Chemtrade Logistics Income Fund reports 2010 second quarter results
TORONTO, July 28 /CNW/ - Chemtrade Logistics Income Fund (TSX: CHE.UN) today announced results for the three months and six months ended June 30, 2010.
Cash flow from operating activities for the second quarter was $5.8 million (2009: $6.8 million) and Distributable cash after maintenance capital expenditures for the period was $8.1 million, or $0.27 per unit (2009: $11.0 million, or $0.36 per unit), generated from revenue of $137.4 million (2009: $124.6 million). Distributable cash after maintenance capital expenditures for the quarter was negatively impacted by the shutdown of Chemtrade's Beaumont, Texas plant following a fire on May 15, 2010. The results do not include any potential insurance proceeds which will be included in Distributable cash when received. The revenue increase reflected the improvement in demand and increased volume over last year in the Sulphur Products & Performance Chemicals (SPPC) segment, and higher sulphur prices in SPPC and International. EBITDA for the second quarter was $15.0 million (2009: $17.5 million) and net loss was $1.1 million compared with net earnings of $13.6 million in the same period in 2009.
For the six months ended June 30, 2010 cash flows from operating activities were $35.1 million (2009: negative $3.1 million), and Distributable cash after maintenance capital expenditures was $23.1 million (2009: $20.6 million), or $0.75 per unit (2009: $0.67 per unit). EBITDA was $39.5 million (2009: $35.7 million), and revenue was $264.2 million (2009: $286.4 million). Net earnings for the first six months of 2010 were $12.7 million (2009: $14.9 million).
Mark Davis, President and Chief Executive Officer of Chemtrade, said, "Overall business conditions in the second quarter this year were better than a year ago. Demand levels are well above 2009 levels, and prices for sulphuric acid, our major product by volume, while still lower than a year ago, continued the improvement trend seen during the first quarter of this year. It is unfortunate that the benefit of these improved conditions was offset by the impact of the incident at Beaumont. We estimate that this incident adversely impacted second quarter distributable cash by $2.5 million, or 8 cents per unit. Despite this, for the first half of 2010, Distributable cash of $0.75 per unit was comfortably ahead of our distributions of $0.60 per unit."
Sulphur Products & Performance Chemicals (SPPC) generated revenue of $82.0 million in the second quarter compared with $77.9 million in the second quarter of 2009. The main reasons for the increase in revenue were higher volumes and higher sulphur prices. These positive factors more than offset the negative impact of the stronger Canadian dollar on U.S. denominated revenue. EBITDA for the second quarter was $13.2 million compared with $15.2 million in 2009. The lower EBITDA relative to the second quarter last year was due primarily to the Beaumont plant being off-line for half of the quarter and to extra costs incurred to ensure customer operations were not disrupted. Additionally, results for the second quarter of 2009 benefited from an insurance recovery of $2.3 million related to an incident at the Beaumont plant in 2008.
Pulp Chemicals reported second quarter revenue of $11.2 million compared with $13.2 million in 2009, reflecting lower sales volume of sodium chlorate. EBITDA was $4.0 million compared with $4.7 million in 2009 with lower costs partially offsetting the impact of lower volumes.
International reported revenue of $44.3 million for the second quarter, compared with $33.5 million in 2009, the increase due mainly to higher prices for sulphur. EBITDA for the quarter was $3.7 million compared with $4.9 million reported last year, which included a few high margin contracts.
Corporate costs during the second quarter of 2010 were $1.4 million lower than the second quarter of 2009. Of this, $0.6 million was due to lower LTIP costs. Additionally, in the second quarter of 2009 unrealized losses of $0.6 million relating to natural gas swaps were recorded, whereas there were no swaps in 2010.
During the second quarter of 2010, the Fund issued $10.0 million of 6% convertible unsecured subordinated debentures due March 31, 2017 pursuant to an over-allotment option granted to the underwriters who purchased the $80.0 million convertible debentures issuance in the first quarter. The Fund also repaid approximately $25.0 million of outstanding term debt, bringing total repayments for the year to approximately $79.0 million.
Mr. Davis said, "Looking forward, demand for our products remains stable. Vale has now settled its strike and is expected to return to full production soon. Finally, we also expect our Beaumont plant will be re-started by the end of October. The results for the first half of the year, despite these issues, again demonstrated the resilience of our business and business model. The strong performance of our underlying businesses along with the strength of our balance sheet supports our belief that the current distribution rate is sustainable."
Distributions
Distributions declared in the second quarter totalled $0.30 per unit, comprised of monthly distributions of $0.10 per unit.
This news release contains certain statements which may constitute "forward-looking" statements within the meaning of certain securities laws, including the "safe harbour" provisions of the Securities Act (Ontario). The use of any of the words "anticipate", "continue", estimate", "expect", "expected", "intend", "may", "will", "project", "plan", "should", "believe" and similar expressions are intended to identify forward-looking statements. These statements are based on a number of material factors and assumptions and involve known and unknown risks and uncertainties that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. As a result, we cannot guarantee that any forward-looking statement will materialize. Forward-looking statements in this news release describe the expectations of Chemtrade as of the date of this news release. Forward-looking statements do not take into account the effect that transactions or non-recurring items announced or occurring after the statements are made may have on our business. We disclaim any intention or obligation to update any forward-looking statement even if new information becomes available, as a result of future events or for any other reason.
This news release contains forward-looking statements about the objectives, strategies, financial condition, results of operations and businesses of the Fund, including, but not limited to:
- the strength of demand for our products going forward;
- the timing of a return to full production by Vale;
- the timing of Chemtrade's Beaumont plant re-start; and
- the sustainability of the Fund's distribution rate.
Financial outlook information contained in this news release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this news release should not be used for purposes other than those for which it is disclosed herein.
Further information can be found in the disclosure documents filed by Chemtrade Logistics Income Fund with the securities regulatory authorities, available at www.sedar.com.
A conference call to review the second quarter 2010 results will be webcast live on www.chemtradelogistics.com and www.newswire.ca/webcast on Thursday, July 29, 2010 at 10:00 a.m.
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Balance Sheets
(in thousands of dollars)
June 30, December 31,
2010 2009
-------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 26,219 $ 19,885
Accounts receivable (note 3) 84,476 75,748
Inventories 20,616 20,107
Prepaid expenses and other assets
(note 10(b)) 3,904 2,284
-------------------------------------------------------------------------
135,215 118,024
Restricted cash 2,438 2,599
Notes receivable 2,662 2,627
Property, plant and equipment 146,613 156,960
Other assets 2,287 2,164
Future tax asset 17,521 14,084
Intangibles (note 4) 96,290 108,389
Goodwill 91,298 90,630
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$ 494,324 $ 495,477
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-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Accounts payable 42,323 42,918
Accrued and other liabilities (notes 7(f)
and 10(b)) 51,528 42,920
Distributions payable 3,067 3,067
Income taxes payable 1,687 2,855
-------------------------------------------------------------------------
98,605 91,760
Long-term bank debt (note 5) 80,951 160,105
Convertible unsecured subordinated debentures
(note 6) 76,193 -
Other long-term liabilities (notes 7(f)
and 10(b)) 9,718 19,075
Post-employment benefits 3,649 4,051
Future tax liability 17,092 20,082
Unitholders' equity
Units (note 7(b)) 377,144 377,144
Contributed surplus 9,720 9,720
Equity component of convertible debentures
(note 7(c)) 10,151 -
Deficit (148,798) (143,112)
Accumulated other comprehensive (loss)
(note 8) (40,101) (43,348)
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208,116 200,404
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$ 494,324 $ 495,477
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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)
(unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Revenue $ 137,406 $ 124,624 $ 264,230 $ 286,447
Cost of sales and
services (excluding
depreciation
disclosed below) 110,624 96,539 200,282 234,061
-------------------------------------------------------------------------
Gross profit 26,782 28,085 63,948 52,386
Selling, general,
administrative and
other costs 11,806 10,625 24,495 16,650
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Earnings before the
under-noted 14,976 17,460 39,453 35,736
Unrealized foreign
exchange loss (gain)
and ineffectiveness
of cash flow hedges 1,685 (9,147) 1,271 (5,244)
Debt extinguishment
costs (note 5) 128 - 699 -
Depreciation and
amortization
(note 4) 14,419 11,272 25,232 22,437
Net interest and
accretion expense 3,011 2,342 5,275 4,445
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(Loss) earnings
before income
taxes (4,267) 12,993 6,976 14,098
Income taxes
Current 402 1,124 1,457 1,832
Future (3,576) (1,704) (7,197) (2,628)
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(3,174) (580) (5,740) (796)
-------------------------------------------------------------------------
Net (loss)earnings $ (1,093) $ 13,573 $ 12,716 $ 14,894
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net (loss) earnings
per unit (note
7(d))
Basic $ (0.04) $ 0.44 $ 0.41 $ 0.48
Diluted $ (0.04) $ 0.44 $ 0.41 $ 0.48
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-------------------------------------------------------------------------
Cost of sales and services for the three months and the six months ended
June 30, 2010 does not include $6,327 and $11,750 respectively (2009 -
$5,717 and $11,254 respectively) of depreciation relating to plant
buildings and equipment.
See accompanying notes to consolidated financial statements.
