TSX: SPB
CALGARY, Aug. 6 /CNW/ -
HIGHLIGHTS
- The rapid decline in economic activity in the first half of 2009 was
the most significant factor which contributed to reduced sales in all
business segments. Superior's customers continued to conserve and
reduce inventories due to the prolonged and deep impact of the global
economic downturn. Superior continues to see positive signs that the
economy has bottomed and is expected to improve in the last half of
2009.
- Superior's revised forecast for adjusted operating cash flow per
share is $1.95 - $2.10 in 2009 compared to $2.18 per share in 2008, a
decrease of approximately 7% based upon the mid-point of the 2009
financial outlook range.
- Strong first quarter adjusted operating cash flow of $0.70 per share
combined with a seasonal weak second quarter adjusted operating cash
flow of $0.21 per share resulted in year-to-date adjusted operating
cash flow of $0.91 per share, which was 14% lower than the 2008
year-to-date period.
- Gross profits were $134.9 million and $323.2 million for the second
quarter and year-to-date, a decrease of 12% and 0%, respectively,
compared to prior year periods. Gross profits in the current year
were impacted by the recession resulting in reduced sales volumes.
- Second quarter and year-to-date EBITDA from operations decreased by
41% and 10% to $31 million and $111 million, respectively, compared
to prior year periods reflecting reduced sales volumes.
- Four quarter trailing EBITDA was $232.4 million resulting in a Senior
Debt to EBITDA ratio of 2.3x and a Total Debt to EBITDA ratio of 3.4x
as at June 30, 2009.
- The Port Edwards expansion project is on schedule and is being
commissioned during the third quarter of 2009. The project is
expected to start to provide a positive contribution in the fourth
quarter with annualized incremental EBITDA of US$20 - $30 million at
full capacity.
- On August 6, 2009, Superior entered into a definitive agreement to
acquire Specialty Products and Insulation Co. ("SPI") for the total
aggregate purchase price of approximately US$135 million anticipated
to close in September 2009. For details on the acquisition, please
refer to press release entitled "Superior Plus Announces Expansion of
its Construction Products Distribution Business with a US$135 Million
Acquisition" dated August 6, 2009.
FINANCIAL SUMMARY
-------------------------------------------------------------------------
Three months ended Six months ended
(millions of dollars except June 30, June 30,
per share amounts) 2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue 454.4 567.2 1,057.9 1,248.6
-------------------------------------------------------------------------
Gross profit 134.9 153.3 323.2 323.2
-------------------------------------------------------------------------
EBITDA from operations(1) 31.0 52.7 111.0 123.4
Interest (7.7) (8.4) (18.0) (18.2)
Cash taxes (1.2) (4.2) (6.2) (5.9)
Corporate costs (3.2) (2.0) (6.6) (5.5)
-------------------------------------------------------------------------
Adjusted operating cash
flow(1) 18.9 38.1 80.2 93.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted operating cash
flow per share, basic(1)(2)
and diluted(1)(3) $0.21 $0.43 $0.91 $1.06
-------------------------------------------------------------------------
Dividends/Distributions
paid per share/unit $0.405 $0.405 $0.81 $0.80
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA from operations and adjusted operating cash flow are key
performance measures used by management to evaluate the performance
of Superior. These measures are defined under Non-GAAP Financial
Measures in Management's Discussion and Analysis of the 2009 Second
Quarter Results.
(2) The weighted average number of shares outstanding for the three
months ended June 30, 2009 is 88.4 million (2008 - 88.4 million)
(3) For the three and six months ended June 30, 2009 and 2008, there were
no dilutive instruments.
FINANCIAL OUTLOOK
"The length and depth of the global recession has made forecasting the recovery of the businesses difficult, but Superior has responded swiftly to minimize the short-term impact of the recession. Superior is well-positioned and diversified to capitalize on the recovery and future opportunities given its strong balance sheet and operational expertise. We have navigated through one of the most severe economic downturns in the past century and remain committed to stability of dividends and creating value growth for our shareholders," said Chairman and Chief Executive Officer Grant Billing.
-------------------------------------------------------------------------
2009(1) 2009(2)(4)
(millions of dollars, except per share amounts) Prior Current
-------------------------------------------------------------------------
EBITDA from operations
Propane Distribution 95-105 95-105
Specialty Chemicals 100-110 95-105
Construction Products Distribution 20-27 20-25
Fixed-Price Energy Services 9-12 9-12
-------------------------------------------------------------------------
Adjusted operating cash flow per share $2.00-$2.15 $1.95-$2.10
Dividends paid per share $1.62 $1.62
-------------------------------------------------------------------------
Senior Debt/EBITDA Ratio(3) 1.9 1.9
Total Debt/EBITDA Ratio(3) 2.9 3.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As provided in Superior's First Quarter 2009 Financial Results.
(2) The assumptions, definitions, and risk factors relating to the
Financial Outlook are discussed in Management's Discussion and
Analysis of the 2009 Second Quarter Results.
(3) Superior's debt ratios take into account the impact of the
off-balance sheet receivable sales program amounts, the efficiency
and growth projects and excludes Port Edwards project debt of
$150 million (US$130 million) as well as project EBITDA contribution.
Including the Port Edwards project debt with no corresponding EBITDA
would result in a year-end Senior Debt to EBITDA ratio of 2.6x and
Total Debt to EBITDA ratio of 3.7x.
(4) The current 2009 financial outlook does not include any benefit or
cost associated with the proposed acquisition of SPI anticipated to
close in September 2009.
Superior has revised its annual expectations for adjusted operating cash flow by $0.05 to be $1.95 - $2.10 per share in 2009 based upon year-to-date results and its current outlook for the remainder of 2009. The forecast decrease in EBITDA from operations has been partially offset by reduced interest costs and lower income taxes as compared to the previous outlook provided in the 2009 First Quarter Results. Superior's financial outlook for 2010 adjusted operating cash flow has been decreased to $2.05 - $2.25 from its previous first quarter outlook of $2.20 - $2.40 to reflect a deeper more prolonged slowdown in economic activity. The current financial outlook for 2009 and 2010 does not include any benefit or cost associated with the proposed acquisition of SPI anticipated to close in September 2009. Superior expects to update its financial outlook upon completion of the SPI transaction at the next quarterly release of its financial statements.
Although the timing of the recovery remains uncertain, Superior continues to see positive signs that the economy has bottomed and is expected to improve in the last half of 2009. Superior's successful marketing programs, focused cost cutting initiatives, anticipated demand from its customers, and a successful closing of the SPI acquisition are expected to provide support for a solid finish to the year and an improved outlook in 2010. The Port Edwards expansion project continues to remain on time and is scheduled to be commissioned during the third quarter of 2009. The Port Edwards expansion project will require the closure of the facility for approximately 4-6 weeks and this reduced production is included in the current 2009 financial outlook.
SEGMENTED INFORMATION
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2009(1) 2008(1) 2009(1) 2008(1)
-------------------------------------------------------------------------
EBITDA from operations:
Propane Distribution 4.7 12.9 49.6 50.8
Specialty Chemicals 20.2 25.7 52.3 51.7
Construction Products
Distribution 3.3 11.0 4.8 15.8
Fixed-Price Energy
Services 2.8 3.1 4.3 5.1
-------------------------------------------------------------------------
31.0 52.7 111.0 123.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBITDA from operations is a key performance measure used by
management to evaluate the performance of Superior. This measure is
defined under Non-GAAP Financial Measures in Management's Discussion
and Analysis of the 2009 Second Quarter Results.
Propane Distribution
- EBITDA from operations were $4.7 million and $49.6 million for the
second quarter and first half of 2009, a decrease of $8.2 million and
$1.2 million, respectively, compared to prior year periods, primarily
as a result of a 9% decline in sales volumes due to the impact of the
economic recession in Canada.
- Total gross profits per litre for the second quarter and first half
of 2009 were 21.9 cents and 22.8 cents, a decrease of 0.7 cents and
an increase of 2.1 cents, respectively, compared to the prior year
periods.
- Retail propane and delivery gross profits of $46.8 million and
$126.4 million decreased by 9% and 4% in the second quarter and first
half of 2009, respectively, compared to the prior year periods.
Superior's sales and marketing program has produced positive results
in the first half of the year with annualized new customer volumes of
approximately 81 million litres partially offsetting the impact on
sales volumes due to the economic recession in Canada.
- Wholesale and related gross profits were $2.8 million and
$18.2 million in the second quarter and first half of 2009, a
decrease of $2.7 million and an increase of $6.6 million,
respectively, compared to the prior year periods, substantially due
to the timing of gross profits recognized in the 2008/2009 winter
heating season.
- Superior substantially completed the implementation of its new
routing and scheduling system in the second quarter and expects to
consolidate the logistics functions from six Regional Operation
Centres into one National Operations Centre during the third quarter
of 2009. Superior anticipates the installation of handheld computers
on the service fleet will be completed by the end of 2009. These
productivity improvements are estimated to have annual cost savings
of $5.8 million upon completion.
- EBITDA from operations is expected to be $95 - $105 million for 2009
consistent with the previous outlook provided in the 2009 First
Quarter Results. The benefits of sales marketing initiatives,
projected efficiency improvements in the cost structure and a
forecast improvement in economic activity provide support for
maintaining the outlook range.
Specialty Chemicals
- EBITDA from operations were $20.2 million and $52.3 million in the
second quarter and first half of 2009, a decrease of $5.5 million and
an increase of $0.6 million, respectively, compared to the prior year
periods.
- Gross profits in the second quarter and first half of 2009 decreased
by $2.2 million and increased by $6.8 million to $51.0 million and
$113.7 million, respectively.
- Chemical sales volumes of 155,000 (MTs) for the second quarter were
33,000 (MTs) lower than the prior year quarter primarily due to
reduced demand for specialty chemical products as a result of reduced
sales volumes to pulp customers. The Valdosta, Georgia facility was
temporarily idled in the second quarter reducing capacity by 8,000 MT
per month with cell line upgrades expected to be completed during the
third quarter. The Valdosta, Georgia facility is anticipated to be
restarted by the fourth quarter of 2009 due to stabilization of pulp
prices along with a forecasted increase in sodium chlorate demand.
- The Port Edwards, Wisconsin chloralkali facility expansion project
remains on budget and is being commissioned during the third quarter
of 2009. The conversion project has started up many of the systems
and will require a temporary closure of the facility for
approximately 4-6 weeks to complete the changes resulting in reduced
revenue and production volumes which has been reflected in the
revised financial outlook. It is expected to provide an annual
incremental US$20 - $30 million of positive EBITDA contribution at
full capacity.
- EBITDA from operations is expected to be $95 - $105 million for 2009,
a decrease of $5 million from the previous outlook provided in the
2009 First Quarter Results reflecting reduced chloralkali pricing.
Construction Products Distribution
- EBITDA from operations were $3.3 million and $4.8 million in the
second quarter and first half of 2009, a decrease of $7.7 million and
$11.0 million, respectively, compared to the prior year periods.
- Gross profits in the second quarter and first half of 2009 were
$24.3 million and $48.7 million, a decrease of $11.8 million and
$16.0 million, respectively, compared to the prior year periods
primarily due to a 21% and 29% decline in drywall sales volumes in
the first and second quarter, respectively. Sales volumes declined
due to a rapid deterioration of the residential and commercial
construction activity as a result of the impact of a recession in
North America.
- Sales margins were consistent in most operating areas in the second
quarter and first half of 2009, compared to the prior year periods
due to a continued focus on margin management initiatives and the
impact of purchasing programs.
- Significant restructuring and cost reduction initiatives have been
made during the second quarter and first half of 2009 to adjust to
the changes in the market. These initiatives expect to have an annual
cost saving in excess of $6 million reflecting significant reductions
in employees in most locations along with consolidation of branch
locations.
- The fragmented nature of the specialty buildings products industry,
combined with the market downturn, provide additional consolidation
and product expansion opportunities for Winroc.
- Several leading indicators such as permits and housing starts have
provided positive signs of both the US and Canadian construction
markets bottoming with some improvement expected in the last half of
2009.
- EBITDA from operations is expected to be $20 - $25 million for 2009,
a decrease of $2 million in the upper-end of our previous outlook
provided in the 2009 First Quarter Results. The residential
construction activity in Canada and the US is starting to improve and
is expected to have limited benefit until later in 2009.
Fixed-Price Energy Services
- EBITDA from operations were $2.8 million and $4.3 million in the
second quarter and first half of 2009, a decrease of $0.3 million and
$0.8 million, respectively, compared to the prior year periods.
- Gross profits were $8.3 million and $15.3 million in the second
quarter and first half of 2009, a decrease of $0.3 million and
$0.1 million, respectively, compared to the prior year periods.
- SEM continued to focus its sales channels towards acquiring and
retaining Ontario commercial natural gas and electricity customers,
Quebec commercial natural gas customers and British Columbia natural
gas residential and commercial customers.
- Currently, SEM's portfolio of customers is approximately 70%
commercial and 30% residential by volume.
- EBITDA from operations is expected to be $9 - $12 million for 2009,
consistent with the previous outlook provided in the 2009 First
Quarter Results.
CAPITAL EXPENDITURE SUMMARY
-------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
(millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Efficiency, process
improvement and growth
related 5.1 7.1 12.9 10.9
Other capital 1.8 2.8 3.3 4.4
Port Edwards expansion
project 29.6 3.3 56.2 8.5
-------------------------------------------------------------------------
Earn-out payment on prior
acquisition - - 0.6 -
Acquisitions - 24.6 - 24.6
-------------------------------------------------------------------------
Proceeds on disposition
of capital (1.1) (1.3) (2.9) (1.5)
-------------------------------------------------------------------------
Total net capital
expenditures 35.4 36.5 70.1 46.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In the second quarter of 2009, Superior continued to improve its cost structure by investing $5.1 million of capital in efficiency projects primarily in the propane distribution and specialty chemicals divisions. The Port Edwards conversion project made good progress in the second quarter of 2009 with capital spending of $29.6 million (US$25.6 million). The project is on budget and scheduled to be commissioned during the third quarter of 2009. As at June 30, 2009, Superior has incurred US$91.6 million of the estimated US$130 million costs to complete the Port Edwards project.
KEY CORPORATE ITEMS
- Total interest expense of $7.7 million in the second quarter
decreased by $0.7 million compared to the prior year quarter
primarily due to lower average interest rates and the impact of the
appreciation of the Canadian dollar on US denominated interest costs,
partially offset by higher average debt levels.
- Superior had a $570 million syndicated credit facility with undrawn
credit capacity of approximately $293.5 million (excluding its
securitization program) as at June 30, 2009.
- As at June 30, 2009, Superior had utilized $85.9 million of its
existing securitization program.
- With the commissioning of the Port Edwards project, there will be
sufficient tax basis available to reduce 2009 US cash income taxes to
zero. Superior anticipates a US cash income tax reversal of
approximately $5.5 million to occur in the third quarter which will
result in an increase to adjusted operating cash flow per share of
approximately $0.06.
- Given Superior's current tax basis of approximately $1.7 billion as
at December 31, 2008, the corporation does not anticipate any
material Canadian cash taxes payable until 2014 based upon the
current level of Canadian taxable income projected from 2009-2014.
Beyond 2014, Superior anticipates incurring Canadian cash taxes at an
approximate rate of 12-13% for a period of 3-4 years.
2009 Second Quarter Results
Superior's 2009 Second Quarter Results are attached and available on Superior's website at: www.superiorplus.com under the investor information section and at www.sedar.com.
Conference Call
Superior Plus will be conducting a conference call and webcast for investors, analysts, brokers and media representatives to discuss the 2009 Second Quarter Results at 3:00 p.m. MST on Thursday, August 6, 2009. To participate in the call, dial: 1-800-732-6179. A recording of the call will be available for replay until midnight, September 6, 2009. To access the recording, dial: 1-877-289-8525 and enter pass code: 21309903, followed by the pound 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 calendar section.
