Chemtrade Logistics Income Fund Reports Strong 2010 First Quarter Results
TORONTO, May 10 /CNW/ - Chemtrade Logistics Income Fund (TSX: CHE.UN) today announced results for the three months ended March 31, 2010. The Fund reported higher distributable cash after maintenance capital expenditures, EBITDA (earnings before interest, income taxes, depreciation and amortization) and net earnings than in the first quarter last year.
Mark Davis, President and Chief Executive Officer of Chemtrade, said, "Our first quarter results reflect a number of positive changes from a year ago. The economy has improved and our customers are operating at higher rates than last year. We also benefitted from the partial restart of production at Vale Inco, a key supplier of sulphur products and the return to normal production of our Beaumont plant that was still in its re-start phase last year. The supply/demand characteristics for sulphuric acid, our major product by volume continued to improve in the quarter which also had a positive impact."
Cash flow from operating activities for the first quarter was $29.3 million (2009: negative $9.9 million) and Distributable cash after maintenance capital expenditures for the period was $14.9 million, or $0.49 per unit (2009: $9.6 million, or $0.31 per unit), generated from revenue of $126.8 million (2009: $161.8 million). The revenue decline was attributable to lower prices for sulphuric acid than a year ago and to the negative impact of the stronger Canadian dollar on U.S. denominated revenue. EBITDA for the first quarter was $24.5 million (2009: $18.3 million) and net earnings were $13.8 million compared with $1.3 million in the same period in 2009.
Sulphur Products & Performance Chemicals (SPPC) generated revenue of $73.5 million in the first quarter compared with $99.7 million in the first quarter of 2009. The main reason for the decline in revenue was lower realized pricing for sulphuric acid and the negative impact of the stronger Canadian dollar on U.S. denominated revenue. However, the lower revenues were generally offset by reduced costs for most products. EBITDA for the first quarter was $16.5 million compared with $9.1 million in 2009. The higher EBITDA relative to the first quarter last year was due primarily to the extra costs incurred last year to ensure customer operations were not disrupted during the re-start of the Beaumont plant.
Pulp Chemicals reported first quarter revenue of $10.9 million compared with $11.9 million in 2009, reflecting reduced demand for sodium chlorate. EBITDA was steady at $4.8 million as lower costs offset the impact of lower volumes.
International reported revenue of $42.4 million for the first quarter, compared with $50.2 million in 2009. This reflected mainly the negative effect of the stronger Canadian dollar on U.S. dollar denominated revenue. Lower realized prices for sulphuric acid were offset by the impact of higher volumes. EBITDA for the quarter of $10.3 million was significantly higher than the $3.8 million reported last year. This was the result of certain contracts where customers who had delayed delivery from earlier periods honoured their commitments in the first quarter of 2010.
Corporate costs during the first quarter of 2010 were $7.6 million higher than the first quarter of 2009. Of this, $5.6 million was due to LTIP costs, as in the first quarter of 2010 LTIP accruals were $2.2 million, whereas in 2009 there was a net reversal of $3.4 million. This movement reflects the substantial appreciation of the unit price over this time period. Additionally, in the first quarter of 2009 realized foreign exchange gains of $1.2 million were reported whereas this year realized gains were $0.2 million.
During the first quarter the Fund completed a public issue of 6% convertible unsecured subordinated debentures due March 31, 2017, with gross proceeds of $80 million. Subsequent to the end of the quarter, the underwriters exercised their over-allotment option, resulting in additional gross proceeds of $10 million. Part of the net proceeds were used to repay $54.4 million of existing long-term debt.
Mr. Davis said, "It was a solid first quarter for Chemtrade that once again demonstrated the strength of our business and business model. The economy has improved and all our plants are operating smoothly. Demand for most of our products has strengthened and we expect this demand rate to continue or improve over the remainder of the year. Our first quarter results also reflect the benefit of favourable timing of International earnings and capital spending."
Mr. Davis noted that in addition to the strong operating results, Chemtrade also executed extensions to two important relationships during the quarter. The long-term agreement under which Chemtrade produces and exclusively supplies sodium chlorate to Canfor's Prince George, B.C. plants was extended for five years to 2018 and the sodium hydrosulphite supply and marketing agreement with Guangdong ZhongCheng Chemicals was extended for three years to 2016. Mr. Davis added, "The strengthening of our balance sheet and the extension of two of our important contractual relationships will provide long-term benefits for Chemtrade and our unitholders. All these factors continue to support our belief that the current distribution rate is sustainable."
Distributions
Distributions declared in the first 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 over the remainder of the
year;
- the long-term benefits of a strengthened balance sheet and contracts
with Canfor and Guangdong ZhongCheng Chemicals; 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 first quarter 2010 results will be webcast live on www.chemtradelogistics.com and www.newswire.ca/webcast on Tuesday, May 11, 2010 at 8:30 a.m.
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Balance Sheets
(in thousands of dollars)
March 31, December 31,
2010 2009
-------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 48,855 $ 19,885
Accounts receivable 65,901 75,748
Inventories 22,016 20,107
Prepaid expenses and other assets (note 8(b)) 2,059 2,284
-------------------------------------------------------------------------
138,831 118,024
Restricted cash 2,640 2,599
Notes receivable 2,540 2,627
Property, plant and equipment 151,186 156,960
Other assets 2,137 2,164
Future tax asset 14,722 14,084
Intangibles 101,831 108,389
Goodwill 88,900 90,630
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$ 502,787 $ 495,477
-------------------------------------------------------------------------
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LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Accounts payable 45,833 42,918
Accrued and other liabilities (notes 5(f)
and 8(b)) 43,077 42,920
Distributions payable 3,067 3,067
Income taxes payable 1,572 2,855
-------------------------------------------------------------------------
93,549 91,760
Long-term bank debt (note 4) 101,370 160,105
Convertible unsecured subordinated debentures
(note 4) 67,898 -
Other long-term liabilities (notes 5(f) and 8(b)) 10,408 19,075
Post-employment benefits 3,761 4,051
Future tax liability 16,910 20,082
Unitholders' equity
Units (note 5(b)) 377,144 377,144
Contributed surplus 9,720 9,720
Equity component of convertible debentures
(note 5(c)) 8,395 -
Deficit (138,504) (143,112)
Accumulated other comprehensive (loss) (note 6) (47,864) (43,348)
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208,891 200,404
Subsequent event (note 4)
-------------------------------------------------------------------------
$ 502,787 $ 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
------------------
March 31, March 31,
2010 2009
-------------------------------------------------------------------------
Revenue $ 126,824 $ 161,823
Cost of sales and services (excluding
depreciation disclosed below) 89,658 137,522
-------------------------------------------------------------------------
Gross profit 37,166 24,301
Selling, general, administrative and
other costs 12,689 6,025
-------------------------------------------------------------------------
Earnings before the under-noted 24,477 18,276
Unrealized foreign exchange (gain) loss and
ineffectiveness of cash flow hedges (414) 3,903
Debt extinguishment costs (note 4) 571 -
Depreciation and amortization 10,813 11,165
Net interest and accretion expense 2,264 2,103
-------------------------------------------------------------------------
Earnings before income taxes 11,243 1,105
Income taxes
Current 1,055 708
Future (3,621) (924)
-------------------------------------------------------------------------
(2,566) (216)
-------------------------------------------------------------------------
Net earnings $ 13,809 $ 1,321
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per unit (note 5(d))
Basic $ 0.45 $ 0.04
Diluted $ 0.45 $ 0.04
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cost of sales and services for the three months ended March 31, 2010 does
not include $5,423 (2009 - $5,537) 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
------------------
