TSX: SPF.UN
CALGARY, Aug. 10 /CNW/ -
Q2 Highlights
- Q2 Distributable Cash Flow of $29.9 million, down 5% from prior year
period, as soft results from Superior Propane offset contribution
from Winroc, acquired in June 2004.
- Acquisitions by ERCO Worldwide and Winroc provide diversified value
growth.
- Balance sheet strengthened with $175 million convertible debenture
financing, completed in June.
- August 2005 regular distribution declared of $0.20 per trust unit or
$2.40 annualized.
<<
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(millions of dollars, Three Months Ended Six Months Ended
except per trust unit June 30 June 30
amounts) 2005 2004(1) 2005 2004(1)
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Financial
Operating distributable cash
flow
Superior Propane 9.5 14.9 53.7 59.2
ERCO Worldwide 21.8 22.4 43.8 44.2
Winroc 6.8 1.4 11.2 1.4
Superior Energy Management 1.4 1.8 3.0 4.2
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39.5 40.5 111.7 109.0
Corporate costs (1.8) (1.8) (3.2) (2.4)
Interest and debenture
distributions (7.8) (7.3) (14.9) (14.7)
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Distributable cash flow
(see Note 1 to the Interim
Consolidated Financial
Statements) 29.9 31.4 93.6 91.9
Distributable cash flow
per trust unit, basic $ 0.38 $ 0.44 $ 1.21 $ 1.29
Distributable cash flow
per trust unit, diluted $ 0.38 $ 0.43 $ 1.17 $ 1.19
Average number of trust
units outstanding
(millions) 77.7 72.2 77.1 71.3
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Operating
Litres of retail propane
sold (millions of litres) 286 302 771 816
Propane retail sales margin
(cents per litre) 15.4 16.5 16.1 16.0
Total chemical sales
(thousands of metric
tonnes "MT") 175 161 339 315
Average chemical selling
price (dollar per MT) 537 573 544 570
Gigajoules ("GJ") of natural
gas sold (millions) 9 7 18 13
Natural gas sales margin
(cents per GJ) 36.6 48.3 37.8 52.3
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(1) Restated to give retroactive effect to change in accounting for
natural gas customer acquisition costs. (See Note 2(b) to the Interim
Consolidated Financial Statements)
Q2 Distributable Cash Flow Highlights:
- Distributable cash flow per trust unit of $0.38, down 14% from Q2
last year, due to 5% decline in distributable cash flow and 8%
increase in average number of trust units outstanding.
- Increase in trust units due to conversion of debentures which
strengthened the balance sheet.
Q2 Events Driving Value Growth:
- Winroc's $31.7 million acquisition of Leon's Insulation positions
Winroc as the largest distributor of walls and ceilings
construction products in the Ontario market.
- ERCO Worldwide's $22.4 million acquisition of a chloralkali
facility in Port Edwards, Wisconsin, enhances its chloralkali
capabilities and diversifies its product line into potassium
markets.
Forward Looking Statements
--------------------------
Except for the historical and present factual information, certain
statements contained herein are forward-looking. Such forward-looking
statements are not guarantees of future performance and involve a number of
known and unknown risks and uncertainties which may cause the actual results
of the Superior Plus Income Fund (the "Fund") or Superior Plus Inc.
("Superior") in future periods to differ materially from any projections
expressed or implied by such forward-looking statements and therefore should
not be unduly relied upon. Any forward-looking statements are made as of the
date hereof and neither the Fund nor Superior undertakes any obligation to
publicly update or revise such statements to reflect new information,
subsequent events or otherwise.
Distributable Cash Flow
-----------------------
Distributable cash flow of the Fund available for distribution to
Unitholders, is equal to cash generated from operations before natural gas
customer acquisition costs and changes in working capital, less amortization
of natural gas customer acquisition costs and maintenance capital
expenditures. Maintenance capital expenditures are equal to capital
expenditures incurred to sustain the ongoing capacity of Superior's operations
and are deducted from the calculation of distributable cash flow. Acquisitions
and other capital expenditures incurred to expand the capacity of Superior's
operations or to increase its profitability, are excluded from the calculation
of distributable cash flow. See Note 1 to the Interim Consolidated Financial
Statements for the calculation of distributable cash flow. Distributable cash
flow is the main performance measure used by management and investors to
evaluate the performance of the Fund and its businesses. Readers are cautioned
that distributable cash flow is not a defined performance measure under
Canadian generally accepted accounting principles ("GAAP"), and that
distributable cash flow cannot be assured. The Fund's calculation of
distributable cash flow may differ from similar calculations used by
comparable entities. Operating distributable cash flow is distributable cash
flow before corporate and interest expenses. It is also a non-GAAP measure and
is used by management to assess the performance of the operating divisions.
Cash Distribution Notice
------------------------
The Fund announced today its regular monthly cash distribution for the
month of August 2005 of $0.20 (20.0 cents) per trust unit, payable on
September 15, 2005, to unitholders of record at the close of business on
August 31, 2005. The ex-distribution date will be August 29, 2005. For income
tax purposes, the cash distribution of $0.20 per trust unit is considered to
be a dividend of $0.047 and other income of $0.153 per trust unit. A cash
distribution summary since inception of the Fund, together with tax
information, is posted on our website at www.superiorplus.com.
Management's Discussion and Analysis of 2005 Second Quarter Results
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The following should be read in conjunction with the Fund's Interim
Consolidated Financial Statements contained herein, along with the Management
Discussion and Analysis and Consolidated Financial Statements for the year
ended December 31, 2004, and the Fund's First Quarter Report for the period
ended March 31, 2005.
Second Quarter and Year to Date Results
Second quarter distributable cash flow was $29.9 million, down
$1.5 million (5%) from the prior year period. The acquisition of Winroc in
June 2004, contributed an incremental $5.4 million of operating distributable
cash flow and was fully offset by lower results at Superior Propane. Slightly
lower results from ERCO Worldwide and Superior Energy Management, combined
with higher borrowing costs, contributed to lower distributable cash flow
compared to the prior year period.
Distributable cash flow per trust unit was $0.38 for the second quarter,
down $0.06 per trust unit from the prior year period due to the 5% decline in
distributable cash flow combined with an 8% increase in the average number of
trust units outstanding. The conversion of the Fund's convertible unsecured
subordinated debentures ("Debentures") into trust units has contributed to the
increase in trust units outstanding and continues to strengthen the Fund's
balance sheet.
Distributable cash flow for the six month period ended June 30, 2005
reached $93.6 million, an increase of $1.7 million (2%) over the prior year
period. The acquisition of Winroc in June 2004, contributed an incremental
$9.8 million of operating distributable cash flow which was partially offset
by lower results from Superior Propane in the second quarter, lower year to
date results from Superior Energy Management, and increased corporate costs.
Distributable cash flow per trust unit was $1.21, down $0.08 per trust unit
(6%) from the prior year period, as the increase in distributable cash flow
was more than offset by an 8% increase in the average number of trust units
outstanding due to the conversion of Debentures into trust units.
Net earnings for the second quarter were $18.9 million, down $2.2 million
(10%) from the prior year period. Net earnings for the six month period ended
June 30, 2005 reached $60.4 million, an increase of $2.3 million (4%) over the
prior year period. Second quarter earnings include $1.3 million of management
retention bonuses (2004 - $2.6 million), which were in turn used to repay
trust unit purchase loans issued as part of the May 2003 management
internalization transaction. These costs have been excluded from the
calculation of distributable cash flow, consistent with the accounting for
management internalization costs in 2003. The remaining changes in net
earnings for the second quarter and six month periods ended June 30, 2005
compared to the prior year periods, are due to the same reasons that
contributed to the changes in distributable cash flow.
Superior Propane
Superior Propane generated operating distributable cash flow of
$9.5 million, down $5.4 million from the prior year period as lower propane
sales margins and volumes and increased operating costs, were only partially
offset by increased other services gross profit generated by the Superior Gas
Liquids ("SGL") wholesale marketing business acquired in February 2005.