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Changes in Unitholders' Equity
(in thousands of dollars)
(unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Units
Balance, beginning
of period $ 377,144 $ 377,144 $ 377,144 $ 389,932
Re-purchase of
units - - - (12,788)
-------------------------------------------------------------------------
Balance, end of
period $ 377,144 $ 377,144 $ 377,144 $ 377,144
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning
of period $ 9,720 $ 9,720 $ 9,720 $ 5,272
Re-purchase of
units - - - 4,448
-------------------------------------------------------------------------
Balance, end of
period $ 9,720 $ 9,720 $ 9,720 $ 9,720
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity component
of convertible
debentures
Balance, beginning
of period $ 8,395 $ - $ - $ -
Issuance of
debentures (notes
6 and 7(c)) 1,756 - 10,151 -
-------------------------------------------------------------------------
Balance, end of
period $ 10,151 $ - $ 10,151 $ -
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-------------------------------------------------------------------------
Deficit
Balance, beginning
of period $ (138,504) $ (161,108) $ (143,112) $ (153,141)
Net (loss)
earnings (1,093) 13,573 12,716 14,894
Distributions (9,201) (9,201) (18,402) (18,489)
-------------------------------------------------------------------------
Balance, end of
period $ (148,798) $ (156,736) $ (148,798) $ (156,736)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other
comprehensive
(loss) (note 8)
Balance, beginning
of period $ (47,864) $ (20,319) $ (43,348) $ (24,127)
Other comprehensive
income (loss) 7,763 (11,534) 3,247 (7,726)
-------------------------------------------------------------------------
Balance, end of
period $ (40,101) $ (31,853) $ (40,101) $ (31,853)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(in thousands of dollars)
(unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Net (loss)
earnings $ (1,093) $ 13,573 $ 12,716 $ 14,894
Change in unrealized
loss on translation
of self-sustaining
foreign operations 7,612 (12,924) 2,081 (7,444)
Change in unrealized
loss on derivatives
designated as cash
flow hedges 680 1,390 564 (282)
Losses on derivatives
designated as cash
flow hedges in prior
years transferred
to net income in the
current year (529) - 602 -
-------------------------------------------------------------------------
Other comprehensive
income (loss) 7,763 (11,534) 3,247 (7,726)
-------------------------------------------------------------------------
Comprehensive
income $ 6,670 $ 2,039 $ 15,963 $ 7,168
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-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Cash Flows
(in thousands of dollars)
(unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Cash provided by
(used in):
Operating activities:
Net (loss)
earnings $ (1,093) $ 13,573 $ 12,716 $ 14,894
Items not
affecting cash:
Depreciation
and amor-
tization 14,419 11,272 25,232 22,437
Future income
taxes (3,576) (1,704) (7,197) (2,628)
Accretion
expense 492 146 660 299
Change in fair
value of der-
ivatives and
unrealized
foreign ex-
change loss
(gain) 1,829 (8,563) 1,471 (4,810)
-------------------------------------------------------------------------
12,071 14,724 32,882 30,192
(Increase) decrease
in working capital (6,256) (7,952) 2,206 (33,310)
-------------------------------------------------------------------------
5,815 6,772 35,088 (3,118)
Financing activities:
Distributions to
unitholders (9,201) (9,211) (18,402) (18,601)
Re-purchase of
units - - - (8,340)
Increase in
operating line
of credit - 777 - 777
Repayment of
long-term debt (24,775) - (79,189) -
Issuance of
convertible
debentures 10,000 - 90,000 -
Financing trans-
action costs (364) - (4,223) -
Debt extinguish-
ment costs (914) - (3,217) -
Increase (decrease)
in other long-term
liabilities 214 (2,150) (6,160) (1,277)
-------------------------------------------------------------------------
(25,040) (10,584) (21,191) (27,441)
Investing activities:
Decrease in
restricted cash 201 - 161 -
Additions to
property, plant
and equipment,
net of insurance
proceeds (3,469) (3,993) (7,524) (10,080)
-------------------------------------------------------------------------
(3,268) (3,993) (7,363) (10,080)
Effect of exchange
rates on cash held
in foreign
currencies (143) 58 (200) 19
-------------------------------------------------------------------------
(Decrease) increase
in cash and cash
equivalents (22,636) (7,747) 6,334 (40,620)
Cash and cash
equivalents -
beginning of
period 48,855 15,177 19,885 48,050
-------------------------------------------------------------------------
Cash and cash
equivalents -
end of period $ 26,219 $ 7,430 $ 26,219 $ 7,430
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental
information:
Cash taxes
paid $ 286 $ 468 $ 2,625 $ 3,737
Cash interest
paid $ 1,427 $ 2,327 $ 3,588 $ 4,612
See accompanying notes to consolidated financial statements.
CHEMTRADE LOGISTICS INCOME FUND
Notes to Consolidated Financial Statements
(in thousands of dollars)
(unaudited)
June 30, 2010
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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 9.
These interim consolidated financial statements of the Fund have been
prepared by management in accordance with accounting principles
generally accepted in Canada. These interim consolidated financial
statements include the accounts of the Fund and its wholly-owned
subsidiaries. Inter-company transactions and balances have been
eliminated. These interim consolidated financial statements have
been prepared following the same accounting policies and methods of
computation as the annual consolidated financial statements of the
Fund for the year ended December 31, 2009. These interim
consolidated financial statements do not contain all disclosures
required by generally accepted accounting principles and accordingly
should be read in conjunction with the annual consolidated financial
statements and the notes thereto.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
(a) Convergence to International Financial Reporting Standards
(IFRS):
In February 2008, the Accounting Standards Board of the CICA
confirmed that the use of International Financial Reporting
Standards (IFRS) established by the International Accounting
Standards Board will be required for fiscal years beginning
January 1, 2011 for publicly accountable enterprises. IFRS will
replace Canada's current GAAP. The Fund is currently evaluating
the impact of adopting IFRS.
(b) Business combinations:
In January 2009, the CICA issued Handbook Sections 1582,
Business Combinations; 1601, Consolidated Financial Statements;
and 1602, Non-Controlling Interests. These sections replace
Handbook Sections 1581, Business Combinations; and 1600,
Consolidated Financial Statements. Section 1582 establishes
standards for the accounting for business combinations that is
equivalent to the business combination accounting standard
under IFRS. Section 1582 is applicable for the Fund's business
combinations with acquisition dates on or after January 1,
2011. Early adoption of this section is permitted. Sections
1601 and 1602 establish standards for the preparation of
consolidated financial statements and for accounting for a non-
controlling interest in a subsidiary in the consolidated
financial statements subsequent to a business combination.
Sections 1601 and 1602 are applicable for the Fund's interim
and annual consolidated financial statements for its fiscal
year beginning January 1, 2011. Early adoption of these
sections is also permitted. If the Fund chooses to early adopt
any one of these sections, the other two sections must also be
adopted at the same time. The Fund is currently evaluating the
effect of these new sections on the consolidated financial
statements.
3. INSURANCE CLAIMS:
During the second quarter of 2010, a fire occurred at the Fund's
Beaumont, Texas facility. Currently, it is not possible to estimate
the amount of income the Fund has lost or the expected amount of
recovery the Fund will receive under its business interruption
insurance policies and therefore as at June 30, 2010, no insurance
recovery has been recorded. An insurance recovery will be recorded
when the amount of the recovery has been agreed with the insurer or
when payments are received. The Fund expects the Beaumont plant to be
back on-line by late 2010.
During the second quarter of 2010, the Fund wrote off the value of
equipment that was damaged in the fire. The costs to repair and
replace these assets are recoverable under the Fund's property
insurance policy and to the extent payment had not been received
prior to June 30, 2010 an amount has been included in Accounts
receivable.
During the third quarter of 2008, an incident occurred at the Fund's
Beaumont, Texas facility, which resulted in property damage and
business interruption. During the second quarter and first half of
2009, the Fund incurred capital expenditures of US$nil and US$2,587,
respectively, relating to the repair of damaged property at the
Beaumont facility.
4. IMPAIRMENT LOSS:
During the second quarter of 2010, the Fund recorded impairment
losses of $2,108 related to its intangible assets. This impairment
loss was recorded to depreciation and amortization within the Pulp
business segment. These intangible assets were related to certain
impaired customer relationships that had been recognized at the time
of the acquisition of the business in 2003.
5. LONG-TERM BANK DEBT:
During the six months ended June 30, 2010, the Fund utilized a
portion of the net proceeds of the convertible unsecured subordinated
debenture offering (see Note 6) to repay $79,189 (US$76,770) of its
existing long-term bank debt. The Fund realized a foreign exchange
loss of $215 and wrote off the remaining transaction costs related to
the portion of the long-term bank debt repaid in the amount of $270,
both of which are included in debt extinguishment costs on the
Consolidated Statements of Earnings.
The Fund also collapsed the interest rate swap arrangements related
to the portion of its long-term bank debt that was repaid. As a
result of collapsing these arrangements, the Fund had to pay $3,217
to settle the arrangements; however, it recognized a loss of only
$214 due to amounts previously recognized in net income. This loss
has been recorded in debt extinguishment costs on the Consolidated
Statements of Earnings.
6. CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES:
During the first quarter of 2010, the Fund entered into an agreement
with a syndicate of underwriters to issue $80,000 principal amount of
convertible unsecured subordinated debentures (the Debentures).
During the second quarter of 2010, as allowed under provisions of the
agreement to issue the Debentures, the underwriters purchased an
additional $10,000 principal amount of the Debentures, increasing the
aggregate gross proceeds of the public offering to $90,000. The Fund
incurred transaction costs of $4,223, which included the
underwriters' fee and other expenses of the offering.
The Debentures bear interest at a rate of 6% per annum, payable semi-
annually in arrears on March 31 and September 30 in each year
commencing September 30, 2010 and will mature on March 31, 2017. The
Debentures are convertible, at the option of the holder, into units
of the Fund at any time prior to the earlier of the maturity date and
the date of redemption specified by the Fund at a conversion price of
$16.00 per unit. The Debentures will not be redeemable before and
including March 31, 2013. On or after April 1, 2013 and prior to
April 1, 2015, the Fund may, at its option, redeem the Debentures in
whole or in part provided that the volume weighted average trading
price of the trust units of the Fund on the Toronto Stock Exchange
during the 20 consecutive trading days ending on the fifth trading
day preceding the date on which the notice of redemption is given is
not less than 125% of the conversion price. On or after April 1, 2015
and prior to the maturity date, the Fund may, at its option, redeem
the Debentures, in whole or in part, from time to time at par plus
accrued and unpaid interest.
Upon issuance, the Debentures were separated into liability and
equity components based on the respective estimated fair values at
the date of issuance. The fair value of the liability component is
estimated based on the present value of future interest and principal
payments due under the terms of the Debentures using a discount rate
for similar debt instruments without a conversion feature. The value
assigned to the equity component is the estimated fair value ascribed
to the holder's option to convert. Interest expense on the Debentures
is determined by applying an effective interest rate to the
outstanding liability component. The difference between actual cash
interest accrued and interest expense is accreted to the liability
component.
The following table allocates the Debentures between debt and equity:
Cost of
Borrowing Debt Equity Total
---------------------------------------------------------------------
Convertible
debentures 6.0% $ 79,507 $ 10,493 $ 90,000
Transaction
costs(1)(2) (3,731) (342) (4,073)
---------------------------------------------------------------------
At issuance 75,776 10,151 85,927
Accretion expense 417 - 417
---------------------------------------------------------------------
As at June 30,
2010 $ 76,193 $ 10,151 $ 86,344
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Transaction costs are capitalized and offset with the debt and
equity portions of the debentures and amortized over the life of
the debentures using the effective interest rate.
(2) Transaction costs offset against the equity portion of the
convertible debentures are net of income tax recovery of $150.
For the three months ended June 30, 2010, the net interest expense
was $1,740, comprised of accrued interest of $1,350 and accretion
expense of $390. For the six months ended June 30, 2010, the net
interest expense was $1,873, comprised of accrued interest of $1,456
and accretion expense of $417.