March 31, March 31,
2010 2009
-------------------------------------------------------------------------
Units
Balance, beginning of period $ 377,144 $ 389,932
Re-purchase of units - (12,788)
-------------------------------------------------------------------------
Balance, end of period $ 377,144 $ 377,144
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning of period $ 9,720 $ 5,272
Re-purchase of units - 4,448
-------------------------------------------------------------------------
Balance, end of period $ 9,720 $ 9,720
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity component of convertible debentures
Balance, beginning of period $ - $ -
Issuance of debentures (notes 4 and 5(c)) 8,395 -
-------------------------------------------------------------------------
Balance, end of period $ 8,395 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit
Balance, beginning of period $ (143,112) $ (153,141)
Net earnings 13,809 1,321
Distributions (9,201) (9,288)
-------------------------------------------------------------------------
Balance, end of period $ (138,504) $ (161,108)
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-------------------------------------------------------------------------
Accumulated other comprehensive (loss) (note 6)
Balance, beginning of period $ (43,348) $ (24,127)
Other comprehensive (loss) income (4,516) 3,808
-------------------------------------------------------------------------
Balance, end of period $ (47,864) $ (20,319)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(in thousands of dollars)
(unaudited)
Three Months Ended
------------------
March 31, March 31,
2010 2009
-------------------------------------------------------------------------
Net earnings $ 13,809 $ 1,321
Change in unrealized loss on translation of
self-sustaining foreign operations (5,531) 5,480
Change in unrealized loss on derivatives
designated as cash flow hedges (116) (1,672)
Losses on derivatives designated as cash flow
hedges in prior years transferred to net
income in the current year 1,131 -
-------------------------------------------------------------------------
Other comprehensive (loss) income (4,516) 3,808
-------------------------------------------------------------------------
Comprehensive income $ 9,293 $ 5,129
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Cash Flows
(in thousands of dollars)
(unaudited)
Three Months Ended
------------------
March 31, March 31,
2010 2009
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings $ 13,809 $ 1,321
Items not affecting cash:
Depreciation and amortization 10,813 11,165
Future income taxes (3,621) (924)
Accretion expense 168 153
Change in fair value of derivatives and
unrealized foreign exchange (gain) loss (358) 3,753
-------------------------------------------------------------------------
20,811 15,468
Decrease (increase) in working capital 8,462 (25,358)
-------------------------------------------------------------------------
29,273 (9,890)
Financing activities:
Distributions to unitholders (9,201) (9,390)
Re-purchase of units - (8,340)
Re-payment of long-term debt (54,414) -
Issuance of convertible debentures 80,000 -
Financing transaction costs (3,859) -
Debt extinguishment costs (2,303) -
(Decrease) increase in other long-term
liabilities (6,374) 873
-------------------------------------------------------------------------
3,849 (16,857)
Investing activities:
Decrease in restricted cash (40) -
Additions to property, plant and equipment,
net of insurance proceeds (note 3) (4,055) (6,087)
-------------------------------------------------------------------------
(4,095) (6,087)
Effect of exchange rates on cash held in foreign
currencies (57) (39)
-------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 28,970 (32,873)
Cash and cash equivalents - beginning of year 19,885 48,050
-------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 48,855 $ 15,177
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental information:
Cash taxes paid $ 2,339 $ 3,269
Cash interest paid $ 2,161 $ 2,285
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CHEMTRADE LOGISTICS INCOME FUND
Notes to Consolidated Financial Statements
(in thousands of dollars)
(unaudited)
March 31, 2010
-------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS:
Chemtrade Logistics Income Fund (the "Fund") commenced operations on
July 18, 2001 when it completed an Initial Public Offering and
purchased various assets and related businesses from Marsulex Inc.
The Fund operates in four business segments: Sulphur Products &
Performance Chemicals (SPPC), Pulp Chemicals, International and
Corporate. For additional information regarding the Fund's business
segments see Note 7.
These interim consolidated financial statements of the Fund have been
prepared by management in accordance with accounting principles
generally accepted in Canada. These interim consolidated financial
statements include the accounts of the Fund and its wholly-owned
subsidiaries. Inter-company transactions and balances have been
eliminated. These interim consolidated financial statements have been
prepared following the same accounting policies and methods of
computation as the annual consolidated financial statements of the
Fund for the year ended December 31, 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 January 2006, the CICA Accounting Standards Board (AcSB) adopted a
strategic plan for the direction of accounting standards in Canada.
The AcSB has recently confirmed that accounting standards in Canada
for public companies are to converge with IFRS effective for fiscal
periods beginning on or after January 1, 2011. The Fund has assembled
an IFRS transition team which is continuing to assess the impact of
the convergence of Canadian GAAP and IFRS, and will implement the new
IFRS standards.
(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 CLAIM:
During the third quarter of 2008, an incident occurred at the Fund's
Beaumont, Texas facility, which resulted in property damage and
business interruption.
During the first quarter of 2009, the Fund incurred capital
expenditures of US$2,587 relating to the repair of damaged property
at the Beaumont facility. Since these repairs were covered under the
Fund's insurance policy, these expenditures were included in Accounts
receivable as they had not been recovered at the end of the period.
4. LONG-TERM DEBT:
During the three months ended March 31, 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"). The Fund granted the underwriters of the issuance
an over-allotment option to purchase up to an additional $12,000
aggregate principal amount of Debentures, at the same price,
exercisable in whole or in part at any time for a period of 30 days
following the closing. The Fund incurred transaction costs of $3,859,
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, Chemtrade may, at its option, redeem
the Debentures, in whole or in part, from time to time at par plus
accrued and unpaid interest.
Subsequent to March 31, 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.
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% $ 71,310 $ 8,690 $ 80,000
Transaction
costs (1)(2) (3,439) (295) (3,734)
---------------------------------------------------------------------
At issuance 67,871 8,395 76,266
Accretion expense 27 - 27
---------------------------------------------------------------------
As at March 31,
2010 $ 67,898 $ 8,395 $ 76,293
---------------------------------------------------------------------
---------------------------------------------------------------------
(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 $125.
For the three months ended March 31, 2010, the net interest expense
was $133, comprised of accrued interest of $106 and accretion expense
of $27.
The Fund utilized a portion of the net proceeds of the offering to
repay $54,414 (US$52,853) of its existing long-term debt. The Fund
realized a foreign exchange loss of $215 and wrote off the remaining
transaction costs related to the portion of the long-term debt repaid
in the amount of $196, 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 $2,303 to settle
the arrangements, however, recognized a loss of only $160 due to
amounts previously recognized in net income. This loss has been
recorded in debt extinguishment costs on the Consolidated Statements
of Earnings.
5. UNITS:
(a) Authorized:
Unlimited number of units.
(b) Outstanding:
Number
of Units Amount
---------------------------------------------------------------------
Units
Balance - December 31, 2009 and
March 31, 2010 30,670,470 $ 377,144
---------------------------------------------------------------------
---------------------------------------------------------------------
(c) Equity component of convertible debentures:
As described in Note 3, during the three months ended March 31,
2010, the Fund entered into an agreement to issue $80,000
principal amount of Debentures. 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 period ended March 31, 2010, there were no
debentures converted into units.