Condensed operating results for the three and six month periods ended
June 30, 2005 and 2004 are provided in the following table:
(millions of
dollars except Three Months Ended Six Months Ended
per litre June 30 June 30
amounts) 2005 2004 2005 2004
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cents/ cents/ cents/ cents/
Gross Profit litre litre litre litre
Propane sales 44.1 15.4 49.7 16.5 124.2 16.1 130.9 16.0
Other services 12.1 4.2 9.4 3.1 24.6 3.2 19.3 2.3
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Total Gross
Profit 56.2 19.6 59.1 19.6 148.8 19.3 150.2 18.3
Less:
Cash operating,
admin & cash
tax costs (45.8) (16.0) (43.1) (14.3) (93.7) (12.2) (89.3) (11.0)
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Cash generated
from operations
before changes
in net working
capital 10.4 3.6 16.0 5.3 55.1 7.1 60.9 7.3
Maintenance
capital
expenditures,
net (0.9) (0.3) (1.1) (0.4) (1.4) (0.2) (1.7) (0.2)
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Operating
distributable
cash flow 9.5 3.3 14.9 4.9 53.7 6.9 59.2 7.1
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Propane retail
volumes sold
(millions of
litres) 286 302 771 816
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Propane sales gross profit was $44.1 million, down $5.6 million (11%)
from the prior year period, as sales volumes declined by 5% (16 million
litres) and sales margins declined by 7% (1.1 cents/litre). Wet weather
experienced across the prairies caused road bans to be in place longer than
normal and reduced sales volumes. Heating sales volumes declined by 7%
(7 million litres) and were generally impacted by warmer weather, particularly
in Eastern Canada, and customer conservation in response to a 17% increase in
average wholesale propane costs over the prior year period. Heating degree
days during the second quarter were on average 11% warmer across Canada than
the prior year period and the comparable last five year period average. Auto
propane sales volumes declined by 14% (8 million litres), consistent with auto
propane market decline trends. Propane sales margins averaged 15.4 cents per
litre, down 7% from the prior year period, reflecting lower margin performance
for all end use applications. Other services gross profit reached
$12.1 million in the second quarter, an increase of $2.7 million over the
prior year period due to $1.6 million generated from SGL and higher premiums
realized from fixed price sales programs.
Volume and Gross Profit by End Use Market Segment
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Three Months Ended June 30
2005 2004
-------------------------------------------------
End Use Gross Gross
Applications: Volume(1) Profit(2) Volume(1) Profit(2)
-------------------------------------------------
Residential 26 8.8 28 10.0
Commercial 54 10.7 57 12.2
Agricultural 12 1.2 14 1.4
Industrial 144 17.4 145 18.7
Automotive 50 6.0 58 7.4
Other Services - 12.1 - 9.4
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286 56.2 302 59.1
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Average Margin(3) 15.4 16.5
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Six Months Ended June 30
2005 2004
-------------------------------------------------
End Use Gross Gross
Applications: Volume(1) Profit(2) Volume(1) Profit(2)
-------------------------------------------------
Residential 102 33.6 107 34.8
Commercial 178 34.5 188 36.6
Agricultural 46 4.8 49 5.0
Industrial 358 40.5 369 42.1
Automotive 87 10.8 103 12.4
Other Services - 24.6 - 19.3
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771 148.8 816 150.2
-------------------------------------------------
Average Margin(3) 16.1 16.0
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Volume and Gross Profit by Region
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Three Months Ended June 30
2005 2004
-------------------------------------------------
Gross Gross
Regions: Volume(1) Profit(2) Volume(1) Profit(2)
-------------------------------------------------
Atlantic 24 7.0 25 6.1
Quebec 51 10.8 52 10.5
Ontario 66 14.7 68 13.9
Sask/Man 33 4.8 38 5.4
AB/NWT/YK 62 10.2 69 14.1
BC 50 8.7 50 9.1
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286 56.2 302 59.1
-------------------------------------------------
Average Margin(3) 15.4 16.5
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Six Months Ended June 30
2005 2004
-------------------------------------------------
Gross Gross
Regions: Volume(1) Profit(2) Volume(1) Profit(2)
-------------------------------------------------
Atlantic 62 17.3 63 16.9
Quebec 133 26.0 143 26.3
Ontario 184 42.3 191 42.3
Sask/Man 114 14.4 118 15.2
AB/NWT/YK 165 28.2 185 28.7
BC 113 20.6 116 20.8
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771 148.8 816 150.2
-------------------------------------------------
Average Margin(3) 16.1 16.0
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(1) Volume of retail propane sold (millions of litres)
(2) Millions of dollars
(3) Average retail propane sale margin (cents per litre)
Cash operating, administrative and capital tax costs of $45.8 million
increased by 6% ($2.7 million) over the prior year period due to higher fuel
delivery and equipment maintenance expenses, a $0.5 million loss due to a fire
at a facility, and a $0.4 million non-recurring property tax refund received
in the prior year period. Maintenance capital expenditures of $0.9 million
were comparable to the prior year period.
ERCO Worldwide
ERCO Worldwide generated operating distributable cash flow of
$21.8 million, down $0.6 million (3%) from the prior year period. The impact
of lower chemical sales from existing operations and reduced technology
royalty revenues were partially offset by reduced maintenance capital
expenditures and $2.3 million of operating distributable cash flow generated
by the Port Edwards chloralkali/potassium facility acquired on June 7, 2005.
Condensed operating results for the three and six month periods ended June 30,
2005 and 2004 are provided below:
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(millions of
dollars except Three Months Ended Six Months Ended
per metric June 30 June 30
tonne amounts) 2005 2004 2005 2004
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Revenue $ per MT $ per MT $ per MT $ per MT
Chemical 94.0 537 92.3 573 184.4 544 179.6 570
Technology 6.7 38 6.3 39 12.6 37 16.3 52
Cost of Sales
Chemical (49.1) (281) (47.9) (298) (96.5) (285) (91.9) (292)
Technology (3.7) (21) (1.9) (11) (6.5) (19) (8.6) (27)
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Gross Profit 47.9 273 48.8 303 94.0 277 95.4 303
Less: Cash
operating, admin
& cash tax costs (25.0) (143) (24.7) (153) (48.2) (142) (48.9) (155)
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Cash generated
from operations
before changes in
net working
capital 22.9 130 24.1 150 45.8 135 46.5 148
Maintenance
capital
expenditures (1.1) (6) (1.7) (11) (2.0) (6) (2.3) (7)
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Operating
distributable
cash flow 21.8 124 22.4 139 43.8 129 44.2 141
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Chemical volumes
sold (thousands
of metric tonnes) 175 161 339 315
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Chemical sales gross profit of $44.9 million increased by $0.5 million
over the prior year period. The Port Edwards facility contributed $3.4 million
of gross profit since its acquisition through total chemical sales of
17,500 tonnes. Chemical sales volumes from existing operations were 2% lower
than prior year period levels while sodium chlorate gross profit/tonne
increased by 1%. The average chemical revenue and cost of sales per tonne
statistics declined in the second quarter from the prior year period as a
result of the addition of potassium/chloralkali product sales from Port
Edwards which have lower average selling and production costs than ERCO
Worldwide's existing product mix. Technology gross profit of $3.0 million,
declined by $1.4 million from the prior year period due to normal course
royalty license expirations and due to project revenue recognized in the prior
year period.
Cash operating, administrative and tax costs were $25.0 million in the
second quarter and were comparable to the prior year period. Port Edwards
operating costs were $1.1 million since its acquisition. This was offset by
lower overhead costs associated with exiting the calcium hypochlorite business
in the third quarter of 2004. Maintenance capital expenditures of $1.1 million
were down $0.6 million from the prior year period due mainly to timing and are
anticipated to be in the $8 million to $9 million range for 2005.
Growth capital expenditures on the five year cell replacement program
were $1.9 million during the second quarter ($14.8 million cumulatively). The
project is approximately 50% complete and is anticipated to be completed over
the next three years. Improvements in cell design are yielding an approximate
7% increase in electrical efficiency. ERCO Worldwide continues to focus on
opportunities to optimize its production costs across its network of eight
sodium chlorate plants in order to remain one of the lowest cost producers in
North America. Construction of the 55,000 tonne sodium chlorate plant in Chile
continued on time and on budget. The plant is scheduled to start up in
mid-2006 at a cost of $65 million and will provide CMPC Celulosa S.A. with a
long term sodium chlorate supply to its three pulp mills. Expenditures of
$5.0 million were incurred during the quarter ($9.0 million cumulatively).
Remaining construction costs are anticipated to be funded from existing
revolving term bank credit facilities.