Forward-Looking Information
Certain information included herein is forward-looking, within the meaning of applicable Canadian securities laws. Forward-looking information can be identified by looking for words such as "believe", "expects", "expected", "will", "intends", "projects", "anticipates", "estimates", "continues" or similar words. Forward-looking information in this press release, including the attached Management's Discussion and Analysis of 2009 Second Quarter Results, includes but is not limited to, consolidated and business segment outlooks, expected EBITDA from operations, expected adjusted operating cash flow, expected adjusted operating cash flow per share, future capital expenditures, business strategy and objectives, dividend strategy, expected senior debt and total debt to EBITDA ratios, future cash flows, anticipated taxes, expected timing of restarting the Valdosta, Georgia facility, timing and expected impact of proposed productivity improvement initiatives, expected timing of the closing of the SPI acquisition, expected timing with respect to commissioning the Port Edwards, Wisconsin project and statements regarding the future financial position of Superior and Superior LP. Superior and Superior LP believe the expectations reflected in such forward-looking information are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.
Forward-looking information is based on various assumptions. Those assumptions are based on information currently available to Superior, including information obtained from third party industry analysts and other third party sources and include, the historic performance of Superior's businesses, current business and economic trends, availability and utilization of tax basis, currency, exchange and interest rates, trading data, cost estimates and the other assumptions set forth under the "Outlook" sections contained in the attached Management's Discussion and Analysis of 2009 Second Quarter Results. Readers are cautioned that the preceding list of assumptions is not exhaustive.
Forward-looking information is not a guarantee of future performance and involves a number of risks and uncertainties some of which are described herein and in the attached Management's Discussion and Analysis of 2009 Second Quarter Results. Such forward-looking information necessarily involves known and unknown risks and uncertainties, which may cause Superior's or Superior LP's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking information. These risks and uncertainties include but are not limited to the risks referred to under the section entitled "Risk Factors to Superior", in the attached Management's Discussion and Analysis of 2009 Second Quarter Results, the risks associated with the availability and amount of the tax basis and the risks identified in Superior's 2008 Annual Information Form under the heading "Risk Factors". Any forward-looking information is made as of the date hereof and, except as required by law, neither Superior nor Superior LP undertakes any obligation to publicly update or revise such information to reflect new information, subsequent or otherwise.
Management's Discussion and Analysis of 2009 Second Quarter Results August 6, 2009 Non-GAAP Financial Measures Adjusted Operating Cash Flow
Adjusted operating cash flow is equal to cash flow from operating activities as defined by Canadian generally accepted accounting principles (GAAP), adjusted for changes in non-cash working capital and customer acquisition costs. Superior may deduct or include additional items to its calculation of adjusted operating cash flow; these items would generally, but not necessarily, be items of a non-recurring nature. Adjusted operating cash flow is the main performance measure used by management and investors to evaluate the performance of Superior. Readers are cautioned that adjusted operating cash flow is not a defined performance measure under Canadian GAAP and that adjusted operating cash flow cannot be assured. Superior's calculation of adjusted operating cash flow may differ from similar calculations used by comparable entities. Adjusted operating cash flow represents cash flow generated by Superior that is available for, but not necessarily limited to, changes in working capital requirements, investing activities and financing activities of Superior.
The seasonality of Superior's individual quarterly results must be assessed in the context of annualized adjusted operating cash flow. Adjustments recorded by Superior as part of its calculation of adjusted operating cash flow include, but are not limited to, the impact of the seasonality of Superior's businesses, principally Superior Propane, by adjusting for non-cash working capital items, thereby eliminating the impact of the timing between the recognition and collection/payment of Superior's revenues and expense, which can differ significantly from quarter to quarter. Adjustments are also made to reclassify the cash flows related to natural gas and electricity customer contract related costs in a manner consistent with the income statement recognition of these costs. Adjusted operating cash flow is reconciled to cash flow from operating activities on page 9.
EBITDA
EBITDA represents earnings before interest, taxes, depreciation, amortization and other non-cash expenses, and is used by Superior to assess its consolidated results and the results of its operating divisions. EBITDA is not a defined performance measure under GAAP. Superior's calculation of EBITDA may differ from similar calculations used by comparable entities. EBITDA of Superior's operating businesses may be referred to as EBITDA from operations. Net earnings (loss) are reconciled to EBITDA from operations on page 24.
Compliance EBITDA
Compliance EBITDA represents earnings before interest, taxes, depreciation, amortization and other non-cash expenses calculated on a 12 month trailing basis giving pro forma effect to acquisitions and divestitures and is used by Superior to calculate its debt covenants and other credit information. Compliance EBITDA is not a defined performance measure under GAAP. Superior's calculation of compliance EBITDA may differ from similar calculations used by comparable entities. See Note 10 to the unaudited Interim Consolidated Financial Statements for a reconciliation of net earnings (loss) to compliance EBITDA.
Overview of Superior
Superior Plus Corp. is a diversified business corporation. Superior holds 100% of Superior LP, a limited partnership formed between Superior General Partner Inc., as general partner and Superior as limited partner. Superior owns 100% of the shares of Superior General Partner Inc. The cash flow of Superior is solely dependent on the results of Superior LP and is derived from the allocation of Superior LP's income to Superior by means of partnership allocations. Superior, through its ownership of Superior LP has four operating businesses: a propane distribution and related services business operating under the trade name Superior Propane; a specialty chemicals business operating under the trade name ERCO Worldwide (ERCO); a construction products distribution business operating under the trade name Winroc; and a fixed-price energy services business operating under the trade name Superior Energy Management (SEM).
Second Quarter Results
----------------------
Summary of Adjusted Operating Cash Flow
-------------------------------------------------------------------------
(millions of dollars Three months ended Six months ended
except per share June 30, June 30,
amounts) 2009 2008 2009 2008
-------------------------------------------------------------------------
EBITDA from operations:
Propane Distribution 4.7 12.9 49.6 50.8
Specialty Chemicals 20.2 25.7 52.3 51.7
Construction Products
Distribution 3.3 11.0 4.8 15.8
Fixed-Price Energy
Services 2.8 3.1 4.3 5.1
-------------------------------------------------------------------------
31.0 52.7 111.0 123.4
Interest (7.7) (8.4) (18.0) (18.2)
Cash income taxes (1.2) (4.2) (6.2) (5.9)
Corporate costs (3.2) (2.0) (6.6) (5.5)
-------------------------------------------------------------------------
Adjusted operating
cash flow 18.9 38.1 80.2 93.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Adjusted operating cash
flow per share,
basic(1) and diluted(2) $0.21 $0.43 $0.91 $1.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The weighted average number of shares outstanding for the three
months ended June 30, 2009, is 88.4 million (2008 - 88.4 million) and
for the six months ended June 30, 2009, is 88.4 million (2008 - 88.3
million)
(2) For the three and six months ended June 30, 2009 and 2008, there were
no dilutive instruments.
Adjusted Operating Cash Flow Reconciled to Cash Flow from Operating
Activities(1)
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash flows from operating
activities 75.0 82.2 158.4 145.4
Add: Customer contract
related costs
capitalized 1.2 1.7 2.1 2.4
Less: Decrease in non-cash
working capital (58.3) (44.1) (76.9) (50.7)
Amortization of
customer contract
related costs (1.7) (1.7) (3.4) (3.3)
Reversal of unrealized
losses on financial
instruments previously
treated as realized. 2.7 - - -
-------------------------------------------------------------------------
Adjusted operating
cash flow 18.9 38.1 80.2 93.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See the unaudited Interim Consolidated Financial Statements for cash
flows from operating activities, customer contract related costs and
changes in non-cash working capital.
Second quarter adjusted operating cash flow was $18.9 million, a decrease of $19.2 million or 50% over the prior year quarter. The decrease in adjusted operating cash flow was due to reduced EBITDA from operations at all of Superior's businesses and higher corporate costs, offset in part by lower cash income taxes and interest costs. Adjusted operating cash flow per share was $0.21 per share in the second quarter, a decrease of 50% from $0.43 per share in the prior year quarter due to the decrease in adjusted operating cash flow noted above; the weighted average number of shares outstanding was consistent with the prior year quarter. A comprehensive review of EBTIDA from operations for all of Superior's businesses follows.
Adjusted operating cash flow for the six months ended June 30, 2009 was $80.2 million, a decrease of $13.6 million or 14% compared to the prior year period. The decrease in adjusted operating cash flow was due to reduced EBITDA from operations at Winroc, Superior Propane and SEM, combined with modestly higher cash income taxes and higher corporate costs, offset by higher EBITDA from operations at ERCO and lower interest costs. Adjusted operating cash flow per share was $0.91 per share for the six months ended June 30, 2009, a decrease of $0.15 per share or 14% due to the decrease in adjusted operating cash flow as noted above. The weighted average number of shares outstanding was consistent with the prior year period.
Net earnings for the second quarter were $23.4 million, compared to net earnings of $164.3 million in the prior year quarter. Net earnings were impacted by $18.6 million in unrealized gains on financial instruments in the current quarter, compared to unrealized gains of $149.8 million in the prior year quarter. The change in the unrealized gains and losses on financial instruments was due principally to reduced gains on SEM's natural gas financial derivatives compared to the prior year as a result of fluctuations in the spot price for natural gas. Revenues of $454.4 million were $112.8 million lower than the prior year quarter due principally to a decrease in the retail selling prices of propane as a result of a reduction in the wholesale cost of propane. Gross profit of $134.9 million was $18.4 million lower than the prior year quarter due principally to reduced sales volumes at all of Superior's operating businesses. Total income taxes for the second quarter was an expense of $3.5 million compared to an income tax expense of $11.0 million in the prior year quarter. Income taxes were impacted by Superior's conversion to a corporation on December 31, 2008, and the change in unrealized gains on financial instruments in the second quarter as discussed above. Additionally, second quarter net earnings were affected for the same reasons as the analysis of adjusted operating cash flow for the second quarter.
Net earnings for the six months ended June 30, 2009 were $17.9 million, compared to net earnings of $291.5 million in the prior year period. Net earnings were impacted by $54.3 million in unrealized losses on financial instruments in the current period, compared to unrealized gains of $255.1 million in the prior year period. The change in the unrealized gains and losses on financial instruments was due principally to reduced gains on SEM's natural gas financial derivatives compared to the prior year as a result of fluctuations in the spot price for natural gas. Revenues of $1,057.9 million were $190.7 million lower than the prior year period due principally to a decrease in the retail selling prices of propane as a result of a reduction in the wholesale cost of propane. Gross profit of $323.2 million was consistent with the prior year quarter as improved gross profit at ERCO offset lower gross profit at Winroc. Total income tax recovery in the current period was $13.3 million compared to an income tax expense of $29.0 million in the prior year quarter. Income taxes were impacted by Superior's conversion to a corporation on December 31, 2008, and the change in unrealized gains on financial instruments as discussed above.
Propane Distribution
Superior Propane generated EBITDA from operations of $4.7 million in the second quarter, a decrease of $8.2 million from the prior year quarter due to lower gross profit and modestly higher operating costs.
Condensed operating results for the three and six months ended June 30, 2009 and 2008 are provided in the following table.
-------------------------------------------------------------------------
(millions of dollars Three months ended June 30,
except per litre amounts) 2009 2008
-------------------------------------------------------------------------
cents/litre cents/litre
----------- -----------
Revenue(1)(2)(3) 163.4 65.6 228.3 83.3
Cost of sales (108.9) (43.7) (166.2) (60.7)
-------------------------------------------------------------------------
Gross profit 54.5 21.9 62.1 22.6
Less: Cash operating and
administration costs (49.8) (20.0) (49.2) (17.9)
-------------------------------------------------------------------------
EBITDA from operations 4.7 1.9 12.9 4.7
Propane retail volumes sold
(millions of litres) 249 274
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of dollars Six months ended June 30,
except per litre amounts) 2009 2008
-------------------------------------------------------------------------
cents/litre cents/litre
----------- -----------
Revenue(1)(2)(3) 466.8 68.6 597.6 80.4
Cost of sales (311.6) (45.8) (443.9) (59.7)
-------------------------------------------------------------------------
Gross profit 155.2 22.8 153.7 20.7
Less: Cash operating and
administration costs (105.6) (15.5) (102.9) (13.8)
-------------------------------------------------------------------------
EBITDA from operations 49.6 7.3 50.8 6.9
Propane retail volumes sold
(millions of litres) 680 743
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Effective January 1, 2007, Superior discontinued hedge accounting for
all economic hedging activities, as such, amounts related to these
contracts must be accounted for separately on Superior's financial
statements (see Notes 8 and 12 to the unaudited Interim Consolidated
Financial Statements). In order to better reflect the results of its
operations, Superior has reclassified these amounts for purposes of
this management's discussion and analysis to present its results as
if it had accounted for these transactions as accounting hedges. As
such, included in revenue for the three and six months ended June 30,
2009 is $1.7 million and ($0.9) million in realized foreign currency
forward contract gains (losses) and included in revenue for the three
and six months ended June 30, 2008 is $0.4 million and ($0.6) million
in realized foreign currency forward contract gains (losses).
(2) For the three and six months ended June 30, 2009 for purposes of the
management's discussion and analysis, Superior has reclassified
($0.3) million and $0.1 million, of foreign currency translation
losses (gains) related to US-denominated working capital from
operating and administrative expense to revenue and for the three and
six months ended June 30, 2008 has reclassified $0.2 million and $0.6
million of foreign currency translation losses related to US-
denominated working capital from operating and administrative expense
to revenue. Reclassification of the translation gains or losses
provides improved matching to the income statement recognition of the
underlying working capital item that resulted in the translation
gains or losses.
(3) For the three months ended June 30, 2009, for purposes of this
management's discussion and analysis, Superior has reversed the
impact of $2.7 million of unrealized losses on forward propane
purchase contracts as a component of revenue for the three months
ended March 31, 2009, related to Superior Propane's wholesale trading
business. There is no impact on Superior Propane's EBITDA from
operations for the six months ended June 30, 2009.
Revenues for the second quarter of 2009 were $163.4 million, a decrease of $64.9 million from revenues of $228.3 million in 2008. The decrease in revenues was due to lower retail propane sales volumes, combined with a lower average retail selling price of propane as a result of reductions in the wholesale cost of propane. Total gross profit for the second quarter of 2009 was $54.5 million, a decrease of $7.6 million or 12% over the prior year quarter. Total gross profit per litre for the second quarter of 2009 was 21.9 cents per litre, a decrease of 0.7 cents per litre or 3% compared to the prior year quarter. A summary and detailed review of gross profit by segment is provided below.
Gross Profit by Segment
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Retail propane and delivery 46.8 51.4 126.4 131.7
Other services 4.9 5.2 10.6 10.4
Wholesale and related 2.8 5.5 18.2 11.6
-------------------------------------------------------------------------
Total gross profit 54.5 62.1 155.2 153.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retail propane and delivery gross profit for the second quarter was $46.8 million, a decrease of $4.6 million or 9% from the prior year quarter, due principally to a 25 million litre or 9% reduction in sales volumes. The average retail and delivery sales margin in the second quarter was consistent with the prior year quarter. Residential and commercial volumes decreased by 6 million litres or 8% and were negatively impacted by a weaker overall economic environment throughout most of Canada and the ongoing impact of the customer conservation trend which began in 2008. Superior Propane's ongoing marketing efforts have been successful in acquiring new customers, partially offsetting the impact of reduced volumes due to the weaker economic environment. Average weather, as measured by degree days, for the second quarter was 3% colder than the prior year and 8% colder than the five year average, the impact of which partially mitigated a reduction in volumes due to the weaker economic environment. However, heating related volumes in the second and third quarters are generally not materially impacted by average weather due to the seasonality of Superior Propane's operations. Industrial volumes decreased by 15 million litres or 10%, due principally to the impact of a weaker economic environment as noted above. In particular, volumes were negatively impacted by customer cutbacks and closures in the manufacturing and mining sectors, throughout Eastern Canada and the Prairies in addition to the impact of reduced activity levels in the oil and gas sector. Automotive propane volumes declined by 3 million litres or 9%, which was modestly below the historical decline trend in this end-use market due to a favourable pricing differential between propane and retail gas. Superior Propane continued to actively manage sales margins in the second quarter, resulting in an average retail propane and delivery sales margin of 18.8 cents per litre, which was consistent with the prior year quarter average margin of 18.8 cents per litre. Average margins compared to the prior year quarter were positively impacted by margin management initiatives, offset by the impact of competitive pressures.
Other services gross profit was $4.9 million in the second quarter, a decrease of $0.3 million over the prior year quarter as weaker demand for service and installations was partially offset by an increase in rental gross profit. Wholesale and related gross profits were $2.8 million in the second quarter, a decrease of $2.7 million compared to the prior year quarter due to lower gross profits within the wholesale trading business as a result of weaker trading conditions during the quarter in addition to the timing of the recognition of gross profits compared to the prior year quarter. On an annualized basis, Superior Propane anticipates that wholesale trading gross profits will be higher than the prior year assuming normal volatility in the wholesale cost of propane for the remainder of 2009.