(d) Net earnings per unit:
Net 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 earnings per unit and
diluted net earnings per unit.
Numerator
-----------------------------------------------------------------
Three Months Ended
------------------
March 31, March 31,
2010 2009
-----------------------------------------------------------------
Net earnings $ 13,809 $ 1,321
Net interest and accretion expense on
convertible debentures 133 -
-----------------------------------------------------------------
Diluted net earnings $ 13,942 $ 1,321
-----------------------------------------------------------------
-----------------------------------------------------------------
Denominator
-----------------------------------------------------------------
Three Months Ended
------------------
March 31, March 31,
2010 2009
-----------------------------------------------------------------
Weighted average number of units 30,670,470 31,267,886
Weighted average convertible debenture
dilutive units 444,444 -
-----------------------------------------------------------------
Weighted average number of diluted
units 31,114,914 31,267,886
-----------------------------------------------------------------
-----------------------------------------------------------------
(e) Distributions:
Distributions paid for the three month period ended March 31,
2010 were $9,201 (2009 - $9,390). 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 period ended
March 31, 2010, the Fund recorded an expense of $2,174 (2009 -
$3,433) related to the TR LTIP. As at March 31, 2010 a liability
of $12,977 (December 31, 2009 - $15,979) has been recorded, of
which $8,023 (December 31, 2009 - $5,177) is included in Accrued
and other liabilities and $4,954 (December 31, 2009 - $10,802) is
included in Other long-term liabilities.
6. ACCUMULATED OTHER COMPREHENSIVE (LOSS):
The components of accumulated other comprehensive (loss) as at March
31, 2010 and 2009 and other comprehensive (loss) for the three months
then ended were as follows:
Accumulated Opening Ending
other comp- balance Transferred balance
rehensive December 31, to net March 31,
(loss) 2009 Net change income 2010
---------------------------------------------------------------------
Unrealized
(loss) gain on
translation of
self- sustaining
foreign
operations $ (40,935) $ (5,531) $ - $(46,466)(1)
(Loss) gain on
derivatives
designated as
cash flow hedges (2,413) (116) 1,131(2) (1,398)(3)
---------------------------------------------------------------------
Accumulated other
comprehensive
(loss) $ (43,348) $ (5,647) $ 1,131 $ (47,864)
---------------------------------------------------------------------
---------------------------------------------------------------------
Accumulated Opening Ending
other comp- balance balance
rehensive December 31, March 31,
(loss) 2008 Net change 2009
-------------------------------------------------------
Unrealized
(loss) gain on
translation of
self- sustaining
foreign
operations $ (19,411) $ 5,480 $(13,931)(1)
(Loss) gain on
derivatives
designated as
cash flow hedges (4,716) (1,672) (6,388)(3)
-------------------------------------------------------
Accumulated other
comprehensive
(loss) $ (24,127) $ 3,808 $ (20,319)
-------------------------------------------------------
-------------------------------------------------------
(1) Net of income tax expense of $nil (2009 - $nil).
(2) Ineffectiveness of cash flow hedges and losses on derivatives
designated as cash flow hedges in prior years transferred to net
income in the current year.
(3) Net of cumulative income tax recovery of $1,400 (2009 - $3,839).
7. BUSINESS SEGMENTS:
The Fund operates in four business segments: Sulphur Products &
Performance Chemicals (SPPC), Pulp Chemicals (Pulp), International
(Intl) and Corporate (Corp).
SPPC markets, removes and/or produces merchant and regenerated
sulphuric acid, liquid sulphur dioxide, sodium hydrosulphite,
elemental sulphur and phosphorous pentasulphide. These products are
marketed primarily to North American customers.
Pulp produces sodium chlorate and crude tall oil. These products are
marketed primarily to Canadian customers.
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 March 31, 2010
---------------------------------------------------------------------
SPPC Pulp Intl Corp Total
---------------------------------------------------------------------
Revenue from
external
customers $ 73,500 $ 10,911 $ 42,413 $ - $126,824
Earnings before the
under-noted 16,507 4,782 10,285 (7,097) 24,477
Unrealized foreign
exchange (gain)
loss and
ineffectiveness
of cash flow
hedges - - - (414) (414)
Debt extinguishment
costs 571 571
Depreciation and
amortization 7,979 2,354 480 - 10,813
Net interest and
accretion expense 1,723 405 3 133 2,264
Income taxes (2,288) - 817 (1,095) (2,566)
Net earnings (loss) 9,093 2,023 8,985 (6,292) 13,809
Total assets 272,841 77,690 151,995 261 502,787
Goodwill 58,667 - 30,233 - 88,900
Intangibles 65,063 32,841 3,927 - 101,831
Capital
expenditures 3,849 199 13 (6) 4,055
---------------------------------------------------------------------
---------------------------------------------------------------------
Three Months Ended March 31, 2009
---------------------------------------------------------------------
SPPC Pulp Intl Corp Total
---------------------------------------------------------------------
Revenue from
external
customers $ 99,695 $ 11,943 $ 50,185 $ - $161,823
Earnings before
the under-
noted 9,145 4,786 3,821 524 18,276
Unrealized
foreign exchange
(gain) loss and
ineffectiveness
of cash flow
hedges - - - 3,903 3,903
Depreciation and
amortization 8,293 2,272 600 - 11,165
Net interest and
accretion expense 1,655 496 (48) - 2,103
Income taxes (866) - 650 - (216)
Net earnings
(loss) 63 2,018 2,619 (3,379) 1,321
Capital
expenditures 5,758 100 40 189 6,087
---------------------------------------------------------------------
---------------------------------------------------------------------
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
------------------
March 31, March 31,
2010 2009
---------------------------------------------------------------------
Canada $ 26,842 $ 31,523
US and other 57,569 80,115
Europe 42,413 50,185
---------------------------------------------------------------------
$ 126,824 $ 161,823
---------------------------------------------------------------------
---------------------------------------------------------------------
Property, Plant and Equipment, Goodwill and Intangibles
---------------------------------------------------------------------
March 31, December 31,
2010 2009
---------------------------------------------------------------------
Canada $ 107,392 $ 110,876
US and other 192,721 202,174
Europe 41,804 42,929
---------------------------------------------------------------------
$ 341,917 $ 355,979
---------------------------------------------------------------------
---------------------------------------------------------------------
For the three months ended March 31, 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 three months ended March 31,
2009, the Fund obtained product from a producer that accounted for
17.7% of the Fund's total revenue. For the three months ended
March 31, 2010, revenue from a customer accounted for 10.3% (2009 -
11.5%) of the Fund's total revenues.
