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
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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.
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(In thousands of dollars Three Months Three Months
except per unit amounts) Ended Ended
June 30, June 30,
2010 2009
$ $
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REVENUE
Coal loading 52,094 57,375
Other 1,179 939
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53,273 58,314
EXPENSES
Operating 21,266 16,593
Administrative 6,564 1,290
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27,830 17,883
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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
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Earnings before income taxes 18,459 43,927
Provision for income taxes 286 1,121
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Net earnings 18,173 42,806
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Net earnings per unit(1) 0.245 0.576
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Cash Distributions declared(2) 30,443 20,790
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Cash Distributions per unit 0.410 0.280
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Distribution of units in lieu of cash - 3,255
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Distribution of units in lieu of cash per unit - 0.044
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(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.
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(In thousands of dollars Three Months Ended
except per unit amounts) ----------------------------------------------
Jun 30, Mar 31, Dec 31, Sep 30,
2010 2010 2009 2009
$ $ $ $
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Revenue
Coal loading 52,094 52,140 46,445 46,460
Other 1,179 1,175 1,029 833
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53,273 53,315 47,474 47,293
Expenses
Operating 21,266 20,993 22,172 19,323
Administration 6,564 3,750 4,513 1,862
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27,830 24,743 26,685 21,185
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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)
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Earnings before income
taxes 18,459 23,593 16,008 20,682
Provision for (recovery
of) income taxes 286 330 (2,406) 446
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Net earnings 18,173 23,263 18,414 20,236
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Net earnings per unit 0.245 0.313 0.248 0.273
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Cash Distributions
declared(1) 30,443 31,185 29,700 23,760
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Cash Distributions per unit 0.410 0.420 0.400 0.320
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Distribution of units in
lieu of cash - - 4,650 3,720
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Distribution of units in
lieu of cash per unit - - 0.062 0.050
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(1) Refer to page 6 for a comparison of cash distributions to
Standardized Distributable Cash.
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(In thousands of dollars Three Months Ended
except per unit amounts) ----------------------------------------------
Jun 30, Mar 31, Dec 31, Sep 30,
2009 2009 2008 2008
$ $ $ $
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Revenue
Coal loading 57,375 53,647 88,425 73,764
Other 939 1,050 1,039 942
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58,314 54,697 89,464 74,706
Expenses
Operating 16,593 17,624 18,471 20,470
Administration 1,290 2,324 8,076 7,228
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17,883 19,948 26,547 27,698
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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)
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Earnings before income
taxes 43,927 26,501 42,095 41,032
Provision for income taxes 1,121 827 613 870
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Net earnings 42,806 25,674 41,482 40,162
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Net earnings per unit 0.576 0.346 0.559 0.541
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Cash Distributions
declared(1) 20,790 17,820 39,353 38,610
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Cash Distributions per unit 0.280 0.240 0.530 0.520
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Distribution of units in
lieu of cash 3,255 2,790 3,988 3,913
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Distribution of units in
lieu of cash per unit 0.044 0.038 0.054 0.053
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(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.
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(In thousands of dollars) Three Months Ended Six Months Ended
Jun 30 Jun 30
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2010 2009 2010 2009
$ $ $ $
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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
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Net foreign exchange gains
(losses) (1,817) 8,704 (1,611) 5,702
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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:
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(In thousands of dollars) Terminal
lease Other Total
$ $ $
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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
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Thereafter to 2026 139,980 - 139,980
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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.
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(In thousands of dollars) Three Months Ended Six Months Ended
Jun 30 Jun 30
2010 2009 2010 2009
$ $ $ $
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Cash flows from operating
activities 25,281 43,568 69,342 71,737
Less: Capital expenditures (4,950) (9,237) (6,578) (9,269)
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Standardized Distributable
Cash 20,331 34,331 62,764 62,468
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Cash Distributions declared 30,443 20,790 61,628 38,610
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Basic and diluted
Standardized Distributable
Cash per unit 0.274 0.462 0.845 0.841
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Cash Distributions per unit 0.410 0.280 0.830 0.520
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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
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.