7. UNITS:
(a) Authorized:
Unlimited number of units.
(b) Outstanding:
Number of Units Amount
---------------------------------------------------------------------
Units
Balance - December 31, 2009
and June 30, 2010 30,670,470 $ 377,144
---------------------------------------------------------------------
(c) Equity component of convertible debentures:
As described in Note 6, during the first quarter of 2010, the
Fund entered into an agreement to issue $80,000 principal
amount of Debentures. During the second quarter of 2010, as
allowed under provisions of the agreement to issue the
Debentures, the underwriters purchased an additional $10,000
principal amount of the Debentures, increasing the aggregate
gross proceeds of the public offering to $90,000. The
Debentures are convertible, at the option of the holder, into
units of the Fund at any time prior to the earlier of the
maturity date and the date of redemption specified by the Fund
at a conversion price of $16.00 per unit.
For the three month and six month periods ended June 30, 2010,
there were no Debentures converted into units.
(d) Net (loss) earnings per unit:
Net (loss) earnings per unit has been calculated on the basis
of the weighted average number of units outstanding.
The following table provides a breakdown of the numerator and
denominator used in the calculation of net (loss) earnings per
unit and diluted net (loss) earnings per unit.
Numerator
------------------------------------------------------------------------
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Net (loss)
earnings $ (1,093) $ 13,573 $ 12,716 $ 14,894
Net interest and
accretion expense
on convertible
debentures(1) - - - -
-------------------------------------------------------------------------
Diluted net (loss)
earnings $ (1,093) $ 13,573 $ 12,716 $ 14,894
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the three and six month periods ended June 30, 2010, the
potential conversion of the convertible debentures has not been
included as the effect on net (loss) earnings per unit would be
anti-dilutive.
Denominator
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Weighted average
number of units 30,670,470 30,672,773 30,670,470 30,968,686
Weighted average
convertible
debenture
dilutive units(1) - - - -
-------------------------------------------------------------------------
Weighted average
number of diluted
units 30,670,470 30,672,773 30,670,470 30,968,686
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) For the three and six month periods ended June 30, 2010, the effect
of conversion of the convertible debentures has not been included as
the effect on net (loss) earnings per unit would be anti-dilutive.
(e) Distributions:
Distributions paid for the three month and six month periods
ended June 30, 2010 were $9,201 and $18,402 respectively (2009
- $9,211 and $18,601 respectively). All of the Fund's
distributions are discretionary.
(f) Long-term incentive plan:
The Fund operates a Total Return Long-Term Incentive Plan (TR
LTIP) which grants cash awards based on achieving total
Unitholder return over a performance period. Total Unitholder
return consists of changes in unit price and distributions paid
to Unitholders. The Fund treats these awards as liabilities
with the value of these liabilities being re-measured at each
reporting period, based upon changes in the intrinsic value of
the awards. Any gains or losses on re-measurement are recorded
in the Consolidated Statements of Earnings, provided that the
aggregate compensation cost accrued during the performance
period is not adjusted below zero. For the three month and six
month periods ended June 30, 2010, the Fund recorded expenses
of $1,593 and $3,768 respectively (2009 - $2,200 and recovery
of $1,233 respectively) related to the TR LTIP. As at June 30,
2010 a liability of $14,570 (December 31, 2009 - $15,979) has
been recorded, of which $8,915 (December 31, 2009 - $5,177) is
included in Accrued and other liabilities and $5,655 (December
31, 2009 - $10,802) is included in Other long-term liabilities.
8. ACCUMULATED OTHER COMPREHENSIVE (LOSS):
The components of accumulated other comprehensive (loss) as at June
30, 2010 and 2009, and other comprehensive (loss) for the six months
then ended were as follows:
Accumulated Opening Ending
other comp- balance balance
rehensive December 31, Transferred June 30,
(loss) 2009 Net change to net income 2010
---------------------------------------------------------------------
Unrealized (loss)
gain on trans-
lation of self-
sustaining
foreign
operations $ (40,935) $ 2,081 $ (430)(1) $(39,284)(2)
(Loss) gain on
derivatives
designated as
cash flow
hedges (2,413) 564 1,032(3) (817)(4)
---------------------------------------------------------------------
Accumulated
other comp-
rehensive
(loss) $ (43,348) $ 2,645 $ 602 $ (40,101)
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated Opening Ending
other comp- balance balance
rehensive December 31, June 30,
(loss) 2008 Net change 2009
-----------------------------------------------------------
Unrealized (loss)
gain on trans-
lation of self-
sustaining
foreign
operations $ (19,411) $ (7,444) $(26,855)(2)
(Loss) gain on
derivatives
designated as
cash flow
hedges (4,716) (282) (4,998)(4)
-----------------------------------------------------------
Accumulated
other comp-
rehensive (loss) $ (24,127) $ (7,726) $ (31,853)
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
(1) Cumulative translation losses on cash flow hedges collapsed
during the six month period ended June 30, 2010.
(2) Net of income tax expense of $nil (2009 - $nil).
(3) Ineffectiveness of cash flow hedges and losses on derivatives
designated as cash flow hedges in prior years transferred to net
income in the current year.
(4) Net of cumulative income tax recovery of $440 (2009 - $2,875).
9. BUSINESS SEGMENTS:
The Fund operates in four business segments: Sulphur Products &
Performance Chemicals (SPPC), Pulp Chemicals (Pulp), International
(Intl) and Corporate (Corp).
SPPC markets, removes and/or produces merchant and re-generated
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.
International provides removal and marketing services for elemental
sulphur and sulphuric acid. These products are marketed to customers
in Europe, the Mediterranean, North Africa, Central and South
America, North America, as well as in the Pacific region.
Corporate is a non-operating segment that provides centralized
services such as treasury, finance, information systems, human
resources, legal and risk management.
Three Months Ended June 30, 2010
-------------------------------------------------------------------------
SPPC Pulp Intl Corp Total
-------------------------------------------------------------------------
Revenue from
external
customers $ 81,952 $ 11,183 $ 44,271 $ - $ 137,406
Earnings
before the
under-noted 13,247 3,987 3,731 (5,989) 14,976
Unrealized
foreign ex-
change (gain)
loss and in-
effectiveness
of cash flow
hedges - - - 1,685 1,685
Debt ex-
tinguishment
costs - - - 128 128
Depreciation
and amort-
ization 9,410 4,530 479 - 14,419
Net interest
and accretion
expense 1,276 - (5) 1,740 3,011
Income taxes (1,671) - 181 (1,684) (3,174)
Net earnings
(loss) 4,232 (543) 3,076 (7,858) (1,093)
Total assets 253,395 73,718 162,965 4,246 494,324
Goodwill 60,650 - 30,648 - 91,298
Intangibles 62,994 29,382 3,914 - 96,290
Capital ex-
penditures 3,334 59 18 58 3,469
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended June 30, 2009
-------------------------------------------------------------------------
SPPC Pulp Intl Corp Total
-------------------------------------------------------------------------
Revenue from
external
customers $ 77,908 $ 13,248 $ 33,468 $ - $ 124,624
Earnings
before the
under-noted 15,221 4,745 4,927 (7,433) 17,460
Unrealized
foreign ex-
change (gain)
loss and in-
effectiveness
of cash flow
hedges - - - (9,147) (9,147)
Depreciation
and amort-
ization 8,263 2,435 574 - 11,272
Net interest
and accretion
expense 1,900 462 (20) - 2,342
Income taxes (1,255) - 675 - (580)
Net earnings 6,313 1,848 3,698 1,714 13,573
Capital ex-
penditures 3,115 108 605 165 3,993
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Months Ended June 30, 2010
-------------------------------------------------------------------------
SPPC Pulp Intl Corp Total
-------------------------------------------------------------------------
Revenue from
external
customers $ 155,452 $ 22,094 $ 86,684 $ - $ 264,230
Earnings
before the
under-noted 29,754 8,769 14,016 (13,086) 39,453
Unrealized
foreign ex-
change (gain)
loss and in-
effectiveness
of cash flow
hedges - - - 1,271 1,271
Debt ex-
tinguishment
costs - - - 699 699
Depreciation
and amort-
ization 17,389 6,884 959 - 25,232
Net interest
and accretion
expense 2,999 405 (2) 1,873 5,275
Income taxes (3,959) - 998 (2,779) (5,740)
Net earnings
(loss) 13,325 1,480 12,061 (14,150) 12,716
Total assets 253,395 73,718 162,965 4,246 494,324
Goodwill 60,650 - 30,648 - 91,298
Intangibles 62,994 29,382 3,914 - 96,290
Capital ex-
penditures 7,183 258 31 52 7,524
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Months Ended June 30, 2009
-------------------------------------------------------------------------
SPPC Pulp Intl Corp Total
-------------------------------------------------------------------------
Revenue from
external
customers $ 177,603 $ 25,191 $ 83,653 $ - $ 286,447
Earnings
before the
under-noted 24,366 9,531 8,748 (6,909) 35,736
Unrealized
foreign ex-
change (gain)
loss and in-
effectiveness
of cash flow
hedges - - - (5,244) (5,244)
Depreciation
and amort-
ization 16,556 4,707 1,174 - 22,437
Net interest
and accretion
expense 3,555 958 (68) - 4,445
Income taxes (2,121) - 1,325 - (796)
Net earnings
(loss) 6,376 3,866 6,317 (1,665) 14,894
Capital ex-
penditures 8,873 208 645 354 10,080
-------------------------------------------------------------------------
-------------------------------------------------------------------------
December 31, 2009
-------------------------------------------------------------------------
SPPC Pulp Intl Corp Total
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Geographic segments:
The Fund operates primarily in Canada, the United States and Europe.
Revenue is attributed to customers based on location of customer.
Revenue
---------------------------------------------------------------------
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
---------------------------------------------------------------------
Canada $ 28,090 $ 28,660 $ 54,932 $ 60,183
U.S. 65,045 62,496 122,614 142,611
Europe 44,271 33,468 86,684 83,653
---------------------------------------------------------------------
$ 137,406 $ 124,624 $ 264,230 $ 286,447
---------------------------------------------------------------------
---------------------------------------------------------------------
Property, Plant and Equipment, Goodwill and Intangibles
June 30, December 31,
2010 2009
---------------------------------------------------------------------
Canada $ 101,855 $ 110,876
U.S. and other 190,048 202,174
Europe 42,298 42,929
---------------------------------------------------------------------
$ 334,201 $ 355,979
---------------------------------------------------------------------
---------------------------------------------------------------------
For the six months ended June 30, 2010, there were no producers from
which the Fund obtained product that accounted for more than 10% of
the Fund's total revenue. For the six months ended June 30, 2009, the
Fund obtained product from a producer that accounted for 14.6% of the
Fund's total revenue. For the six months ended June 30, 2010, revenue
from a customer accounted for 10.5% (2009 - 10.9%) of the Fund's
total revenues.