8. FINANCIAL INSTRUMENTS:
(a) Categories of financial assets and liabilities:
The following table summarizes information regarding the carrying
values of the Fund's financial instruments:
March 31, December 31,
2010 2009
-----------------------------------------------------------------
Held for trading:
Cash and cash equivalents $ 48,855 $ 19,885
Restricted cash 2,640 2,599
Notes receivable 2,540 2,627
Derivatives designated as held for
trading - gain/(loss) (583) 1,007
Loans and receivables:
Accounts receivable 65,901 75,748
Other financial liabilities:
Accounts payable 45,833 42,918
Accrued and other liabilities 43,077 42,920
Distributions payable 3,067 3,067
Derivatives designated as cash flow
hedges - gain/(loss) (3,999) (6,677)
Long-term debt 169,268 160,105
-----------------------------------------------------------------
-----------------------------------------------------------------
(b) Derivatives and hedging:
-------------------------------------------------------------------------
March 31, 2010 December 31, 2009
Fair Value Fair Value
Notional Notional
Amount Asset Liability Amount Asset Liability
-------------------------------------------------------------------------
Cash flow
hedges:
Interest
rate
swaps US$100,284 $ - $ 3,999 US$153,138 $ - $ 6,677
Derivatives
not
designated
in a formal
hedging
relationship:
Foreign
exchange
contracts(1) - 261 844 - 1,166 159
Commodity
forward
contracts(2) N/A 119 119 N/A 148 148
-------------------------------------------------------------------------
Total $ 380 $ 4,962 $ 1,314 $ 6,984
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current $ 380 $ 963 $ 1,314 $ 307
Non-current - 3,999 - 6,677
-------------------------------------------------------------------------
Total $ 380 $ 4,962 $ 1,314 $ 6,984
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See below for notional amounts.
(2) Includes natural gas forward contracts, commitments to buy and sell
commodities and commodity forward contracts related to those
commitments.
The Fund has entered into swap arrangements with its principal
banker, which fix the LIBOR component of its interest rates on
all of its outstanding term debt until August 2011. During the
three months ended March 31, 2010, the Fund collapsed a portion
of its swap arrangements. Losses are included in accrued and
other liabilities and other long-term liabilities with the offset
included in other comprehensive income, except for the
amortization of the fair value liability of the interest rate
swaps entered into during the first quarter of 2009 which is
included in unrealized foreign exchange (gain) loss and
ineffectiveness of cash flow hedges.
The Fund has entered into foreign exchange contracts to manage
its exposure to foreign currencies. The Fund buys and sells
specific amounts of currencies at pre-determined dates and
exchange rates, which are matched with the anticipated
operational cash flows. Contracts in place at March 31, 2010
include future contracts to sell US$7,829, C$7,602 and
(euro) 2,729 at weighted average exchange rates of (euro)0.76,
(euro) 0.65 and US$1.34, respectively, for periods through to
January 2011.
The Fund's International business segment has commitments to buy
and sell commodities and has entered into commodity forward
contracts to manage its exposure to commodity price changes.
The commitments to buy and sell commodities are treated as
derivatives and are measured at fair value. The commodity
forward contracts are derivatives and are measured at fair value.
At March 31, 2010 and December 31, 2009, the net unrealized value
of these transactions is not significant.
(c) Fair values of financial instruments:
Fair value is the value that would be agreed upon in an arm's
length transaction between willing and knowledgeable counter-
parties. The carrying amounts of cash and cash equivalents,
accounts receivable, 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 THREE MONTH PERIOD ENDED MARCH 31, 2010
The information in this Management's Discussion and Analysis, or MD&A, is intended to assist the reader in the understanding and assessment of the trends and significant changes in the results of operations and financial condition of Chemtrade Logistics Income Fund. Throughout this MD&A, the term the "Fund" refers to Chemtrade Logistics Income Fund and its consolidated subsidiaries. The terms "we", "us" or "our" similarly refers to the Fund. This MD&A should be read in conjunction with the unaudited consolidated statements of the Fund for the three month period ended March 31, 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. 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, the Fund cannot guarantee that any forward-looking statement will materialize. Forward-looking statements in this MD&A describes the expectations of the Fund as of the date of this MD&A. 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 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; and
- the potential impact of recent accounting pronouncements, including
the timing of the implementation of various steps in connection with
the transition to IFRS.
Financial outlook information contained in the MD&A about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this MD&A should not be used for purposes other than those for which it is disclosed herein.
FINANCIAL HIGHLIGHTS
Three Months Ended
------------------
March 31, March 31,
($'000 except per unit amounts) 2010 2009
-------------------------------------------------------------------------
Revenue $ 126,824 $ 161,823
Net earnings $ 13,809 $ 1,321
Net earnings per unit - Basic $ 0.45 $ 0.04
- Diluted $ 0.45 $ 0.04
Total assets $ 502,787 $ 574,336
Long-term bank debt $ 101,370 $ 191,757
Convertible unsecured subordinated debentures $ 67,898 $ -
EBITDA(3) $ 24,477 $ 18,276
EBITDA per unit(1) $ 0.80 $ 0.58
Cash flows from operating activities $ 29,273 $ (9,890)
Cash flows from operating activities per unit(1) $ 0.95 $ (0.32)
Adjusted cash flows from operating activities(3) $ 18,808 $ 15,428
Adjusted cash flows from operating activities per
unit(1)(3) $ 0.61 $ 0.49
Distributable cash after maintenance capital
expenditures(3) $ 14,935 $ 9,634
Distributable cash after maintenance capital
expenditures per unit(1)(3) $ 0.49 $ 0.31
Distributions declared $ 9,201 $ 9,288
Distributions declared per unit(2) $ 0.30 $ 0.30
Distributions paid $ 9,201 $ 9,390
Distributions paid per unit(2) $ 0.30 $ 0.30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Based on weighted average number of units
outstanding for the period of: 30,670,470 31,267,886
(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
------------------
March 31, March 31,
($'000) 2010 2009
------------------------------------------------------------------------
Net earnings $ 13,809 $ 1,321
Add:
Unrealized foreign exchange (gain) loss and
ineffectiveness of cash flow hedges (414) 3,903
Debt extinguishment costs 571 -
Depreciation and amortization 10,813 11,165
Net interest and accretion expense 2,264 2,103
Net taxes (2,566) (216)
------------------------------------------------------------------------
EBITDA $ 24,477 $ 18,276
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash Flow -
The following table is derived from, and should be read in conjunction with, the consolidated statement of cash flows. Management believes this supplementary disclosure provides useful additional information related to the cash flows of the Fund including the amount of cash available for distribution to Unitholders, repayment of debt and other investing activities. Certain sub-totals presented within the cash flows table below, such as "Adjusted cash flows from operating activities", "Distributable cash after maintenance capital expenditure" and "Distributable cash after all capital expenditure", are not defined terms under Canadian GAAP. These sub-totals are used by management as measures of internal performance and as a supplement to the consolidated statement of cash flows. Investors are cautioned that these measures should not be construed as an alternative to using net income as a measure of profitability or as an alternative to the GAAP consolidated statement of cash flows. Further, the Fund's method of calculating each measure may not be comparable to calculations used by other income trusts bearing the same description.
Three Months Ended
------------------
March 31, March 31,
($'000) 2010 2009
-------------------------------------------------------------------------
Cash flows from operating activities $ 29,273 $ (9,890)
Add (deduct):
Changes in non-cash working capital and other
items (10,465) 25,318
-------------------------------------------------------------------------
Adjusted cash flows from operating activities 18,808 15,428
Less:
Maintenance capital expenditure 3,873 5,794
-------------------------------------------------------------------------
Distributable cash after maintenance capital
expenditure 14,935 9,634
Less:
Non-maintenance capital expenditure(1) 182 293
-------------------------------------------------------------------------
Distributable cash after all capital expenditure $ 14,753 $ 9,341
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Non-maintenance capital expenditures are either pre-funded, usually
as part of a significant acquisition and related financing or are
considered to expand the capacity of the Fund's operations.
