Westshore Terminals Income Fund - 2010 second quarter report

VANCOUVER, Aug. 5 /CNW/ - Westshore Terminals Income Fund (TSX: WTE-UN) announced today its earnings for the second quarter ending June 30, 2010. Please see attached Report to Unitholders for details.

    Westshore Terminals Income Fund
    Second Quarter Report
    For the six months ended June 30, 2010

The earnings and distributable cash of Westshore Terminals Income Fund (the "Fund") are wholly dependent on the results of Westshore Terminals Limited Partnership ("Westshore"). Westshore's results are determined largely by the volume of coal shipped by its coal mine customers for sale in the export market, the US dollar denominated price received by Westshore's customers for coal, the CDN/US dollar exchange rate and Westshore's costs. In recent years, a substantial portion of Teck Coal's throughput was handled at loading rates that varied with the price of coal. However, as a result of an agreement concluded with Teck earlier this year, a smaller portion of Teck's throughput will be at variable loading rates in 2010, and for the 2011/12 coal year none of the contracts with Teck will provide for variable pricing. Lower prices for hard coking coal resulted in Teck, which is Westshore's principal customer, achieving lower average settlement prices for the 2009/10 coal year (ended March 31, 2010) compared to the 2008/09 coal year. For the 2010/11 coal year, prices that have been publicly announced to date, including Teck's release dated July 27, 2010, reflect coal prices which are now being settled quarterly (rather than annually) in the US$195-$225 per tonne range. As Westshore has some exposure to fluctuations in exchange rates (as a result of pricing mechanisms under its customer contracts), Westshore engages in periodic currency hedging arrangements to provide some partial shielding from material short-term swings in the CDN/US dollar exchange rate.

    Westshore Terminals Income Fund
    Management's Discussion and Analysis of Financial Condition and Results
    of Operations

This management's discussion and analysis refers to certain measures other than those prescribed by Canadian Generally Accepted Accounting Principles ("GAAP"). These measures do not have standardized meanings and may not be comparable to similar measures presented by other trusts or corporations. They are however determined by reference to the Fund's financial statements. These non-GAAP measures are discussed because the Fund believes that they provide investors with valuable information in understanding the results of the Fund's operations and financial position. The unaudited financial results along with management's discussion and analysis contained in this report should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Fund's Annual Report for the year ended December 31, 2009. The date of this management's discussion and analysis and results of operations is August 5, 2010.

The following table sets out selected consolidated financial information for the Fund for the quarter ended June 30, 2010. As at August 5, 2010 the Fund has 74,250,016 issued and outstanding trust units.

    (In thousands of dollars                     Three Months   Three Months
     except per unit amounts)                       Ended          Ended
                                                   June 30,       June 30,
                                                     2010           2009
                                                      $              $
      Coal loading                                     52,094         57,375
      Other                                             1,179            939
                                                       53,273         58,314
      Operating                                        21,266         16,593
      Administrative                                    6,564          1,290
                                                       27,830         17,883
    Earnings before the undernoted                     25,443         40,431
    Interest income                                        80             73
    Depreciation                                       (5,247)        (5,281)
    Foreign exchange gain (loss)                       (1,817)         8,704
    Earnings before income taxes                       18,459         43,927
    Provision for income taxes                            286          1,121
    Net earnings                                       18,173         42,806
    Net earnings per unit(1)                            0.245          0.576
    Cash Distributions declared(2)                     30,443         20,790
    Cash Distributions per unit                         0.410          0.280
    Distribution of units in lieu of cash                   -          3,255
    Distribution of units in lieu of cash per unit          -          0.044
    (1) Weighted average units outstanding for the quarter ended June 30,
        2010 were 74,250,016 (June 30, 2009 - 74,250,016).
    (2) Refer to page 6 for a comparison of cash distributions to
        Standardized Distributable Cash.

The following tables set out selected consolidated financial information for the Fund on a quarterly basis for the last eight quarters.

    (In thousands of dollars                 Three Months Ended
     except per unit amounts)  ----------------------------------------------
                                  Jun 30,     Mar 31,     Dec 31,     Sep 30,
                                   2010        2010        2009        2009
                                     $           $           $           $
      Coal loading                52,094      52,140      46,445      46,460
      Other                        1,179       1,175       1,029         833
                                  53,273      53,315      47,474      47,293
      Operating                   21,266      20,993      22,172      19,323
      Administration               6,564       3,750       4,513       1,862
                                  27,830      24,743      26,685      21,185
    Earnings before the
     undernoted                   25,443      28,572      20,789      26,108
    Interest income                   80          62          71          74
    Depreciation                  (5,247)     (5,247)     (5,416)     (5,281)
    Foreign exchange gain
     (loss)                       (1,817)        206         564        (219)
    Earnings before income
     taxes                        18,459      23,593      16,008      20,682
    Provision for (recovery
     of) income taxes                286         330      (2,406)        446
    Net earnings                  18,173      23,263      18,414      20,236
    Net earnings per unit          0.245       0.313       0.248       0.273
    Cash Distributions
     declared(1)                  30,443      31,185      29,700      23,760
    Cash Distributions per unit    0.410       0.420       0.400       0.320
    Distribution of units in
     lieu of cash                      -           -       4,650       3,720
    Distribution of units in
     lieu of cash per unit             -           -       0.062       0.050
    (1) Refer to page 6 for a comparison of cash distributions to
        Standardized Distributable Cash.