10. FINANCIAL INSTRUMENTS:
(a) Categories of financial assets and liabilities:
The following table summarizes information regarding the
carrying values of the Fund's financial instruments:
June 30, December 31,
2010 2009
-----------------------------------------------------------------
Held for trading:
Cash and cash equivalents $ 26,219 $ 19,885
Restricted cash 2,438 2,599
Notes receivable 2,662 2,627
Derivatives designated as held
for trading - (loss) / gain (3,936) 1,007
Loans and receivables:
Accounts receivable 84,476 75,748
Other financial liabilities:
Accounts payable 42,323 42,918
Accrued and other liabilities 51,528 42,920
Distributions payable 3,067 3,067
Derivatives designated as cash
flow hedges - (loss) - (6,677)
Long-term debt 157,144 160,105
-----------------------------------------------------------------
-----------------------------------------------------------------
(b) Derivatives and hedging:
-----------------------------------------------------------------
June 30, December 31,
2010 2009
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
Derivatives
not design-
ated in a
formal
hedging
relationship:
Interest
rate
swaps US$76,368 $ - $ 2,631 - $ - $ -
Foreign
exchange
contracts(1) - - 1,305 - 1,166 159
Commodity
forward
contracts(2) N/A 57 57 N/A 148 148
------------------------------------------------------------------
Total $ 57 $ 3,993 $ 1,314 $ 6,984
------------------------------------------------------------------
------------------------------------------------------------------
Current $ 57 $ 1,362 $ 1,314 $ 307
Non-current - 2,631 - 6,677
------------------------------------------------------------------
Total $ 57 $ 3,993 $ 1,314 $ 6,984
------------------------------------------------------------------
------------------------------------------------------------------
(1) See below for notional amounts.
(2) Includes commitments to buy and sell commodities and commodity
forward contracts related to those commitments.
The Fund has entered into swap arrangements with its principal
banker, which fix the LIBOR component of its interest rates on
all of its outstanding term debt until August 2011. During the
six months ended June 30, 2010, the Fund collapsed a portion of
its swap arrangements. Losses are included in other long-term
liabilities and prior to June 29, 2010 the offset was included
in other comprehensive income, except for the amortization of
the fair value liability of the interest rate swaps entered
into during the first quarter of 2009 which was included in
unrealized foreign exchange (gain) loss and ineffectiveness of
cash flow hedges. As at June 29, 2010, the Fund de-designated
its remaining swap arrangements as cash flow hedges. In the
future, all changes in the fair market value of the swap
arrangements will be recorded in the Consolidated Statements of
Earnings. In addition, the Fund will amortize the remaining
amount in Accumulated Other Comprehensive Income related to the
swap arrangements to the Consolidated Statements of Earnings
over the remaining term of the swap arrangements.
The 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 June 30, 2010
include future contracts to sell US$5,027, C$7,602 and
(euro) 1,878 at weighted average exchange rates of (euro)0.79,
(euro) 0.65 and US$1.22, respectively, for periods through to
January 2011.
The Fund's International business segment has commitments to
buy and sell commodities and has entered into commodity forward
contracts to manage its exposure to commodity price changes.
The commitments to buy and sell commodities and the associated
forward contracts are treated as derivatives and are measured
at fair value. At June 30, 2010 and December 31, 2009, the net
unrealized value of these transactions was not significant.
(c) Fair values of financial instruments:
Fair value is the value that would be agreed upon in an arm's
length transaction between willing and knowledgeable counter-
parties. The carrying amounts of cash and cash equivalents,
accounts receivable, 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.
CHEMTRADE LOGISTICS INCOME FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2010
The information in this Management's Discussion and Analysis, or MD&A, is intended to assist the reader in the understanding and assessment of the trends and significant changes in the results of operations and financial condition of Chemtrade Logistics Income Fund. Throughout this MD&A, the term the "Fund" refers to Chemtrade Logistics Income Fund and its consolidated subsidiaries. The terms "we", "us" or "our" similarly refers to the Fund. This MD&A should be read in conjunction with the unaudited consolidated statements of the Fund for the six month period ended June 30, 2010 and the annual MD&A 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 describes the expectations of the Fund as of the date of this MD&A. The Fund's actual results could be materially different from its expectations if known or unknown risks affect its business, or if its estimates or assumptions turn out to be inaccurate. As a result, the Fund cannot guarantee that any forward-looking statement will materialize. Forward-looking statements do not take into account the effect that transactions or non-recurring items announced or occurring after the statements are made may have on the Fund's business. The Fund disclaims any intention or obligation to update any forward-looking statement even if new information becomes available, as a result of future events or for any other reason.
This MD&A contains forward-looking statements about the objectives, strategies, financial condition, results of operations and businesses of the Fund including, but not limited to (capitalized terms are as defined in the MD&A):
- all of the risks identified in "RISKS AND UNCERTAINTIES" section;
- all of the forward-looking statements in the "OUTLOOK" section;
- the amount of any TR LTIP payouts and the amounts to be accrued under the TR LTIP;
- the timing of the reversal of deductible temporary differences of certain flow-though subsidiaries;
- with respect to the 2010 Beaumont incident, the amount of income lost, the ability to recover and the quantum of any recovery from the Fund's insurers, and the timing of the plant's return to production;
- the ability to comply with the new emission limits imposed by the EPA and the expected cost of compliance;
- the estimated impact of the Canadian/U.S. dollar exchange rate on the Fund's business;
- the anticipated tax characterization of planned distributions;
- the Fund's ability to renew its term debt at maturity;
- the implementation of planned maintenance capital expenditures, as well as the cost and timing thereof;
- the use and sufficiency of cash flows from operating activities;
- the potential impact of recent accounting pronouncements; and
- with respect to IFRS, the timing of the implementation of various transition steps, the IFRS1 and policy choices made, and the impact thereof.
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 Six Months Ended
-------------------------- --------------------------
($'000 except per June 30, June 30, June 30, June 30,
unit amounts) 2010 2009 2010 2009
-------------------------------------------------------------------------
Revenue $ 137,406 $ 124,624 $ 264,230 $ 286,447
Net (loss)
earnings $ (1,093) $ 13,573 $ 12,716 $ 14,894
Net (loss)
earnings per unit
- Basic $ (0.04) $ 0.44 $ 0.41 $ 0.48
- Diluted $ (0.04) $ 0.44 $ 0.41 $ 0.48
Total assets $ 494,324 $ 505,801 $ 494,324 $ 505,801
Long-term bank
debt $ 80,951 $ 176,921 $ 80,951 $ 176,921
Convertible
unsecured
subordinated
debentures $ 76,193 $ - $ 76,193 $ -
EBITDA(3) $ 14,976 $ 17,460 $ 39,453 $ 35,736
EBITDA per unit(1) $ 0.49 $ 0.57 $ 1.29 $ 1.15
Cash flows from
operating
activities $ 5,815 $ 6,772 $ 35,088 $ (3,118)
Cash flows from
operating
activities per
unit(1) $ 0.19 $ 0.22 $ 1.14 $ (0.10)
Adjusted cash
flows from
operating
activities(3) $ 11,301 $ 14,782 $ 30,109 $ 30,210
Adjusted cash
flows from
operating
activities per
unit(1)(3) $ 0.37 $ 0.48 $ 0.98 $ 0.98
Distributable
cash after
maintenance
capital ex-
penditures(3) $ 8,129 $ 10,982 $ 23,064 $ 20,616
Distributable
cash after
maintenance
capital ex-
penditures
per unit(1)(3) $ 0.27 $ 0.36 $ 0.75 $ 0.67
Distributions
declared $ 9,201 $ 9,201 $ 18,402 $ 18,489
Distributions
declared per
unit(2) $ 0.30 $ 0.30 $ 0.60 $ 0.60
Distributions
paid $ 9,201 $ 9,211 $ 18,402 $ 18,601
Distributions
paid per unit(2) $ 0.30 $ 0.30 $ 0.60 $ 0.60
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Based on weighted
average number of
units outstanding
for the period
of: 30,670,470 30,672,773 30,670,470 30,968,686
(2) Based on actual number of units outstanding on record date.
(3) See NON-GAAP MEASURES.
NON-GAAP MEASURES
EBITDA -
Throughout this MD&A, the term EBITDA is used to describe earnings before any deduction for net interest and accretion expense, taxes, depreciation and amortization and other charges such as unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges. EBITDA is a metric used by many investors and analysts to compare organizations on the basis of ability to generate cash from operations. Management considers EBITDA (as defined) to be an indirect measure of operating cash flow, which is a significant indicator of the success of any business. EBITDA is not intended to be representative of cash flow from operations or results of operations determined in accordance with Canadian generally accepted accounting principles (GAAP) or cash available for distribution.
EBITDA is not a recognized measure under Canadian GAAP. The Fund's method of calculating EBITDA may differ from methods used by other income trusts or companies, and accordingly may not be comparable to similar measures presented by other organizations. A reconciliation of EBITDA to net earnings follows:
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
($'000) 2010 2009 2010 2009
-------------------------------------------------------------------------
Net (loss)
earnings $ (1,093) $ 13,573 $ 12,716 $ 14,894
Add:
Unrealized
foreign ex-
change loss
(gain) and
ineffective-
ness of cash
flow hedges 1,685 (9,147) 1,271 (5,244)
Debt extinguish-
ment costs 128 - 699 -
Depreciation and
amortization 14,419 11,272 25,232 22,437
Net interest and
accretion
expense 3,011 2,342 5,275 4,445
Net taxes (3,174) (580) (5,740) (796)
-------------------------------------------------------------------------
EBITDA $ 14,976 $ 17,460 $ 39,453 $ 35,736
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
($'000) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash flows from
operating
activities $ 5,815 $ 6,772 $ 35,088 $ (3,118)
Add (deduct):
Changes in non-
cash working
capital and
other items 5,486 8,010 (4,979) 33,328
-------------------------------------------------------------------------
Adjusted cash flows
from operating
activities 11,301 14,782 30,109 30,210
Less:
Maintenance capital
expenditure 3,172 3,800 7,045 9,594
-------------------------------------------------------------------------
Distributable cash
after maintenance
capital expenditure 8,129 10,982 23,064 20,616
Less:
Non-maintenance
capital expenditure(1) 297 193 479 486
-------------------------------------------------------------------------
Distributable cash
after all capital
expenditure 7,832 10,789 22,585 20,130
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 second quarter of 2010 was $137.4 million, which was $ 12.8 million higher than the same quarter of 2009, principally due to higher volumes within the SPPC segment and higher sulphur prices in the International and SPPC segments. On a year-to-date basis, consolidated revenue declined by $22.2 million, mainly due to the impact of the weaker U.S. dollar on U.S. dollar denominated sales.