Superior Propane Annual Sales Volumes:
Volumes by End-Use Application(1) Volumes by Region(1)(2)
-------------------------------------------------------------------------
Three months ended Three months ended
June 30, June 30,
2009 2008 2009 2008
--------------------------------- -------------------------------------
Residential 22 24 Western Canada 134 152
Commercial 49 53 Eastern Canada 94 101
Agricultural 8 9 Atlantic Canada 21 21
Industrial 140 155
Automotive 30 33
--------------------------------- -------------------------------------
249 274 249 274
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Volumes by End-Use Application(1) Volumes by Region(1)(2)
-------------------------------------------------------------------------
Six months ended Six months ended
June 30, June 30,
2009 2008 2009 2008
--------------------------------- -------------------------------------
Residential 85 90 Western Canada 379 416
Commercial 163 171 Eastern Canada 248 274
Agricultural 31 35 Atlantic Canada 53 53
Industrial 351 390
Automotive 50 57
--------------------------------- -------------------------------------
680 743 680 743
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Volume: Volume of retail propane sold (millions of litres).
(2) Regions: Western Canada region consists of British Columbia, Alberta,
Saskatchewan, Manitoba, Northwest Ontario, Yukon and Northwest
Territories; Eastern Canada region consists of Ontario (except for
Northwest Ontario) and Quebec.
Cash operating and administrative costs of $49.8 million increased by $0.6 million or 1% from the prior year quarter due to higher provisions for bad debts and truck expenses, offset by lower wages and benefits and fuel costs. Superior Propane continues to actively manage expenses, particularly wages and benefits in response to fluctuations in volumes.
Outlook
Superior Propane expects EBITDA from operations for 2009 to be between $95 million and $105 million, consistent with Superior Propane's previous outlook as provided in the first quarter 2009 Management's Discussion and Analysis. Superior Propane's significant assumptions underlying its current outlook are:
- Superior Propane forecasts average temperatures across Canada to be
consistent with the most recent five-year average;
- Total sales volumes compared to the prior year are expected to
decline due to a continued slowdown in economic activity resulting in
reduced demand for propane and related services.
- Commercial and industrial volumes are anticipated to improve in the
second half of 2009 relative to the first half of 2009 due to
customer sales initiatives and a modestly improved outlook for the
general economy.
- Superior Propane expects that wholesale propane prices will not
significantly impact demand for propane and related propane services;
- Total gross profit for Superior Propane compared to the prior year is
anticipated to decrease due to reduced economic activity and
resulting demand; and
- Wholesale trading gross profits will be higher than in 2008 assuming
normal volatility in the wholesale cost of propane for the remainder
of 2009.
In addition to Superior Propane's significant assumptions detailed above, refer to the section "Risk Factors to Superior" for a detailed review of Superior Propane's significant business risk.
Specialty Chemicals
ERCO Worldwide generated EBITDA from operations in the second quarter of $20.2 million, a decrease of $5.5 million or 21% from the prior year quarter due to lower gross profits and higher operating expenditures.
Condensed operating results for the three and six months ended June 30, 2009 and 2008 are provided in the following table.
-------------------------------------------------------------------------
(millions of dollars
except per metric tonne Three months ended June 30,
(MT) amounts) 2009 2008
-------------------------------------------------------------------------
Revenue $ per MT $ per MT
Chemical(1)(3) 112.0 722 110.9 590
Technology 3.5 23 2.8 15
Cost of Sales
Chemical(1)(2) (62.8) (405) (59.2) (315)
Technology (1.7) (11) (1.3) (7)
-------------------------------------------------------------------------
Gross Profit 51.0 329 53.2 283
Less: Cash operating and
administrative costs(3) (30.8) (199) (27.5) (146)
-------------------------------------------------------------------------
EBITDA from operations 20.2 130 25.7 137
Chemical volumes sold
(thousands of MTs) 155 188
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of dollars
except per metric tonne Six months ended June 30,
(MT) amounts) 2009 2008
-------------------------------------------------------------------------
Revenue $ per MT $ per MT
Chemical(1)(3) 230.6 744 222.5 587
Technology 5.2 18 8.3 22
Cost of Sales
Chemical(1)(2) (119.9) (387) (119.0) (314)
Technology (2.2) (7) (4.9) (13)
-------------------------------------------------------------------------
Gross Profit 113.7 368 106.9 282
Less: Cash operating and
administrative costs(3) (61.4) (198) (55.2) (146)
-------------------------------------------------------------------------
EBITDA from operations 52.3 170 51.7 136
Chemical volumes sold
(thousands of MTs) 310 379
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Effective January 1, 2007, Superior discontinued hedge accounting for
all economic hedging activities. As such, amounts related to these
contracts must be accounted for separately on Superior's financial
statements (see Notes 8 and 12 to the unaudited Interim Consolidated
Financial Statements). In order to better reflect the results of its
operations, Superior has reclassified these amounts for purposes of
this management's discussion analysis to present its results as if it
had accounted for these transactions as accounting hedges. As such,
included in revenue for the three and six months ended June 30, 2009
is $2.5 million and $6.8 million in realized foreign currency forward
contract losses and included in chemical cost of sales for the three
and six months ended June 30, 2009 is ($1.1) million and $0.1 million
in realized fixed-price electricity gains (losses). Included in
revenue for the three and six months ended June 30, 2008 is $2.3
million and $4.8 million in realized foreign currency forward
contract gains and included in chemical cost of sales for the three
and six months ended June 30, 2008 is $8.5 million and $11.8 million
in realized fixed-price electricity gains.
(2) Effective January 1, 2008, Superior adopted a revised CICA Handbook
section related to Inventory. This section impacts the calculation of
the cost of inventory at ERCO Worldwide, due to the requirement to
inventory the cost of certain fixed overhead items, principally the
amortization of property, plant and equipment. Additionally, this
section requires that the amortization that is inventoried be
classified as a component of cost of products sold once sold. As
such, for the three and six months ended June 30, 2009, for purposes
of the management's discussion and analysis, Superior has excluded
$9.1 million and $18.2 million in non-cash amortization from cost of
sales in the calculation of ERCO Worldwide's EBITDA from operations
and for the three and six months ended June 30, 2008, Superior has
excluded $9.1 million and $19.7 million.
(3) For the three and six months ended June 30, 2009 for purposes of the
management's discussion and analysis, Superior has reclassified $2.1
million and $1.4 million, of foreign currency translation losses
related to US-denominated working capital from operating and
administrative expense to revenue and for the three and six months
ended June 30, 2008 has reclassified $0.6 million and ($0.6) million
of foreign currency translation losses (gains) related to US-
denominated working capital from operating and administrative expense
to revenue. Reclassification of the translation gains or losses
provides improved matching to the income statement recognition of the
underlying working capital item that resulted in the translation
gains or losses.
Chemical and technology revenues for the second quarter of $115.5 million were $1.8 million or 2% higher than the prior year quarter due to higher chemical revenue as improved chemical pricing more than offset reduced chemical sales volumes. Technology revenues were modestly higher than the prior year quarter due to the timing of the recognition of revenue on various projects. Second quarter gross profit was $51.0 million, comprised of $49.2 million from chemical sales and $1.8 million from technology projects. Chemical gross profit was $2.5 million lower than the prior year quarter as higher chloralkali/potassium gross profit was more than offset by reduced sodium chlorate gross profit. Chloralkali/potassium gross profit was higher than the prior year quarter as an increase in the average aggregate selling price more than offset lower sales volumes. Sales prices for potassium based products continue to be at historically high levels in response to the increase in the cost of potash, the primary input cost in the production of potassium products. The reduction in chloralkali/potassium sale volumes compared to the prior year quarter was due principally to the general economic slow down and the high selling price of potassium based products as noted above, both of which resulted in reduced customer demand. Sodium chlorate gross profits were lower than the prior year as reduced sales volumes and higher average electricity costs more than offset an increase in average selling prices. Sodium chlorate sales volumes decreased by 25,000 tonnes or 19% due principally to reduced sales volumes in North America as a result of weaker demand for pulp. Weak demand for pulp, and therefore sodium chlorate in North America was due principally to the global economic slow down. Sodium chlorate average selling prices were 7% higher than the prior year quarter due to the appreciation of the US dollar relative to the Canadian dollar on US denominated sales. Technology gross profit was $0.3 million higher than the prior year quarter due to the time of the recognition of profits on various projects, offset by the impact of the normal course expiration of royalty revenues.
Cash operating and administrative costs of $30.8 million were $3.3 million or 12% higher than the prior year quarter, due principally to the impact of the appreciation of the US dollar on US-denominated expenses and higher provisions for potential bad debts, offset in part by reduced operating costs at ERCO's Valdosta, Georgia facility due to production curtailments.
During 2007, ERCO determined that it will convert its Port Edwards, Wisconsin chloralkali facility from mercury based technology to membrane technology. The conversion is anticipated to be completed as planned during the third quarter of 2009. The project maintains the facility's ability to produce both sodium and potassium products, provides increased production capacity of approximately 30%, provides a significant extension of the plant life and enhances the efficiency of ERCO's use of electrical energy. The cost of the conversion is estimated to be US $130 million. See "Consolidated Capital Expenditure Summary" for additional details on costs incurred related to Port Edwards.
Outlook
ERCO expects EBITDA from operations for 2009 to be between $95 million and $105 million. ERCO's previous outlook as provided in the first quarter 2009 Management's Discussion and Analysis was $100 million to $110 million. The reduction in ERCO's guidance reflects weaker pricing for caustic products, offset by improved pricing on chlorine products and modestly higher sodium chlorate volumes compared to the first half of 2009. ERCO's significant assumptions underlying its current outlook are:
- Current supply and demand fundamentals for sodium chlorate will be
weaker than the prior year, resulting in reduced sales volumes for
2009;
- Chloralkali/potassium gross profits will be impacted by lower sales
prices compared to historically high levels in the first half of 2009
and the second half of 2008;
- ERCO's average plant utilization is expected to be approximately 80-
85%, excluding the impact of production curtailments at the Valdosta,
Georgia facility and the conversion of the Port Edwards, Wisconsin
facility;
- The foreign currency exchange rate between the Canadian and United
States dollar is expected to be 1.11 on all unhedged foreign currency
transactions;
- ERCO's conversion of its Port Edwards, Wisconsin chloralkali facility
from mercury based technology to membrane technology for US $130
million is expected to be completed on-budget and on schedule in the
third quarter of 2009; and
- No incremental cash flow is anticipated as a result of the Port
Edward's project in 2009, except for the impact of reduced US cash
income taxes compared to the prior year which does not form part of
ERCO's EBITDA from operations.
In addition to ERCO's significant assumptions detailed above, refer to the section "Risk Factors to Superior" for a detailed review of ERCO's significant business risk.
Construction Products Distribution
Winroc generated EBITDA from operations of $3.3 million in the second quarter, a decrease of $7.7 million or 70% from the prior year quarter, as reduced gross profit more than offset lower operating expenses.
Condensed operating results for the three and six months ended June 30, 2009 and 2008 are provided in the following table.
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Distribution and direct
sales revenue 98.2 141.5 192.3 256.9
Distribution and direct
sales cost of sales (73.9) (105.4) (143.6) (192.2)
-------------------------------------------------------------------------
Distribution and direct
sales gross profit 24.3 36.1 48.7 64.7
Less: Cash operating and
administrative costs (21.0) (25.1) (43.9) (48.9)
-------------------------------------------------------------------------
EBITDA from operations 3.3 11.0 4.8 15.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distribution and direct sales revenues of $98.2 million for the second quarter of 2009 were $43.3 million or 31% lower than the prior year quarter due to reduced sales volumes and lower selling prices. Distribution and direct sales gross profit of $24.3 million in the second quarter was $11.8 million or 33% lower than the prior year quarter, as the impact of reduced sales volumes, offset in part by sales volumes due to the acquisition of Fackoury's Building Supplies Ltd. (Fackoury's) on May 9, 2008, combined with lower average sales margins. Distribution drywall sales volumes, an indicator of overall distribution sales volumes, decreased 29% compared to the prior year quarter. The decrease in distribution sales volumes was largely due to the ongoing slowdown in new home residential housing starts which negatively impacted volumes in all of Winroc's operating regions, particularly in Western Canada and the U.S. Sales volumes were also negatively impacted by the general economic slowdown throughout North America. Percentage sales margins were lower than the prior year quarter, as competitive pressures on sales prices more than offset the impact of margin management initiatives. Cash operating and administrative costs of $21.0 million were $4.1 million or 16% lower than the prior year quarter as reduced warehouse wages and fleet costs due to cost management initiatives and reduced sales volumes were partially offset by increased costs due to the acquisition of Fackoury's and the impact of the appreciation of the US dollar on US-denominated expenses.
Outlook
Winroc expects EBITDA from operations for 2009 to be between $20 million and $25 million. Winroc's previous outlook as provided in the 2009 first quarter Management's Discussion and Analysis was $20 million to $27 million. The reduction in the top end of Winroc's 2009 outlook reflects the ongoing impact of reduced sales volumes due to the current economic environment within North America, which is anticipated to continue to negatively impact Winroc's operations. Winroc's significant assumptions underlying its current outlook are:
- Sales volumes compared to the prior year are expected to continue to
be negatively impacted by the ongoing decline in new home residential
and commercial activity in both Canada and the United States.
- Residential sales volumes in the second half of 2009 are anticipated
to modestly improve compared to the first half of 2009, while
commercial volumes will continue to be weaker than the prior year.
- Current economic conditions in Canada and the United States will
improve in the last half of 2009 with continued improvement
throughout 2010.
In addition to Winroc's significant assumptions detailed above, refer to the section "Risk Factors to Superior" for a detailed review of Winroc's significant business risks.
Fixed-Price Energy Services
SEM's condensed operating results for the three and six months ended June 30, 2009 and 2008 are provided below.
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue 77.4 85.6 153.8 167.5
Cost of sales(1)(2) (69.1) (77.0) (138.5) (152.1)
-------------------------------------------------------------------------
Gross profit 8.3 8.6 15.3 15.4
Less: Operating,
administrative and
selling costs(2) (5.5) (5.5) (11.0) (10.3)
-------------------------------------------------------------------------
EBITDA from operations 2.8 3.1 4.3 5.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Effective January 1, 2007, Superior discontinued hedge accounting for
all economic hedging activities. As such, amounts related to these
contracts must be accounted for separately on Superior's financial
statements (see Notes 8 and 12 to the unaudited Interim Consolidated
Financial Statements.) In order to better reflect the results of its
operations, Superior has reclassified these amounts for purposes of
this management's discussion and analysis to present its results as
if it had accounted for these transactions as accounting hedges. As
such, included in cost of sales for the three and six months ended
June 30, 2009, is ($0.6) million and $0.3 million in realized foreign
currency forward contract gains (losses) and $29.5 million and
$47.4 million related to natural gas commodity realized fixed price
losses. Included in cost of sales for the three and six months ended
June 30, 2008, is $6.3 million and $12.6 million in realized foreign
currency forward contract losses and $19.7 million and $21.4 million
in related to natural gas commodity realized fixed price gains.
(2) For the three and six months ended June 30, 2009 for purposes of the
management's discussion and analysis, Superior has reclassified
$0.9 million and $0.7 million, of foreign currency translation gains
related to US-denominated working capital from operating and
administrative expense to cost of sales, and for the three and six
months ended June 30, 2008 has reclassified $0.2 million and
$0.8 million of foreign currency translation losses related to
US-denominated working capital from operating and administrative
expense to cost of sales. Reclassification of the translation gains
or losses provides improved matching to the income statement
recognition of the underlying working capital item that resulted in
the translation gains or losses.