CONSOLIDATED OPERATING RESULTS
Consolidated revenue for the first quarter of 2010 was $126.8 million, compared with consolidated revenue of $161.8 million recorded in the first quarter of 2009. The main reason for the decline was lower prices for sulphuric acid in the International and SPPC segments. Additionally, the stronger Canadian dollar relative to the U.S. dollar, negatively impacted U.S. dollar denominated revenues.
The Fund's net earnings and EBITDA for the first quarter of 2010 were $13.8 million and $24.5 million respectively compared to net earnings and EBITDA for the first quarter of 2009 of $1.3 million and $18.3 million respectively. EBITDA and net earnings were higher due to significantly stronger results in SPPC and International segments, partially offset by an increase in Corporate costs. Net earnings were further positively impacted by the inclusion of unrealized foreign exchange gains in 2010, whereas in the first quarter of 2009 there were unrealized foreign exchange losses.
RESULTS OF OPERATIONS BY BUSINESS SEGMENT
SPPC -
Three Months Ended
------------------
March 31, March 31,
($'000) 2010 2009
-------------------------------------------------------------------------
Revenue $ 73,500 $ 99,695
Earnings before the under-noted (EBITDA) 16,507 9,145
Depreciation and amortization (7,979) (8,293)
Net interest and accretion expense (1,723) (1,655)
Income tax recovery 2,288 866
-------------------------------------------------------------------------
Net earnings $ 9,093 $ 63
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 first quarter of 2010, SPPC generated revenue of $73.5 million, compared with revenue of $99.7 million for the first quarter of 2009. The main reason for the decline in revenue was lower realized pricing for sulphuric acid and the negative impact of the stronger Canadian dollar on U.S. dollar denominated revenue. The negative impact of lower revenues realized during the first quarter of 2010 was generally offset by reduced costs for most products. The main reason for the improvement in net earnings and EBITDA during the first quarter of 2010 relative to the first quarter of 2009 was that during the first quarter of 2009, increased costs were incurred to ensure that customer operations were not disrupted as the Beaumont plant was being restarted after the incident at the Beaumont plant in 2008 (as described in the BEAUMONT INCIDENT section).
The higher income tax recovery during the first quarter of 2010 is due mainly to lower taxable income in certain Canadian and foreign corporate subsidiaries.
Pulp Chemicals -
Three Months Ended
------------------
March 31, March 31,
($'000) 2010 2009
-------------------------------------------------------------------------
Revenue $ 10,911 $ 11,943
Earnings before the under-noted (EBITDA) 4,782 4,786
Depreciation and amortization (2,354) (2,272)
Net interest and accretion expense (405) (496)
-------------------------------------------------------------------------
Net earnings $ 2,023 $ 2,018
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pulp Chemicals produces sodium chlorate and crude tall oil (CTO), both of which are chemicals used in the pulp and paper industry. Sodium chlorate is used to bleach pulp and CTO is used as a less expensive alternative energy source to natural gas.
First quarter 2010 Pulp Chemicals revenue was $1.0 million lower than the level achieved during the first quarter of 2009, mainly due to reduced demand for sodium chlorate. The negative impact of the reduced volume was offset by lower costs, resulting in a similar level of EBITDA and net earnings in both periods.
International -
Three Months Ended
------------------
March 31, March 31,
($'000) 2010 2009
-------------------------------------------------------------------------
Revenue $ 42,413 $ 50,185
Earnings before the under-noted (EBITDA) 10,285 3,821
Depreciation and amortization (480) (600)
Net interest (expense) income (3) 48
Income tax (expense) (817) (650)
-------------------------------------------------------------------------
Net earnings $ 8,985 $ 2,619
-------------------------------------------------------------------------
-------------------------------------------------------------------------
International operations provide removal and marketing services for elemental sulphur and sulphuric acid. These products are marketed to customers globally.
During the first quarter of 2010, International's revenue was $42.4 million compared with $50.2 million for the same period of 2009. The decline in revenues is mainly due to the impact of the stronger Canadian dollar on U.S. dollar denominated revenue. Lower realized pricing for sulphuric acid during the first quarter of 2010 relative to 2009 was offset by increased volume. Net earnings and EBITDA realized during the first quarter of 2010 were significantly higher than the first quarter of 2009 as a result of certain contracts where customers who had delayed delivery from earlier periods honoured their commitments in the first quarter of 2010.
Corporate -
Three Months Ended
------------------
March 31, March 31,
($'000) 2010 2009
-------------------------------------------------------------------------
Cost of services (recoveries) $ 7,097 $ (524)
Recovery (loss) before the under-noted (EBITDA) (7,097) 524
Unrealized foreign exchange gain (loss) and
ineffectiveness of cash flow hedges 414 (3,903)
Debt extinguishment costs (571) -
Net interest and accretion expense (133) -
Income tax recovery 1,095 -
-------------------------------------------------------------------------
Net earnings $ (6,292) $ (3,379)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 first quarter of 2010, corporate costs, excluding unrealized foreign exchange gains and losses, were $7.6 million higher than the first quarter of 2009. The main reason for the higher expense in 2010 was an accrual of $2.2 million with respect to the Fund's Total Return Long-Term Incentive Plan (TR LTIP) because of the increased unit price, compared with a net reversal of $3.4 million in the first quarter of 2009. Additionally, costs were lower in the first quarter of 2009 because they included realized foreign exchange gains of $1.2 million, whereas foreign exchange gains during the first quarter of 2010 were $0.2 million. Finally, during the first quarter of 2010, the Fund incurred expenditures of $0.8 million on diligence activities relating to a potential acquisition that did not result in a transaction.
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 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 the 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 of $0.6 million 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 $2.3 million.
Net interest and accretion expense for the first quarter of 2010 in the amount of $0.1 million relates to the convertible debentures issued during the first quarter of 2010. See Liquidity and Capital Resources - Financing Activities.
The income tax recovery of $1.1 million represents future taxes related to deductible temporary differences of certain flow-through subsidiaries expected to reverse subsequent to 2010.
BEAUMONT INCIDENT
During the third quarter of 2008, an explosion occurred at the Fund's Beaumont, Texas facility which resulted in property damage as well as business interruption. After a lengthy period of repairs, the plant was operational during the first quarter of 2009. During the first three months of 2009, the Fund incurred operational, legal and consulting costs relating to this incident.
During the fourth quarter of 2008 and the first quarter of 2009, the Fund incurred capital expenditures relating to the repair of damaged property at the Beaumont facility. During 2009, the Fund concluded its property damage claim and recovered US$9.8 million of its capital expenditures relating to the repair.
U.S. ENVIRONMENTAL PROTECTION AGENCY (EPA) SETTLEMENT
In January 2009, the Fund reached a settlement with the EPA and certain States, whereby new emission limitations were established at each of its five sulphuric acid manufacturing facilities. The agreement with Chemtrade arose from a broader EPA initiative regarding the domestic sulphuric acid manufacturing industry. Chemtrade's plants are required to meet these stricter limits by various agreed dates ranging from December 2009 to December 2012. Chemtrade anticipates that these compliance actions will cost approximately US$6.0 million in respect of four facilities, most of which will be spent to bring its Riverton, Wyoming facility into compliance with the new limits by December 2012. Chemtrade is in compliance with these requirements and remains confident that it will fulfill its obligations under this agreement. Because of Chemtrade's existing overall levels of control, the civil penalty paid by Chemtrade was not material and it was recorded in 2008. Certain additional funds and penalties will be expended in respect of Chemtrade's Cairo facility, but those costs will be paid for by Marsulex Inc., pursuant to an indemnity agreement between the two companies.