    (In thousands of dollars                 Three Months Ended
     except per unit amounts)  ----------------------------------------------
                                  Jun 30,     Mar 31,     Dec 31,     Sep 30,
                                   2009        2009        2008        2008
                                     $           $           $           $
      Coal loading                57,375      53,647      88,425      73,764
      Other                          939       1,050       1,039         942
                                  58,314      54,697      89,464      74,706
      Operating                   16,593      17,624      18,471      20,470
      Administration               1,290       2,324       8,076       7,228
                                  17,883      19,948      26,547      27,698
    Earnings before the
     undernoted                   40,431      34,749      62,917      47,008
    Interest income                   73         155         339         530
    Depreciation                  (5,281)     (5,401)     (5,573)     (5,572)
    Foreign exchange gain
     (loss)                        8,704      (3,002)    (15,588)       (934)
    Earnings before income
     taxes                        43,927      26,501      42,095      41,032
    Provision for income taxes     1,121         827         613         870
    Net earnings                  42,806      25,674      41,482      40,162
    Net earnings per unit          0.576       0.346       0.559       0.541
    Cash Distributions
     declared(1)                  20,790      17,820      39,353      38,610
    Cash Distributions per unit    0.280       0.240       0.530       0.520
    Distribution of units in
     lieu of cash                  3,255       2,790       3,988       3,913
    Distribution of units in
     lieu of cash per unit         0.044       0.038       0.054       0.053
    (1) Refer to page 6 for a comparison of cash distributions to
        Standardized Distributable Cash.

Results of Operations

In the second quarter of 2010, Westshore shipped 6.1 million tonnes of coal, compared with 5.1 million tonnes shipped during the same period in 2009, an increase of 20%. Based on information currently available, and assuming throughput levels in the second half of the year are comparable to those of the first half, Westshore anticipates that total throughput volumes for 2010 could be in excess of its previous 23.5 million tonnes record set in 1997.

Coal loading revenue decreased by 9% to $52.1 million in the second quarter of 2010 from $57.4 million in the second quarter of 2009. The decrease in revenue was due to a decrease in the average loading rate and despite a 20% increase in volumes. The average loading rate in the second quarter of 2010 reduced to $8.50 per tonne compared to $11.28 per tonne for the same period in 2009 because of a combination of factors, including increased tonnages from US customers, a lower proportion of coal loaded at variable rates, and lower variable loading rates. In Q2 2009, variable loading rates remained strong as there was some carryover tonnage from the 2008/09 coal contract year when coal prices were at record highs.

Other income was consistent with that of the second quarter of 2009 and consisted mostly of wharfage income. Operating expenses increased from $16.6 million in the second quarter of 2009 to $21.3 million in the second quarter of 2010, as a result of higher throughput, including increased demurrage as discussed on page 8, and increased costs resulting from the integration of the new stacker/reclaimer and implementation of an automation project. Administration expenses were $6.6 million in the second quarter of 2010 compared to $1.3 million in the first quarter of 2009 as a larger management incentive fee was accrued in 2010 compared to the management incentive fee accrued in 2009. Interest income for the first quarter of 2010 was consistent with that of the second quarter of 2009 as interest rates are still at low levels.

Foreign exchange, which includes both realized gains/losses and changes in the mark-to-market adjustment for unrealized gains/losses, decreased to a $1.8 million loss for the three months ended June 30, 2010 from a $8.7 million gain in the second quarter of 2009. This decrease was mainly caused by a change in the unrealized foreign exchange gains/losses (see Currency Fluctuations).

Earnings before depreciation, interest, foreign exchange and income taxes were lower in the second quarter of 2010, at $25.4 million as compared to $40.4 million in the second quarter of 2009.

Taxation on Trusts in Canada

Bill C-52 Budget Implementations Act, 2007 contains legislative provisions to tax publicly traded income trusts in Canada. Under these rules, distributions declared by the Fund after January 1, 2011 will be taxed at a rate of 26.5% (2012 - 25%) and the distributions will be treated as taxable dividends in the hands of unitholders. Unitholders will be entitled to a dividend tax credit which will give credit for the level of taxation incurred by the Fund. The Fund is currently exploring possible changes to its structure as a result of these rules. Further announcements of the Fund's intended actions will be provided at a later date when planning has been finalized.

The Fund has not provided for current income taxes in 2010 as the income of the Fund is distributed to and taxed in the hands of unitholders. The future taxation of distributions makes relevant for accounting purposes the timing differences between the recognition of certain assets and liabilities for tax and accounting purposes. A non-cash expense of $0.3 million has been recorded in the quarter ended June 30, 2010 to reflect changes in assets and liabilities and their expected recognition for tax purposes. The future income tax liability of $9.3 million as at June 30, 2010 is primarily the result of fixed assets having a net book value that is $45.9 million higher than the undepreciated capital cost for tax purposes. The future income tax expense reflects changes in estimates of future annual depreciation relative to capital cost allowance claims. Future income tax expense does not affect current distributions.

Distribution Reinvestment Plan

On April 5, 2007 the Fund announced a distribution reinvestment plan (the "Plan"). Under the Plan, Canadian resident unitholders will be able to designate that all or a portion of the quarterly distributions payable on their Fund Units be applied towards the purchase of existing Fund Units through the facilities of the Toronto Stock Exchange at prevailing market prices. No additional units will be issued from treasury under the Plan. Unitholders should contact their brokers or Computershare Investor Services Inc. if they wish to participate in the Plan. Additional information on the Plan is also available on the Fund's website at www.westshore.com.