On June 7, 2005, ERCO Worldwide acquired the Port Edwards, Wisconsin
chloralkali/potassium facility from an affiliate of Occidental Chemical
Corporation, for $22.4 million (US$17.9 million) on a debt free basis. This
acquisition cost is lower than the previously announced estimate of
US$29.5 million due mainly to accounting rules which exclude planned
transitional capital expenditures and working capital not acquired directly
through the acquisition. The Port Edwards facility is the second largest
producer of potassium products in North America and has a strong competitive
position and track record of stable cash flow. The acquisition is expected to
provide ERCO Worldwide with the opportunity to profitably leverage its
existing chloralkali production and sales capability and diversify its product
line into potassium products which are used in making agricultural chemicals,
soaps, detergents, de-icing chemicals, and as an electrolyte in alkaline
batteries. ERCO Worldwide anticipates incurring $6.5 million of capital
expenditures over the next 18 months to upgrade certain operating processes at
the Port Edwards facility. The acquisition cost and the anticipated cost of
operating process upgrades are considered to be growth capital in nature and
will be included when incurred in "other capital expenditures" on the Interim
Consolidated Statement of Cash Flows and excluded from the calculation of
distributable cash flow.
Winroc
Winroc generated operating distributable cash flow of $6.8 million in the
second quarter, an increase of 62% ($2.6 million) over the comparable prior
year period as the impact of higher sales volumes and lower maintenance
capital expenditures were partially offset by higher operating costs.
Condensed operating results for the three and six month periods ended June 30,
2005 are provided below. The prior year periods include Winroc results, from
its date of acquisition on June 11, 2004. The 2004 prior year period results
are also provided below for comparative purposes and are not included in the
Interim Consolidated Financial Statements.
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Three Months Ended Six Months Ended June 11-
June 30 June 30 June 30
(millions of dollars) 2005 2004 2005 2004 2004
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Distribution sales gross
profit 28.7 19.8 49.6 37.6 4.6
Direct sales gross profit 1.0 1.3 1.8 2.1 0.3
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Gross Profit 29.7 21.1 51.4 39.7 4.9
Less: Cash operating,
admin & cash tax costs (21.4) (14.3) (37.4) (27.7) (3.1)
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Cash generated from
operations before changes
in net working capital 8.3 6.8 14.0 12.0 1.8
Capital expenditures, net (1.5) (2.6) (2.8) (4.8) (0.4)
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Operating distributable
cash flow 6.8 4.2 11.2 7.2 1.4
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Distribution sales gross profit reached $28.7 million in the second
quarter, an increase of 45% ($8.9 million) over the prior year period. Higher
sales volumes contributed to improved gross profit performance as drywall
sales, which are an indicator of overall sales volumes, increased by 36%. Two
thirds of the increase in sales volumes was driven by the expansion of
Winroc's distribution network into Ontario through the acquisitions of
Interior Building Supplies ("IBS") in December 2004 and Leon's Insulation Inc.
("Leon's") on April 11, 2005. The remaining increase in sales volumes was
generated from Winroc's distribution operations in the United States. Average
sales margins were comparable to the prior year period. Cash operating,
administration and tax costs were $21.4 million in the quarter, an increase of
50% ($7.1 million) over the prior year period, due to increased overhead costs
associated with the growth in Winroc's distribution network, higher variable
delivery costs associated with the growth in sales volumes, and increased fuel
costs. Maintenance capital expenditures were $1.5 million in the second
quarter, down $1.1 million from the prior year period as expenditures in the
prior year period were increased to support pending distribution sales volume
growth.
On April 11, 2005, Winroc acquired Leon's, for $31.7 million on a debt
free basis. Pursuant to the acquisition agreement, Winroc may be obligated to
pay up to $5.0 million of additional consideration over the next five years
based on Leon's profitability. The acquisition cost and any additional
consideration paid will be considered growth capital and excluded from the
calculation of distributable cash flow. The acquisition cost is less than the
previously announced estimate of $48.5 million due mainly to seasonal
reductions in Leon's net working capital and accounting rules which require
contingent additional consideration described above, to be capitalized at the
time payment is made. Leon's was founded in 1956 and is Ontario's largest
distributor of drywall, insulation and associated products. Its two
distribution locations servicing the Greater Toronto Area, combined with the
three IBS distribution locations in South Western Ontario acquired in December
2004, provide Winroc with a leading market presence in Ontario, which is the
largest regional market in Canada.
Superior Energy Management ("SEM")
Effective January 1, 2005, SEM began to capitalize customer acquisition
costs and amortize capitalized costs on a straight line basis over the term of
the customer contract. Previously, customer acquisition costs were expensed at
the time natural gas deliveries commenced under new contracts. This change in
accounting policy results in improved matching of up-front contract
acquisition costs with the economic benefits derived from gas sales over the
term of the customer contract and has been retroactively applied. Capitalized
costs are treated as "growth capital" and the amortization of capitalized
costs are deducted from distributable cash flow. This change in accounting
increased SEM's operating distributable cash flow for the three month periods
ended June 30, 2005 and 2004 by $1.4 million and $0.1 million, respectively
(six month periods ended June 30, 2005 and 2004 by $2.3 million and
$0.5 million, respectively) as detailed below (See Note 2(b) to the Interim
Consolidated Financial Statements):
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Three Months Ended Six Months Ended
June 30 June 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Operating distributable cash flow,
previous accounting policy $ - $ 1.7 $ 0.7 $ 3.7
Capitalized customer acquisition
costs 2.0 0.4 3.4 1.0
Amortization of capitalized costs (0.6) (0.3) (1.1) (0.5)
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Operating distributable cash flow,
new accounting policy $ 1.4 $ 1.8 $ 3.0 $ 4.2
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After giving retroactive effect to the change in accounting for customer
acquisition costs, SEM's condensed operating results for the three and six
month periods ended June 30, 2005 and 2004 are provided below:
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(millions of Three Months Ended Six Months Ended
dollars except June 30 June 30
per GJ amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
cents cents cents cents
per GJ per GJ per GJ per GJ
------ ------ ------ ------
Gross profit 3.4 36.6 3.2 48.3 6.8 37.8 6.9 52.3
Cash operating,
admin. & selling
costs (2.0) (21.5) (1.4) (20.3) (3.8) (21.1) (2.7) (20.3)
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Operating
distributable
cash flow 1.4 15.1 1.8 28.0 3.0 16.7 4.2 32.0
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Gigajoules of
natural gas
sold (millions) 9 7 18 13
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SEM generated operating distributable cash flow of $1.4 million in the
second quarter, a decrease of $0.4 million from the prior year period. Sales
margins in the second quarter averaged 36.6 cents per GJ, down 24% from the
prior year period as high natural gas prices experienced since the fall of
2004, have compressed large volume, commercial/industrial fixed price margins
and encouraged consumers in this segment to purchase their gas requirements on
a lower margin, floating rate basis. Residential and small commercial customer
growth continued in the second quarter and contributed to the 29% year over
year growth in sales volumes at attractive margins. Operating and
administration costs increased by $0.6 million over the prior year period due
to increased amortization of customer contract acquisition costs and higher
overhead costs associated with increased sales activity levels. The majority
of fixed price sales contracts entered into during the quarter were for a five
year term. The average remaining term of SEM's sales contracts at June 30,
2005 was 37 months.
Corporate
Corporate costs were $1.8 million in the second quarter, and were
comparable to the prior year period. Cash taxes were limited to federal and
provincial capital taxes of $0.9 million, similar to the prior year period, as
income taxes were fully deferred. Capital taxes have been allocated to
Superior's four business segments based on net taxable capital deployed.
Interest expense on revolving term bank credits and term loans was
$5.7 million, an increase of $2.1 million from the prior year period, due to
increased average borrowing levels used to finance growth capital expenditures
and increased floating interest rates. Convertible Debenture interest was
$2.1 million, down $1.6 million from the prior year period, due to the
conversion of $101.5 million of Debentures into 5.2 million trust units since
June 30, 2004, partially offset by interest accrued on the $175 million, 5.75%
Debentures that were issued on June 14, 2005.
Liquidity and Capital Resources
Superior's net working capital requirements, excluding net working
capital acquired through the acquisition of Leon's and Port Edwards, decreased
in the second quarter by $39.7 million ($58.2 million year to date),
principally due to seasonal declines in Superior Propane's working capital
requirements. Working capital requirements for Superior Propane peak
seasonally during the first quarter and then decline through the second and
third quarters before building again in the fall, consistent with the seasonal
demand profile of its heating end use customers. Similarly, Superior's
revolving trade accounts receivable sales program, which is used to finance a
portion of its net working capital requirements, declined by $36.7 million
during the second quarter ($6.7 million year to date). Proceeds from the sale
of receivables were $93.3 million at June 30, 2005 (June 30, 2004 -
$85.6 million), compared to $100.0 million at December 31, 2004, and are an
off-balance sheet obligation. As at June 30, 2005, Superior had undrawn
revolving term bank lines of $228.1 million.