The Fund's net loss and EBITDA for the second quarter of 2010 were $1.1 million and $15.0 million, respectively, compared with net earnings and EBITDA for the second quarter of 2009 of $13.6 million and $17.5 million, respectively. 2010 second quarter EBITDA was lower than the same quarter of 2009 mainly due to the impact of the Beaumont incidents (as described in the BEAUMONT INCIDENTS section).
The reduction in net earnings during the second quarter of 2010 compared with the second quarter of 2009 was even more pronounced as during 2009, there was a large unrealized foreign exchange gain recorded whereas in the second quarter of 2010 a loss was recorded.
Net earnings and EBITDA for the first six months of 2010 were $12.7 million and $39.5 million respectively. Comparable net earnings and EBITDA for the first six months of 2009 were $14.9 million and $35.7 million respectively. EBITDA during the first six months of 2010 was higher than the same period in 2009 due to the significantly stronger results in the International and SPPC segments generated during the first quarter of 2010. However, this did not result in increased earnings due to the high level of unrealized foreign exchange gains recorded during the first six months of 2009.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
SPPC -
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
($'000) 2010 2009 2010 2009
-------------------------------------------------------------------------
Revenue $ 81,952 $ 77,908 $ 155,452 $ 177,603
Earnings before
the under-noted
(EBITDA) 13,247 15,221 29,754 24,366
Depreciation and
amortization (9,410) (8,263) (17,389) (16,556)
Net interest and
accretion expense (1,276) (1,900) (2,999) (3,555)
Income tax recovery 1,671 1,255 3,959 2,121
-------------------------------------------------------------------------
Net earnings $ 4,232 $ 6,313 $ 13,325 $ 6,376
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 second quarter of 2010, SPPC generated revenue of $82.0 million, which was $4.0 million higher than the second quarter of 2009, mainly due to higher volumes and higher sulphur prices. These factors more than offset the negative impact of the weaker U.S. dollar on U.S. dollar denominated revenue. In the second quarter of 2010, net earnings and EBITDA were lower than the same period of 2009 by $2.1 million and $2.0 million, respectively. The main reason for these decreases was the effect of the Beaumont incidents (as described in the BEAUMONT INCIDENTS section). Results for the second quarter of 2009 benefited by $2.3 million, due to an insurance recovery relating to the 2008 Beaumont incident; whereas, during the second quarter of 2010, the fire at the Beaumont plant in May 2010 resulted in the plant being off-line for half the quarter and increased costs were incurred to ensure that customer operations were not disrupted.
For the first six months of 2010, revenue declined by $22.2 million from the level achieved during the same period of 2009. This was mainly due to the impact of the weaker U.S. dollar on U.S. dollar denominated revenue. For the first six months of 2010, net earnings and EBITDA improved by $6.9 million and $5.4 million respectively from the levels generated during the same period of 2009. The main reason for these improvements was that during 2009, additional costs were incurred while the Beaumont plant was being re-started after the 2008 incident. Additionally, input costs for certain products were lower in the first six months of 2010 relative to the same period of 2009.
Net interest expenses were lower in the second quarter and first six months of 2010 due mainly to the repayment of long-term bank debt. See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities.
The higher income tax recovery during the second quarter and first six months of 2010 is due mainly to lower taxable income in certain Canadian and foreign corporate subsidiaries.
Pulp Chemicals -
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
($'000) 2010 2009 2010 2009
-------------------------------------------------------------------------
Revenue $ 11,183 $ 13,248 $ 22,094 $ 25,191
Earnings before
the under-noted
(EBITDA) 3,987 4,745 8,769 9,531
Depreciation and
amortization (4,530) (2,435) (6,884) (4,707)
Net interest and
accretion expense - (462) (405) (958)
-------------------------------------------------------------------------
Net (loss)
earnings $ (543) $ 1,848 $ 1,480 $ 3,866
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
Second quarter 2010 Pulp Chemicals revenue was $2.1 million lower than the level achieved during the second quarter of 2009, mainly due to lower sales volume of sodium chlorate. The reduced volume also resulted in revenue for the first six months of 2010 being $3.1 million lower than the same period of 2009. The negative impact of the reduced volume was partially offset by lower costs, resulting in a reduction in EBITDA of approximately $0.8 million for the second quarter and first six months of 2010 relative to the comparable periods of 2009.
Depreciation and amortization for the second quarter and first six months of 2010 were higher than the same periods of 2009 due to impairment charges recorded in the value of intangible assets. These intangible assets relate to certain customer relationships and had been recognized at time of the acquisition of this business in 2003.
Net interest expenses were lower in the second quarter and first six months of 2010 due mainly to the repayment of long-term bank debt. See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities.
International -
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
($'000) 2010 2009 2010 2009
-------------------------------------------------------------------------
Revenue $ 44,271 $ 33,468 $ 86,684 $ 83,653
Earnings before
the under-noted
(EBITDA) 3,731 4,927 14,016 8,748
Depreciation and
amortization (479) (574) (959) (1,174)
Net interest income 5 20 2 68
Income tax (expense) (181) (675) (998) (1,325)
-------------------------------------------------------------------------
Net earnings $ 3,076 $ 3,698 $ 12,061 $ 6,317
-------------------------------------------------------------------------
-------------------------------------------------------------------------
International operations provide removal and marketing services for elemental sulphur and sulphuric acid. These products are marketed to customers globally.
Revenues for the second quarter and first six months of 2010 were higher than the same periods of 2009, mainly due to higher prices for sulphur. Net earnings and EBITDA for the second quarter of 2010 were $0.6 million and $1.2 million lower than the same period of 2009, as 2009 results benefited from a few high-margin contracts. For the first six months of 2010, net earnings and EBITDA were $5.7 million and $5.3 million higher than the first six months of 2009. These increases were due to significantly higher earnings realized during the first quarter of 2010, when certain customers who had delayed delivery from earlier periods honoured their commitments at pricing that resulted in favourable margins.
Corporate -
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
($'000) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cost of services $ 5,989 $ 7,433 $ 13,086 $ 6,909
Loss before
the under-noted
(EBITDA) (5,989) (7,433) (13,086) (6,909)
Unrealized foreign
exchange gain
(loss) and in-
effectiveness of
cash flow hedges (1,685) 9,147 (1,271) 5,244
Debt extinguishment
costs (128) - (699) -
Net interest and
accretion expense (1,740) - (1,873) -
Income tax
recovery 1,684 - 2,779 -
-------------------------------------------------------------------------
Net (loss)
earnings $ (7,858) $ 1,714 $ (14,150) $ (1,665)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 second quarter, corporate costs, excluding unrealized foreign exchange gains and losses, were $1.4 million lower than the second quarter of 2009. During the second quarter of 2010, accruals for the Fund's Total Return Long-Term Incentive Plan (TR LTIP) were $0.6 million lower than the second quarter of 2009. Also, during the second quarter of 2009, the Fund recorded unrealized losses of $0.6 million relating to natural gas swaps, whereas there were no swaps during the second quarter of 2010.
For the first six months of 2010, the main reasons for the $6.2 million increase in corporate costs relative to the first six months of 2009 were a TR LTIP accrual of $3.8 million, compared with a net reversal of $1.2 million in the first six months of 2009 and an expenditure of $0.8 million with respect to diligence activities relating to a potential acquisition that did not result in a transaction. Additionally, costs were lower in the first six months of 2009 because they included realized foreign exchange gains of $1.4 million, whereas there were foreign exchange gains of $0.4 million during the first six months of 2010. The impact of these items was partially offset by higher costs of $0.7 million recorded during the first six months of 2009 relating to unrealized natural gas swaps and additional allowances for doubtful accounts receivable.
The comments on TR LTIP expenses relate to the 2008-2010, 2009-2011 and 2010-2012 TR LTIPs. The 2008-2010, 2009-2011 and 2010-2012 TR LTIP payouts are payable at the beginning of 2011, 2012 and 2013 respectively and will be based upon Total Return, as described in the Fund's Management Information Circular, achieved over the three-year performance periods of each plan. The nature of this calculation makes it difficult to forecast the amount of TR LTIP expenses that will be recordable in any period as it is based upon future distributions and changes in unit value.
The Corporate segment includes unrealized foreign exchange gains on the translation of U.S. dollar denominated debt, which were a result of the appreciation in the Canadian dollar relative to the U.S. dollar during the first six months of 2010. This exchange rate fluctuation also resulted in unrealized foreign exchange losses on the translation of U.S. dollar denominated assets in self-sustaining foreign operations. However, in accordance with accounting rules, those losses are required to be shown in other comprehensive income rather than in earnings.
Also included in unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges is the ineffectiveness of the Fund's cash flow hedges entered into in the first quarter of 2009. See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities - Financial Instruments for more detail.
Debt extinguishment costs for the second quarter and first six months of 2010 of $0.1 million and $0.7 million respectively relate to the repayment of a portion of the Fund's long-term debt which is more fully described in LIQUIDITY AND CAPITAL RESOURCES - Financing Activities. The impact on Distributable cash after maintenance capital expenditure was more significant, as the cash component of this cost was $0.9 million and $3.2 million during the second quarter and first six months of 2010 respectively.
Net interest and accretion expense for the second quarter and first six months of 2010 of $1.7 million and $1.9 million respectively relates to the convertible debentures issued during the first quarter of 2010. See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities.
The income tax recovery of $1.7 million and $2.8 million during the second quarter and first six months of 2010 represents future taxes related to deductible temporary differences of certain flow-through subsidiaries expected to reverse subsequent to 2010.
BEAUMONT INCIDENTS -
During the second quarter of 2010, a fire occurred at the Fund's Beaumont, Texas facility. Currently, it is not possible to accurately estimate the amount of income the Fund has lost or the expected amount of recovery the Fund will receive under its business interruption insurance policies and therefore as at June 30, 2010, no insurance recovery has been recorded. An insurance recovery will be recorded when the amount of the recovery has been agreed with the insurer or when payments are received. The Fund expects the Beaumont plant to be back on-line by late 2010.
During the second quarter of 2010, the Fund wrote off the value of equipment that was damaged in the fire. The costs to repair and replace these assets are recoverable under the Fund's property insurance policy and to the extent payment had not been received prior to June 30, 2010 an amount has been included in Accounts receivable.
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 six months of 2009, the Fund incurred operational, legal and consulting costs relating to this incident.