Currency Fluctuations

Westshore expects that, in the coal year commencing April 1, 2010 (for the 2010/11 coal year), loading rates for approximately 35% of the coal loaded at Westshore will be at fully variable rates and depend on the prices realized for coal by its customers, (including shipments from US customers). That portion is expected to be materially lower than the portion of the throughput that was at variable rates in 2009. Coal sales by Westshore's customers are priced in US dollars, with the result that the Canadian dollar price received fluctuates because of exchange rate movements. To mitigate the resulting risk, Westshore has engaged in periodic hedging activities. Westshore has adopted a policy under which it expects to hedge by April 30 of each year a portion of its anticipated US dollar related revenues for that coal year, based on the annual budget. Westshore will continue to review the need for additional future hedging.

In the financial statements, currency fluctuations are shown as affecting coal loading revenues before taking into account hedging activities, the financial effect of which is accounted for as foreign exchange. As Westshore's hedging transactions do not qualify for "hedge accounting" treatment, the value of Westshore's outstanding foreign exchange contracts must be "marked to market" at each period end.

    (In thousands of dollars)     Three Months Ended       Six Months Ended
                                        Jun 30                  Jun 30
                                   2010        2009        2010        2009
                                     $           $           $           $
    Realized foreign exchange
     gains (losses)                1,260      (3,510)      1,156      (8,793)
    Unrealized foreign exchange
     gains (losses)               (3,077)     12,214      (2,767)     14,495
    Net foreign exchange gains
     (losses)                     (1,817)      8,704      (1,611)      5,702

The Q2 unrealized foreign exchange losses have resulted from the strengthening of the US/CDN dollar exchange rate in the quarter which decreased the mark-to-market value of the outstanding forward exchange contracts. Unrealized foreign exchange gains and losses are non-cash items and do not impact current distributions.

Realized foreign exchange gains or losses affect cash flow and therefore impact unitholder distributions. The realized foreign exchange gains for the current year arose on cash balances held in foreign currencies and settled forward exchange contracts. This is a significant improvement over the prior year when the settlement of forward exchange contracts resulted in significant losses that partially offset the benefit of higher exchange rates on the coal loading revenues.

Liquidity and Capital Resources

The Fund generally distributes to Unitholders its income net of administrative costs of the Fund but the Fund has no fixed distribution requirements, distributions being solely a function of amounts received by the Fund from Westshore. It is not anticipated that the Fund will require significant capital resources to maintain its investment in Westshore on an ongoing basis or to meet working capital requirements. Westshore's facility is a mature facility which does not require significant ongoing replacement of equipment. As a result, the Fund does not anticipate any liquidity concerns with the ongoing operations of Westshore.

During Q1 2010, Westshore extended the term (to February 11, 2011) of its $1 million operating facility with a Canadian chartered bank which, if required, can be utilized to meet working capital requirements. This facility was not used during the second quarter and remained undrawn at June 30, 2010. Westshore's distribution policy involves leaving sufficient earnings before depreciation and unrealized gains or losses on forward exchange contracts to cover cash requirements such as capital expenditures and pension contributions.

Westshore has an obligation to fund its pension plans in accordance with the plans' actuarial valuations. Westshore is anticipating its funding requirements in 2010 to be consistent with 2009 levels. Westshore does not anticipate any problems in meeting these obligations.

Obligations under operating leases for the years ending December 31 are as follows:

    (In thousands of dollars)         Terminal
                                       lease            Other          Total
                                         $                $              $
    2010                                11,665            448         12,113
    2011                                11,665            246         11,911
    2012                                11,665            246         11,911
    2013                                11,665              -         11,665
    2014                                11,665              -         11,665
    Thereafter to 2026                 139,980              -        139,980

The Fund does not have any long-term debt, material capital lease obligations, or other long-term obligations.

Quarterly Distributions

On June 15, 2010, the Fund distributed $30,442,507 (representing $0.41 per trust unit) to unitholders of record on June 30, 2010 as compared to $20,790,005 (representing $0.28 per trust unit) for the same period in 2009. $0.33 per unit of the Q2 distribution is derived from the results from operations of Westshore in the current period, and $0.08 per unit comes from Westshore's cash reserves.

Standardized Distributable Cash

References to "Standardized Distributable Cash" are to cash from operating activities less capital expenditures, both measures recognized under GAAP. Standardized Distributable Cash is a financial measure that indicates the Fund's ability to make distributions. It is a measure that has been recommended by the CICA's Canadian Performance Reporting Board for use by income funds in Canada as an indicator of financial performance. As one of the factors that may be considered relevant by investors is the cash available to be distributed by the Fund relative to the price of the Units, the Fund believes that Standardized Distributable Cash is a useful supplemental measure that may assist investors to assess an investment in the Units.

The Standardized Distributable Cash of the Fund is substantially comprised of distributions from Westshore which are impacted by the operating results of Westshore. The following table sets out the Standardized Distributable Cash calculation for the three and six month periods ended June 30, 2010 and 2009 respectively.