Superior's revolving term bank credits and term loans were $321.7 million
at June 30, 2005, down $124.5 million from December 31, 2004. The main reasons
for the reduction in debt were the receipt of net proceeds of $167.5 million
received from the issuance by the Fund of the 5.75% Debentures, combined with
$51.5 million realized from the reduction in net working capital net of the
decrease in receivable sales program amounts, offset by cash growth capital
expenditures of $76.1 million and $13.9 million of debt taken back by vendors
as part of the SGL and Leon's acquisitions.
Convertible Debentures of the Fund outstanding at June 30, 2005 were
$246.0 million, an increase of $130.0 million from December 31, 2004, due to
the issuance on June 14, 2005 of $175 million, 5.75% Debentures due December
31, 2012, offset by the conversion of $42.2 million Series 1 and 2, 8%
Debentures into 2.2 million trust units. The 5.75% Debentures are convertible
into trust units at $36.00 per trust unit. Issuance of the 5.75% Debentures
strengthened Superior's balance sheet by extending the repayment profile of
its debt, improving its senior debt leverage ratio, and freeing up borrowing
capacity under its revolving term bank lines. At June 30, 2005, senior debt
(including off-balance sheet accounts receivable sales program amounts) was
1.6 times earnings before interest, taxes and amortization for the last 12
month period (including acquisitions on a pro forma basis), calculated in
accordance with its debt covenants (2.2 times at December 31, 2004). Including
the Fund's Convertible Debentures, Superior's total leverage ratios improved
from 2.7 times at December 31, 2004 to 2.6 times at June 30, 2005. At June 30,
2005, 64% of Superior's revolving term bank credits, term loans and
convertible Debentures were not repayable for at least 5 years.
Unitholders' Capital
The weighted average number of trust units outstanding during the second
quarter was 77.7 million trust units, an increase of 8% (5.5 million trust
units) over the prior year period due to the Debenture conversions described
previously and the issue of 0.1 million trust units resulting from the
exercise of trust unit warrants in 2005.
As at June 30, 2005 and December 31, 2004, the following trust units, and
securities convertible into trust units, were outstanding:
-------------------------------------------------------------------------
June 30, 2005 December 31, 2004
Convertible Trust Convertible Trust
(millions) Securities Units Securities Units
-------------------------------------------------------------------------
Trust units outstanding 78.2 75.9
Series 1, 8% Debentures
(convertible at $16 per
trust unit) $ 10.2 0.6 $ 13.9 0.9
Series 2, 8% Debentures
(convertible at $20 per
trust unit) $ 64.1 3.2 $102.6 5.1
Series 1, 5.75%Debentures
(convertible at $36 per
trust unit) $175.0 4.9
Warrants (exercisable (at)
$20 per trust unit) 3.0 3.0 3.1 3.1
-------------------------------------------------------------------------
Trust units outstanding, and
issuable upon conversion of
Debenture and Warrant securities 89.9 85.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The trust unit warrants are exercisable until May 2008 and represent a
potential $60.0 million source of future equity capital. In addition, as at
June 30, 2005, there were 1,011,000 trust unit options outstanding (December
31, 2004 - 960,000 trust units) with a weighted average exercise price of
$22.06 per trust unit. The number of trust units issued upon exercise of the
trust unit options is equal to the growth in the value of the options at the
time the options are exercised, (represented by the market price less the
exercise price) times the number of options exercised, divided by the current
market price of the trust units.
Foreign Currency Hedging
SEM contracts a portion of its fixed price natural gas purchases in US
dollars and enters into forward US dollar purchase contracts to create an
effective Canadian dollar fixed price purchase cost. ERCO Worldwide enters
into US dollar forward sales contracts on an ongoing basis to mitigate the
impact of foreign exchange fluctuations on sales margins on production from
its Canadian plants that is sold in US dollars. Interest expense on Superior's
US dollar denominated debt is also used to mitigate the impact of foreign
exchange fluctuations on its US dollar distributable cash flow. Superior's US
dollar denominated debt acts as a balance sheet hedge against its US dollar
denominated net assets. Superior hedges its net US dollar future cash flows
with external third party contracts after first matching internally SEM's
forward US dollar purchase requirements against ERCO Worldwide's US dollar
revenues where possible.
As at June 30, 2005, SEM had hedged approximately 100% of its US dollar
natural gas purchase obligations and ERCO Worldwide had hedged 69%, 79%, 53%,
and 10% of its estimated US dollar revenue stream for the remainder of 2005,
2006, 2007, and 2008 respectively, as shown in the table below. (See Note 8(i)
to the Interim Consolidated Financial Statements).
-------------------------------------------------------------------------
(US$ millions) 2005 2006 2007 2008 2009 2010 Total
-------------------------------------------------------------------------
SEM - US $ forward
purchases 71.3 113.5 85.0 70.4 62.2 11.3 413.7
ERCO - US $ forward
sales (45.6) (103.1) (69.0) (12.6) - - (230.3)
-------------------------------------------------------------------------
Net US $ forward
purchases/(sales) 25.7 10.4 16.0 57.8 62.2 11.3 183.4
-------------------------------------------------------------------------
SEM - Average US $
forward purchase
rate 1.29 1.29 1.25 1.26 1.26 1.22 1.27
ERCO - Average US $
forward sales
rate 1.37 1.29 1.24 1.23 - - 1.27
-------------------------------------------------------------------------
Net average
external US$/Cdn$
exchange rate 1.32 1.29 1.25 1.25 1.26 1.22 1.27
-------------------------------------------------------------------------
Quarterly Financial and Operating Information(1)
-------------------------------------------------------------------------
(millions of dollars
except per trust 2005 Quarters 2004 Quarters 2003 Quarters
unit amounts) Second First Fourth Third Second First Fourth Third
-------------------------------------------------------------------------
Propane sales
volumes (millions
of litres) 286 485 438 290 302 514 467 298
Chemical sales
volumes (thousands
of metric tonnes) 175 164 170 163 161 155 165 138
Natural gas sales
volumes
(millions of GJs) 9 9 7 7 7 7 6 6
Gross profit 137.2 163.8 155.2 130.2 116.0 141.4 137.5 95.0
Net earnings 18.9 41.5 33.5 20.8 21.1 37.0 27.1 11.6
Per basic trust
unit $0.24 $0.54 $0.45 $0.28 $0.29 $0.53 $0.39 $0.18
Per diluted trust
unit $0.24 $0.52 $0.44 $0.28 $0.29 $0.49 $0.40 $0.18
Distributable cash
flow 29.9 63.7 55.8 36.7 31.4 60.5 49.6 17.9
Per basic trust
unit $0.38 $0.83 $0.73 $0.50 $0.44 $0.86 $0.72 $0.27
Per diluted trust
unit $0.38 $0.79 $0.69 $0.48 $0.43 $0.77 $0.68 $0.27
Net working
capital(2) 64.3 54.9 97.9 62.9 36.2 (3.8) 36.9 32.5
-------------------------------------------------------------------------
(1) Restated to give retroactive effect of change in accounting for
natural gas customer acquisition costs. (See Note 2(b) to the Interim
Consolidated Financial Statements).
(2) Net working capital reflects amounts as at the quarter end and is
comprised of accounts receivable and inventories, less accounts
payable and accrued liabilities.
Outlook
For 2005, we anticipate distributable cash flow per trust unit to be
comparable to the $2.51 per trust unit generated in 2004. Increased
distributable cash flow is anticipated from a full year's contribution from
the acquisition of Winroc in June 2004 and Winroc's subsequent acquisitions of
IBS and Leon's and ERCO's acquisition of the Port Edwards
chloralkali/potassium facility. Superior Propane's distributable cash flow is
anticipated to be comparable to 2004. Increased distributable cash flow is
anticipated to be offset by the dilutive impact of continued Debenture
conversions and warrants exercised into trust units.
Over the longer term, the Fund plans to continue its disciplined
diversification strategy by taking advantage of profitable growth
opportunities within each division and to acquire other businesses that have
risk profiles appropriate for an income fund structure. Acquisitions must be
accretive to unitholder distributions and be financed in a manner that
maintains Superior's existing financial strength.
-------------------------------------------------------------------------
Analyst Conference Call: Superior Plus will be conducting a conference
call and webcast for investors, analysts, brokers and media representatives to
discuss the 2005 Second Quarter Results at 10:30 a.m. EST (8:30 a.m. MST) on
Thursday, August 11, 2005. To participate dial: 1-800-814-4853. A recording of
the call will be available for replay until midnight, August 18, 2005 by
dialing: 877-289-8525 and entering pass code 21128642 followed by the No. key.
Internet users can listen to the call live, or as an archived call, on
Superior's website at: www.superiorplus.com under the "Events and
Presentations" section.