Gross Profit by Segment
-------------------------------------------------------------------------
(millions of
dollars except Three months ended Three months ended
volume and June 30, 2009 June 30, 2008
per unit Gross Gross
amounts) Profit Volume Per Unit Profit Volume Per Unit
-------------------------------------------------------------------------
Natural Gas(1) 8.00 8.3 GJ 96.4 8.35 8.0 GJ 104.4
cents/GJ cents/GJ
Electricity(2) 0.30 38.1 KWh 0.79 0.25 13.9KWh 1.79
cents/KWh cents/KWh
-------------------------------------------------------------------------
Total 8.30 8.60
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(millions of
dollars except Six months ended Six months ended
volume and June 30, 2009 June 30, 2008
per unit Gross Gross
amounts) Profit Volume Per Unit Profit Volume Per Unit
-------------------------------------------------------------------------
Natural Gas(1) 14.78 16.4 GJ 90.1 14.99 16.7 GJ 89.8
cents/GJ cents/GJ
Electricity(2) 0.52 69.0 KWh 0.75 0.41 24.3KWh 1.70
cents/KWh cents/KWh
-------------------------------------------------------------------------
Total 15.30 15.40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Natural gas volumes and per unit amounts are expressed in millions of
gigajoules (GJ).
(2) Electricity volumes and per unit amounts are expressed in millions of
kilowatt hours (KWh).
SEM generated EBITDA from operations of $2.8 million in the second quarter, a decrease of $0.3 million compared to the prior year quarter. SEM's revenues were $77.4 million in the second quarter, compared to $85.6 million in the prior year quarter. Revenues were impacted by a reduction in the average selling price of natural gas, offset in part, by an increase in electricity revenues due to higher sales volumes. Gross profit from natural gas was $8.0 million in the second quarter, a decrease of $0.3 million or 4% compared to the prior year quarter, as gross profit per gigajoule (GJ) of 96.4 cents was 8% lower than over the prior year quarter, more than offsetting a 4% increase in natural gas volume sold. Gross profit per GJ was impacted by the revaluation of US-denominated working capital which resulted in a net increase of gross profit of $0.9 million compared to the prior year quarter, offset in part by reduced gross profit due to a lower proportion of higher margin natural gas residential volumes. Natural gas sales volumes were modestly higher than the prior year quarter as an increase in commercial volumes more than offset the impact of reduced residential customer volumes. The mix between commercial and residential volumes was impacted by reduced residential customer sign-up and SEM's determination during the first quarter of 2009 that it would refocus its efforts away from direct residential natural gas and electricity marketing in Ontario to commercial natural gas and electricity marketing. SEM made this determination based on the challenges in the Ontario residential market in the acquisition of new customers and the retention of existing customers. Electricity gross profit in the second quarter of 2009 was $0.3 million, modestly higher than the prior year quarter due to the aggregation of additional commercial customers over the past twelve months. Similar to natural gas, electricity gross profit, electricity unit margins and electricity volumes were impacted by the increased focus on commercial customers. Operating, administration and selling costs of $5.5 million were consistent with the prior year quarter, as reduced selling costs due to exiting the Ontario residential market were offset by higher professional costs associated with the restructuring.
SEM invested $1.2 million in customer acquisition costs during the quarter, resulting in a customer base of 89,900 residential natural gas customers, 6,400 commercial natural gas customers and 4,700 electricity customers. As at June 30, 2009, the average remaining term of SEM's contracts was 23 months (June 30, 2008 - 30 months), reflecting the slowdown in the sign-up of new customers, and the retention of existing customers. Residential and small commercial customer volumes comprised approximately 28% of sales volumes in the second quarter (2008 second quarter - 29%).
Outlook
SEM expects EBITDA from operations for 2009 to be between $9 million and $12 million, consistent with. SEM's previous outlook as provided in the first quarter 2009 Management's Discussion and Analysis. SEM's significant assumptions underlying its current outlook are:
- SEM is able to access sales channel distributors on acceptable
contract terms;
- Natural gas markets in Ontario, Quebec and British Columbia will
provide growth opportunities for SEM; and
- The commercial electricity market in Ontario is expected to provide
additional growth opportunities for SEM.
In addition to SEM's significant assumptions detailed above, refer to the
section "Risk Factors to Superior" for a detailed review of SEM's significant
business risks.
Consolidated Capital Expenditure Summary
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Efficiency, process
improvement and growth
related 5.1 7.1 12.9 10.9
Other capital 1.8 2.8 3.3 4.4
Port Edwards expansion
project 29.6 3.3 56.2 8.5
-------------------------------------------------------------------------
36.5 13.2 72.4 23.8
Earn-out payment on
prior acquisition - - 0.6 -
Acquisitions - 24.6 - 24.6
Proceeds on disposition
of capital (1.1) (1.3) (2.9) (1.5)
-------------------------------------------------------------------------
Total net capital
expenditures 35.4 36.5 70.1 46.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Efficiency, process improvement and growth related expenditures were $5.1 million in the second quarter compared to $7.1 million in the prior year quarter. Efficiency, process improvement and growth related expenditures were incurred in relation to ERCO's electrical cell replacement program, other efficiency projects and Superior Propane's business transformation project. Other capital expenditures were $1.8 million in the second quarter compared to $2.8 million in the prior year quarter, consisting primarily of required maintenance and general capital at Superior Propane and ERCO. Proceeds on the disposal of capital were $1.1 million in the second quarter and consisted of Superior Propane's disposition of an excess property and surplus tanks and cylinders. ERCO incurred $29.6 million (US$25.6 million) in the second quarter of 2009 related to its Port Edward's expansion project, and has incurred US$91.6 million cumulatively on the project which is anticipated to cost US$130.0 million in aggregate.
Corporate and Interest Costs
Corporate costs for the second quarter were $3.2 million, compared to $2.0 million in the prior year quarter. Corporate costs were impacted by the timing of the recognition of long-term incentive plan costs due to quarter-over-quarter fluctuations in the market value of Superior's share price and higher professional and consulting costs, offset by reduced short-term incentive plan costs.
Interest expense on revolving term bank credits and term loans was $4.0 million (net of $1.4 million of realized gains on interest rate swaps) for the second quarter, a decrease of $0.7 million from the prior year quarter. The decrease in interest expense was due to lower average interest rates on floating rate debt, offset by the impact of higher average debt levels and the appreciation of the US dollar on US-denominated interest costs. See "Liquidity and Capital Resources" discussion for further details on the change in average debt levels.
Interest on Superior's unsecured subordinated convertible debentures (the debentures) was $3.7 million for the second quarter of 2009, consistent with the prior year quarter interest of $3.7 million.
Taxation
On December 31, 2008, Superior converted from a publicly traded income trust to a publicly traded corporation by way of a plan of arrangement with Ballard Power for cash consideration of $46.3 million. The transaction resulted in Superior increasing its tax basis by approximately $1,002.3 million. Additional consideration may be payable to/receivable from Ballard in future periods based on the finalization of tax basis available to Superior. Superior's calculation of current and future income taxes for the period ended June 30, 2009 is based on the conversion to a corporate structure effective December 31, 2008, whereas Superior's calculation of current and future income taxes for the period ended June 30, 2008 is based on Superior being a publicly traded income trust. Consistent with prior periods, Superior recognizes a provision for income taxes for its subsidiaries that are subject to current and future income taxes, including United States income tax, United States non-resident withholding tax and Chilean income tax.
Total income tax expense for the second quarter was $3.5 million, and consists of $1.2 million in cash income taxes and $2.3 million in future income taxes, compared to a total income tax expense of $11.0 million in the prior year quarter, which consisted of $4.2 million in cash income taxes and a $6.8 million future income tax expense.
Cash income and withholding taxes for the second quarter were $1.2 million and consisted of cash taxes in the US of $0.9 million and Canadian capital and withholding taxes of $0.3 million (2008 Q2 - $2.8 million of US cash taxes and $1.4 million of withholding taxes). The decrease in US cash income taxes was due to reduced US-denominated taxable earnings as a result of weaker operating results at ERCO and Winroc's US operations. The decrease in withholding taxes is due to the establishment of certain intercompany financing structures in the prior year quarter. Future income tax expense for the second quarter of 2009 was $2.3 million (2008 Q2 - $6.8 million future income tax expense), resulting in a corresponding net future income tax asset of $253.7 million as at June 30, 2009 and a net deferred credit of $281.2 million. Future income taxes were impacted by Superior's conversion to a corporation on December 31, 2008 and the impact of unrealized gains and losses on financial instruments.
Consolidated Outlook
Superior expects adjusted cash flow from operations for 2009 to be between $1.95 and $2.10 per share and for 2010 to be between $2.05 and $2.25 per share. Superior's previous outlook for 2009 was $2.00 and $2.15 per share and for 2010 to be between $2.20 and $2.40 per share, as provided in the first quarter 2009 Management's Discussion and Analysis. Superior has reduced its 2009 outlook to reflect a reduction in divisional operating guidance at ERCO and Winroc. Superior has reduced its 2010 outlook to reflect Superior's view that general economic growth in 2010 will be slower than previously forecast. Superior's consolidated adjusted operating cash flow outlook is predominantly dependent on the operating results of its four divisions. See the discussion of operating results by division for additional details on Superior's 2009 guidance. In addition to the operating results of Superior's four divisions, significant assumptions underlying Superior's current 2009 and 2010 outlook are:
- Current economic conditions in Canada and the United States will
improve in the second half of 2009 with continued modest improvement
throughout 2010;
- Superior continues to attract capital and obtain financing on
acceptable terms;
- The foreign currency exchange rate between the Canadian and US dollar
averages 1.11 in 2009 and 1.11 in 2010 on all unhedged foreign
currency transactions;
- Superior's average interest rate on floating rate debt remains stable
to marginally lower throughout 2009, increasing modestly in 2010;
- Financial and physical counterparties continue to fulfill their
obligations to Superior;
- Regulatory authorities do not impose any new regulations impacting
Superior;
- EBITDA from operations of the divisions in 2010 is consistent, to
modestly improved, compared to 2009;
- Incremental EBITDA is generated in 2010 from the Port Edward's
expansion project, which is due to be completed in the third quarter
of 2009; and
- US cash income taxes for 2009 and 2010 will be reduced due to the
completion of the Port Edward's expansion project in the third
quarter of 2009.
In addition to Superior's significant assumptions detailed above, refer to the section "Risk Factors to Superior" for a detailed review of Superior's significant business risks.
Liquidity and Capital Resources
Superior's revolving term bank credit and term loans before deferred financing fees, including $85.9 million related to Superior's accounts receivable securitization program totaled $530.3 million as at June 30, 2009, a decrease of $47.4 million from December 31, 2008. The decrease in revolving term bank credits and terms loans is predominately due to the repayment of debt with cash flow in excess of dividends for the six months ended June 30, 2009 and the non-cash impact of the appreciation of the US dollar on US-denominated debt (approximately $15.0 million), offset by the impact of capital expenditures. On May 21, 2009, Superior extended $570.0 million of its revolving term credit facility; the facility matures on June 28, 2011. See "Summary of Cash Flows" for a complete summary of Superior's sources and uses of cash.
As at June 30, 2009, debentures before deferred issue costs issued by Superior totaled $248.0 million, which is $0.4 million higher than the balance at December 31, 2008. The change in the stated cost of the debentures is due to the accretion of the original discount to interest expense during the six months ended June 30, 2009.
As at June 30, 2009, approximately $293.5 million was available under Superior's credit facilities and accounts receivable securitization program, which Superior considers sufficient to meet its net working capital funding requirements and expected capital expenditures.
Consolidated net working capital was $72.0 million as at June 30, 2009, a decrease of $74.7 million from $146.7 million as at December 31, 2008. The reduction in net working capital is due to lower working capital levels at Superior Propane due to the seasonal reduction in working capital levels combined with a reduction in the retail cost of propane. Lower working capital levels at Winroc were due to reduced sales activity and inventory management initiatives, while working capital at ERCO was impacted by the accounts receivable securitization program. Corporate related working capital was impacted by the requirement to fund the December 31, 2008 distribution to Superior's trust agent in advance of the payment on January 15, 2008. Net working capital at Propane and ERCO was impacted in part by a $14.9 million decrease in Superior's accounts receivable securitization program. Superior's net working capital requirements are financed from revolving term bank credit facilities and by proceeds raised from a trade accounts receivable sales program.
As at June 30, 2009, Superior's senior debt and total debt to compliance EBITDA are 2.2 and 3.3 times, respectively, (December 31, 2008, 2.3 and 3.4 times), after taking into account the impact of the off-balance sheet receivable sales program amounts and the impact of cash on hand. These ratios are within the requirements contained in Superior's debt covenants which restrict its ability to pay dividends. In accordance with Superior's credit facilities, Superior must maintain a consolidated debt to compliance EBITDA ratio of not more than 5.0 to 1.0, a consolidated senior debt to compliance EBITDA ratio of not more than 3.0 to 1.0 and distributions (including payments to debenture holders) cannot exceed compliance EBITDA, less cash income taxes and certain capital expenditures, plus $25.0 million on a trailing twelve month rolling basis. At June 30, 2008, the senior debt ratio when calculated in accordance with Superior's senior banking agreements was 2.3 times to 1.0 (December 31, 2008 - 2.4 to 1.0) and the total debt ratio when calculated in accordance with Superior's senior bank agreements was 2.3 times to 1.0 (December 31, 2008 - 2.4 times to 1.0). Total debt to compliance EBITDA for purposes of senior credit agreements does not include the debentures.
Superior has entered into an agreement to sell, with limited recourse, certain accounts receivables on a 30-day revolving basis to an entity sponsored by a Canadian chartered bank to finance a portion of its working capital requirements, which represents an off-balance sheet obligation. The receivables are sold at a discount to face value based on prevailing money market rates. As at June 30, 2009, proceeds of $85.9 million (December 31, 2008 - $100.0 million) had been raised from this program and were used to repay revolving term bank credits. (See Note 4 to the unaudited Interim Consolidated Financial Statements). Superior is able to adjust the size of the sales program on a seasonal basis in order to match the fluctuations of its accounts receivable funding requirements. The program requires Superior to maintain a minimum secured credit rating of BB and meet certain collection performance standards. Superior is currently fully compliant with program requirements. Effective April 30, 2009, Superior extended the maturity of its accounts receivable securitization program until June 29, 2010.
On June 10, 2009, DBRS confirmed Superior's senior secured notes rating at BBB(low) with a stable outlook. On June 12, 2009, Standard and Poor's confirmed Superior's BBB- secured long-term debt credit rating, but altered their outlook from stable to negative. Additionally, on June 12, 2009, Standard and Poor's confirmed Superior's BB+ unsecured credit rating.
At June 30, 2009, Superior had an estimated defined benefit pension solvency deficiency of approximately $24 million. Funding requirements required by applicable pension legislation are based upon solvency actuarial assumptions. These assumptions differ from the going concern actuarial assumptions used in Superior's financial statements. Superior has sufficient liquidity through existing revolving term bank credits and anticipated future operating cash flow to fund this deficiency over the prescribed funding period.
In the normal course of business, Superior is subject to lawsuits and claims. Superior believes the resolution of these matters will not have a material adverse effect, individually or in the aggregate, on Superior's liquidity, consolidated financial position or results of operations. Superior records costs as they are incurred or when they become determinable.
Shareholders' Capital
The weighted average number of shares outstanding during the second quarter was 88.4 million shares, consistent with the prior year quarter.
As at August 6, 2009, June 30, 2009, and December 31, 2008, the following shares and securities convertible into shares were outstanding:
-------------------------------------------------------------------------
August 6, 2009 June 30, 2009 December 31, 2008
Convert- Convert- Convert-
ible ible ible
Secur- Secur- Secur-
(millions) ities Shares ities Shares ities Shares
-------------------------------------------------------------------------
Shares
outstanding 88.4 88.4 88.4
Series 1, 5.75%
Debentures
(convertible
at $36.00 per
share) $174.9 4.9 $174.9 4.9 $174.9 4.9
Series 1, 5.85%
Debentures
(convertible
at $31.25 per
share) $75.0 2.4 $75.0 2.4 $75.0 2.4
-------------------------------------------------------------------------
Shares
outstanding, and
issuable upon
conversion of
debenture and
warrant
securities 95.7 95.7 95.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Dividends Paid to Shareholders
Superior's dividends to its shareholders are dependent on its cash flow from operating activities with consideration for changes in working capital requirements, investing activities and financing activities of Superior. See "Summary of Adjusted Operating Cash Flow" on page 8 and "Summary of Cash Flows" on page 20 for additional details on the sources and uses of Superior's cash flow.
Dividends paid to shareholders for the quarter ended June 30, 2009 totaled $35.8 million or $0.405 per share, consistent with the second quarter of 2008. Superior's current monthly dividend is $0.135 per share ($1.62 on an annualized basis). Dividends to shareholders are declared at the discretion of Superior.