    (In thousands of dollars)     Three Months Ended       Six Months Ended
                                        Jun 30                  Jun 30
                                   2010        2009        2010        2009
                                     $           $           $           $
    Cash flows from operating
     activities                   25,281      43,568      69,342      71,737
    Less: Capital expenditures    (4,950)     (9,237)     (6,578)     (9,269)
    Standardized Distributable
     Cash                         20,331      34,331      62,764      62,468
    Cash Distributions declared   30,443      20,790      61,628      38,610
    Basic and diluted
     Standardized Distributable
     Cash per unit                 0.274       0.462       0.845       0.841
    Cash Distributions per unit    0.410       0.280       0.830       0.520

Quarterly cash distributions will typically differ from Standardized Distributable Cash as the Fund bases its quarterly distributions on anticipated taxable income for the year in question and does not adjust them for fluctuations in working capital. Quarterly cash distributions are also impacted by the Fund's desire to provide smoother distributions throughout the year. Any particular quarterly distribution may therefore vary from Standardized Distributable Cash flow for that quarter. Most of the difference between the distribution declared and the cash flow from operations in Q2 2010 was attributable to the additional distribution of $0.08 per unit from the Fund's cash reserves.

Because the Fund's investments consist of substantially all the limited partnership units of Westshore, virtually all of the taxable income of Westshore for any year is automatically allocated to the Fund. It is normal for there to be some discrepancy between the taxable income of the Fund and cash distributions by the Fund. In order to deal with the situation where the taxable income of the Fund exceeds cash distributions, the Declaration of Trust provides that an amount equal to the excess will be distributed to unitholders in the form of additional trust units, which are then consolidated. The amount of any such distributions is then added to the cost base of the units.

Critical Accounting Estimates

Plant and equipment: Depreciation

Plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight line method over the estimated useful production life of the assets. The estimated useful lives of plant and equipment range from 3 to 35 years. A change in the estimated useful lives of plant and equipment could result in either a higher or lower depreciation charge to net earnings.


Goodwill is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired, by comparing the fair value of Westshore to its carrying value, including goodwill. If the fair value of Westshore is less than its carrying value, a goodwill impairment loss is recognized as the excess of the carrying value of the goodwill over the fair value of the goodwill. The determination of fair value requires management to make assumptions and estimates about future coal prices, operating costs, foreign exchange rates and discount rates. Changes in any of these assumptions, such as lower coal prices, an increase in operating costs or an increase in discount rates could result in an impairment of all or a portion of the goodwill carrying value in future periods.

Employee Future Benefits

Westshore has post-retirement benefit obligations under its pension plans and other post-retirement benefit plans, the costs of which are based on estimates. Actuarial calculations of benefit costs and obligations depend on Westshore's assumptions about future events. Major estimates and assumptions relate to expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs, as well as discount rates, withdrawal rates and mortality rates.

Provisions for Estimated Liabilities

Westshore makes certain provisions, including its portion of ship demurrage and train detention costs, which are often not finally determined until well after the year-end.

Westshore's customers incur demurrage penalties if a ship being loaded with their coal is not loaded within a specified number of hours after it is ready to load at the Terminal. They also receive credits for early completion of loading, but only at half the hourly rate of the demurrage penalty. Westshore shares these penalties and credits in respect of certain mines, except in certain situations where the customer bears the entire penalty and receives the entire credit. One such situation is if the coal to be loaded on the vessel is not at the Terminal when the vessel arrives. In Q2 2010, Westshore incurred $1.5 million in ship demurrage charges with no adjustment for demurrage accruals in prior periods, compared to $0.2 million in the same period in 2009 which included income of $0.2 million from the adjustment of demurrage accruals in prior periods. Under the new contract covering the Elkview, Line Creek and Cheviot mines, Westshore will not share demurrage (nor rail detention, referred to below), unlike under the Elkview contract which expired March 31, 2010.

The railways that deliver coal to the Terminal also claim detention charges from Westshore's customers in respect of any delays beyond a specified number of hours that occur between the commencement of loading at the mine and the completion of unloading at the Terminal. The railways also grant credits in respect of trains that complete the process in less than the specified number of hours. With certain exceptions, Westshore also shares these charges and credits in respect of certain mines. For Q2 2010, Westshore realized train detention income of $0.4 million as a result of receipt of $0.6 million from the settlement of prior period accruals, compared to income of $0.4 million in the same period in 2009, which included income of $0.7 million from the settlement of prior period accruals.

While Westshore endeavours to ensure that provisions are reasonable in the circumstances, actual costs may be greater or less than the provisions made for those costs.

International Financial Reporting Standards (IFRS)

The use of IFRS for financial reporting in Canada will be applicable for the fiscal year beginning January 1, 2011. The Fund's IFRS transition plan consists of three main phases - Scoping, Analysis and Implementation. The Scoping phase involves a high-level analysis of the significant accounting differences between IFRS and Canadian GAAP and determining the potential impact of the new accounting standards on business areas such as information technology, internal controls and disclosure controls. The Analysis phase involves a more comprehensive analysis of the accounting standards, including the development of accounting policies and the quantification of the conversion impact. The Implementation phase executes the changes identified in the Analysis phase.

The Fund has completed the Scoping phase and has substantially completed the Analysis phase. The Implementation phase is well underway and is proceeding as planned. The Fund has made a determination of which IFRS 1 elections will be utilized and which accounting policies will be adopted under IFRS. The financial impact on the opening balance sheet under IFRS on January 1, 2010 has been estimated and is being reviewed by the external auditors. The 2010 financial statements are also being accounted for concurrently under IFRS but this is still a work-in-process while the Fund finalizes the opening IFRS balance sheet. A more in-depth discussion of the expected accounting changes follows after the transition plan summary.

The following table highlights some of the key activities in the transition plan and expected completion dates.

