President and CEO, Tel: (416) 496-4176; Rohit Bhardwaj, Vice-President, Finance and CFO, Tel: (416) 496-4177
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