FOREIGN EXCHANGE
The Fund has operating subsidiaries that are based in the U.S. In addition, BCT Chemtrade Corporation, the Fund's international subsidiary, uses the U.S. dollar as its measurement currency. As the Fund reports in Canadian dollars, its reported earnings are exposed to fluctuations in the Canadian/U.S. dollar exchange rate. The Fund currently estimates that on an unhedged basis, a $0.01 increase in the Canadian/U.S. dollar exchange rate reduces Distributable cash after maintenance capital expenditures by less than $0.1 million on an annual basis and vice-versa.
To manage the volatility of foreign exchange rates, the Fund has entered into a series of foreign exchange contracts with its principal bankers. All foreign exchange contracts are under International Swap and Derivatives Association (ISDA) agreements. Contracts in place at March 31, 2010 include future contracts to sell US$7.8 million, C$7.6 million and (euro)2.7 million at weighted average exchange rates of (euro)0.76, (euro)0.65 and US$1.34, respectively, for periods through to January 2011. There are unrealized losses of $0.8 million and unrealized gains of $0.3 million from these contracts at March 31, 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 March 31, 2010. Until the first quarter of 2010, when it was repaid, the Fund's Canadian based operations had all its term debt denominated in U.S. dollars. The gains or losses arising from the translation of these loans were recorded on the Consolidated Statements of Earnings as unrealized foreign exchange (gain) loss. The rate of exchange used to translate U.S. denominated balances has changed from a rate of US$1.00 = $1.05 at December 31, 2009 to US$1.00 = $1.02 at March 31, 2010. See Risks and Uncertainties for additional comments on foreign exchange.
NET INTEREST AND ACCRETION EXPENSE
Net interest and accretion expense was $2.3 million in the first quarter of 2010 compared with $2.1 million in the first quarter of 2009.
Interest expense in 2010 was higher than 2009 mainly due to 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 March 31, 2010 was 4.78% (December 31, 2009 - 4.83%). See Liquidity and Capital Resources - Financing Activities - Financial Instruments for information concerning swap arrangements.
During the first quarters of 2010 and 2009, the Fund recorded accretion expense of $0.2 million. This accretion is due to the amortization of transaction costs related to the Fund's borrowings and accretion on the convertible debentures issued during the first quarter of 2010. See Liquidity and Capital Resources - Financing Activities.
INCOME TAXES
Current income tax expense was $1.1 million for the first quarter of 2010 compared with $0.7 million for the first quarter of 2009. The future income tax recovery was $3.6 million for the first quarter of 2010 compared to the future income tax recovery of $0.9 million for the first quarter of 2009. The effective tax rates for the first quarter 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 $0.6 million at March 31, 2010 relative to December 31, 2009 is the result of increased tax loss carry forwards, net of valuation allowances, and other deductible temporary differences, net of valuation allowances, available in certain Canadian and foreign corporate subsidiaries.
The decrease in future tax liability of $3.2 million at March 31, 2010 relative to December 31, 2009 is the result of the decrease in the taxable temporary differences between the accounting carrying amount and the tax basis of assets associated with certain Canadian and foreign corporate subsidiaries.
At March 31, 2010, the Fund has $6.3 million of deductible temporary differences related to certain flow-through subsidiaries compared with $7.9 million at December 31, 2009. The Fund has recorded $2.2 million for future taxes related to the portion of these deductible temporary differences that are expected to reverse after 2011.
EXCESS CASH FLOWS AND NET INCOME OVER DISTRIBUTIONS PAID
The following table presents excess cash flows from operating activities and net income over distributions paid for the three month period ended March 31, 2010 and for the years ended December 31, 2009 and 2008.
Three Months Year Year
Ended Ended Ended
March 31, December 31, December 31,
($'000) 2010 2009 2008
-------------------------------------------------------------------------
Cash flows from operating
activities $ 29,273 $ 41,133 $ 147,904
Net earnings 13,809 46,920 40,331
Distributions paid during period 9,201 37,003 40,086
Excess of cash flows from operating
activities over cash distributions
paid 20,072 4,130 107,818
Excess of net income over cash
distributions paid $ 4,608 $ 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.
Distributions -
Distributions to Unitholders for the three months ended March 31, 2010 were declared as follows:
Distribution Total
Record Date Payment Date Per Unit ($'000)
-------------------------------------------------------------------------
Three months ended March 31:
January 29, 2010 February 26, 2010 $ 0.10 $ 3,067
February 26, 2010 March 31, 2010 0.10 3,067
March 31, 2010 April 30, 2010 0.10 3,067
-------------------------------------------------------------------------
Total for the three months
ended March 31, 2010 $ 0.30 $ 9,201
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributions declared in the three months ended March 31, 2009 were as follows:
Distribution Total
Record Date Payment Date Per Unit ($'000)
-------------------------------------------------------------------------
Three months ended March 31:
January 30, 2009 February 27, 2009 $ 0.10 $ 3,124
February 27, 2009 March 31, 2009 0.10 3,087
March 31, 2009 April 30, 2009 0.10 3,077
-------------------------------------------------------------------------
Total for the three months
ended March 31, 2009 $ 0.30 $ 9,288
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 first quarter of 2010 was $29.3 million, an increase of $39.2 million from the level used during the first quarter of 2009. The main reason for this difference is the significant increase in working capital during the first quarter of 2009, when working capital increased by $25.4 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"). The Fund granted the underwriters of the issuance an over-allotment option to purchase up to an additional $12.0 million aggregate principal amount of Debentures, at the same price. The Fund incurred transaction costs of $3.8 million, which included the underwriters' fee and other expenses of the offering.
Subsequent to March 31, 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 utilized a portion of the net proceeds of the offering to repay $54.4 million (US$52.9 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 $0.2 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 $2.3 million to settle the arrangements, however, 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 first quarter of 2010 were $0.2 million lower than the first quarter 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 will be amortized on a straight-line basis over the remaining term of the term debt in unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges. As described above, during the first quarter of 2010, the Fund collapsed a portion of the swap arrangements. The weighted average effective interest rate under the remaining swap arrangements is 4.78%. At March 31, 2010, the fair value of the above noted agreements was a liability of $4.0 million (US$3.9 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 $4.1 million in the first quarter of 2010, compared with $6.1 million in the first quarter of 2009. These amounts include $3.9 million in the first quarter of 2010 and $5.8 million in the first quarter of 2009 for maintenance capital requirements. As previously disclosed, the Fund intends to continue upgrading its manufacturing assets and consequently maintenance capital expenditures for 2010 are expected to be approximately $21.0 million.