During the second quarter of 2009, the Fund received an interim payment from its insurer of US$2.5 million with respect to the business interruption loss. The Fund allocated US$0.5 million of this towards a receivable that had been previously recorded and the balance was included in selling, general, administrative and other costs in the SPPC segment.
During the fourth quarter of 2009, the Fund concluded its property damage claim and recovered US$9.8 million of its capital expenditures relating to the repair. The Fund also concluded its business interruption claim and recovered an aggregate of US$10.6 million.
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 would be established at each of its five sulphuric acid manufacturing facilities. The agreement with Chemtrade arose from a broader EPA initiative regarding the domestic sulphuric acid manufacturing industry. Chemtrade's plants have met or will meet these stricter limits by various agreed dates ranging from December 2009 to December 2012. Chemtrade anticipates that these compliance actions will cost approximately US$6.0 million in respect of four facilities, most of which will be spent to bring its Riverton, Wyoming facility into compliance with the new limits by December 2012. Chemtrade is in compliance with these requirements and remains confident that it will fulfill its obligations under this agreement. Because of Chemtrade's existing overall levels of control, the civil penalty paid by Chemtrade was not material and it was recorded in 2008. Certain additional funds and penalties will be expended in respect of Chemtrade's Cairo facility, but those costs will be paid for by Marsulex Inc. pursuant to an indemnity agreement between the two companies.
FOREIGN EXCHANGE
The Fund has 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 June 30, 2010 include future contracts to sell US$5.0 million, C$7.6 million and (euro)1.9 million at weighted average exchange rates of (euro)0.79, (euro)0.65 and US$1.22, respectively, for periods through to January 2011. There are unrealized losses of $1.3 million from these contracts at June 30, 2010.
The purpose of these contracts is to hedge specific transactions in a foreign currency. The amount of the related derivative is recorded at fair market value at the period end and included with prepaid expenses and other assets or accrued and other liabilities on the balance sheet. The resultant non-cash charge or gain is reported as unrealized foreign exchange (gain) loss. The impact of this non-cash charge or gain is excluded from the computation of Distributable cash after maintenance capital expenditures. See NON-GAAP MEASURES - Cash Flow.
The Fund's International and U.S. based operations are considered to be self-sustaining, as they are financially independent. As a result, gains or losses arising from the translation of the assets and liabilities of self-sustaining operations are recorded in other comprehensive income. The changes recorded in the accumulated other comprehensive income account since December 31, 2009 were a result of changes in the Canadian/U.S. dollar exchange rate between December 31, 2009 and June 30, 2010. Until the first quarter of 2010, when it was repaid, the Fund's Canadian based operations had all its term debt denominated in U.S. dollars. The gains or losses arising from the translation of these loans were recorded on the Consolidated Statements of Earnings as unrealized foreign exchange (gain) loss. The rate of exchange used to translate U.S. denominated balances has changed from a rate of US$1.00 (equal sign) $1.05 at December 31, 2009 to US$1.00 = $1.06 at June 30, 2010. See RISKS AND UNCERTAINTIES for additional comments on foreign exchange.
NET INTEREST AND ACCRETION EXPENSE
Net interest and accretion expense was $3.0 million in the second quarter of 2010 compared with $2.3 million in the second quarter of 2009. Net interest and accretion expense was $5.3 million in the first six months of 2010 compared with $4.4 million in the first six months of 2009.
Interest expense in 2010 was higher than 2009 mainly due to the interest rate on the convertible debentures that were issued during the first and second quarters of 2010 being higher than the interest rate on the long-term bank debt which was repaid during the second quarter and first six months of 2010. In addition, there were reversals of accruals in the first quarter of 2009, related to interest accruals from 2008 which were rolled into the fair value of the new interest rate swap arrangements entered into during the first quarter of 2009. See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities - Financial Instruments.
The weighted average effective annual interest rate at June 30, 2010 on the Fund's long-term bank debt was 4.45% (December 31, 2009 - 4.83%). See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities - Financial Instruments for information concerning swap arrangements.
During the second quarter and first six months of 2010 the Fund recorded accretion expense of $0.5 and $0.7 million, respectively, compared to $0.1 million and $0.3 million during the second quarter and first six months of 2009. The higher accretion expense is due to the accretion on the convertible debentures issued during the first and second quarters of 2010.
INCOME TAXES
Current income tax expense was $0.4 million and $1.5 million for the second quarter and first six months of 2010 respectively, compared with $1.1 million and $1.8 million for the second quarter and first six months of 2009 respectively. The future income tax recovery was $3.6 million and $7.2 million for the second quarter and first six months of 2010 compared to the future income tax recovery of $1.7 million and $2.6 million for the second quarter and first six months of 2009 respectively. The effective tax rates for the second quarter and first six months of 2010 differ from the statutory tax rate of 30.6% primarily due to the operating losses in high tax rate jurisdictions and operating profits in low tax rate jurisdictions and flow-through entities.
The increase in future tax asset of $3.4 million at June 30, 2010 relative to December 31, 2009 is the result of increased tax loss carry forwards, net of valuation allowances, and other deductible temporary differences, net of valuation allowances, available in certain Canadian and foreign corporate subsidiaries.
The decrease in future tax liability of $3.0 million at June 30, 2010 relative to December 31, 2009 is the result of the decrease in the taxable temporary differences between the accounting carrying amount and the tax basis of assets associated with certain Canadian and foreign corporate subsidiaries.
At June 30, 2010, the Fund has $9.9 million of deductible temporary differences related to certain flow-through subsidiaries compared with $7.9 million at December 31, 2009. The Fund has recorded $3.9 million for future taxes related to the portion of these deductible temporary differences that are expected to reverse after 2011.
EXCESS CASH FLOWS AND NET INCOME OVER DISTRIBUTIONS PAID
The following table presents excess cash flows from operating activities and net income over distributions paid for the three months and the six months ended June 30, 2010 and for the years ended December 31, 2009 and 2008.
Three Six
Months Months Year Year
Ended Ended Ended Ended
June 30, June 30, December 31, December 31,
($'000) 2010 2010 2009 2008
-------------------------------------------------------------------------
Cash flows from
operating
activities $ 5,815 $ 35,088 $ 41,133 $ 147,904
Net (loss)
earnings (1,093) 12,716 46,920 40,331
Distributions paid
during period 9,201 18,402 37,003 40,086
(Shortfall) excess
of cash flows from
operating activities
over cash dist-
ributions paid (3,386) 16,686 4,130 107,818
(Shortfall) excess
of net income over
cash distributions
paid $ (10,294) $ (5,686) $ 9,917 $ 245
-------------------------------------------------------------------------
The Fund considers the amount of cash generated by the business in determining the amount of distributions payable to its Unitholders. In general, the Fund does not take into account quarterly working capital fluctuations as these tend to be temporary in nature. The Fund does not generally consider net income in setting the level of distributions as this is a non-cash metric and is not reflective of the level of cash flow that the Fund can generate. This divergence is particularly relevant for the Fund as it has a relatively high level of depreciation and amortization expenses and foreign exchange gains and losses.
For the three months ended June 30, 2010 distributions to Unitholders exceeded cash flows from operating activities mainly due to an increase in working capital. The additional distributions were funded by cash being held by the Fund.
Distributions -
Distributions to Unitholders for the three months ended June 30, 2010 were declared as follows:
Distribution Total
Record Date Payment Date Per Unit ($'000)
-------------------------------------------------------------------------
Three months ended June 30:
April 30, 2010 May 31, 2010 $ 0.10 $ 3,067
May 31, 2010 June 30, 2010 0.10 3,067
June 30, 2010 July 30, 2010 0.10 3,067
-------------------------------------------------------------------------
Sub-Total $ 0.30 $ 9,201
Three months ended March 31 $ 0.30 $ 9,201
-------------------------------------------------------------------------
Total for six months ended June 30 $ 0.60 $ 18,402
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions declared in the three months ended June 30, 2009 were as follows:
Distribution Total
Record Date Payment Date Per Unit ($'000)
-------------------------------------------------------------------------
Three months ended June 30:
April 30, 2009 May 29, 2009 $ 0.10 $ 3,067
May 29, 2009 June 30, 2009 0.10 3,067
June 30, 2009 July 31, 2009 0.10 3,067
-------------------------------------------------------------------------
Sub-Total $ 0.30 $ 9,201
Three months ended March 31 $ 0.30 $ 9,288
-------------------------------------------------------------------------
Total for six months ended June 30 $ 0.60 $ 18,489
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Treatment of the Fund's distributions for Canadian Income Tax purposes for 2009 and 2010 is as follows:
Foreign
Non-Business
Other Income Income Total
-------------------------------------------------------------------------
2009 74.8% 25.2% 100.0%
2010(1) 74.0% 26.0% 100.0%
-------------------------------------------------------------------------
(1) Represents anticipated tax characterization of planned distributions.
The actual tax treatment of 2010 distributions will be determined by
February 28, 2011.
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 long-term debt. The Fund intends to renew its long-term debt prior to maturity.
Cash Flow from Operating Activities
-----------------------------------
Cash flow from operating activities for the second quarter of 2010 was $5.8 million, a decrease of $1.0 million from the level generated during the second quarter of 2009. The decrease in cash flow is due mainly to lower earnings.
For the first six months of 2010, cash flow from operating activities was $35.1 million, an increase of approximately $38.2 million from the level achieved in 2009. The main reason for this difference is the significant increase in working capital during 2009, when working capital increased by $33.3 million. The increase during the first quarter of 2009 was primarily due to a reduction in accounts payable and accruals relating to the timing of certain items. This reduction more than offset a reduction in inventory and accounts receivable.
Financing Activities
--------------------
During the first quarter of 2010, the Fund entered into an agreement with a syndicate of underwriters to issue $80.0 million principal amount of convertible unsecured subordinated debentures (the Debentures). During the second quarter of 2010, as allowed under provisions of the agreement to issue the Debentures, the underwriters purchased an additional $10.0 million principal amount of the Debentures, increasing the aggregate gross proceeds of the public offering to $90.0 million. The Fund incurred transaction costs of $4.2 million, which included the underwriters' fee and other expenses of the offering.
During the six months ended June 30, 2010, the Fund utilized a portion of the net proceeds of the offering to repay $79.2 million (US$76.8 million) of its existing long-term debt. The Fund realized a foreign exchange loss of $0.2 million and wrote off the remaining transaction costs related to the portion of the long-term debt repaid in the amount of $0.3 million, both of which are included in debt extinguishment costs on the Consolidated Statements of Earnings.
The Fund also collapsed the interest rate swap arrangements related to the portion of its long-term debt that was repaid. As a result of collapsing these arrangements, the Fund had to pay $3.2 million to settle the arrangements; however, it recognized a loss of only $0.2 million due to amounts previously recognized in net income. This loss has been recorded in debt extinguishment costs on the Consolidated Statements of Earnings.