SUPERIOR PLUS INCOME FUND
Consolidated Balance Sheets
-------------------------------------------------------------------------
June 30 December 31
(unaudited, millions of dollars) 2005 2004
-------------------------------------------------------------------------
Assets (Restated-
Note 2(b))
Current Assets
Accounts receivable (Note 4) 162.9 165.0
Inventories 86.4 93.6
-------------------------------------------------------------------------
249.3 258.6
Property, plant and equipment 747.5 741.0
Intangible assets 59.9 49.9
Goodwill 541.8 502.6
-------------------------------------------------------------------------
1,598.5 1,552.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current Liabilities
Accounts payable and accrued liabilities 185.0 160.7
Distributions payable to Unitholders and
Debentureholders 17.3 17.0
-------------------------------------------------------------------------
202.3 177.7
Revolving term bank credits and term loans 321.7 446.2
Convertible unsecured subordinated
debentures (Note 5) 246.0 116.0
Future employee benefits 19.1 18.6
Future income taxes 120.6 121.7
-------------------------------------------------------------------------
Total Liabilities 909.7 880.2
Unitholders' Equity
Unitholders' capital (Note 6) 1,170.7 1,122.0
Retained earnings from operations 322.7 262.3
Accumulated distributions on trust unit equity (803.6) (711.1)
-------------------------------------------------------------------------
Deficit (480.9) (448.8)
Currency translation account (1.0) (1.3)
-------------------------------------------------------------------------
Total Unitholders' Equity 688.8 671.9
-------------------------------------------------------------------------
1,598.5 1,552.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
SUPERIOR PLUS INCOME FUND
Consolidated Statements of Net Earnings and Deficit
-------------------------------------------------------------------------
(unaudited, millions of Three Months Ended Six Months Ended
dollars except per trust June 30 June 30
unit amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
(Restated- (Restated-
Note 2(b)) Note 2(b))
Revenues 460.2 310.6 972.3 686.2
Cost of products sold 323.0 194.6 671.3 428.8
-------------------------------------------------------------------------
Gross profit 137.2 116.0 301.0 257.4
-------------------------------------------------------------------------
Expenses
Operating and
administrative 95.7 71.5 184.8 143.9
Amortization of property,
plant and equipment 18.5 16.6 36.5 34.5
Amortization of intangible
assets 1.4 1.4 2.7 2.8
Interest on revolving
term bank credits and
term loans 5.7 3.6 10.9 7.0
Interest on convertible
unsecured subordinated
debentures 2.1 3.7 4.0 7.7
Amortization of
convertible debenture
issue costs 0.3 0.4 0.6 0.8
Management internalization
costs (Note 7) 1.3 2.6 1.3 2.6
Income tax recovery of
Superior (6.7) (4.9) (0.2) -
-------------------------------------------------------------------------
118.3 94.9 240.6 199.3
-------------------------------------------------------------------------
Net Earnings 18.9 21.1 60.4 58.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit, Beginning
of Period (453.2) (395.9) (448.8) (382.1)
Net earnings 18.9 21.1 60.4 58.1
Distributions to
Unitholders (46.6) (40.0) (92.5) (90.8)
-------------------------------------------------------------------------
Deficit, End of Period (480.9) (414.8) (480.9) (414.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per trust
unit, basic (Note 6) $0.24 $0.29 $0.78 $0.81
Net earnings per trust
unit, diluted (Note 6) $0.24 $0.29 $0.77 $0.78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
SUPERIOR PLUS INCOME FUND
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
(unaudited, millions June 30 June 30
of dollars) 2005 2004 2005 2004
-------------------------------------------------------------------------
(Restated- (Restated-
Note 2(b)) Note 2(b))
Operating Activities
Net earnings 18.9 21.1 60.4 58.1
Items not affecting cash:
Amortization of property,
plant and equipment,
intangible assets and
convertible debenture
issue costs 20.2 18.4 39.8 38.1
Amortization of natural
gas customer
acquisition costs
(Note 2(b)) 0.6 0.3 1.1 0.5
Trust unit incentive
plan compensation
expense (recovery) 0.6 (1.7) 0.3 (0.8)
Future income tax
recovery of Superior (7.6) (5.8) (2.0) (1.7)
-------------------------------------------------------------------------
Cash generated from
operations before natural
gas customer acquisition
costs and changes in
working capital 32.7 32.3 99.6 94.2
Natural gas customer
acquisition costs
capitalized (Note 2(b)) (2.0) (0.4) (3.4) (1.0)
Decrease in non-cash
operating working
capital items 39.7 14.5 58.2 47.6
-------------------------------------------------------------------------
Cash flows from operating
activities 70.4 46.4 154.4 140.8
-------------------------------------------------------------------------
Investing Activities
Maintenance capital
expenditures, net (3.5) (3.2) (6.2) (4.4)
Other capital
expenditures, net (7.0) (1.3) (10.3) (2.2)
Acquisitions (Note 3) (51.1) (104.2) (65.8) (104.2)
-------------------------------------------------------------------------
Cash flows from investing
activities (61.6) (108.7) (82.3) (110.8)
-------------------------------------------------------------------------
Financing Activities
Revolving term bank
credits and term loans (96.6) 133.0 (144.0) 65.4
Net proceeds from sale
of accounts receivable (36.7) (39.4) (6.7) (14.4)
Distributions to
Unitholders (46.6) (40.0) (92.5) (90.8)
Receipt of management
internalization loans
receivable (Note 7) 1.3 2.6 1.3 2.6
Net proceeds from issue
of 5.75% Series 1
convertible unsecured
subordinated debentures
(Note 5) 167.5 - 167.5 -
Proceeds from exercise
of trust unit warrants 2.3 6.1 2.3 7.2
-------------------------------------------------------------------------
Cash flows from financing
activities (8.8) 62.3 (72.1) (30.0)
-------------------------------------------------------------------------
Change in Cash - - - -
-------------------------------------------------------------------------
Cash at Beginning and End
of Period - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
Notes to Interim Consolidated Financial Statements
(tabular amounts in Canadian millions of dollars, unless noted otherwise,
except per trust unit amounts)
1. Distributable Cash Flows
Three Months Ended Six Months Ended
June 30 June 30
2005 2004 2005 2004
-------------------------------------------------------------------------
(Note 2(b)) (Note 2(b))
Cash generated from
operations before natural
gas customer acquisition
costs and changes in
working capital 32.7 32.3 99.6 94.2
Add: Management
internalization costs
(Note 7) 1.3 2.6 1.3 2.6
Less: Amortization of
natural gas customer
acquisition costs (0.6) (0.3) (1.1) (0.5)
Maintenance capital
expenditures, net (3.5) (3.2) (6.2) (4.4)
-------------------------------------------------------------------------
Distributable Cash Flow 29.9 31.4 93.6 91.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow
per trust unit, basic
(Note 6) $ 0.38 $ 0.44 $ 1.21 $ 1.29
Distributable cash flow
per trust unit, diluted
(Note 6) $ 0.38 $ 0.43 $ 1.17 $ 1.19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow of the Superior Plus Income Fund (the "Fund")
available for distribution to its unitholders ("Unitholders"), is equal
to cash generated from operations before natural gas customer acquisition
costs and changes in working capital, less amortization of natural gas
customer acquisition costs and maintenance capital expenditures.
Maintenance capital expenditures are equal to capital expenditures
incurred to sustain the ongoing operating capacity of Superior Plus Inc.
("Superior") and are deducted from the calculation of distributable cash
flow. Acquisitions and other capital expenditures are incurred to expand
the capacity of Superior's operations or to increase its profitability
are excluded from the calculation of distributable cash flow.
Distributable cash flow is the main performance measure used by
management and investors to evaluate Fund and business segment
performance. Readers are cautioned that distributable cash flow is not a
defined performance measure under Canadian generally accepted accounting
principles ("GAAP"), and that distributable cash flow cannot be assured.
The Fund targets to pay out substantially all of its ongoing sustainable
distributable cash flow through regular monthly distributions. The Fund's
calculation of distributable cash flow may differ from similar
calculations used by comparable entities.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited Interim Consolidated Financial Statements have
been prepared according to Canadian GAAP applied on a consistent basis
and include the accounts of the Fund and its wholly owned subsidiary,
Superior Plus Inc. ("Superior"), and Superior's subsidiaries. Certain
information and disclosures included in annual financial statement notes
have been condensed and updated. The accounting principles applied are
consistent with those as set out in the Fund's annual financial
statements for the year ended December 31, 2004, except for the change in
accounting policy as described below. These financial statements and
notes thereto should be read in conjunction with the Fund's financial
statements for the year ended December 31, 2004. All significant
transactions and balances (including the Shareholder Notes) between the
Fund, Superior and Superior's subsidiaries have been eliminated on
consolidation.