Investment in non-maintenance capital expenditures were $0.2 million during the first quarter of 2010 compared to approximately $0.3 million during the first quarter 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 March 31, 2010 the Fund had net cash balances of $48.9 million and a working capital deficit of $0.5 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 March 31, 2010, the Fund had senior credit facilities of $175.1 million, consisting of a term loan of $101.9 million and a revolving credit facility of $73.2 million. The term bank debt is not due or payable until August 2011. At March 31, 2010, the Fund had nothing drawn on its operating lines of credit, and had committed a total of $7.1 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 March 31, 2010, the Fund had convertible debentures of $80.0 million outstanding which mature on March 31, 2017.
Debt Covenants -
As at March 31, 2010, the Fund was compliant with all debt covenants contained in its credit facility.
SUMMARY OF QUARTERLY RESULTS
Three Months Ended
------------------
March 31, December 31, September 30, June 30,
($'000) 2010 2009 2009 2009
-------------------------------------------------------------------------
Revenue $ 126,824 $ 132,756 $ 126,989 $ 124,624
Cost of sales and
services 89,658 92,289 95,660 96,539
-------------------------------------------------------------------------
Gross profit 37,166 40,467 31,329 28,085
Selling, general,
administrative
and other costs 12,689 16,410 9,803 10,625
-------------------------------------------------------------------------
Earnings before
the under-noted 24,477 24,057 21,526 17,460
Unrealized foreign
exchange (gain)
loss and
ineffectiveness
of cash flow hedges (414) 1,109 (6,802) (9,147)
Debt extinguishment
costs 571 - - -
-------------------------------------------------------------------------
Depreciation and
amortization 10,813 10,623 11,086 11,272
Loss (gain) on
disposal of
property, plant
and equipment - (15) 94 -
Net interest and
accretion expense 2,264 2,126 2,122 2,342
Income taxes (net) (2,566) (2,277) (4,509) (580)
-------------------------------------------------------------------------
Net earnings $ 13,809 $ 12,491 $ 19,535 $ 13,573
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended
------------------
March 31, December 31, September 30, June 30,
($'000) 2009 2008 2008 2008
-------------------------------------------------------------------------
Revenue $ 161,823 $ 292,789 $ 393,971 $ 274,276
Cost of sales and
services 137,522 255,955 346,615 230,432
-------------------------------------------------------------------------
Gross profit 24,301 36,834 47,356 43,844
Selling, general,
administrative
and other costs 6,025 12,630 5,662 13,558
-------------------------------------------------------------------------
Earnings before
the under-noted 18,276 24,204 41,694 30,286
Unrealized foreign
exchange (gain)
loss and
ineffectiveness
of cash flow hedges 3,903 12,195 3,520 446
Depreciation and
amortization 11,165 11,240 9,893 10,145
Gain on disposal
of property - - (250) -
Net interest and
accretion expense 2,103 4,070 3,639 2,795
Income taxes (net) (216) (841) 5,402 3,053
-------------------------------------------------------------------------
Net earnings
(loss) $ 1,321 $ (2,460) $ 19,490 $ 13,847
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 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 (as described in the BEAUMONT INCIDENT section).
Selling, general, administrative and other costs (S,G&A) during the second quarter of 2008 were high as they included unrealized mark-to-market losses of $1.5 million on natural gas forward contracts. S,G&A during the third quarter of 2008 were low as they included lower TR LTIP accruals. S,G&A for the fourth quarter of 2008 were high as they 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 $2.2 million relating to the Fund's TR LTIP, also caused by an appreciation in the Fund's unit value.
Unrealized foreign exchange losses were higher commencing with the third quarter of 2008 up to and including the first quarter of 2009 due to the impact of the weaker Canadian dollar relative to the U.S. dollar on the Fund's long-term debt which is U.S. dollar denominated. There was a corresponding unrealized gain on the Fund's U.S. dollar denominated assets in self-sustaining foreign operations, but accounting rules require that those be recorded in other comprehensive income. During the second, third and fourth quarters of 2009 and the first quarter of 2010, the Canadian dollar strengthened relative to the U.S. dollar, thereby causing an unrealized foreign exchange gain on the Fund's long-term debt. However, the gain during the fourth quarter of 2009 was more than offset by ineffectiveness booked related to the initial fair value liability on the Fund's interest rate swap arrangements entered into during the first quarter of 2009.
OUTSTANDING SECURITIES OF THE FUND
At May 10, 2010, the Fund had 30,670,470 units outstanding (March 31, 2010 - 30,670,470) and 90,000 convertible unsecured subordinated debentures (March 31, 2010 - 80,000).
CONTRACTUAL OBLIGATIONS
Information concerning contractual obligations is shown below:
Contractual
Obligations Less Than 1-3 4-5 After
($'000) Total 1 Year Years Years 5 Years
-------------------------------------------------------------------------
Long-Term Debt $ 181,869 $ - $ 101,869 $ - $ 80,000
Operating
Leases 53,752 14,690 25,041 11,624 2,397
Interest on
Long-Term
Debt 40,098 9,673 11,225 9,600 9,600
-------------------------------------------------------------------------
Total
Contractual
Obligations $ 275,719 $ 24,363 $ 138,135 $ 21,224 $ 91,997
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
Dependence on Vale Inco Relationship -
Vale Inco Limited (Vale Inco) is the Fund's largest sulphur products supplier. Effective January 1, 2008, the Fund renewed its agreement with Vale Inco for the marketing of all sulphur by-products produced by the Vale Inco smelter in Sudbury, Ontario. This 10-year contract contains similar terms to the prior agreements between the parties. For the three months ended March 31, 2010, this supply source accounted for approximately 5% of the Fund's revenues. Vale Inco had a significant collective bargaining agreement which expired on May 31, 2009. The Vale Inco union and management were unable to reach an agreement and a strike commenced on July 13, 2009. Although the strike continues, partial production commenced in January 2010. The Fund's ability to continue supplying its customers could be affected depending upon the duration of the labour disruption, the availability of other sources of product supply and demand levels. Currently the Fund does not expect any disruption to its customers.
Exchange Rates -
The Fund is exposed to fluctuations in the exchange rate of the U.S. dollar relative to the Canadian dollar, as a portion of the Fund's Distributable cash after maintenance capital expenditures is earned in U.S. dollars. On an unhedged basis, the Fund currently estimates that a one-cent change in the exchange rate would have an impact on Distributable cash after maintenance capital expenditures of less than $0.1 million per annum.
On an unhedged basis, the Fund also currently estimates that a one-cent change in the exchange rate would have an impact on the translation of the net earnings of its U.S. currency based subsidiaries of less than $0.2 million per annum.
Interest Rates -
The Fund has a credit facility with term debt and operating lines of credit which bear variable rates of interest. As at March 31, 2010, on an unhedged basis, a change in interest rates of 1% per annum would have an impact of approximately $1.0 million per annum. As at March 31, 2010, the Fund had fixed interest rates on its total term debt until August 2011.
Sulphuric Acid Pricing -
A change in sulphuric acid pricing, net of freight, of $1 per tonne, would have an impact on annual revenues in North America of approximately $1.4 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 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 and goodwill.
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 2006, the Canadian Accounting Standards Board (AcSB) published a new strategic plan that will significantly affect financial reporting requirements for Canadian publicly accountable entities. The AcSB strategic plan outlines the convergence of Canadian GAAP with International Financial Reporting Standards (IFRS) over an expected five-year transitional period. In February 2008 the AcSB announced that 2011 is the changeover date for publicly accountable companies to use IFRS, replacing Canada's own GAAP. The changeover date applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. For the Fund, the transition date of January 1, 2011 will require the re-statement for comparative purposes of amounts reported by the Fund for the year ended December 31, 2010. The following outlines the Fund's IFRS conversion plan.