Distributions to Unitholders during the second quarter of 2010 were similar to the second quarter of 2009. Distributions to Unitholders during the first six months of 2010 were $0.2 million lower than the first six months of 2009. These decreased distributions were due to lower units outstanding as a result of the buy back and cancellation of units by the Fund pursuant to a normal course issuer bid commenced in September 2008 (as explained in 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 2009, the Fund purchased 1,039,940 units at an average per unit price of $8.02 for an aggregate purchase amount of $8.3 million. This resulted in $12.8 million being recorded as a reduction to the value of units and $4.4 million being recorded as contributed surplus.
For additional information on cash distributions, see NON-GAAP MEASURES - Cash Flow and EXCESS CASH FLOWS AND NET INCOME OVER DISTRIBUTIONS PAID.
Financial Instruments -
The Fund has entered into swap agreements with its principal bankers in order to fix the interest rates on its term debt. In the first quarter of 2009, the Fund entered into new swap arrangements which will fix interest rates on all of its term debt until August 2011. Previously the Fund had interest rate swaps related to its term debt and operating lines of credit, which fixed interest rates until August 2010. The Fund collapsed all of these interest rate swaps upon entering into the new swap arrangements and rolled the related fair value liability of $9.8 million into its new interest rate swaps. This value was being amortized on a straight-line basis over the remaining term of the term debt in unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges. As described above, during the second quarter and first six months of 2010, the Fund collapsed a portion of the swap arrangements. As at June 29, 2010, the Fund de-designated its remaining swap arrangements as cash flow hedges. In the future, all changes in the fair market value of the swap arrangements will be recorded in the Consolidated Statements of Earnings. In addition, the Fund will amortize the remaining amount in Accumulated Other Comprehensive Income related to the swap arrangements to the Consolidated Statements of Earnings over the remaining term of the swap arrangements. The weighted average effective interest rate under the remaining swap arrangements is 4.45%. At June 30, 2010, the fair values of the above noted agreements was a liability of $2.6 million (US$2.5 million). See comments under NET INTEREST AND ACCRETION EXPENSE for comments on these rates.
See RESULTS OF OPERATIONS BY BUSINESS SEGMENT - Foreign Exchange for additional comments on hedging.
Investing Activities
---------------------
Investment in capital expenditures was $3.5 million in the second quarter of 2010, compared with $4.0 million in the second quarter of 2009. These amounts include $3.2 million in the second quarter of 2010 and $3.8 million in the second quarter of 2009 for maintenance capital requirements. Investment in capital expenditures was $7.5 million for the first six months of 2010, compared with $10.1 million in the first six months of 2009. These amounts include $7.0 million in the first six months of 2010 and $9.6 million in the first six months of 2009 for maintenance capital requirements. As previously disclosed, the Fund intends to continue upgrading its manufacturing assets and currently estimates maintenance capital expenditures for 2010 to be approximately $19.0 million.
Investment in non-maintenance capital expenditures was $0.3 million during the second quarter of 2010 compared to approximately $0.2 million during the second quarter of 2009. Investment in non-maintenance capital expenditures was $0.5 million during the first six months of 2010 which was similar to the first six months of 2009. Non-maintenance capital expenditures are either pre-funded, usually as part of a significant acquisition and related financing or are considered to expand or improve the capacity of the Fund's operations.
Cash Balances -
At June 30, 2010 the Fund had net cash balances of $26.2 million and working capital of $13.5 million. Comparable numbers for December 31, 2009 were $19.9 million and working capital of $9.4 million, respectively. The Fund defines working capital to exclude cash, operating line of credit, distributions payable and current portion of long-term 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 ongoing expenditures, including maintenance capital, distributions to Unitholders and normal course financial commitments. Cash flows are sensitive to changes in volume, sales prices and input costs and any changes in these may impact future liquidity. Management believes that cash flows from operating activities will be sufficient for the Fund to meet future obligations and commitments that arise in the normal course of business activities.
Capital Resources -
At June 30, 2010, the Fund had senior credit facilities of $157.9 million, consisting of a term loan of $81.3 million and a revolving credit facility of $76.6 million. The term bank debt is not due or payable until August 2011. At June 30, 2010, the Fund had nothing drawn on its operating lines of credit, and had committed a total of $11.1 million of its revolving credit facility towards standby letter of credits. Subject to certain limits set out in the credit agreement, the credit facilities may be used to finance working capital, fund acquisitions, invest in capital assets, buy back units and pay distributions to Unitholders.
At June 30, 2010, the Fund had convertible debentures of $90.0 million outstanding which mature on March 31, 2017.
Debt Covenants -
As at June 30, 2010, the Fund was compliant with all debt covenants contained in its credit facility.
SUMMARY OF QUARTERLY RESULTS
Three Months Ended
------------------
June 30, March 31, December 31, September 30,
($'000) 2010 2010 2009 2009
-------------------------------------------------------------------------
Revenue $ 137,406 $ 126,824 $ 132,756 $ 126,989
Cost of sales and
services 110,624 89,658 92,289 95,660
-------------------------------------------------------------------------
Gross profit 26,782 37,166 40,467 31,329
Selling, general,
administrative and
other costs 11,806 12,689 16,410 9,803
-------------------------------------------------------------------------
Earnings before the
under-noted 14,976 24,477 24,057 21,526
Unrealized foreign
exchange loss (gain)
and ineffectiveness
of cash flow hedges 1,685 (414) 1,109 (6,802)
Debt extinguishment
costs 128 571 - -
Depreciation and
amortization 14,419 10,813 10,623 11,086
Loss (gain) on
disposal of
property, plant
and equipment - - (15) 94
Net interest and
accretion expense 3,011 2,264 2,126 2,122
Income taxes (net) (3,174) (2,566) (2,277) (4,509)
-------------------------------------------------------------------------
Net (loss)
earnings $ (1,093) $ 13,809 $ 1 2,491 $ 19,535
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended
------------------
June 30, March 31, December 31, September 30,
($'000) 2009 2009 2008 2008
-------------------------------------------------------------------------
Revenue $ 124,624 $ 161,823 $ 292,789 $ 393,971
Cost of sales and
services 96,539 137,522 255,955 346,615
-------------------------------------------------------------------------
Gross profit 28,085 24,301 36,834 47,356
Selling, general,
administrative and
other costs 10,625 6,025 12,630 5,662
-------------------------------------------------------------------------
Earnings before
the under-noted 17,460 18,276 24,204 41,694
Unrealized foreign
exchange (gain)
loss (9,147) 3,903 12,195 3,520
Depreciation and
amortization 11,272 11,165 11,240 9,893
Gain on disposal
of property - - - (250)
Net interest and
accretion expense 2,342 2,103 4,070 3,639
Income taxes (net) (580) (924) (841) 5,402
-------------------------------------------------------------------------
Net earnings
(loss) $ 13,573 $ 1,321 $ (2,460) $ 19,490
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 lower prices for sulphuric acid in the International and SPPC segments continued into the first and second quarter of 2010. In 2010, the stronger Canadian dollar relative to the U.S. dollar also negatively impacted U.S. dollar denominated revenues.
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. Earnings in the second quarter of 2010 were negatively impacted due to the incident at Beaumont during the quarter (both as described in the BEAUMONT INCIDENTS section).
Selling, general, administrative and other costs (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 included 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. 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. Finally, S,G&A during the first quarter of 2010 were high as they included an accrual of $2.2 million relating to the Fund's TR LTIP, also caused by an appreciation in the Fund's unit value.
Unrealized foreign exchange losses were higher commencing with the third quarter of 2008 up to and including the first quarter of 2009 due to the impact of the weaker Canadian dollar relative to the U.S. dollar on the Fund's long-term debt which is U.S. dollar denominated. There was a corresponding unrealized gain on the Fund's U.S. dollar denominated assets in self-sustaining foreign operations, but accounting rules require that those be recorded in other comprehensive income. During the second, third and fourth quarters of 2009 and the first quarter of 2010, the Canadian dollar strengthened relative to the U.S. dollar, thereby causing an unrealized foreign exchange gain on the Fund's long-term debt. However, the gain during the fourth quarter of 2009 was more than offset by ineffectiveness booked related to the initial fair value liability on the Fund's interest rate swap arrangements entered into during the first quarter of 2009.
OUTSTANDING SECURITIES OF THE FUND
At July 28, 2010, the Fund had 30,670,470 units outstanding (June 30, 2010 - 30,670,470) and 90,000 convertible unsecured subordinated debentures (June 30, 2010 - 90,000).
CONTRACTUAL OBLIGATIONS
Information concerning contractual obligations is shown below:
Contractual
Obligations Less Than 1-3 4-5 After 5
($'000) Total 1 Year Years Years Years
-------------------------------------------------------------------------
Long-Term Debt $ 171,301 $ - $ 81,301 $ - $ 90,000
Operating Leases 55,166 17,971 25,395 10,100 1,700
Interest on Long-
Term Debt 40,368 9,017 11,101 10,800 9,450
-------------------------------------------------------------------------
Total Contractual
Obligations $ 266,836 $ 26,988 $ 117,797 $ 20,900 $ 101,150
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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. For a more detailed discussion of the Fund's risks, please refer to the RISK FACTORS section of the most recently filed Annual Information Form.
The Fund manages the risks associated with its customer base and sales price by seeking to obtain contractual protection to mitigate these risks. The Fund also seeks to differentiate its products and services with customers to mitigate price fluctuations and uses its scale to obtain beneficial raw material contracts.
All members of the Fund's senior management team were involved in an enterprise-wide business risk assessment, which included a review of the North American and international operations. Key risks were identified and prioritized for review and the development of action plans. This enterprise-wide risk review process is an ongoing aspect of the Fund's risk management program. In addition, the Fund maintains an extensive insurance program which includes general liability and environmental coverage.
Credit Risk -
Credit risk arises from the non-performance by counter-parties of contractual financial obligations. The Fund manages credit risk for trade and other receivables through established credit monitoring activities. The Fund does not have a significant concentration of credit risk with any single counter-party or group of counter-parties. The primary counter-parties related to the foreign exchange forward contracts, commodity price contracts and interest rate swaps carry investment grade ratings. The Fund's maximum exposure to credit risk at the reporting date is the carrying value of its receivables and derivative assets.
Potential Preference Claims -
Under U.S. bankruptcy laws, payments made by a debtor to creditors during the 90-day period before the filing of a bankruptcy petition can be reclaimed in certain circumstances as "preferential transfers". In such circumstances, a creditor may have defences available to it with respect to part, or all of a debtor's claim of alleged preferential transfers. The Fund has not made any provision for potential preferential transfer exposure.