Superior's primary sources and uses of cash have been detailed in the
table below:
Summary of Cash Flows(1)
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash flows from operating
activities 75.0 82.2 158.4 145.4
Investing activities:
Purchase of property,
plant and equipment(2) (36.5) (13.2) (72.4) (23.8)
Proceeds on disposal of
property, plant and
equipment 1.1 1.3 2.9 1.5
Earn-out payment on
prior acquisition - - (0.6) -
Acquisitions - (24.6) - (24.6)
-------------------------------------------------------------------------
Cash flows from investing
activities (35.4) (36.5) (70.1) (46.9)
-------------------------------------------------------------------------
Financing activities:
Dividends to
shareholders (35.8) (35.8) (71.6) (70.6)
Revolving term bank
credits and term loans 36.1 (9.2) (23.0) 64.8
Net proceeds of accounts
receivable
securitization program (39.1) - (14.1) (100.0)
Realized gain on
financial instruments 6.3 - 6.3 -
Other (3.5) - 12.0 -
Proceeds from
distribution
reinvestment plan - - - 8.9
-------------------------------------------------------------------------
Cash flows from financing
activities (36.0) (45.0) (90.4) (96.9)
-------------------------------------------------------------------------
Net increase (decrease)
in cash 3.6 0.7 (2.1) 1.6
Cash beginning of period 10.4 15.0 16.1 14.1
-------------------------------------------------------------------------
Cash end of period 14.0 15.7 14.0 15.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See the unaudited Interim Consolidated Statements of Cash Flows for
additional details.
(2) See "Consolidated Capital Expenditure Summary" for additional
details.
Financial Instruments - Risk Management
Derivative and non-financial derivatives are used by Superior to manage its exposure to fluctuations in foreign currency exchange rates, interest rates and commodity prices. Superior assesses the inherent risks of these instruments by grouping derivative and non-financial derivatives related to the exposures these instruments mitigate. Superior's policy is not to use derivative or non-financial derivative instruments for speculative purposes. Superior does not formally designate its derivatives as hedges, as a result, Superior does not apply hedge accounting and is required to designate its derivatives and non-financial derivatives as held for trading.
Effective 2008, SEM enters into natural gas financial swaps primarily with Constellation Energy Commodities Group Inc. for distributor billed natural gas business in Canada to manage its economic exposure of providing fixed-price natural gas to its customers. Additionally, SEM continues to maintain its historical natural gas swap positions with seven additional counterparties. SEM monitors its fixed-price natural gas positions on a daily basis to evaluate compliance with established risk management policies. SEM maintains a substantially balanced fixed-price natural gas position in relation to its customer supply commitments.
SEM enters into electricity financial swaps with three counterparties to manage the economic exposure of providing fixed-price electricity to its customers. SEM monitors its fixed-price electricity positions on a daily basis to evaluate compliance with established risk management policies. SEM maintains a substantially balanced fixed-price electricity position in relation to its customer supply commitments.
ERCO has entered into fixed-price electricity purchase agreements to manage the economic exposure of certain of its chemical facilities to changes in the market price of electricity, in markets where the price of electricity is not fixed. Substantially all of the fair value with respect to these agreements is with a single counterparty.
Superior Propane enters into various propane forward purchase and sale agreements with more than twenty counterparties to manage the economic exposure of its wholesale customer supply contracts. Superior Propane monitors its fixed-price propane positions on a daily basis to monitor compliance with established risk management policies. Superior Propane maintains a substantially balanced fixed-price propane gas position in relation to its wholesale customer supply commitments.
Superior, on behalf of its operating divisions, enters into foreign currency forward contracts with ten counterparties to manage the economic exposure of Superior's operations to movements in foreign currency exchange rates. SEM and Superior Propane contract a portion of their fixed-price natural gas, and propane purchases and sales in US dollars and enter into forward US dollar purchase contracts to create an effective Canadian dollar fixed-price purchase cost. ERCO 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 debt is also used to mitigate the impact of foreign exchange fluctuations.
As at June 30, 2009, SEM and Superior Propane had hedged approximately 100% of their US dollar natural gas and propane purchase (sales) obligations and ERCO Worldwide had hedged 89%(2) and 75%(2) of its estimated US dollar exposure for the remainder of 2009 and 2010. The estimated sensitivity on adjusted operating cash flow for Superior, including divisional US exposures and the impact on US-denominated debt with respect to a $0.01 change in the Canadian to United States exchange rate for 2009 is $0.1 million, after giving effect to United States forward contracts for 2009, as shown in the table below. Superior's sensitivities and guidance are based on an anticipated Canadian to USD foreign currency exchange rate for 2009 of 1.11.
-------------------------------------------------------------------------
2014
and
There-
(US$ millions) 2009 2010 2011 2012 2013 after Total
-------------------------------------------------------------------------
SEM - US$ forward
purchases(1) (49.4) (61.9) (5.4) - - - (116.7)
Superior Propane -
US$ forward sales 6.6 3.1 - - - - 9.7
ERCO - US$ forward
sales(2) 64.7 111.4 64.5 32.5 9.0 - 282.1
SPLP - US$ forward
purchases (5.3) - - - - - (5.3)
-------------------------------------------------------------------------
Net US $ forward
purchases 16.6 52.6 59.1 32.5 9.0 - 169.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEM - Average US$
forward purchase
rate(1) 1.21 1.16 1.11 - - - 1.18
Superior Propane -
Average US$ forward
rate 1.22 1.21 - - - - 1.22
ERCO - Average US$
forward sales rate(2) 1.08 1.08 1.20 1.13 1.11 - 1.12
SPLP - Average US$
forward sales purchase
rate 1.09 - - - - - 1.09
-------------------------------------------------------------------------
Net average external
US$/Cdn$ exchange rate 1.14 1.11 1.19 1.13 1.11 - 1.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ERCO - EURO forward
sales 2.8 5.1 0.3 - - - 8.2
-------------------------------------------------------------------------
ERCO - Average EURO
forward sales rate 1.58 1.58 1.58 - - - 1.58
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) SEM is now sourcing its fixed-price natural gas requirements in
Canadian dollars, as such, SEM will no longer be required to use
United States dollar forward contracts to fix its Canadian dollar
exposure.
(2) Does not include the impact of the US$ conversion of ERCO's Port
Edwards, Wisconsin chloralkali facility which is anticipated to cost
US$130.0 million in aggregate, of which $29.6 million
(US$25.6 million) was incurred in the second quarter of 2009,
(US$91.6 million cumulatively) with the remaining costs expected
throughout 2009.
Superior has interest rate swaps with a single counterparty to manage the interest rate mix of its total debt portfolio and related overall cost of borrowing. Superior manages its overall liquidity risk in relation to its general funding requirements by utilizing a mix of short-term and longer-term maturity debt instruments. Superior reviews its mix of short-term and longer-term debt instruments on an on-going basis to ensure it is able to meet its liquidity requirements.
Superior utilizes a variety of counterparties in relation to its derivative and non-financial derivative instruments in order to mitigate its counterparty risk. Superior assesses the credit worthiness of its significant counterparties at the inception and throughout the term of a contract. Superior is also exposed to customer credit risk. Superior Propane and Winroc deal with a large number of small customers, thereby reducing this risk. ERCO, due to the nature of its operations, sells its products to a relatively small number of customers. ERCO mitigates its customer credit risk by actively monitoring the overall credit worthiness of its customers. SEM has minimal exposure to customer credit risk as local natural gas and electricity distribution utilities have been mandated, for a nominal fee, to provide SEM with invoicing, collection and the assumption of bad debts risk for residential and small commercial customers. SEM actively monitors the credit worthiness of its industrial customers.
For additional details on Superior's financial instruments, including the amount and classification of gains and losses recorded in Superior's second quarter Consolidated Financial Statements, summary of fair values, notional balances, effective rates and terms, and significant assumptions used in the calculation of the fair value of Superior's financial instruments, see Note 8 to the Interim Consolidated Financial Statements.
Subsequent Event
On August 6, 2009, Superior entered into a definitive agreement to acquire the shares of Specialty Products & Insulation Co. (SPI), a privately held US national distributor of insulation and architectural products in the commercial and industrial markets for consideration of approximately US$135 million (not including acquisition costs and normal course closing adjustments). The acquisition is anticipated to close in the third quarter of 2009.
Changes in Internal Control over Financial Reporting
During the first quarter of 2009, Superior made changes in the processes and procedures at SEM in response to the two material weaknesses referenced in the 2008 annual certification. During the first and second quarters, management has overseen changes to ensure the specific internal controls are effective. Management has confirmed through ongoing monitoring and independent review that the key reconciliation at SEM and controls over the mark-to-market calculation at SEM operated effectively throughout the first and second quarters. Management will continue to monitor and test these controls throughout 2009.
Critical Accounting Policies and Estimates
Superior's unaudited Interim Consolidated Financial Statements have been prepared in accordance with Canadian GAAP. The significant accounting policies are described in the Consolidated Financial Statements, see Note 2 on pages 61 to 66 of the 2008 annual report. Certain of these accounting policies, as well as estimates made by management in applying such policies, are recognized as critical because they require management to make subjective or complex judgments about matters that are inherently uncertain. Our critical accounting estimates relate to the allowance for doubtful accounts, employee future benefits, future income tax assets and liabilities, the valuation of derivatives and non-financial derivatives and asset impairments and the assessment of potential asset retirement obligations.
Changes in Accounting Policies Financial Assets and Financial Liabilities
On January 1, 2009, Superior adopted the requirements of guidance provided by the CICA related to the application of credit risk and the determination of the fair value of financial assets and liabilities. Superior adopted the guidance retrospectively, but did not restate prior periods. Accordingly, Superior decreased the carrying value of its net financial instrument assets and liabilities as at January 1, 2009, by $0.4 million, with a corresponding increase of $0.1 million to Superior's future income tax asset and an increase of $0.3 million to Superior's opening accumulated deficit; comparative earnings and financial assets and liabilities for prior periods have not been restated. See the unaudited Interim Consolidated Financial Statements for additional details.
Goodwill and Intangible Assets
On January 1, 2009, Superior adopted CICA Handbook Section 3064 Goodwill and Intangible Assets. This standard provides more specific guidance on the recognition of internally developed intangible assets and requires that research and development expenditures be evaluated against the same criteria as expenditures for intangible assets. The Section harmonizes Canadian GAAP with International Financial Reporting Standards (IFRS). Adoption of this standard did not have an impact on Superior.
Future Accounting Changes International Financial Reporting Standards
The Accounting Standards Board of Canada (AcSB) has announced plans that will require the convergence of Canadian GAAP with International Financial Reporting Standards (IFRS) for publicly accountable enterprises, including Superior Plus Corp. The changeover date from Canadian GAAP to IFRS is for annual and interim financial statements relating to fiscal years beginning on or after January 1, 2011.
During 2008, Superior formed an IFRS project team to develop an IFRS transition plan. Superior's approach is to assess and coordinate ongoing training requirements in conjunction with the development of a comprehensive diagnostic/planning document throughout the first and second quarters of 2009. Superior's diagnostic plan will include the assessment of differences between Canadian GAAP and IFRS, options available under IFRS, potential system requirements as a result of the adoption of IFRS, and the impact on internal controls and other business activities. Upon completion of a comprehensive diagnostic, Superior will focus its efforts on the development and execution of a detailed IFRS transition plan.
At this time, Superior is unable to reasonably estimate the impact that the adoption of IFRS may have on its future operating results or financial position. Superior's preliminary assessment of areas that may have a significant impact upon adoption of IFRS consist of, but may not be limited to:
- Property, plant and equipment may be impacted by the requirement to
record and amortize on the basis of material components;
- Employee future benefit obligations will be impacted as IFRS does not
allow the deferral of certain actuarial gains and losses which are
currently deferred under Canadian GAAP;
- Asset impairments recorded in prior years, under certain
circumstances, are eligible to be reversed under IFRS;
- The classification of a lease arrangement as either an operating
lease or a finance/capital lease may differ under IFRS;
- The assessment and accounting treatment of off-balance sheet
arrangements such as Superior's accounts receivable securitization
program may differ under IFRS ;
- The classification of financial statement items may differ under
IFRS; and
- Financial statement disclosures under IFRS tend to be more
comprehensive than those under Canadian GAAP.
Superior will continue to assess the impact of IFRS throughout 2009, including the impact on its consolidated financial statements, financial reporting systems and internal control systems.
Financial Instruments - Disclosure
The CICA has amended Handbook Section 3862 Financial Instruments - Disclosure. These amendments require enhanced disclosure on the fair value of certain financial instruments. The amendments are effective for annual financial statements on or after September 30, 2009. Superior does not anticipate that these amendments will have a significant impact on its consolidated financial statements.
Quarterly Financial and Operating Information
-------------------------------------------------------------------------
2009 2008
Quarters Quarters
-------------------------------------------------------------------------
(millions of
dollars except
per share
amounts) Second First Fourth Third Second First
-------------------------------------------------------------------------
Propane sales
volumes
(millions of
litres) 249 431 390 244 274 469
Chemical sales
volumes
(thousands of
metric tonnes) 155 155 160 188 188 191
Natural gas
sales volumes
(millions of
GJs) 8 8 8 8 8 9
Electricity
sales volumes
(millions of
KWh) 38 31 28 18 14 10
Gross profit 134.9 188.3 193.1 152.8 153.3 169.9
Net earnings
(loss) 23.4 (5.5) (19.9) (203.9) 164.3 127.2
Per share,
basic $0.26 $(0.06) $(0.23) $(2.31) $1.86 $1.44
Per share,
diluted $0.26 $(0.06) $(0.23) $(2.31) $1.86 $1.44
Adjusted
operating cash
flow 18.9 61.3 65.0 33.5 38.1 55.7
Per share,
basic $0.21 $0.69 $0.74 $0.38 $0.43 $0.63
Per share,
diluted $0.21 $0.69 $0.74 $0.38 $0.43 $0.63
Net working
capital(1) 72.0 83.7 152.2 227.4 217.6 256.3
-------------------------------------------------------------------------
-------------------------------------------
2007
Quarters
-------------------------------------------
(millions of
dollars except
per share
amounts) Fourth Third Second
-------------------------------------------
Propane sales
volumes
(millions of
litres) 416 256 280
Chemical sales
volumes
(thousands of
metric tonnes) 194 187 193
Natural gas
sales volumes
(millions of
GJs) 9 9 9
Electricity
sales volumes
(millions of
KWh) 2 - -
Gross profit 185.8 145.9 144.4
Net earnings
(loss) 64.5 (26.9) (25.5)
Per share,
basic $0.74 $(0.31) $(0.30)
Per share,
diluted $0.74 $(0.31) $(0.30)
Adjusted
operating cash
flow 64.9 30.3 21.7
Per share,
basic $0.74 $0.35 $0.25
Per share,
diluted $0.74 $0.35 $0.25
Net working
capital(1) 157.0 62.3 105.2
-------------------------------------------
(1) Net working capital reflects amounts as at the quarter end and is
comprised of cash and cash equivalents, accounts receivable and
inventories, less bank indebtedness, accounts payable and accrued
liabilities, current portion of term loans and dividends and interest
payable to shareholders and debentureholders.