    Key Activity             Milestones              Status
    Financial statement

    - Identification of      Identification of       Identification of major
      significant            major differences and   accounting differences
      accounting             accounting policy       completed
      differences            choices made by the
    - Selection of           end of 2009             Completed initial
      accounting policy                              determination of
      choices                Quantification and      accounting changes as
    - Selection of choices   development of          of January 1, 2010 and
      available under        disclosure to occur     utilization of IFRS 1
      IFRS 1 (first-time     through 2010            elections (still subject
      adoption)                                      to change)
    - Financial statement
      format                                         Accounting policy
    - Changes in disclosure                          choices made, subject
                                                     to any future
                                                     pronouncements issued
                                                     by IASB

                                                     IFRS accounting being
                                                     done simultaneously with
                                                     Canadian GAAP accounting

                                                     Detailed analysis
                                                     underway for financial
                                                     statement disclosure

                                                     Preparing rough drafts
                                                     of IFRS-compliant
                                                     financial statements

                                                     External auditors
                                                     reviewing IFRS
                                                     transition balance sheet

    - Development of         Major knowledge         Formal course training
      knowledge and          training completed by   completed and more
      resources              end of 2009; new        courses being attended
    - IT impact assessment   developments monitored  throughout 2010
      and conversion         throughout 2010
                                                     Regular updates
                             IT systems ready to     provided to the audit
                             process information     committee
                             in parallel in 2010
                                                     IASB work plan being
                                                     monitored on ongoing

                                                     IT system accounting for
                                                     the Fund's activities
                                                     under both Canadian GAAP
                                                     and IFRS for 2010
    Control Environment

    - Assessment of impact   Processes and           Impact assessment
      on ICFR and DC&P       documentation to be     started
    - Changes in processes   complete by end of
      to accommodate IFRS    2010                    Processes and policies
    - Documentation                                  being evaluated and
      requirements                                   amended to accommodate
                                                     accounting policy
    Business Policy

    - Assessment of impact   Assessment to be        Initial impact
      on financial           complete by mid-2010    assessment has been
      covenants                                      completed with respect
    - Assessment of impact                           to draft transition
      on capital adequacy                            balance sheet

                                                     Impact assessment to be
                                                     monitored throughout

    Financial Statement Impact - IFRS 1

The Fund expects to use the IFRS 1 elections available for business combinations, leases, decommissioning liabilities and borrowing costs.

The employee benefits election is no longer required as the Fund has elected to recognize all actuarial gains or losses on defined-benefit pension plans immediately through other comprehensive income as they occur. The adoption of this accounting policy forces all unamortized actuarial gains and losses through retained earnings. This change will also have an impact on future income taxes.

The borrowing costs election allows the Fund to capitalize interest costs for constructed assets on a prospective basis. This will not have any immediate impact on the financial statements but could have a material effect if Westshore undertakes any significant capital projects using borrowed funds.

The remaining elections allow the Fund to avoid retrospective application for certain accounting standards and should not result in any material changes.

    IFRS - Accounting Policies and Choices

Employee Benefits

Under IAS 19 Employee Benefits, there are options for the recognition of actuarial gains and losses for defined benefit pension plans. The Fund intends to recognize these actuarial gains and losses immediately as they occur with changes being recorded through other comprehensive income. This is a departure from the Fund's current accounting practice of amortizing actuarial gains and losses over the average remaining service life of the employees. This accounting policy choice is consistent with the recent exposure draft on IAS 19 which proposes to eliminate the corridor approach for amortizing actuarial gains and losses over a period of time.

IAS 19 requires past service costs for defined benefit pension plans to be amortized through net income over the vesting period. IAS 19 also requires the immediate recognition of actuarial gains and losses through net income for non-pension post-retirement benefits. Under Canadian GAAP, both of these types of costs are amortized through net income over the average remaining service life of the employees which is a longer period of time. As a consequence of adopting IFRS, all of the unamortized net actuarial losses and past service costs as disclosed in note 9 of the December 31, 2009 audited financial statements will be recognized on the balance sheet through a retained earnings adjustment. The post-retirement benefit asset of $24.2 million will be eliminated and the post-retirement benefit liability will increase by another $9.7 million. This change would be accompanied by an estimated decrease in the future income tax liability of $7.9 million. The Fund is still assessing whether IFRIC 14 will have any impact due to Westshore's existing minimum funding requirements.

The immediate recognition of these costs on the balance sheet will reduce the pension expense that is being recognized in the income statement. Under Canadian GAAP, the pension expense includes an additional amount for the amortization of actuarial losses and past service costs. The estimated impact on net income for the second quarter of 2010 under IFRS is an increase of $0.8 million.


IAS 16 Property, Plant & Equipment requires depreciation to start once an asset is available for use. Westshore's current accounting policy results in depreciation commencing at a later date. This change is not expected to have a material impact on the opening balance sheet. The estimated change to the net income for the second quarter of 2010 under IFRS is a decrease of $0.3 million.

Other Items

In previous quarters, the Fund noted certain IFRS that could have an impact on the financial statements. The Fund does not expect any significant changes from the adoption of the following IFRS except as noted:

    -   IAS 12 Income Taxes - any future income taxes attributable to
        actuarial gains and losses on employee future benefits will be
        recorded through other comprehensive income
    -   IAS 37 Provisions, Contingent Liabilities and Contingent Assets -
        provisions must be disclosed separately so there are some potential
        disclosure changes (no impact on net income)

The accounting standards under IFRS continue to evolve and future changes could result in the identification of new financial statement impacts not previously noted or could require a revision to the financial statement impacts previously disclosed. Westshore has engaged its external auditors to audit the IFRS transition balance sheet which may also result in changes from what has been previously disclosed.