In the opinion of Management, the accompanying unaudited Interim
Consolidated Financial Statements include all adjustments (of a normal
recurring nature) necessary to present fairly the consolidated financial
position of the Fund as at June 30, 2005 and December 31, 2004 and the
consolidated results of its operations for the three and six month
periods ended June 30, 2005 and 2004.
(b) Change in Accounting Policy
Effective January 1, 2005, the Fund retroactively adopted a new
accounting policy for Superior Energy Management's natural gas customer
acquisition costs. Previously customer acquisition costs were expensed at
the time natural gas deliveries commenced under new contracts. Under the
new policy, customer acquisition costs are capitalized and amortized on a
straight-line basis over the term of the customer contract. This new
policy provides improved matching of up-front contract acquisition costs
with the economic benefits derived from gas sales over the term of the
customer contract. The cumulative effect of the change in policy on the
balance sheet as at December 31, 2004 was to increase intangible assets
by $3.1 million, increase the future income tax liability by $1.1 million
and increase retained earnings from operations by $2.0 million.
For the three months ended June 30, 2004, the effect of the new policy on
distributable cash flow resulted in an increase of $0.1 million (six
months ended June 30, 2004 - $0.5 million). For the three months ended
June 30, 2004 the effect on the statement on net earnings was to reduce
operating and administrative costs by $0.1 million (six months ended June
30, 2004 - $0.5 million) and increase future income tax expense by
$0.1 million (six months ended June 30, 2004 - $0.2 million), resulting
in an increase in net earnings of $NIL (six months ended June 30, 2004 -
$0.3 million). For the three months ended June 30, 2004 basic and diluted
distributable cash flow per trust unit increased $0.01 to $0.44 and $0.43
per trust unit respectively (six months ended June 30, 2004 an increase
of $0.01 to $1.29 and $1.19 per trust unit respectively). There was no
impact on basic or diluted net earnings per trust unit.
(c) Customer Acquisition Costs
Superior Energy Management
Costs incurred to acquire natural gas customer contracts are capitalized
and recorded as intangible assets at the time the cost is incurred. The
costs are recognized into net earnings as an operating and administrative
expense and deducted from distributable cash flow over the term of the
underlying contracts.
(d) Revenue Recognition
Superior Propane
Revenues from sales are generally recognized at the time of delivery, or
when related services are performed. Amounts billed to customers for
shipping and handling are classified as revenues, with the related
shipping and handling costs included in cost of goods sold. Approximately
50% of Superior Propane's revenues are heating related and 50% are
related to economic activities. Propane sales typically peak in the first
quarter when approximately one-third of annual propane sales volumes and
gross profits are generated due to the demand from heating end use
customers. They then decline through the second and third quarters rising
seasonally again in the fourth quarter with heating demand. Similarly,
net working capital levels are typically at seasonally high levels at the
end of the first quarter, and normally decline to seasonally low levels
in the second and third quarters. Net working capital levels are also
significantly influenced by wholesale propane prices.
ERCO Worldwide
Revenues from chemical sales are recognized as products are shipped.
Revenues associated with the construction of chlorine dioxide generators
are recognized using the percentage of completion method based on cost
incurred compared to total estimated cost.
Winroc
Revenue is recognized when the products are delivered to the customer.
Revenue is stated net of discounts and rebates granted. Purchase rebates
are recognized as a reduction of cost of goods sold when the related
performance is completed and the inventory is sold. Vendor rebates that
are contingent upon Winroc completing a specified level of purchases are
recognized as a reduction of cost of goods sold based on a systematic and
rational allocation of the cash consideration to each of the underlying
transactions that results in progress toward earning that rebate or
refund, assuming that the rebate can be reasonably estimated and it is
probable that the specified target will be obtained. Otherwise, the
rebate is recognized as the milestone is achieved and the inventory is
sold.
Winroc's sales typically peak during the second and third quarters with
the seasonal increase in building and remodeling activities. They then
decline through the fourth and first quarters. Similarly, net working
capital levels are typically at seasonally high levels during the second
and third quarter, and normally decline to seasonally low levels in the
fourth and first quarters.
Superior Energy Management
Revenues are recognized as gas is delivered to local natural gas
distribution companies. Costs associated with balancing the amount of gas
used by SEM's customers with the volumes delivered by SEM to the local
distribution companies are recognized as period costs.
3. Acquisitions
The following acquisitions were completed by Superior during 2005 and
2004:
On June 7, 2005, ERCO acquired a chloralkali potassium business in Port
Edwards, Wisconsin for consideration of $22.4 million (the "Port Edwards"
acquisition).
On April 11, 2005, Winroc acquired the shares of Leon's Insulation Inc.
and associated entities (collectively "Leon's"), a distributor of
specialty walls and ceilings construction products for consideration of
$31.7 million of which $28.2 million was paid in cash (net of $5.3
million in cash acquired). Deferred consideration bears interest at the
prime bank rate and is repayable over a five year period. Additional
consideration of up to $5.0 million is contingently payable over a period
of five years based upon Leon's achieving specified financial targets.
Future payments will be treated as additional consideration as the
amounts become payable, with a corresponding increase to goodwill. The
allocation of the purchase price may be adjusted based on future
contingent payments or if additional information regarding the fair
values of assets and liabilities becomes available.
On February 2, 2005, Superior Propane acquired the business of Foster
Energy Corporation, a wholesale marketer of natural gas liquids, for
consideration of $25.6 million of which $14.6 million was paid in cash
(net of $2.3 million in cash acquired). Deferred consideration is payable
over a five year period and has been recorded at its fair market value of
$10.9 million, calculated by discounting future cash payments. Foster
Energy is now being operated under the trade name Superior Gas Liquids
("SGL").
On June 11, 2004, Superior acquired all of the shares of The Winroc
Corporation, Winroc Supplies Ltd. and Allroc Building Products Ltd.
(collectively "Winroc"), a distributor of specialty walls and ceilings
construction products in North America, for consideration of
$104.2 million.
Using the purchase method for acquisitions, Superior consolidated the
assets and liabilities from the acquisitions and included earnings as of
the closing dates. The consideration for these acquisitions has been
allocated as follows:
2005 2004
-------------------------------------------------------------------------
Superior
ERCO's Winroc's Propane's
Acquisition Acquisi- Acquisi- Total Acquisi-
of Port tion tion Acquisi- tion
Edwards of Leon's of SGL tions of Winroc
-------------------------------------------------------------------------
Cash consideration
paid 21.6 28.2 14.6 64.4 103.2
Transaction costs 0.8 0.5 0.1 1.4 1.0
-------------------------------------------------------------------------
Total cash
consideration 22.4 28.7 14.7 65.8 104.2
Deferred
consideration(1) - 3.0 10.9 13.9 -
-------------------------------------------------------------------------
Total consideration 22.4 31.7 25.6 79.7 104.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill - 16.2 22.7 38.9 52.5
Non-compete agreements - 2.0 1.3 3.3 -
Working capital, net 3.2 10.4 1.6 15.2 37.1
Property, plant and
equipment 22.1 3.1 - 25.2 18.2
Other liabilities (2.9) - - (2.9) (3.6)
-------------------------------------------------------------------------
22.4 31.7 25.6 79.7 104.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Deferred consideration are unsecured obligations and have been
included in revolving term bank credits and term loans on the Interim
Consolidated Balance Sheets.
4. Accounts Receivable
Superior sells, with limited recourse, certain trade accounts receivable
on a revolving basis to an entity sponsored by a Canadian chartered bank,
and has accounted for the sale in accordance with the CICA guidelines
relating to transfers of receivables. The accounts receivable are sold at
a discount to face value based on prevailing money market rates. Superior
has retained the servicing responsibility for the accounts receivable
sold and has therefore recognized a servicing liability. The level of
accounts receivable sold under the program fluctuates seasonally with the
level of accounts receivable. At June 30, 2005, net proceeds of
$93.3 million (December 31, 2004 - $100.0 million) had been received.