Reconciliation of Net Earnings (Loss) to EBITDA from Operations(1)(2)(3)
-------------------------------------------------------------------------
For the three months Superior
ended June 30, 2009 Propane ERCO Winroc SEM
-------------------------------------------------------------------------
Net earnings (loss) 6.3 8.0 2.2 17.6
Add: Amortization of
property, plant and
equipment, intangible
assets and accretion
of convertible
debenture issue costs 3.2 1.4 1.1 -
Amortization included
in cost of sales - 9.1 - -
Superior Propane
non-cash pension
expense 0.3 - - -
Unrealized (gains)
losses on financial
instruments (7.8) 1.7 - (14.8)
Reversal of unrealized
losses financial
instruments previously
treated as realized 2.7 - - -
-------------------------------------------------------------------------
EBITDA from operations 4.7 20.2 3.3 2.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months Superior
ended June 30, 2008 Propane ERCO Winroc SEM
-------------------------------------------------------------------------
Net earnings (loss) 8.8 25.1 10.0 145.1
Add: Amortization of
property, plant and
equipment, intangible
assets and accretion
of convertible
debenture issue costs 3.9 1.8 1.0 0.1
Amortization included
in cost of sales - 9.1 - -
Superior Propane
non-cash pension
expense 0.6 - - -
Unrealized (gains)
losses on financial
instruments (0.4) (10.3) - (142.1)
-------------------------------------------------------------------------
EBITDA from operations 12.9 25.7 11.0 3.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months Superior
ended June 30, 2009 Propane ERCO Winroc SEM
-------------------------------------------------------------------------
Net earnings (loss) 43.4 14.8 2.6 (35.9)
Add: Amortization of
property, plant and
equipment, intangible
assets and accretion
of convertible
debenture issue costs 9.4 2.5 2.2 0.2
Amortization included
in cost of sales - 18.2 - -
Superior Propane
non-cash pension
expense 0.7 - - -
Unrealized (gains)
losses on financial
instruments (3.9) 16.8 - 40.0
-------------------------------------------------------------------------
EBITDA from operations 49.6 52.3 4.8 4.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months Superior
ended June 30, 2008 Propane ERCO Winroc SEM
-------------------------------------------------------------------------
Net earnings (loss) 39.3 55.9 13.8 232.2
Add: Amortization of
property, plant and
equipment, intangible
assets and accretion
of convertible
debenture issue costs 7.7 2.8 2.0 0.1
Amortization included
in cost of sales - 19.7 - -
Superior Propane
non-cash pension
expense 1.2 - - -
Unrealized (gains)
losses on financial
instruments 2.6 (26.7) - (227.2)
-------------------------------------------------------------------------
EBITDA from operations 50.8 51.7 15.8 5.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See the unaudited Interim Consolidated Financial Statements for net
earnings (loss), amortization of property, plant and equipment,
intangible assets and accretion of convertible debenture issue costs,
tax expense (recovery), management internalization costs, non-cash
pension expense and unrealized (gains) losses on financial
instruments.
(2) See "Non-GAAP Financial Measures" for additional details.
(3) For the three months ended June 30, 2009, Superior has reversed the
impact of $2.7 million of unrealized losses on financial instruments
which were treated as a component of EBITDA from operations for the
three months ended March 31, 2009, related to Superior Propane's
wholesale trading business. There is no impact on Superior Propane's
EBITDA from operations for the six months ended June 30, 2009.
Risk Factors to Superior
The risks factors and uncertainties detailed below are a summary of Superior's assessment of its material risk factors as identified in Superior's 2008 Annual Information Form under the heading "Risk Factors". For a detailed discussion of these risks, see Superior's 2008 Annual Information Form filed on the Canadian Securities Administrator's website, www.sedar.com and Superior's website, www.superiorplus.com.
Risks to Superior
Superior is entirely dependent upon the operations and assets of Superior LP. Superior's ability to make dividend payments to shareholders is dependent upon the ability of Superior LP to make distributions on its outstanding limited partnership units as well as the operations and business of Superior LP.
Although Superior intends to distribute the income allocated from Superior LP, less the amount of its expenses, indebtedness and other obligations and less amounts, if any, Superior pays in connection with the redemption of common shares, there is no assurance regarding the amounts of cash to be distributed by Superior LP or generated by Superior LP and therefore funds available for dividends to shareholders. The actual amount distributed in respect of the limited partnership units will depend on a variety of factors including, without limitation, the performance of Superior LP's operating businesses, the effect of acquisitions or dispositions on Superior LP, and other factors that may be beyond the control of Superior LP or Superior. In the event significant sustaining capital expenditures are required by Superior LP or the profitability of Superior LP declines, there would be a decrease in the amount of cash available for dividends to shareholders and such a decrease could be material.
Superior's dividend policy and the distribution policy of Superior LP are subject to change at the discretion of the board of directors of Superior or the board of directors of Superior General Partner Inc., the General Partner of Superior LP, as applicable. Superior's dividend policy and the distribution policy of Superior LP are also limited by contractual agreements including agreements with lenders to Superior and its affiliates and by restrictions under corporate law.
The credit facilities of Superior LP contain covenants that require Superior LP to meet certain financial tests and that restrict, among other things, the ability of Superior LP to incur additional debt, dispose of assets or pay dividends/distributions in certain circumstances. These restrictions may preclude Superior LP from returning capital or making distributions on the limited partnership units.
The payout by Superior LP of substantially all of its available cash flow means that capital expenditures to fund growth opportunities can only be made in the event that other sources of financing are available. Lack of access to such additional financing could limit the future growth of the business of Superior LP and, over time, have a material adverse effect on the amount of cash available for dividends to Shareholders.
To the extent that external sources of capital, including public and private markets, become limited or unavailable, Superior's and Superior LP's ability to make the necessary capital investments to maintain or expand the current business and to make necessary principal payments, uncertainties and assumptions under its term credit facilities may be impaired.
Superior maintains a substantial floating interest rate exposure through a combination of floating interest rate borrowings and the use of derivative instruments. Demand levels for approximately half of Superior Propane's sales and substantially all of ERCO and Winroc's sales are affected by general economic trends. Generally speaking, when the economy is strong, interest rates increase as does sales demand from Superior's customers, thereby increasing Superior's ability to pay higher interest costs and vice versa. In this way, there is a common relationship between economic activity levels, interest rates and Superior's ability to pay higher or lower rates.
A portion of Superior's net cash flows are denominated in US dollars. Accordingly, fluctuations in the Canadian/US dollar exchange rate can impact profitability.
The timing and amount of capital expenditures incurred by Superior LP or by its subsidiaries will directly affect the amount of cash available to Superior for dividends to shareholders. Dividends may be reduced, or even eliminated, at times when significant capital expenditures are incurred or other unusual expenditures are made.
If the board of directors of Superior decides to issue additional common shares, preferred shares or securities convertible into common shares, existing shareholders may suffer significant dilution.
Superior is or may be exposed to third-party credit risk relating to any obligations of Ballard that are not transferred, or if transferred, from which obligations Superior has not been released. Superior has, through the contractual provisions in the agreement entered into with Ballard in connection with Superior's corporate conversion (the Arrangement Agreement), the indemnity agreement and the divestiture agreement contemplated thereby, and through securing certain insurance coverage, attempted to ensure that the liabilities and obligations relating to the business of Ballard are transferred to and assumed by New Ballard, that Superior is released from any such obligations and, even where such transfer or release is not effective or is not obtained, Superior is indemnified by New Ballard for all such obligations. However, in the event New Ballard fails or is unable to meet such contractual obligations to Superior and to the extent any applicable insurance coverage is not available, Superior may be liable for such obligations which could have a material adverse effect on the business, financial condition and results of operations of Superior.
Although Superior has conducted investigations of, and engaged legal counsel to review, the corporate, legal, financial and business records of Ballard and attempted to ensure, through the contractual provisions in the Arrangement Agreement, the indemnity agreement and the divestiture agreement, and through securing certain insurance coverage, that the liabilities and obligations relating to the business of Ballard are transferred to and assumed by the new corporation which continued to carry on Ballard's business, there may be liabilities or risks that Superior may not have uncovered in its due diligence investigations, or that may have an unanticipated material adverse effect on Superior. These liabilities and risks could have, individually or in the aggregate, a material adverse effect on the business, financial condition and results of operations of Superior.
The steps under the plan of arrangement pursuant to which the corporate conversion was completed (the Plan of Arrangement) were structured to be tax-deferred to the Fund and Fund Unitholders based on proposals to facilitate tax deferred conversions of certain mutual fund trusts into taxable Canadian corporations (the SIFT Reorganization Amendments) proposed by the Department of Finance on July 14, 2008. On March 5, 2009 the Budget Implementation Act, 2009 (Bill C-10 (2009)), which includes the SIFT Reorganization Amendments, received second reading in the Senate and has been referred to the Senate Standing Committee on National Finance. If the SIFT Reorganization Amendments are not passed in their current form or other legislation or amendments to existing legislation are proposed or announced, there is a risk that the tax consequences contemplated by the Fund or the tax consequences of the Plan of Arrangement to the Fund and the Unitholders may be materially different from the tax consequences described in the Plan of Arrangement. While Superior is confident in its position, there is a possibility that the Canada Revenue Agency could successfully challenge the tax consequences of the Plan of Arrangement or prior transactions of Ballard, or that legislation could be enacted or amended resulting in different tax consequences from those contemplated in the Plan of Arrangement for Superior. Such a challenge or legislation could potentially affect the availability or amount of the tax basis or other tax accounts of Superior.
Risks to the Businesses Superior Propane
Propane is sold in competition with other energy sources such as fuel oil, electricity and natural gas, along with alternative energy sources that are currently under development. In addition to competition from other energy sources, Superior Propane competes with other retail marketers. Superior Propane's ability to remain an industry leader depends on its ability to provide reliable service at competitive selling prices.
Weather and general economic conditions affect propane market volumes. Weather influences the demand for propane primarily for space heating uses and also for agricultural applications.
The trend towards increased conservation measures and technological advances in energy efficiency may have a detrimental effect on propane demand and Superior Propane's sales. Further, increases in the cost of propane encourage customers to conserve fuel and to invest in more energy-efficient equipment, reducing demand. Changes in propane supply costs are normally passed through to customers, but timing lags (the time between when Superior Propane purchases the propane and when the customer purchases the propane) may result in positive or negative gross margin fluctuations.
Superior Propane offers its customers various fixed-price propane programs. In order to mitigate the price risk from offering these services, Superior Propane uses its physical inventory position, supplemented by forward commodity transactions with various third parties having terms and volumes substantially the same as its customers' contracts. In periods of high propane price volatility the fixed price programs create exposure to over or under supply positions as the demand from customers may significantly exceed or fall short of supply procured. In addition, if propane prices decline significantly subsequent to customers signing up for a fixed price program there is a risk that customers will default on their commitments.
Superior Propane's operations are subject to the risks associated with handling, storing and transporting propane in bulk. Slight quantities of propane may also be released during transfer operations. To mitigate risks, Superior Propane has established a comprehensive program directed at environmental, health and safety protection. This program consists of an environmental policy, codes of practice, periodic self-audits, employee training, quarterly and annual reporting and emergency prevention and response.
Approximately 22% of Superior Propane's employees are unionized. Collective bargaining agreements are renegotiated in the normal course of business.
ERCO
ERCO competes with sodium chlorate, chloralkali and potassium producers on a worldwide basis. Key competitive factors include price, product quality, logistics capability, reliability of supply, technical capability and service. The end-use markets for ERCO's products are correlated to the general economic environment and the competitiveness of its customers, all of which are outside of its control.
ERCO has long-term electricity contracts or electricity contracts that renew automatically with power producers in each of the jurisdictions where its plants are located. There is no assurance that ERCO will continue to be able to secure adequate supplies of electricity at reasonable prices or on acceptable terms.
Potassium Chloride (KCl) is a major raw material used in the production of potassium hydroxide at ERCO's Port Edwards, Wisconsin facility. Substantially all of ERCO's KCl is received from Potash Corporation of Saskatchewan (Potash). ERCO currently has a limited ability to source KCl from additional suppliers.
ERCO is exposed to fluctuations in the US dollar and the euro to the Canadian dollar.
ERCO's operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous and are regulated by environmental and health and safety laws, regulations and requirements. The potential exists for the release of highly toxic and lethal substances, including chlorine. Equipment failure could result in damage to facilities, death or injury and liabilities to third parties. If at any time the appropriate regulatory authorities deem any of the facilities unsafe, they may order that such facilities be shut down.
ERCO's operations and activities in various jurisdictions require regulatory approvals for the handling, production, transportation and disposal of chemical products and waste substances. The failure to obtain or comply fully with such applicable regulatory approvals may materially adversely affect ERCO.
Approximately 25% of ERCO employees are unionized. Collective bargaining agreements are renegotiated in the normal course of business.
Winroc
Winroc competes with other specialty construction distributors servicing the builder/contractor market, in addition to big-box home centres and independent lumber yards. Winroc's ability to remain competitive depends on its ability to provide reliable service at competitive prices.
Demand for walls and ceilings building materials are affected by changes in general and local economic factors including demographic trends, employment levels, interest rates, consumer confidence and overall economic growth. These factors in turn impact the level of existing housing sales, new home construction, new non-residential construction, and office/commercial space turnover, all of which are significant factors in the determination of demand for Winroc's products and services.
Approximately 8% of Winroc's employees are unionized. Collective bargaining agreements are renegotiated in the normal course of business.
SEM
New entrants in the energy retailing business may enter the market and compete directly for the customer base that SEM targets, slowing or reducing its market share.
SEM purchases natural gas to meet its estimated commitments to its customers based upon their historical consumption. Depending on a number of factors, including weather, customer attrition and poor economic conditions affecting commercial customers' production levels, customers' combined natural gas consumption may vary from the volume purchased. This variance must be reconciled and settled at least annually and may require SEM to purchase or sell natural gas at market prices which may have an adverse impact on the results of this business. To mitigate balancing risk, SEM closely monitors its balancing position and takes measures such as adjusting gas deliveries and transferring gas between pools of customers, so that imbalances are minimized. In addition, SEM maintains a reserve for potential balancing costs. The reserve is reviewed on a monthly basis to ensure that it is sufficient to absorb any losses that might arise from balancing.
SEM matches its customers' estimated electricity requirements by entering into electricity swaps in advance of acquiring customers. Depending on several factors, including weather, customers' energy consumption may vary from the volumes purchased by SEM. SEM is able to invoice existing commercial electricity customers for balancing charges when the amount of energy used is greater than or less than 10% of the amount of energy that SEM estimated. In certain circumstances, there can be balancing issues for which SEM is responsible when customer aggregation forecasts are not realized.
SEM resources its fixed-price term natural gas sales commitments by entering into various physical natural gas and US dollar foreign exchange purchase contracts for similar terms and volumes to create an effective Canadian dollar fixed-price cost of supply. SEM transacts with nine financial and physical natural gas counterparties. There can be no assurance that any of these counterparties will not default on any of their obligations to SEM. However, the financial condition of each counterparty is evaluated and credit limits are established to minimize SEM's exposure to this risk. There is also a risk that supply commitments and foreign exchange positions may become unmatched; however, this is monitored daily in compliance with SEM's risk management policy.
SEM must retain qualified sales agents in order to properly execute its business strategy. The continued growth of SEM is reliant on the services of agents to sign up new customers. There can be no assurance that competitive conditions will allow these agents to achieve these customer additions. Lack of success in the marketing programs of SEM would limit future growth of the cash flow.
SEM operates in the highly regulated energy industry in Ontario, British Columbia and Quebec. Changes to existing legislation could impact this business's operations. As part of the current regulatory framework, local delivery companies are mandated to perform certain services on behalf of SEM, including invoicing, collection, assuming specific bad debt risks and storage and distribution of natural gas. Any elimination or changes to these rules could have a significant adverse effect on the results of this business.
SUPERIOR PLUS CORP.
Consolidated Balance Sheets
-------------------------------------------------------------------------
June 30, December 31,
(unaudited, millions of dollars) 2009 2008
-------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents 14.0 16.1
Accounts receivable and other (Note 4 and 8) 166.4 246.8
Inventories 105.7 128.0
Future income tax asset (Note 9) 77.5 65.9
Current portion of unrealized gains on
financial instruments (Note 8) 27.5 42.0
-------------------------------------------------------------------------
391.1 498.8
Property, plant and equipment 591.1 562.3
Customer contract related costs 16.4 17.7
Intangible assets 27.6 28.8
Goodwill 472.8 472.7
Accrued pension asset 18.8 19.5
Future income tax asset (Note 9) 176.2 185.9
Investment tax credits 124.0 133.1
Long-term portion of unrealized gains on
financial instruments (Note 8) 37.2 108.1
-------------------------------------------------------------------------
1,855.2 2,026.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accrued liabilities 196.1 230.5
Current portion of term loans (Note 6) 5.3 13.0
Dividends and interest payable to
shareholders and debentureholders 12.7 0.7
Current portion of deferred credit (Note 9) 39.8 37.9
Current portion of unrealized losses on
financial instruments (Note 8) 104.4 87.8
-------------------------------------------------------------------------
358.3 369.9
Revolving term bank credits and term
loans (Note 6) 434.3 462.8
Convertible unsecured subordinated
debentures (Note 7) 242.6 241.7
Future employee benefits 15.2 18.0
Deferred credit (Note 9) 241.4 269.8
Long-term portion of unrealized losses on
financial instruments (Note 8) 56.6 90.5
-------------------------------------------------------------------------
Total Liabilities 1,348.4 1,452.7
Shareholders' Equity
Shareholders' capital (Note 10) 1,370.9 1,370.9
Contributed surplus (Note 10) 4.8 4.8
Accumulated deficit (857.1) (803.1)
Accumulated other comprehensive income
(loss) (Note 10) (11.8) 1.6
-------------------------------------------------------------------------
(868.9) (801.5)
-------------------------------------------------------------------------
Total Shareholders' Equity 506.8 574.2
-------------------------------------------------------------------------
1,855.2 2,026.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Unaudited Interim Consolidated Financial Statements)
SUPERIOR PLUS CORP.