The Fund's cash inflows are entirely dependent on Westshore's operating results and are significantly influenced by four variables: the volume of coal shipped through the Terminal; the US dollar denominated price received by Westshore's customers for that coal; the CDN/US dollar exchange rate; and Westshore's operating and administrative costs. In view of differences in loading rates between its various contracts, Westshore cannot provide a reliable indication of the effect of changes in pricing, exchange rates and tonnage on distributions, which will depend in part on which mines ship the tonnage. Accordingly, Westshore is not providing a discussion of sensitivities.

Critical to Westshore's ongoing success will be the ability of its customers, including Teck in particular, to maintain and increase their coal export volumes while competing with other suppliers for sales worldwide. Based on information currently available, Westshore anticipates 2010 throughput volumes could be in excess of 23.5 million tonnes, compared to 2009 levels of 20 million tonnes, and at a lower average loading rate than in 2009.

For the 2010/11 contract year and based on current tonnage estimates as of the date of this report, tonnages shipped at fixed rates are expected to account for approximately 65% of the Terminal's throughput and tonnages shipped at variable rates are expected to account for approximately 35% of throughput at the Terminal. This percentage is materially lower than in 2009 and will decline further in 2011. Throughput rates realized by Westshore for the balance of 2010 are expected to be similar to the rates achieved to date, reflecting the greater fixed amount in 2010 of Westshore's throughput rates compared to higher proportion of volumes during the 2009/10 coal year that were based on variable rates.

The second quarter distribution was $0.41 per unit compared to $0.28 per unit for the second quarter of 2009. If distributions for the 2010 calendar year exceed $1.035 per unit, incentive fees will be payable by Westshore to the Manager under the Management Agreement, as was the case in 2009. For 2010, those fees are computed on the following basis: 15% of Fund distributable cash between $1.035 - $1.125 per unit; 25% of Fund distributable cash between $1.125 - $1.260 per unit; and 35% of Fund distributable cash above $1.260 per unit. The basis for computation will change in 2011, as disclosed in the Fund's 2009 Annual Report.

Forward-looking Statements

The foregoing statements concerning tonnages, coal prices, exchange rates, loading rates and variability of distributions are forward-looking statements but reflect the current expectations of the Fund and Westshore with respect to future events and performance. Wherever used, the words "may," "will," "anticipate," "intend," "expect," "plan," "believe," and similar expressions identify forward-looking statements. Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether, or the times at which, such performance or results will be achieved.

Forward-looking statements are based on information available at the time they are made, assumptions made by management, and management's good faith belief with respect to future events, and will be impacted by and are subject to the risks and uncertainties outlined in the Fund's Annual Information Form that could cause actual performance or results to differ materially from those reflected in the forward-looking statements, historical results or current expectations.

Additional Information

Additional information relating to the Fund, including the Fund's latest Annual Report and Annual Information Form, are available on SEDAR at www.sedar.com and on Westshore's website at www.westshore.com.

    On behalf of the Trustees,


    William W. Stinson
    August 5, 2010

    Westshore Terminals Income Fund
    Financial Statements

    Consolidated Balance Sheets

    (in thousands of dollars)                        June 30,    December 31,
                                                      2010          2009
                                                        $             $
                                                   (Unaudited)    (Audited)
    Current assets
    Cash and cash equivalents                          83,365         81,486
    Accounts receivable                                15,267         19,512
    Inventories                                         6,974          6,284
    Prepaid expenses                                    2,721            684
    Other assets                                            -          2,517
                                                      108,327        110,483

    Plant and equipment
    At cost                                           522,829        516,251
    Accumulated depreciation                         (418,174)      (407,680)
                                                      104,655        108,571

    Employee future benefits                           24,864         24,168
    Goodwill                                          365,541        365,541

                                                      603,387        608,763

    Current liabilities
    Accounts payable and accrued liabilities           27,942         16,348
    Other liabilities                                     250              -
    Distribution payable to unitholders                30,443         29,700
                                                       58,635         46,048

    Employee future benefits                           23,737         22,118
    Future income taxes                                 9,296          8,680
                                                       91,668         76,846

    Unitholders' equity
    Capital contributions                             704,032        704,032
    Cumulative earnings                               767,816        726,380
    Cumulative distributions declared                (960,129)      (898,495)
                                                      511,719        531,917

                                                      603,387        608,763

    Consolidated Statements of Earnings, Comprehensive Earnings and
    Cumulative Earnings

    (in thousands of dollars,    Three months ended       Six months ended
     except per unit amounts)         June 30                 June 30
                                         $                       $
                                  2010        2009        2010        2009
                              (Unaudited) (Unaudited) (Unaudited) (Unaudited)

    Coal loading                  52,094      57,375     104,234     111,022
    Other                          1,179         939       2,354       1,989
                                  53,273      58,314     106,588     113,011
    Operating                     21,266      16,593      42,259      34,217
    Administrative                 6,564       1,290      10,314       3,614
                                  27,830      17,883      52,573      37,831

    Earnings before the
     undernoted                   25,443      40,431      54,015      75,180
    Interest income                   80          73         142         228
    Depreciation                  (5,247)     (5,281)    (10,494)    (10,682)
    Foreign exchange gain
     (loss)                       (1,817)      8,704      (1,611)      5,702
    Earnings before income
     taxes                        18,459      43,927      42,052      70,428

    Provision for income taxes       286       1,121         616       1,947

    Net earnings and
     comprehensive earnings
     for the period               18,173      42,806      41,436      68,481

    Cumulative earnings -
     Beginning of period         749,643     644,925     726,380     619,250