The Fund's IFRS Changeover Plan: Assessment as of March 31, 2010:
-------------------------------------------------------------------------
Key Activity Milestones Status/Deadlines
-------------------------------------------------------------------------
IFRS Conversion Scoping Review of current The review is complete
Phase standards vs. IFRS. and the determination
Identification of of financial impact is
significant in progress.
differences.
Changes to Canadian
Assessment of GAAP and IFRS are
available resources. monitored and assessed
on an 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.
-------------------------------------------------------------------------
Decisions on Accounting Formal review of All review sessions
Policies and IFRS1 differences in each have been completed.
area with the core team
and members of All IFRS1 and
cross-functional team accounting policy
as required. choice decisions made.
Assessment of
differences between
IFRS and the Fund's
current practices.
Decision on accounting
policy choices and
IFRS1 for each assessed
area.
-------------------------------------------------------------------------
Information Technology Identification of IT The Fund has upgraded
Evaluation requirements, both its ERP software in
hardware and software, readiness for IFRS and
for IFRS conversion. believes that minimal
further IT changes
Development of will be required.
implementation plan for
new or upgraded
software and any
additional hardware
required.
-------------------------------------------------------------------------
Control Environment: Review and assessment Appropriate changes to
Internal Control Over of impact of accounting ensure the integrity
Financial Reporting policy choices and of internal control
and Disclosure changes relating to over financial
Controls and IFRS conversion. reporting and
Procedures disclosure controls and
Update of internal procedures are being
control testing made based on IFRS
procedures and accounting policy
documentation for all decisions and IFRS1
accounting policy choices.
choices and changes.
Implementation of
appropriate changes:
- MD&A Disclosure
Requirements
- Key Performance
Indicators
- Investor Relations
Communication
Process
-------------------------------------------------------------------------
Financial Statement Identification of Skeleton financial
Preparation transactions impacted statements will be
by IFRS conversion. developed in 2010.
An assessment of these
transactions,
appropriate changes and
re-mapping will be
completed.
The assessment and
re-mapping will form
the skeleton of the
IFRS compliant
financial statements.
-------------------------------------------------------------------------
Financial Impact Analysis of differences Quantification of
Analysis for between Canadian GAAP differences between
Transactional Areas and IFRS that was Canadian GAAP and IFRS
completed will be during 2010.
quantified. Senior
Management to review
and sign-off.
-------------------------------------------------------------------------
Business Activities Identification of Assessments and
Impact impacts on business identifications of
activities to be impacts of the
completed. conversion to IFRS are
underway.
Completion of any
re-negotiations. Identification of
impacts is to be
completed during 2010
and any necessary
re-negotiations are to
be completed during
that period.
-------------------------------------------------------------------------
Impact of Adoption of IFRS
--------------------------
IFRS are premised on a conceptual framework similar to Canadian GAAP, however, significant differences exist in certain matters of recognition, measurement and disclosure. The following disclosure highlights areas in which adjustments are required to be made on adoption of IFRS in order to provide an opening balance sheet and the significant accounting policies, required or expected to be applied by the fund subsequent to adoption of IFRS that will be significantly different from the Fund's current accounting policies.
IFRS1 - First Time Adoption of International Financial Reporting Standards
The Funds adoption of IFRS will require the application of IFRS1 First Time Adoption of International Financial Reporting Standards (IFRS1), which provides guidance for an entity's initial adoption of IFRS. IFRS1 generally requires that an entity apply all IFRS effective at the end of its first IFRS reporting period retrospectively. However, IFRS1 does require certain mandatory exceptions and limited optional exemptions in specified areas of certain standards from this general requirement. The following are the optional exemptions available under IFRS1 significant to the Fund.
Deemed Cost - IFRS1 provides a choice between measuring property, plant and equipment at its fair value at the date of transition and using those amounts as deemed cost or using the historical valuation under the prior GAAP. The Fund will continue to apply the cost model for property, plant and equipment and will not re-state property, plant and equipment to fair value under IFRS. The Fund will use the historical bases under Canadian GAAP as deemed cost under IFRS at the Transition Date.
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. Borrowing costs will be capitalized as of the date of January 1, 2011.
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.
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.
IFRS1 allows for certain other optional exemptions; however, the Fund does not expect such exemptions to be significant to its adoption of IFRS.
Impact of IFRS on the Balance Sheet
The Fund is currently in the process of assessing the impact of IFRS1 on its January 1, 2010 balance sheet.
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 from the remainder of the asset. This requirement will have an impact on the Fund's property, plant and equipment values. The Fund is currently in the process of assessing this impact.
Borrowing Costs - Under IFRS, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are capitalized as part of the cost of the qualifying asset. IAS23 is more explicit than Canadian GAAP and the Fund does not capitalize borrowing costs under Canadian GAAP. The Fund is currently in the process of assessing the impact of the IAS23 requirements.
Intangibles
-----------
IAS38 explicitly restricts an intangible asset's useful life to the shorter of the economic factors and legal factors. The Fund is still in the process of assessing the amount of the impact.
Share-Based Payments
--------------------
IFRS2 will require the Fund's TR LTIP accrual to be calculated based on a fair value approach. Under Canadian GAAP the accrual for TR LTIP is calculated based on an intrinsic value approach. The Fund expects that this change in valuation method will have an impact on its Accrued and Other Liabilities, Other Long-Term Liabilities and Selling, General, Administrative and Other Costs. The Fund is currently in the process of assessing the impact of this change.
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 March 31, 2010 through inquiry and review. The Chief Executive Officer and the Chief Financial Officer have concluded that, as at March 31, 2010, the Fund's disclosure control procedures were effective.
The Fund also maintains a system of internal controls over financial reporting designed under the supervision of the Fund's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The Fund 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 March 31, 2010. Based on this evaluation, management has concluded that as at March 31, 2010, the Fund's internal controls over financial reporting were effective. There have been no changes to the design of internal controls over financial reporting that occurred during the most recent interim period ended March 31, 2010 that have materially affected or are measurably likely to materially affect the internal controls over financial reporting.
OUTLOOK
The stabilizing trend in demand for our products seen early in 2010 was apparent throughout the first quarter. Most of our products experienced higher demand levels than a year ago. We anticipate that this demand level will be sustained or improve during 2010 and we are well positioned to benefit from any increase in demand. Vale Inco, our largest supplier of acid, has resumed partial production which simplifies our supply chain logistics but does not provide us the same level of supply as if they were operating at full rates. It remains unclear when full production will return.
We continue to maintain a healthy balance sheet and ample liquidity and this was further strengthened by the recent issuance of $90 million of convertible debentures. The nature of our business model as demonstrated by the strength of our businesses even in times of low demand, coupled with our strong balance sheet are more than sufficient to sustain our current distribution rate.
OTHER
Additional information concerning the Fund, including the Annual Information Form, is filed on SEDAR and can be accessed at www.sedar.com.
May 10, 2010
For further information: Mark Davis, President and CEO, Tel: (416) 496-4176; Rohit Bhardwaj, Vice-President, Finance and CFO, Tel: (416) 496-4177
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