5. Convertible Unsecured Subordinated Debentures
The Fund has three issues of convertible unsecured subordinated
debentures (the "Debentures") outstanding, denoted as 8% Series 1, 8%
Series 2 and 5.75% Series 1 as follows:
Unamor- Total
8% 8% 5.75% tized Carrying
Series 1 Series 2 Series 1 Discount Value
-------------------------------------------------------------------------
Maturity date July 31, Nov. 1, Dec. 31,
2007 2008 2012
Fixed distribution rate 8.00% 8.00% 5.75%
Conversion price per
trust unit $ 16.00 $ 20.00 $ 36.00
-------------------------------------------------------------------------
Debentures outstanding
December 31, 2004 13.9 102.6 - (0.5) 116.0
Issuance of 5.75%
Series 1 Debentures on
June 14, 2005 175.0 (3.1) 171.9
Conversion of Debentures
and amortization of
discount (3.7) (38.5) - 0.3 (41.9)
-------------------------------------------------------------------------
Debentures outstanding
June 30, 2005 10.2 64.1 175.0 (3.3) 246.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quoted market value
June 30, 2005 20.5 101.3 182.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Debentures may be converted into trust units at the option of the
holder at any time prior to maturity and may be redeemed by the Fund in
certain circumstances. The Fund may elect to pay interest and principal
upon maturity or redemption by issuing trust units to a trustee in the
case of interest payments, and to the Debentureholders in the case of
payment of principal. The number of any trust units issued will be
determined based on market prices for the trust units at the time of
issuance.
6. Unitholders' Equity
Authorized
The Fund may issue an unlimited number of trust units. Each trust unit
represents an equal undivided beneficial interest in any distributions
from the Fund and in the net assets in the event of termination or wind-
up of the Fund. All trust units are of the same class with equal rights
and privileges.
Trust Units Equity
(millions)
-------------------------------------------------------------------------
Unitholders' equity, December 31, 2004
(Note 2(b)) 75.9 671.9
Conversion of Debentures - (8% Series 1 -
$3.7 million converted (at) $16 per trust
unit and 8% Series 2 - $38.5 million
converted (at) $20 per trust unit) 2.2 41.7
Exercise of warrants 0.1 2.3
Receipt of management internalization loans
receivable - 1.3
Conversion option on 5.75% Series 1 Debentures - 3.1
Trust unit incentive plan compensation expense - 0.3
Currency translation adjustment - 0.3
Net earnings - 60.4
Distributions to unitholders - (92.5)
-------------------------------------------------------------------------
Unitholders' equity, June 30, 2005 78.2 688.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unitholders' equity and deficit at June 30, 2005 and December 31, 2004
consists of the following components:
2005 2004
-------------------------------------------------------------------------
Unitholders' equity
Trust unit equity 1,160.1 1,114.5
Conversion feature on warrants and convertible
debentures 4.4 1.6
Contributed surplus 6.2 5.9
-------------------------------------------------------------------------
1,170.7 1,122.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit (Note 2(b))
Retained earnings from operations 322.7 262.3
Accumulated distributions on trust unit equity (803.6) (711.1)
-------------------------------------------------------------------------
(480.9) (448.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At June 30, 2005, the Fund had 3.0 million trust unit warrants
outstanding (December 31, 2004 - 3.1 million), exerciseable at $20 per
trust unit warrant. The trust unit warrants expire May 8, 2008.
The weighted average number of trust units used in the calculation of
basic net earnings per trust unit and distributable cash flow per trust
unit was 77.7 million trust units for the three months ended June 30,
2005 (2004 - 72.2 million) and 77.1 million for the six months ended June
30, 2005 (2004 - 71.3 million). The number of trust units used in the
calculation of diluted net earnings per trust unit and distributable cash
flow per trust unit, was calculated using 83.2 million trust units for
the three months ended June 30, 2005 (2004 - 82.6 million) and 83.1
million for the six months ended June 30, 2005 (2004 - 82.5 million). The
number of trust units used in the calculation of dilutive net earnings
and distributable cash flow per trust unit for the three months ended
June 30, 2005 includes the dilutive impact of the conversion of
Debentures resulting in 4.3 million trust units (2004 - 9.6 million), the
incremental dilutive impact due to the exercise of warrants 1.0 million
trust units (2004 - 0.6 million) and the incremental dilutive impact of
trust unit options of 0.2 million trust units (2004 - 0.2 million). The
number of trust units used in the calculation of dilutive net earnings
and distributable cash flow per trust unit for the six months ended June
30, 2004 includes the dilutive impact of the conversion of Debentures
resulting in 4.8 million trust units (2004 - 10.4 million), the
incremental dilutive impact due to the exercise of warrants 1.0 million
trust units (2004 - 0.6 million) and the incremental dilutive impact of
trust unit options 0.2 million trust units (2004 - 0.2 million).
7. Management Internalization Transaction
On May 8, 2003, Superior completed the internalization of its management
and administration agreements. The internalization process resulted in
the elimination of management incentive and administration fees effective
January 1, 2003. The funds paid to the Manager and Administrator to
terminate the contracts were immediately re-invested into trust units and
warrants.
As part of the internalization transaction, non-interest bearing loans
aggregating to $6.5 million were advanced to the executive officers and
were used to fund the purchase of 0.325 million trust units at $20 per
trust unit. The loans are to be repaid over a four-year period in the
form of annual retention bonuses. The repayment in the second quarter of
2005 was $1.3 million (2004 - $2.6 million). On an aggregate basis
$3.9 million in loans receivable have been repaid. The loans receivable
have not been recorded as an asset by Superior, but have been deducted
directly from equity.
8. Commitments
(i) Superior has entered into long-term forward contracts to buy US
dollars in order to hedge US dollar in-flows of ERCO Worldwide and
US dollar out-flows of SEM as follows:
Net US $ Purchases Conversion Rate
------------------ ---------------
2005 $25.7 1.32
2006 $10.4 1.29
2007 $16.0 1.25
2008 $57.8 1.25
2009 $62.2 1.26
2010 and thereafter $11.3 1.22
As at June 30, 2005, the net mark-to-market loss on long-term
foreign currency forward contracts was $4.3 million.
(ii) ERCO Worldwide has entered into a long-term agreement with CMPC
Celulosa S.A. ("CMPC"), a division of Empresas S.A. to supply sodium
chlorate to CMPC's three pulp mills in Chile. As part of this
agreement, ERCO Worldwide will construct a sodium chlorate
manufacturing plant adjacent to the CMPC Pacifico Mill at an
estimated total cost of $65 million. The new plant is scheduled to
start-up in mid-2006. Cumulative expenditures to June 30, 2005 were
$9.0 million (December 31, 2004 - $1.4 million).
9. Business Segments
Superior operates four distinct business segments; the delivery of
propane and propane related services and accessories operating under the
Superior Propane trade name; the manufacture and sale of chemicals and
related products and services for the pulp and paper and water treatment
industries operating under the ERCO Worldwide trade name; the
distribution of walls and ceilings construction products operating under
the Winroc trade name; and the sale of natural gas under fixed price term
contracts operating under SEM. Superior's corporate office arranges
intersegment foreign exchange contracts from time to time between its
business segments. As a result, in the accompanying tables, the
elimination of intersegment revenues and cost of sales pertaining to
intersegment foreign exchange gains and losses are eliminated under the
Corporate cost column.