    Cumulative earnings -
     End of period               767,816     687,731     767,816     687,731

    Basic and diluted
     earnings per trust unit       0.245       0.576       0.558       0.922

    Weighted average number
     of trust units
     outstanding              74,250,016  74,250,016  74,250,016  74,250,016

    Consolidated Statements of Cash Flows

    (in thousands of dollars)    Three months ended       Six months ended
                                      June 30                 June 30
                                         $                       $
                                  2010        2009        2010        2009
                              (Unaudited) (Unaudited) (Unaudited) (Unaudited)

    Cash flows from operating
    Net earnings for the
     period                       18,173      42,806      41,436      68,481
      Items not affecting cash
        Change in unrealized
         gains and losses on
         forward exchange
         contracts                 3,077     (12,214)      2,767     (14,495)
        Depreciation               5,247       5,281      10,494      10,682
        Future income tax
         provision                   286       1,121         616       1,948
        Increase (decrease) in
         employee future
         benefits costs              543      (1,763)        923      (3,415)
                                  27,326      35,231      56,236      63,201

    Decrease (increase) in
     non-cash working capital     (2,045)      8,337      13,106       8,536
                                  25,281      43,568      69,342      71,737
    Cash flows from financing
    Distributions paid to
     unitholders                 (31,185)    (17,820)    (60,885)    (57,173)
                                 (31,185)    (17,820)    (60,885)    (57,173)

    Cash flows from investing
    Additions to plant and
     equipment                    (4,950)     (9,237)     (6,578)     (9,269)
                                  (4,950)     (9,237)     (6,578)     (9,269)

    Increase (decrease) in
     cash and cash equivalents   (10,854)     16,511       1,879       5,295

    Cash and cash equivalents -
     Beginning of period          94,219      63,818      81,486      75,034

    Cash and cash equivalents -
     End of period                83,365      80,329      83,365      80,329

    Supplemental cash flow
    Cash received for interest        80          73         142         228

    Notes to Financial Statements

    1.  Basis of presentation

    These interim financial statements do not contain all the information
    required for annual financial statements and should be read in
    conjunction with the financial statements and notes included in the
    Fund's Annual Report for the year ended December 31, 2009. These interim
    financial statements have not been audited or reviewed by external

    2.  Significant accounting policies

    These interim financial statements have been prepared in accordance with
    Canadian generally accepted accounting principles and follow the same
    accounting principles and methods of application as set out in Note 2 of
    the Fund's annual financial statements for the year ended December 31,

    3.  New accounting pronouncements

    On January 1, 2009, the Fund adopted the new requirements of the CICA
    Handbook Section 3064, Goodwill and Other Intangible Assets. Section 3064
    expands on the standards for recognition, measurement, and disclosure of
    goodwill and intangible assets. The adoption of this new standard did not
    have any impact on the consolidated financial statements of the Fund.

    On January 1, 2009, the Fund adopted the enhanced disclosure requirements
    of amended CICA Handbook Section 3862, Financial Instruments -
    Disclosures. Disclosures using a fair value hierarchy that reflects the
    significance of the inputs used in making the measurements is presented
    in Note 4 of these financial statements.

    On January 23, 2009, the CICA Emerging Issues Committee (EIC) issued
    EIC-173, Credit Risk and Fair Value of Financial Assets and Liabilities.
    EIC-173 is effective for interim and annual financial statements ending
    on or after January 20, 2009. EIC-173 provides guidance that an entity's
    own credit risk and the credit risk of counterparties should be taken
    into account in determining the fair value of financial assets and
    liabilities. Adoption of this guidance is to be applied retrospectively
    without restatement to prior periods. The Fund has evaluated the impact
    of this new standard and concluded that it does not have a material
    impact on its financial statements.

    4.  Financial Instruments

    The carrying amounts reported in the consolidated balance sheet for short
    term financial assets and liabilities, which includes accounts
    receivable, accounts payable and accrued liabilities and distributions
    payable to unitholders, approximate fair values due to the immediate or
    short-term maturities of these financial instruments. Accounts receivable
    are classified as loans and receivables and are recorded at amortized
    cost. Accounts payable and distributions payable to unitholders are
    classified as other financial liabilities and are recorded at amortized

    Following is a classification of fair value measurements recognized in
    the consolidated balance sheet using a fair value hierarchy that reflects
    the significance of the inputs used in making the measurements.

                            Fair value measurement at reporting date using:
                                      Quoted prices
                                        in active
                                       markets for  Significant
                                        identical     other      Significant
                                         assets/    observable  unobservable
                             June 30,  liabilities    inputs       inputs
                               2010     (Level 1)    (Level 2)    (Level 3)
    Financial assets:

    Held-for trading
    Cash and cash
     equivalents           $   83,365   $   83,365   $        -   $        -

    Financial assets
     total                 $   83,365   $   83,365   $        -   $        -

    Financial liabilities:
    Derivative instruments:
    Foreign exchange
     contracts             $     (250)  $        -   $     (250)  $        -

    Financial liabilities
     total                 $     (250)  $        -   $     (250)  $        -

    Cash and cash equivalents are classified as held for trading and
    therefore are recorded at fair value.

    The carrying amounts of foreign exchange contracts are equal to fair
    value, which is based on valuations obtained from the counterparty. The
    mark-to-market value is determined by the counterparty by multiplying the
    notional amount of the trade with the difference between the forward rate
    and the contract rate and discounting the resultant asset or liability by
    an applicable discount factor.