Dependence on Vale Relationship -
Vale Limited (Vale) is the Fund's largest sulphur products supplier. Effective January 1, 2008, the Fund renewed its agreement with Vale for the marketing of all sulphur by-products produced by the Vale smelter in Sudbury, Ontario. This 10-year contract contains similar terms to the prior agreements between the parties. For the six months ended June 30, 2010, this supply source accounted for approximately 6% of the Fund's revenues. Vale had a significant collective bargaining agreement which expired on May 31, 2009. The Vale union and management were unable to reach an agreement and a strike commenced on July 13, 2009. In January 2010, despite the strike, Vale resumed partial production. In July 2010, the strike ended and normal operations are expected to resume within a few weeks of the conclusion of the strike.
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.
On an unhedged basis, the Fund also currently estimates that a one-cent change in the exchange rate would have an impact on the translation of the net earnings of its U.S. currency based subsidiaries of less than $0.2 million per annum.
Interest Rates -
The Fund has a credit facility, with term debt and operating lines of credit, which bears variable rates of interest. As at June 30, 2010, on an unhedged basis, a change in interest rates of 1% per annum would have an impact of approximately $0.8 million per annum. As at June 30, 2010, the Fund had fixed interest rates on its term debt until August 2011.
Sulphuric Acid Pricing -
A change in sulphuric acid pricing, net of freight, of $1.00 per tonne, would have an impact on annual revenues in North America of approximately $1.4 million. However, given the risk-sharing aspect of a key supply contract, the impact on EBITDA would range from $1.0 million to $1.1 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 $1.00 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 75% of the Fund's sodium chlorate sales are to Canfor 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 ESTIMATES
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Significant judgements and estimates include provisions for non-performance of customer and supplier contracts, allowance for doubtful accounts, insurance recoveries, goodwill and intangibles.
RECENT ACCOUNTING PRONOUNCEMENTS
Business Combinations -
In January 2009, the CICA issued Handbook Sections 1582, Business Combinations; 1601, Consolidated Financial Statements; and 1602, Non-Controlling Interests. These sections replace Handbook Sections 1581, Business Combinations; and 1600, Consolidated Financial Statements. Section 1582 establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under IFRS. Section 1582 is applicable for the Fund's business combinations with acquisition dates on or after January 1, 2011. 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.
Convergence to International Financial Reporting Standards -
In February 2008, the Canadian Accounting Standards Board (AcSB) announced that 2011 is the changeover date for publicly accountable companies to use IFRS, replacing Canada's own GAAP. The changeover date applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. For the Fund, the transition date of January 1, 2011 (Transition Date) will require the re-statement for comparative purposes of amounts reported by the Fund for the year ended December 31, 2010. The following outlines the Fund's IFRS conversion plan.
The Fund's IFRS Changeover Plan: Assessment as of June 30, 2010:
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Key Activity Milestones Status / Deadlines
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IFRS Conversion Review of current The review is complete
Scoping Phase standards vs. IFRS. and the determination
Identification of of financial impact is
significant in progress.
differences.
Changes to Canadian GAAP
Assessment of and IFRS are monitored
available resources. and assessed on an
ongoing 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 Formal review of All review sessions have
Accounting Policies differences in each area been completed.
and IFRS1 with the core team and
members of cross- All IFRS1 and accounting
functional team as policy choice decisions
required. 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 Identification of IT The Fund has upgraded its
Technology requirements, both ERP software in readiness
Evaluation hardware and software, for IFRS and believes
for IFRS conversion. that minimal further IT
changes will be required.
Development of
implementation plan for
new or upgraded software
and any additional
hardware required.
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Control Environment: Review and assessment of Appropriate changes to
Internal Control Over impact of accounting ensure the integrity of
Financial Reporting policy choices and internal control over
and Disclosure changes relating to IFRS financial reporting and
Controls and conversion. disclosure controls and
Procedures procedures are being
Update of internal made based on IFRS
control testing accounting policy
procedures and decisions and IFRS1
documentation for all choices.
accounting policy choices
and changes.
Implementation of
appropriate changes:
- MD&A Disclosure
Requirements
- Key Performance
Indicators
- Investor Relations
Communication Process
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Financial Statement Identification of Skeleton financial
Preparation transactions impacted statements will be
by IFRS conversion. developed in 2010.
An assessment of these
transactions, appropriate
changes and re-mapping
will be completed.
The assessment and
re-mapping will form
the skeleton of the IFRS
compliant financial
statements.
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Financial Impact Analysis of differences Quantification of
Analysis for between Canadian GAAP differences between
Transactional Areas and IFRS that was Canadian GAAP and IFRS
completed will be has commenced and will be
quantified. Senior completed during 2010.
Management to review and
sign-off.
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Business Activities Identification of impacts Assessments and
Impact on business activities identifications of
to be completed. impacts of the 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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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. Some of these adjustments have now been quantified and are disclosed below. In some areas, the Fund is still quantifying the impacts of identified differences.
IFRS1 - First Time Adoption of International Financial Reporting Standards
The Fund's adoption of IFRS will require the application of IFRS1 First Time Adoption of International Financial Reporting Standards (IFRS1), which provides guidance for an entity's initial adoption of IFRS. IFRS1 generally requires that an entity apply all IFRS effective at the end of its first IFRS reporting period retrospectively. However, IFRS1 does require certain mandatory exceptions and limited optional exemptions in specified areas of certain standards from this general requirement. The following are the optional exemptions available under IFRS1 significant to the Fund.
Property, Plant and Equipment - IFRS1 provides a choice between measuring
property, plant and equipment at its fair value at the date of transition
and using those amounts as deemed cost or using the historical valuation
under the prior GAAP. The Fund will continue to apply the cost model for
property, plant and equipment and will not re-state property, plant and
equipment to fair value under IFRS. The Fund will use the historical
bases under Canadian GAAP as this approximates the historical cost under
IFRS at the Transition Date. Therefore, an adjustment to the opening
balance sheet on the Transition Date will not be required.
Borrowing Costs - IFRS1 allows an entity to choose the date to apply
capitalization of borrowing costs relating to all qualifying assets. This
date is either the later of January 1, 2009 or the date of transition to
IFRS; or an earlier date. The Fund has elected to prospectively apply the
capitalization of borrowing costs relating to all qualifying assets from
January 1, 2011 onwards. Therefore, an adjustment to the opening balance
sheet on the Transition Date will not be required.
Business Combinations - IFRS1 allows for the guidance under IFRS3
Business Combinations to be applied retrospectively. Retrospective
application would require that the Fund re-state all business
combinations that 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. Therefore, an adjustment to the
opening balance sheet on the Transition Date will not be required.
Cumulative Translation Differences - IAS21 The Effects of Changes in
Foreign Exchange Rates requires an entity to determine the translation
differences in accordance with IFRS from the date on which a subsidiary
was formed or acquired. IFRS1 permits cumulative translation gains and
losses recorded in accumulated other comprehensive income to be re-set to
zero at the Transition Date. The Fund will elect to re-set all cumulative
translation gains and losses to zero in opening retained earnings at the
Transition Date. The Fund had cumulative translation losses of $40.9
million at December 31, 2009, therefore on the Transition Date, Deficit
will increase by $40.9 million and Accumulated other comprehensive (loss)
will decrease by $40.9 million.
Post Employment Benefits - Under IAS19 Employee Benefits, an entity may
elect to use a "corridor" approach that leaves some actuarial gains and
losses unrecognized. Under IFRS1, a first time adopter may elect to
recognize all cumulative actuarial gains and losses at the date of
transition of IFRS. If a first time adopter uses this election, it shall
apply the election to all defined benefit plans. However, this election
can be used even if the entity uses the corridor approach for subsequent
actuarial gains and losses. The Fund will elect to recognize all
actuarial gains and losses at the Transition Date. The Fund had an
unamortized net actuarial gain of $0.2 million at December 31, 2009,
therefore on the Transition Date, Deficit and Post employment benefits
will both decrease by $0.2 million.
IFRS1 allows for certain other optional exemptions; however, the Fund
does not expect such exemptions to be significant to its adoption of
IFRS.
Ongoing IFRS to Canadian GAAP Differences
Property, Plant and Equipment
------------------------------
Componentization - Componentization requirements under IFRS are more
explicit than Canadian GAAP. Component accounting is required for
significant parts and also required if the useful life and/or
depreciation method is different for the significant part than for the
remainder of the asset. This requirement will have an impact on the
Fund's property, plant and equipment values. The impact to the Fund's
financial statements on the Transition Date will be a decrease in
Property, plant and equipment of $1.8 million and an increase in Deficit
of $1.8 million.
Borrowing Costs - Under IFRS, borrowing costs that are directly
attributable to the acquisition, construction, or production of a
qualifying asset are capitalized as part of the cost of the qualifying
asset. Under Canadian GAAP the Fund does not capitalize borrowing costs;
however, IAS23 Borrowing Costs is more explicit than Canadian GAAP. The
Fund is currently in the process of assessing the impact of the IAS23
requirements; however, it does not expect the impact of this requirement
to be material.
Share-Based Payments
--------------------
IFRS2 Share-based Payment 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.
Post Employment Benefits
------------------------
As permitted under IAS19 Employee Benefits, the Fund will choose to
recognize actuarial gains and losses directly in other comprehensive
income rather than through profit and loss. The effect of actuarial gains
and losses will no longer affect net income under the Fund's accounting
policy choice; however, equity is expected to be subject to variability
as the effects of actuarial gains and losses will be recognized
immediately, rather than being deferred and amortized over a period of
time.
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 June 30, 2010 through inquiry and review. The Chief Executive Officer and the Chief Financial Officer have concluded that, as at June 30, 2010, the Fund's disclosure control procedures were effective.
The Fund also maintains a system of internal controls over financial reporting designed under the supervision of the Fund's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The Fund continues to retain 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 June 30, 2010. Based on this evaluation, management has concluded that as at June 30, 2010, the Fund's internal controls over financial reporting were effective. There have been no changes to the design of internal controls over financial reporting that occurred during the most recent interim period ended June 30, 2010 that have materially affected or are measurably likely to materially affect the internal controls over financial reporting.
OUTLOOK
The general improvement in demand levels that we saw during the first quarter continued during the second quarter. In particular, demand for our largest product by volume, acid was well above 2009 levels. The lengthy strike at Vale's Sudbury site, our largest source of acid, has now ended and normal operations are expected to resume over the next few weeks, so we are well positioned to benefit from any increased demand.
Although it is hard to predict future demand for our products, the nature of our business model, 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.
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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