For the three Total
months ended Superior ERCO Consoli-
June 30, 2005 Propane Worldwide Winroc SEM Corporate dated
-------------------------------------------------------------------------
Revenues 162.1 100.7 128.1 70.1 (0.8) 460.2
Cost of products
sold 105.9 52.8 98.4 66.7 (0.8) 323.0
-------------------------------------------------------------------------
Gross Profit 56.2 47.9 29.7 3.4 - 137.2
Expenses
Operating and
administrative 45.7 24.3 20.6 2.0 3.1 95.7
Amortization of
property, plant
and equipment 5.2 12.5 0.8 - - 18.5
Amortization of
intangible assets - 1.3 0.1 - - 1.4
Interest on
revolving term
bank credits and
term loans - - - - 5.7 5.7
Interest on
convertible
unsecured
subordinated
debentures - - - - 2.1 2.1
Amortization of
convertible
debenture issue
costs - - - - 0.3 0.3
Management
internalization
costs - - - - 1.3 1.3
Income tax expense
(recovery) of
Superior 2.0 3.6 3.1 0.5 (15.9) (6.7)
-------------------------------------------------------------------------
52.9 41.7 24.6 2.5 (3.4) 118.3
-------------------------------------------------------------------------
Net earnings 3.3 6.2 5.1 0.9 3.4 18.9
Add: Amortization of
property, plant
and equipment,
intangible assets
and convertible
debenture issue
costs 5.2 13.8 0.9 - 0.3 20.2
Future income
tax expense
(recovery) 1.9 2.9 2.3 0.5 (15.2) (7.6)
Trust unit
incentive
plan expense - - - - 0.6 0.6
Management
internalization
costs - - - - 1.3 1.3
Less: Maintenance
capital
expenditures,
net (0.9) (1.1) (1.5) - - (3.5)
-------------------------------------------------------------------------
Distributable cash
flow 9.5 21.8 6.8 1.4 (9.6) 29.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three Total
months ended Superior ERCO SEM Consoli-
June 30, 2004 Propane Worldwide Winroc(1) (2) Corporate dated
-------------------------------------------------------------------------
Revenues 136.4 98.6 22.8 52.9 (0.1) 310.6
Cost of products sold 77.3 49.8 17.9 49.7 (0.1) 194.6
-------------------------------------------------------------------------
Gross Profit 59.1 48.8 4.9 3.2 - 116.0
Expenses
Operating and
administrative 42.8 24.1 3.0 1.4 0.2 71.5
Amortization of
property, plant
and equipment 4.0 12.4 0.2 - - 16.6
Amortization of
intangible assets - 1.4 - - - 1.4
Interest on revolving
term bank credits
and term loans - - - - 3.6 3.6
Interest on
convertible
unsecured
subordinated
debentures - - - - 3.7 3.7
Amortization of
deferred
convertible
debenture issue
costs - - - - 0.4 0.4
Management
internalization
costs - - - - 2.6 2.6
Income tax expense
(recovery) of
Superior 5.0 4.7 0.1 0.7 (15.4) (4.9)
-------------------------------------------------------------------------
51.8 42.6 3.3 2.1 (4.9) 94.9
-------------------------------------------------------------------------
Net earnings 7.3 6.2 1.6 1.1 4.9 21.1
Add: Amortization of
property, plant
and equipment,
intangible
assets and
convertible
debenture issue
costs 4.0 13.8 0.2 - 0.4 18.4
Future income
tax expense
(recovery) 4.7 4.1 - 0.7 (15.3) (5.8)
Trust unit
incentive plan
recovery - - - - (1.7) (1.7)
Management
internalization
costs - - - - 2.6 2.6
Less: Maintenance
capital
expenditures,
net (1.1) (1.7) (0.4) - - (3.2)
-------------------------------------------------------------------------
Distributable
cash flow 14.9 22.4 1.4 1.8 (9.1) 31.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Winroc was acquired June 11, 2004
(2) See Note 2(b)
For the six Total
months ended Superior ERCO Consoli-
June 30, 2005 Propane Worldwide Winroc SEM Corporate dated
-------------------------------------------------------------------------
Revenues 418.2 197.0 224.5 134.2 (1.6) 972.3
Cost of products
sold 269.4 103.0 173.1 127.4 (1.6) 671.3
-------------------------------------------------------------------------
Gross Profit 148.8 94.0 51.4 6.8 - 301.0
Expenses
Operating and
administrative 93.3 47.0 36.2 3.8 4.5 184.8
Amortization of
property, plant
and equipment 10.4 24.7 1.4 - - 36.5
Amortization of
intangible assets - 2.6 0.1 - - 2.7
Interest on
revolving term
bank credits and
term loans - - - - 10.9 10.9
Interest on
convertible
unsecured
subordinated
debentures - - - - 4.0 4.0
Amortization of
convertible
debenture
issue costs - - - - 0.6 0.6
Management
internalization
costs - - - - 1.3 1.3
Income tax expense
(recovery) of
Superior 17.1 7.2 5.0 1.3 (30.8) (0.2)
-------------------------------------------------------------------------
120.8 81.5 42.7 5.1 (9.5) 240.6
-------------------------------------------------------------------------
Net earnings 28.0 12.5 8.7 1.7 9.5 60.4
Add: Depreciation,
amortization
of property,
plant and
intangible
assets and
convertible
debenture
issue costs 10.4 27.3 1.5 - 0.6 39.8
Future income
tax expense
(recovery) 16.7 6.0 3.8 1.3 (29.8) (2.0)
Trust unit
incentive
plan expense - - - - 0.3 0.3
Management
internalization
costs - - - - 1.3 1.3
Less: Maintenance
capital
expenditures,
net (1.4) (2.0) (2.8) - - (6.2)
-------------------------------------------------------------------------
Distributable
cash flow 53.7 43.8 11.2 3.0 (18.1) 93.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six Total
months ended Superior ERCO SEM Consoli-
June 30, 2004 Propane Worldwide Winroc(1) (2) Corporate dated
-------------------------------------------------------------------------
Revenues 364.9 195.9 22.8 102.9 (0.3) 686.2
Cost of products
sold 214.7 100.5 17.9 96.0 (0.3) 428.8
-------------------------------------------------------------------------
Gross Profit 150.2 95.4 4.9 6.9 - 257.4
Expenses
Operating and
administrative 88.7 47.8 3.0 2.7 1.7 143.9
Amortization of
property, plant
and equipment 9.5 24.8 0.2 - - 34.5
Amortization of
intangible assets - 2.8 - - - 2.8
Interest on
revolving term
bank credits and
term loans - - - - 7.0 7.0
Interest on
convertible
unsecured
subordinated
debentures - - - - 7.7 7.7
Amortization of
deferred convertible
debenture issue
costs - - - - 0.8 0.8
Management
internalization
costs 2.6 2.6
Income tax expense
(recovery) of
Superior 19.7 8.2 0.1 1.6 (29.6) -
-------------------------------------------------------------------------
117.9 83.6 3.3 4.3 (9.8) 199.3
-------------------------------------------------------------------------
Net earnings 32.3 11.8 1.6 2.6 9.8 58.1
Add: Amortization
of property,
plant and
equipment,
intangible
assets and
convertible
debenture
issue costs 9.5 27.6 0.2 - 0.8 38.1
Future income
tax expense
(recovery) 19.1 7.1 - 1.6 (29.5) (1.7)
Trust unit
incentive
plan recovery - - - - (0.8) (0.8)
Management
internalization
costs - - - - 2.6 2.6
Less: Maintenance
capital
expenditures,
net (1.7) (2.3) (0.4) - - (4.4)
-------------------------------------------------------------------------
Distributable cash
flow 59.2 44.2 1.4 4.2 (17.1) 91.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Winroc was acquired June 11, 2004
(2) See Note 2(b)
Total Assets, Net Working Capital, Acquisitions and Other Capital
Expenditures
Total
Superior ERCO Consoli-
Propane Worldwide Winroc SEM(1) Corporate dated
-------------------------------------------------------------------------
As at June 30, 2005
Net working capital 12.8 (12.5) 64.4 0.2 (0.6) 64.3
Total assets 575.3 771.9 205.3 31.3 14.7 1,598.5
-------------------------------------------------------------------------
As at December 31, 2004
Net working capital 61.3 (8.1) 50.5 (2.3) (3.5) 97.9
Total assets 603.6 754.6 152.9 28.6 12.4 1,552.1
-------------------------------------------------------------------------
For the three months
ended June 30, 2005
Acquisitions - 22.4 28.7 - - 51.1
Other capital
expenditures, net 0.1 6.9 - - - 7.0
-------------------------------------------------------------------------
For the three months
ended June 30, 2004
Acquisitions - - - - 104.2 104.2
Other capital
expenditures, net 0.4 0.9 - - - 1.3
-------------------------------------------------------------------------
For the six months
ended June 30, 2005
Acquisitions 14.7 22.4 28.7 - - 65.8
Other capital
expenditures, net 0.1 10.2 - - 10.3
-------------------------------------------------------------------------
For the six months
ended June 30, 2004
Acquisitions - - - - 104.2 104.2
Other capital
expenditures, net 0.4 1.8 - - - 2.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Note 2(b)
Geographic Information United Total
Canada States Other Consolidated
-------------------------------------------------------------------------
Revenues for the three months
ended June 30, 2005 365.1 89.0 6.1 460.2
Revenue for the six months
ended June 30, 2005 796.2 166.6 9.5 972.3
Property, plant and equipment
as at June 30, 2005 639.6 98.9 9.0 747.5
Total assets as at June 30, 2005 1,403.8 185.7 9.0 1,598.5
-------------------------------------------------------------------------
Revenues for the three months
ended June 30, 2004 252.1 53.0 5.5 310.6
Revenues for the six months
ended June 30, 2004 575.6 94.2 16.4 686.2
Property, plant and equipment
as at December 31, 2004 663.2 77.8 - 741.0
Total assets as at December 31,
2004 (Note 2(b)) 1,402.6 149.5 - 1,552.1
-------------------------------------------------------------------------
10. Comparative Figures
Certain reclassifications of prior period amounts have been made to
conform to current period presentations.
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