    Financial risk management and exposure

    The Fund is exposed to various risks associated with its financial
    instruments, which include credit risk, liquidity risk and market risk.

    Credit Risk

    Credit risk is the risk of financial loss to the Company if a customer or
    counterparty to a financial instrument fails to meet its contractual
    obligations. Credit risk arises primarily from accounts receivable and
    cash and cash equivalents. Credit risk can also arise on foreign currency
    contracts held by the Fund.

    The Company's exposure to credit risk is influenced by the profitability
    of coal mining companies, which is heavily impacted by the price of the
    coal. The accounts receivable are concentrated with one customer, Teck
    Coal, as this customer represented approximately 69% of Westshore's
    throughput in Q2 2010 (Q2 2009 - 73%). Westshore does not have any
    collateral or security for its receivables. Westshore monitors the
    financial health of its customers and regularly reviews its accounts
    receivable for impairment. As at June 30, 2010, there were no trade
    accounts receivable past due which were considered uncollectible and no
    reserve in respect of doubtful accounts was recorded.

    The Fund limits its exposure to credit risk arising from cash equivalents
    by only investing in money market funds with a major Canadian financial
    institution. The Fund does not expect any credit losses in the event of
    non-performance by counter parties to its foreign exchange forward
    contracts as the counter parties are major Canadian financial

    The carrying amount of financial assets represents the maximum credit
    exposure. The maximum exposure to credit risk is:


    Cash and cash equivalents                                         83,865

    Accounts receivable                                               15,267

    Liquidity Risk

    Liquidity risk is the risk that the Fund will not be able to meet its
    obligations as they fall due. The Fund continually monitors its financial
    position to ensure that it has sufficient liquidity to discharge its
    obligations when due. The Fund's distribution obligation to unitholders
    is funded from operating income and the recent equipment upgrade was
    funded with additional equity.

    The financial liabilities of the Fund, which include accounts payable and
    accrued liabilities, have a contractual maturity of less than 1 year. The
    Fund's foreign exchange contracts have maturities ranging from one month
    to nine months as at June 30, 2010.

    Westshore also maintains a $1 million operating facility that can be
    drawn down to meet short term financing needs. No amounts were
    outstanding on this facility at June 30, 2010.

    Market Risk

    The significant market risk exposures affecting the financial instruments
    held by the Fund are those related to foreign currency exchange rates and
    interest rates.

    Foreign currency exchange rates

    The fair value of the Fund's outstanding foreign currency contracts at
    June 30, 2010 is a liability of $0.3 million (June 30, 2009 - asset of
    $1.9 million). The fair market value of the Fund's foreign currency
    contracts has decreased by $2.8 million in 2010. The Fund is exposed to
    foreign currency exchange rate risk on its foreign currency contracts.
    The value of these financial instruments fluctuate with changes in the
    US/CAD dollar exchange rate. As at June 30, 2010, the Fund has put
    options with notional amounts totaling $38.5 million to exchange US
    dollars for Canadian dollars with a range of strike prices from $0.965 to
    $1.218. The counterparty has call options with notional amounts totaling
    $38.5 million to exchange US dollars for Canadian dollars with a range of
    strike prices from $1.047 to $1.29. A $0.01 increase in the US/Canadian
    exchange rate at June 30, 2010 would have reduced the value of the US
    dollar foreign exchange contracts by approximately $374,000 for the
    quarter ended June 30, 2010. The impact would have resulted in a
    reduction in net earnings and comprehensive earnings by $374,000 for the
    quarter ended June 30, 2010. From the beginning of 2010 to June 30, 2010,
    the US dollar has strengthened by approximately 1% against the Canadian

    Interest rates

    The Fund has limited exposure to interest rate risk on the cash
    equivalents (short-term investments). Money market fund returns are
    correlated with Canadian T-bills and Bankers' Acceptances of major
    Canadian financial institutions. Based on the cash balance at June 30,
    2010, a 1% change in interest rates would have impacted net earnings and
    comprehensive earnings for the year to date by approximately $417,000.

    5.  Capital Disclosures

    The capital of the Fund consists solely of unitholders' equity which
    includes issued trust units and cumulative earnings less cumulative

    The objective of the Fund is to maintain a stable capital base and ensure
    that the capital structure does not interfere with the Fund's ability to
    meet its distribution requirements on the trust units. In 2010, the Fund
    expects that its quarterly distributions to unitholders will be funded by
    earnings and operating cash flows.

    The trust units are governed by the Second Amended and Restated
    Declaration of Trust dated September 29, 2005, which provides that
    non-residents of Canada may not own more than 49% of the trust units at
    any time. The Fund continually monitors the non-resident ownership levels
    to the best of its ability given the practical limitations regarding
    beneficial ownership interest. The Fund believes that it has always had
    substantially less than 49% non-Canadian ownership.

    The Fund's trust units are not subject to externally imposed capital
    requirements. There have been no changes in how the Fund manages its
    capital during the period ended June 30, 2010.

    6.  Employee future benefits

    The total benefit cost of the Company's defined benefit and other
    retirement and post employment benefit plans was $3.4 million for the six
    months ended June 30, 2010 ($2.0 million for the six months ended June
    30, 2009).

                              Corporate Office
                       Westshore Terminals Income Fund
                       1800 - 1067 West Cordova Street
                     Vancouver, British Columbia V6C 1C7
              Telephone: 604.488.5295  Facsimile: 604.687.2601

SOURCE Westshore Terminals Investment Corporation

For further information: For further information: Nick Desmarais, Secretary, (604) 488-5214

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