Consolidated Statements of Net Earnings, Comprehensive Income and Deficit
-------------------------------------------------------------------------
(unaudited,
millions of
dollars except Three months ended Six months ended
per share June 30, June 30,
amounts) 2009 2008 2009 2008
-------------------------------------------------------------------------
Revenues 454.4 567.2 1,057.9 1,248.6
Cost of products sold (295.2) (439.9) (687.7) (951.6)
Realized gains
(losses) on
financial
instruments (Note 8) (24.3) 26.0 (47.0) 26.2
-------------------------------------------------------------------------
Gross profit 134.9 153.3 323.2 323.2
-------------------------------------------------------------------------
Expenses
Operating and
administrative 111.5 110.9 230.0 224.8
Amortization of
property, plant
and equipment 4.1 5.5 11.3 10.2
Amortization of
intangible assets 1.6 1.3 3.0 2.4
Interest on
revolving term
bank credits and
term loans 5.4 6.1 11.9 12.2
Interest on
convertible
unsecured
subordinated
debentures 3.7 3.7 7.5 7.4
Accretion of
convertible
debenture issue
costs 0.3 0.3 0.6 0.8
Unrealized losses
(gains) on
financial
instruments
(Note 8) (18.6) (149.8) 54.3 (255.1)
-------------------------------------------------------------------------
108.0 (22.0) 318.6 2.7
-------------------------------------------------------------------------
Net earnings before
income taxes 26.9 175.3 4.6 320.5
Income tax recovery
(expense) (Note 9) (3.5) (11.0) 13.3 (29.0)
-------------------------------------------------------------------------
Net Earnings 23.4 164.3 17.9 291.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings 23.4 164.3 17.9 291.5
Other comprehensive
income:
Unrealized foreign
currency gains
(losses) on
translation of
self-sustaining
foreign operations (13.1) 6.4 (9.0) 2.8
Reclassification of
derivative gains
and losses
previously deferred 1.9 (15.1) (4.4) (7.0)
-------------------------------------------------------------------------
Comprehensive Income 12.2 155.6 4.5 287.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit, Beginning
of Period (844.7) (636.2) (803.1) (728.6)
Cumulative impact of
adopting new guidance
on the valuation of
financial instrument
asset and liabilities
(Note 2(b)) - - (0.3) -
Net earnings 23.4 164.3 17.9 291.5
Dividends to
Shareholders
(Note 2(a)) (35.8) (35.8) (71.6) (70.6)
-------------------------------------------------------------------------
Deficit, End
of Period (857.1) (507.7) (857.1) (507.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings (loss)
per share, basic
and diluted
(Note 11) $0.26 $1.86 $0.20 $3.30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Unaudited Interim Consolidated Financial Statements)
SUPERIOR PLUS CORP.
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------
(unaudited, Three months ended Six months ended
millions June 30, June 30,
of dollars) 2009 2008 2009 2008
-------------------------------------------------------------------------
Operating Activities
Net earnings 23.4 164.3 17.9 291.5
Items not affecting cash:
Amortization of property,
plant and equipment,
intangible assets and
accretion of convertible
debenture issue costs 6.0 7.1 14.9 13.4
Amortization of customer
contract related costs 1.7 1.7 3.4 3.3
Amortization included
in cost of sales 9.1 9.1 18.2 19.7
Pension expense 0.3 0.6 0.7 1.2
Unrealized losses
(gains) on
financial instruments (18.6) (149.8) 54.3 (255.1)
Future income tax
expense (recovery) 2.3 6.8 (19.5) 23.1
Customer contract
related costs (1.2) (1.7) (2.1) (2.4)
Realized gain on
financial instruments (6.3) - (6.3) -
Decrease in non-cash
operating working
capital items 58.3 44.1 76.9 50.7
-------------------------------------------------------------------------
Cash flows from
operating activities 75.0 82.2 158.4 145.4
-------------------------------------------------------------------------
Investing Activities
Purchase of property,
plant and equipment (36.5) (13.2) (72.4) (23.8)
Proceeds on disposal
of property, plant
and equipment 1.1 1.3 2.9 1.5
Earn-out payment on
prior acquisition - - (0.6) -
Acquisitions - (24.6) - (24.6)
-------------------------------------------------------------------------
Cash flows from
investing activities (35.4) (36.5) (70.1) (46.9)
-------------------------------------------------------------------------
Financing Activities
Revolving term bank
credits and term
loans 36.1 (9.2) (23.0) 64.8
Net repayment of
accounts receivable
sales program (39.1) - (14.1) (100.0)
Dividends to
Shareholders (35.8) (35.8) (71.6) (70.6)
Proceeds from
distribution
reinvestment
program - - - 8.9
Realized gain on
financial
instruments 6.3 - 6.3 -
Increase in non-cash
working capital (3.5) - 12.0 -
-------------------------------------------------------------------------
Cash flows from
financing activities (36.0) (45.0) (90.4) (96.9)
-------------------------------------------------------------------------
Net increase (decrease)
in cash 3.6 0.7 (2.1) 1.6
Cash and cash
equivalents, beginning
of period 10.4 15.0 16.1 14.1
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period 14.0 15.7 14.0 15.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Unaudited Interim Consolidated Financial Statements)
Notes to Interim Consolidated Financial Statements
(unaudited, tabular amounts in Canadian millions of dollars, unless noted
otherwise, except per share amounts)
1. Organization
Superior Plus Corp. (Superior) is a diversified business corporation,
incorporated under the Canada Business Corporations Act. Superior holds
100% of Superior Plus LP (Superior LP), a limited partnership formed
between Superior General Partner Inc., as general partner and Superior as
limited partner. Superior holds 100% of the shares of Superior General
Partner Inc. Superior does not conduct active business operations but
rather distributes to shareholders the income it receives from Superior
Plus LP in the form of partnership allocations, net of expenses and
interest payable on the convertible unsecured subordinated debentures
(the debentures). Superior's investments in Superior Plus LP are financed
by share capital and debentures.
On December 31, 2008, Superior Plus Income Fund (the Fund) completed a
transaction with Ballard Power Systems Inc. (Ballard) which resulted in
Superior converting from a publicly traded income trust to a publicly
traded corporation. The transaction resulted in the Unitholders of the
Fund becoming Shareholders of Superior with no substantive changes to the
underlying business operations.
2. Accounting Policies
(a) Basis of Presentation
The accompanying unaudited Interim Consolidated Financial Statements have
been prepared according to Canadian generally accepted accounting
principles (GAAP), applied on a consistent basis, and include the
accounts of Superior and its wholly owned subsidiaries. Superior Plus
Corp. is considered a continuation of Superior Plus Income Fund; as such,
these consolidated financial statements follow the continuity of
interests method of accounting. Under the continuity of interests method
of accounting, Superior's transfer of the assets, liabilities and equity
from the Fund to Superior upon the completion of its transaction with
Ballard were recorded at their net book values. As a result of the
application of the continuity of interests method of accounting, certain
terms such as shareholder/unitholder and dividend/distribution may be
used interchangeably throughout these unaudited Interim Consolidated
Financial Statements. For the period ended June 30, 2009, payments to
Shareholders were in the form of dividends, whereas for the period ended
June 30, 2008, payments to Unitholders were in the form of trust unit
distributions. These unaudited Interim Consolidated Financial Statements
do not conform in all respects to the note disclosure requirement of GAAP
for annual financial statements as certain information and disclosures
included in the annual financial statements notes have been condensed or
omitted. These unaudited Interim Consolidated Financial Statements and
notes thereto should be read in conjunction with Superior's financial
statements for the year ended December 31, 2008, and the accounting
policies applied are consistent with this period except as noted in Note
2(b). All significant transactions and balances between Superior and
Superior's subsidiaries have been eliminated on consolidation.
(b) Changes in Accounting Policies
Financial Assets and Financial Liabilities
On January 1, 2009, Superior adopted the requirements of guidance
provided by the CICA related to the application of credit risk and the
determination of the fair value of financial assets and liabilities.
Superior adopted the guidance retrospectively, but did not restate prior
periods. Accordingly, Superior decreased the carrying value of its net
financial instrument assets and liabilities as at January 1, 2009, by
$0.4 million, with a corresponding increase of $0.1 million to Superior's
future income tax asset and an increase of $0.3 million to Superior's
opening accumulated deficit; comparative earnings and financial assets
and liabilities for prior periods have not been restated.
Goodwill and Intangible Assets
On January 1, 2009, Superior adopted CICA Handbook Section 3064 Goodwill
and Intangible Assets. This standard provides more specific guidance on
the recognition of internally developed intangible assets and requires
that research and development expenditures be evaluated against the same
criteria as expenditures for intangible assets. The Section harmonizes
Canadian GAAP with International Financial Reporting Standards (IFRS).
Adoption of this standard did not have an impact on Superior.
(c) Future Accounting Changes
International Financial Reporting Standards
The Accounting Standards Board of Canada (AcSB) has announced plans that
will require the convergence of Canadian GAAP with IFRS for publicly
accountable enterprises, including Superior. The changeover date from
Canadian GAAP to IFRS is for annual and interim financial statements
relating to fiscal years beginning on or after January 1, 2011. Superior
is currently assessing the future impact of these new standards on its
consolidated financial statements.
Financial Instruments - Disclosure
The CICA has amended Handbook Section 3862 Financial Instruments -
Disclosure. These amendments require enhanced disclosure on the fair
value of certain financial instruments. The amendments are effective for
annual financial statements on or after September 30, 2009. Superior does
not anticipate that these amendments will have a significant impact on
its consolidated financial statements.
(d) Business Segments
Superior operates four distinct business segments: a propane distribution
and related services business operating under the Superior Propane trade
name; a specialty chemicals manufacturer operating under the ERCO
Worldwide trade name (ERCO); a construction products distribution
business operating under the Winroc trade name; and a fixed-price energy
services business operating under the Superior Energy Management trade
name (SEM). (See Note 12.)
3. Seasonality of Operations
Superior Propane
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.
Winroc
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 first and fourth 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
first and fourth quarters.
4. Accounts Receivable and Other
Superior sells, with limited recourse, certain trade accounts receivable
on a revolving basis to an entity sponsored by a Canadian chartered bank.
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. As at June 30, 2009, proceeds of $85.9 million (December 31,
2008 - $100.0 million) had been received. The existing accounts
receivable securitization program matures on December 29, 2009.
A summary of accounts receivable and other is as follows:
June 30, December 31,
2009 2008
-------------------------------------------------------------------------
Accounts receivable trade 153.0 225.5
Accounts receivable other 3.6 5.9
Prepaid expenses 9.8 15.4
-------------------------------------------------------------------------
Accounts receivable and other 166.4 246.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Inventories
For the three and six months ended June 30, 2009 inventories of $252.9
million and $591.7 million were expensed through cost of products sold.
For the three and six months ended June 30, 2008 inventories of $335.4
million and $773.0 million were expensed through cost of products sold.
No write-downs of inventory or reversals of write-downs were recorded
during the three and six months ended June 30, 2009 and 2008.
6. Revolving Term Bank Credits and Term Loans
Year of Effective Interest June December
Maturity Rate 30, 2009 31, 2008
-------------------------------------------------------------------------
Revolving term
bank credits(1) Floating BA rate
Bankers plus applicable
Acceptances (BA) 2011 credit spread 187.6 168.9
LIBOR Loans Floating LIBOR rate
(US$58.3 million; 2008 plus applicable
- US$71.6 million) 2011 credit spread 67.8 90.1
-------------------------------------------------------------------------
255.4 259.0
-------------------------------------------------------------------------
Other Debt
Notes payable 2010 Prime 0.6 6.2
Deferred
consideration 2010 Non-interest bearing 2.4 4.8
Loan payable 2009-2014 6.3% - 11.8
-------------------------------------------------------------------------
3.0 22.8
-------------------------------------------------------------------------
Senior Secured Notes
Senior secured notes
subject to floating
interest rates
(US$60.0 million;
2008 - US$60.0 Floating LIBOR
million)(2) 2009-2015 rate plus 1.7% 69.8 73.5
Senior secured
notes subject to
fixed interest
rates
(US$100.0 million;
2008 - US$100.0
million)(2) 2009-2015 6.65% 116.2 122.4
-------------------------------------------------------------------------
186.0 195.9
-------------------------------------------------------------------------
Total revolving term
bank credits and
term loans before
deferred financing
fees 444.4 477.7
Deferred financing fees (4.8) (1.9)
-------------------------------------------------------------------------
Revolving term bank credits and term loans 439.6 475.8
Current maturities (5.3) (13.0)
-------------------------------------------------------------------------
Revolving term bank credits and term loans 434.3 462.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Superior and its wholly-owned subsidiaries, Superior Plus US Holdings
Inc. and Commercial e Industrial (Chile) Limitada, have revolving
term bank credit borrowing capacity of $570.0 million. The credit
facility matures on June 28, 2011 These facilities are secured by a
general charge over the assets of Superior and certain of its
subsidiaries. As at June 30, 2009, Superior had $19.4 million of
outstanding letters of credit (December 31, 2008 - $41.5 million).
The fair value of Superior's revolving term bank credits and other
debt approximates its carrying value as a result of the market based
interest rates and the short-term nature of the underlying debt
instruments.
(2) Senior secured notes (the Notes) totaling US$160.0 million (CDN$186.0
million at June 30, 2009 and CDN$195.9 million at December 31, 2008)
are secured by a general charge over the assets of Superior and
certain of its subsidiaries. Principal repayments begin in 2009.
Management has estimated the fair value of the Notes based on
comparisons to treasury instruments with similar maturities, interest
rates and credit risk profiles. The estimated fair value of the Notes
at June 30, 2009 was CDN$180.5 million (December 31, 2008 - CDN$183.8
million). In conjunction with the issue of the Notes, Superior
swapped US$60.0 million (CDN $69.8 million) (December 31, 2008 - US
$60.0 million (CDN $73.5 million)) of the fixed rate obligation into
a US dollar floating rate obligation.
Repayment requirements of the revolving term bank credits and term loans
are as follows:
-------------------------------------------------------------------------
Current portion 5.3
Due in 2011 294.9
Due in 2012 37.2
Due in 2013 37.2
Due in 2014 34.9
Subsequent to 2014 34.9
-------------------------------------------------------------------------
Total 444.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Convertible Unsecured Subordinated Debentures
Superior has issued two series of debentures denoted as 5.75% Series 1
and 5.85% Series 1 as follows:
Total
Unamortized Carrying
Series 1 Series 1 Discount Value
-------------------------------------------------------------------------
December 31, October 31,
Maturity date 2012 2015
Interest rate 5.75% 5.85%
Conversion price
per share $36.00 $31.25
-------------------------------------------------------------------------
Debentures outstanding
as at December 31, 2008 174.9 75.0 (2.3) 247.6
Conversion and
repayment/redemption
of debentures and
accretion of discount
during 2009 - - 0.4 0.4
Deferred issue costs (3.4) (2.0) (5.4)
-------------------------------------------------------------------------
Debentures outstanding
as at June 30, 2009 171.5 73.0 (1.9) 242.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quoted market value
as at June 30, 2009 173.2 67.5
Quoted market value
as at December 31, 2008 141.7 52.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The debentures may be converted into shares at the option of the holder
at any time prior to maturity and may be redeemed by Superior in certain
circumstances. Superior may elect to pay interest and principal upon
maturity or redemption by issuing shares to a trustee in the case of
interest payments, and to the debenture holders in the case of payment of
principal. The number of any shares issued will be determined based on
market prices for the shares at the time of issuance.