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Key Activity Milestones Status
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Financial statement
preparation
- 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
options
Preparing rough drafts
of IFRS-compliant
financial statements
External auditors
reviewing IFRS
transition balance sheet
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Infrastructure
- 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
basis
IT system accounting for
the Fund's activities
under both Canadian GAAP
and IFRS for 2010
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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
choices
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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
2010
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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
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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.
Depreciation
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.
Outlook
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,
(signed)
William W. Stinson
Chairman
August 5, 2010
Westshore Terminals Income Fund
Financial Statements
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Consolidated Balance Sheets
(in thousands of dollars) June 30, December 31,
2010 2009
$ $
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(Unaudited) (Audited)
ASSETS
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
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108,327 110,483
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Plant and equipment
At cost 522,829 516,251
Accumulated depreciation (418,174) (407,680)
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104,655 108,571
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Employee future benefits 24,864 24,168
Goodwill 365,541 365,541
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603,387 608,763
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LIABILITIES & UNITHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 27,942 16,348
Other liabilities 250 -
Distribution payable to unitholders 30,443 29,700
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58,635 46,048
Employee future benefits 23,737 22,118
Future income taxes 9,296 8,680
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91,668 76,846
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Unitholders' equity
Capital contributions 704,032 704,032
Cumulative earnings 767,816 726,380
Cumulative distributions declared (960,129) (898,495)
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511,719 531,917
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603,387 608,763
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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
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(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUE
Coal loading 52,094 57,375 104,234 111,022
Other 1,179 939 2,354 1,989
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53,273 58,314 106,588 113,011
EXPENSES
Operating 21,266 16,593 42,259 34,217
Administrative 6,564 1,290 10,314 3,614
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27,830 17,883 52,573 37,831
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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
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Earnings before income
taxes 18,459 43,927 42,052 70,428
Provision for income taxes 286 1,121 616 1,947
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Net earnings and
comprehensive earnings
for the period 18,173 42,806 41,436 68,481
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Cumulative earnings -
Beginning of period 749,643 644,925 726,380 619,250
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Cumulative earnings -
End of period 767,816 687,731 767,816 687,731
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Basic and diluted
earnings per trust unit 0.245 0.576 0.558 0.922
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Weighted average number
of trust units
outstanding 74,250,016 74,250,016 74,250,016 74,250,016
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Consolidated Statements of Cash Flows
(in thousands of dollars) Three months ended Six months ended
June 30 June 30
$ $
2010 2009 2010 2009
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(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cash flows from operating
activities
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)
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27,326 35,231 56,236 63,201
Decrease (increase) in
non-cash working capital (2,045) 8,337 13,106 8,536
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25,281 43,568 69,342 71,737
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Cash flows from financing
activities
Distributions paid to
unitholders (31,185) (17,820) (60,885) (57,173)
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(31,185) (17,820) (60,885) (57,173)
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Cash flows from investing
activities
Additions to plant and
equipment (4,950) (9,237) (6,578) (9,269)
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(4,950) (9,237) (6,578) (9,269)
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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
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Cash and cash equivalents -
End of period 83,365 80,329 83,365 80,329
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Supplemental cash flow
information
Cash received for interest 80 73 142 228
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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
auditors.
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,
2009.
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
cost.
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.
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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)
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Financial assets:
Held-for trading
securities:
Cash and cash
equivalents $ 83,365 $ 83,365 $ - $ -
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Financial assets
total $ 83,365 $ 83,365 $ - $ -
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Financial liabilities:
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Derivative instruments:
Foreign exchange
contracts $ (250) $ - $ (250) $ -
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Financial liabilities
total $ (250) $ - $ (250) $ -
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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
institutions.
The carrying amount of financial assets represents the maximum credit
exposure. The maximum exposure to credit risk is:
2010
Cash and cash equivalents 83,865
Accounts receivable 15,267
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99,132
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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
dollar.
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
distributions.
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
www.westshore.com
For further information: Nick Desmarais, Secretary, (604) 488-5214
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