8. Financial Instruments
The fair value of a financial instrument is the amount of consideration
that would be estimated to be agreed upon in an arm's length transaction
between knowledgeable, willing parties who are under no compulsion to
act. Fair values are determined by reference to quoted bid or asking
prices, as appropriate, in the most advantageous active market for that
instrument to which Superior has immediate access. Where bid and ask
prices are unavailable, Superior uses the closing price of the most
recent transaction of the instrument. In the absence of an active market,
Superior estimates fair values based on prevailing market rates (bid and
ask prices, as appropriate) for instruments with similar characteristics
and risk profiles or internal or external valuation models, such as
discounted cash flow analysis, using, to the extent possible, observable
market-based inputs.
Fair values determined using valuation models require the use of
assumptions concerning the amount and timing of estimated future cash
flows and discount rates. In determining those assumptions, Superior
looks primarily to available readily observable external market inputs
including factors such as forecasted commodity price curves, interest
rate yield curves, currency rates, and price and rate volatilities as
applicable. With respect to the valuation of ERCO's fixed-price
electricity agreement, the valuation of this agreement requires Superior
to make assumptions about the long-term price of electricity in
electricity markets for which active market information is not available.
The impact of the assumption for the long-term forward price curve of
electricity has a material impact on the fair value of this agreement. A
$1/MWh change in the forecasted price of electricity would result in a
change in the fair value of this agreement of $1.2 million, with a
corresponding impact to net income before income taxes. Any changes in
the fair values of financial instruments classified or designated as
held-for-trading are recognized in net income.
Financial and Non-Financial Derivatives
Asset Asset
(Liability)(Liability)
as at as at
Effective June 30, December
Description Notional(1) Term Rate 2009 31, 2008
-------------------------------------------------------------------------
Natural gas
financial
swaps-NYMEX 16.2 GJ(2) 2009-2011 US$7.83/GJ (47.1) (33.5)
Natural gas
financial
swaps-AECO 36.7 GJ(2) 2009-2014 CDN$7.81/GJ (60.2) (34.8)
Foreign
currency
forward
contracts,
net sale US$169.8(4) 2009-2015 1.14 (12.9) (11.5)
Foreign
currency
forward EURO
contracts (euro)8.2(4) 2009-2011 1.58 (0.3) -
Floating
Interest rate LIBOR rate
swaps US$60.0(4) 2013-2015 plus 1.7% 6.5 11.7
Propane
wholesale
purchase
and sale
contracts,
net sale 10.0 USG(5) 2009-2010 $1.02/USG 1.7 (1.3)
Butane
wholesale
purchase
and sale
contracts,
net sale 0.7 USG(5) 2009-2010 $1.13/USG 0.8 -
ERCO fixed-
price electri-
city purchase
agreement 45 MW(3) 2009-2017 $45-$52/MWh 24.7 42.1
SEM electricity
swaps 0.5 MWh(6) 2009-2014 $63.5/MWh (9.5) (0.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Notional values as at June 30, 2009
(2) Millions of gigajoules purchased
(3) Mega watts (MW) on a 24/7 continual basis per year purchased
(4) Millions of dollars/Euros
(5) Millions of United States gallons purchased
(6) Millions of mega watt hours (MWh)
All financial and non-financial derivatives are designated as held for
trading upon their initial recognition.
-------------------------------------------------------------------------
Current Long-term Current Long-term
Description Assets Assets Liabilities Liabilities
-------------------------------------------------------------------------
Natural gas financial
swaps - NYMEX and AECO 16.4 5.0 83.9 44.8
SEM electricity swaps - - 4.1 5.4
Foreign currency forward
contracts, net 2.3 4.5 13.6 6.4
Interest rate swaps - 6.5 - -
Propane wholesale purchase
and sale contracts 3.5 - 1.8 -
Butane wholesale purchase
and sale contracts 1.8 - 1.0 -
ERCO fixed-price power
purchase agreements 3.5 21.2 - -
-------------------------------------------------------------------------
As at June 30, 2009 27.5 37.2 104.4 56.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2008 42.0 108.1 87.8 90.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three For the three
months ended months ended
June 30, 2009 June 30, 2008
Realized Unrealized Realized Unrealized
gain gain gain gain
Description (loss) (loss) (loss) (loss)
-------------------------------------------------------------------------
Natural gas financial
swaps - NYMEX and AECO (28.2) 20.3 19.7 140.4
SEM electricity swaps (1.3) (5.6) - 1.7
Foreign currency forward
contracts, net (1.4) (12.1) (3.6) (1.2)
Interest rate swaps 1.4 (5.8) 1.4 (3.4)
Foreign currency forward
contracts - balance
sheet related 6.3 - - -
Propane wholesale purchase
and sale contracts - 7.0 - 0.4
Butane wholesale purchase
and sale contracts - 0.8 - -
ERCO fixed-price power
purchase agreements (1.1) (1.6) 8.5 8.3
-------------------------------------------------------------------------
Total realized and
unrealized gains
(losses) on financial
and non-financial
derivatives (24.3) 3.0 26.0 146.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign currency
translation of senior
secured notes - 15.6 - 1.6
Foreign currency
translation of ERCO
royalty assets - - - 2.0
-------------------------------------------------------------------------
Total realized and
unrealized gains (losses) (24.3) 18.6 26.0 149.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six For the six
months ended months ended
June 30, 2009 June 30, 2008
Realized Unrealized Realized Unrealized
gain gain gain gain
Description (loss) (loss) (loss) (loss)
-------------------------------------------------------------------------
Natural gas financial
swaps - NYMEX and AECO (45.6) (31.5) 21.4 225.0
SEM electricity swaps (1.8) (8.6) - 2.2
Foreign currency forward
contracts, net (7.4) (5.5) (8.4) 9.5
Interest rate swaps 1.4 (5.8) 1.4 (0.9)
Foreign currency forward
contracts - balance sheet
related 6.3 - - -
Propane wholesale purchase
and sale contracts - 3.1 - (2.6)
Butane wholesale purchase
and sale contracts - 0.8 - -
ERCO fixed-price power
purchase agreements 0.1 (16.7) 11.8 25.5
-------------------------------------------------------------------------
Total realized and
unrealized gains (losses)
on financial and
non-financial derivatives (47.0) (64.2) 26.2 258.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign currency
translation of senior
secured notes - 9.9 - (4.8)
Foreign currency
translation of ERCO
royalty assets - - - 1.2
-------------------------------------------------------------------------
Total realized and
unrealized gains (losses) (47.0) (54.3) 26.2 255.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-Derivative Financial Instruments
Superior's accounts receivables have been designated as available for
sale due to Superior's accounts receivable securitization program,
Superior's accounts payable, dividends and interest payable to
shareholders and debentureholders, revolving term bank credits and term
loans and debentures have been designated as other liabilities. The
carrying value of Superior's cash, accounts receivable, accounts payable,
and dividends and interest payable to shareholders and debenture holders
approximates their fair value due to the short-term nature of these
amounts. The carrying value and the fair value of Superior's revolving
term bank credits and term loans, and debentures, is provided in Notes 6
and 7.
Financial Instruments - Risk Management
Derivative and non-financial derivatives are used by Superior to manage
its exposure to fluctuations in foreign currency exchange rates, interest
rates and commodity prices. Superior assesses the inherent risks of these
instruments by grouping derivative and non-financial derivatives related
to the exposures these instruments mitigate. Superior's policy is not to
use derivative or non-financial derivative instruments for speculative
purposes. Superior does not formally designate its derivatives as hedges,
as a result, Superior does not apply hedge accounting and is required to
designate its derivatives and non-financial derivatives as held for
trading.
Effective 2008, SEM enters into natural gas financial swaps primarily
with Constellation Energy Commodities Group Inc. for distributor billed
natural gas business in Canada to manage its economic exposure of
providing fixed-price natural gas to its customers. Additionally, SEM
continues to maintain its historical natural gas swap positions with
seven additional counterparties. SEM monitors its fixed-price natural gas
positions on a daily basis to monitor compliance with established risk
management policies. SEM maintains a substantially balanced fixed-price
natural gas position in relation to its customer supply commitments.
SEM enters into electricity financial swaps with three counterparties to
manage the economic exposure of providing fixed-price electricity to its
customers. SEM monitors its fixed-price electricity positions on a daily
basis to monitor compliance with established risk management policies.
SEM maintains a substantially balanced fixed-price electricity position
in relation to its customer supply commitments.
ERCO has entered into a fixed-price electricity purchase agreement to
manage the economic exposure of certain of its chemical facilities to
changes in the market price of electricity, in a market where the price
of electricity is not fixed. The fair value with respect to this
agreement is with a single counterparty.
Superior Propane enters into various propane forward purchase and sale
agreements with more than twenty counterparties to manage the economic
exposure of its wholesale customer supply contracts. Superior Propane
monitors its fixed-price propane positions on a daily basis to monitor
compliance with established risk management policies. Superior Propane
maintains a substantially balanced fixed-price propane gas position in
relation to its wholesale customer supply commitments.
Superior, on behalf of its operating divisions, enters into foreign
currency forward contracts with ten counterparties to manage the economic
exposure of Superior's operations to movements in foreign currency
exchange rates. SEM and Superior Propane contract a portion of their
fixed-price natural gas, and propane purchases and sales in US dollars
and enter 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 debt is also used to mitigate the impact
of foreign exchange fluctuations.
Superior has interest rate swaps with a single counterparty to manage the
interest rate mix of its total debt portfolio and related overall cost of
borrowing. Superior manages its overall liquidity risk in relation to its
general funding requirements by utilizing a mix of short-term and longer-
term maturity debt instruments. Superior reviews its mix of short-term
and longer-term debt instruments on an on-going basis to ensure it is
able to meet its liquidity requirements.
Superior utilizes a variety of counterparties in relation to its
derivative and non-financial derivative instruments in order to mitigate
its counterparty risk. Superior assesses the credit worthiness of its
significant counterparties at the inception and throughout the term of a
contract. Superior is also exposed to customer credit risk. Superior
Propane and Winroc deal with a large number of small customers, thereby
reducing this risk. ERCO, due to the nature of its operations, sells its
products to a relatively small number of customers. ERCO mitigates its
customer credit risk by actively monitoring the overall credit worthiness
of its customers. SEM has minimal exposure to customer credit risk as
local natural gas and electricity distribution utilities have been
mandated, for a nominal fee, to provide SEM with invoicing, collection
and the assumption of bad debts risk for residential customers. SEM
actively monitors the credit worthiness of its commercial customers.
Allowance for doubtful accounts and past due receivables are reviewed by
Superior at each balance sheet reporting date. Superior updates its
estimate of the allowance for doubtful accounts based on the evaluation
of the recoverability of accounts receivable balances of each customer
taking into account historic collection trends of past due accounts and
current economic conditions. Accounts receivable are written-off once it
is determined they are not collectable.
Pursuant to their respective terms, trade accounts receivable, before
deducting an allowance for doubtful accounts, are aged as follows:
June 30, December 31,
2009 2008
-------------------------------------------------------------------------
Current 121.2 150.5
Past due less than 90 days 29.1 67.6
Past due over 90 days 9.1 16.7
-------------------------------------------------------------------------
Trade accounts receivable, total 159.4 234.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Superior's trade accounts receivable are stated after deducting a
provision of $6.4 million as at June 30, 2009 (December 31, 2008 -
$9.3 million). The movement in the provision for doubtful accounts was as
follows:
Six Twelve
months months
ended ended
June 30, December 31,
2009 2008
-------------------------------------------------------------------------
Allowance for doubtful accounts, opening (9.3) (5.1)
Bad debt expense, net of recoveries (2.4) (8.1)
Written-off 5.3 3.9
-------------------------------------------------------------------------
Allowance for doubtful accounts, ending (6.4) (9.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Superior's contractual obligations associated with its financial
liabilities are as follows:
2015
and
There-
2010 2011 2012 2013 2014 after Total
-------------------------------------------------------------------------
Revolving term bank
credits and term loans 5.3 294.9 37.2 37.2 34.9 34.9 444.4
Convertible unsecured
subordinated debentures - - - - 174.9 75.0 249.9
CDN$ equivalent of US$
foreign currency forward
purchase contracts 57.5 68.0 6.0 - - - 131.5
US$ foreign currency
forward sales contracts
(US$) 64.7 111.4 64.5 32.5 9.0 - 282.1
EURO(euro) foreign
currency forward sales
contracts (EURO) 2.8 5.1 0.3 - - - 8.2
Fixed-price electricity
purchase commitments 8.9 17.7 17.7 17.7 17.7 70.8 150.5
CDN$ natural gas
purchases 17.6 28.9 7.5 4.9 3.4 - 62.3
US$ natural gas
purchases (US$) 27.7 36.3 2.2 - - - 66.2
US$ propane purchases
(US$) 13.0 0.5 - - - - 13.5
US$ butane purchases
(US$) 4.7 1.9 - - - - 6.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Superior's contractual obligations are considered to be normal course
operating commitments and do not include the impact of mark-to-market
fair values on financial and non-financial derivatives. Superior expects
to fund these obligations through a combination of cash flow from
operations, proceeds on revolving term bank credits and proceeds on the
issuance of share capital.
Superior's financial instruments' sensitivity to changes in foreign
currency exchange rates, interest rates and various commodity prices and
the impact to net earnings are detailed below:
-------------------------------------------------------------------------
Three and six
months ended
June 30, 2009
-------------------------------------------------------------------------
Increase (decrease) to net earnings of a $0.01 increase
in the CDN$ to the US$ 3.4
Increase (decrease) to net earnings of a 0.5% increase
in interest rates (0.8)
Increase (decrease) to net earnings of a $0.40/GJ increase
in the price of natural gas 20.3
Increase (decrease) to net earnings of a $0.04/litre increase
in the price of propane 0.6
Increase (decrease) to net earnings of a $0.04/litre increase
in the price of butane 0.1
Increase (decrease) to net earnings of a $1.00/KwH increase
in the price of electricity 1.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The calculation of Superior's sensitivity to changes in foreign currency
exchange rates, interest rates and various commodity prices represent the
change in fair value of the financial instrument without consideration of
the value of the underlying variable, for example, the underlying
customer contracts. The recognition of the sensitivities identified above
would have impacted Superior's unrealized gain (loss) on financial
instruments and would not have a material impact on Superior's cash flow
from operations.
9. Income Taxes
On December 31, 2008, Superior converted from a publicly traded income
trust to a publicly traded corporation. As such, Superior's calculation
of current and future income taxes for the three and six months ended
June 30, 2009 is based on the conversion to a corporate structure
effective December 31, 2008, whereas Superior's calculation of current
and future income taxes for the three and six months ended June 30, 2008
is based on Superior being a publicly traded income trust. Consistent
with prior periods, Superior recognizes a provision for income taxes for
its subsidiaries that are subject to current and future income taxes,
including United States income tax, United States non-resident
withholding tax and Chilean income tax.
Total income tax recovery/expense, comprised of current and future taxes
for the three and six months ended June 30, 2009 was a $3.5 million
expense and a $13.3 million recovery, respectively, compared to an
expense of $11.0 million and $29.0 million in the comparative period.
Income taxes were impacted by Superior's conversion to a corporation on
December 31, 2008 and unrealized gains and losses on financial
instruments. For the three and six months ended June 30, 2009, future
income tax recovery/expense from operations in Canada, the United States
and Chile was a $2.3 million expense and a $19.5 million recovery,
respectively, resulting in a corresponding total future income tax asset
of $253.7 million and a total deferred credit of $281.2 million. Future
income tax expense for the three and six months ended June 30, 2008 was
$6.8 million and $23.1 million, respectively.
10. Shareholders' Equity
Authorized
Superior is authorized to issue an unlimited number of common shares and
an unlimited number of preferred shares. The holders of common shares are
entitled to dividends if, as and when declared by the board of directors;
to one vote per share at meetings of the holders of common shares; and
upon liquidation, dissolution or winding up of Superior to receive pro
rata the remaining property and assets of Superior, subject to the rights
of any shares having priority over the common shares of which none are
outstanding.
Preferred shares are issuable in series with each class of preferred
share having such rights as the board of directors may determine. Holders
of preferred shares are entitled, in priority of holders of common
shares, to be paid rateably with holders of each other series of
preferred shares the amount of accumulated dividends, if any, specified
to be payable preferentially to the holders of such series upon
liquidation, dissolution or winding up of Superior to be paid rateably
with holders of each other series of preferred shares the amount, if any,
specified as being payable preferentially to holders of such series.
Superior does not have any preferred shares outstanding.
Issued
Number of
Common Shares Shareholders'
(Millions)(1) Equity(1)
-------------------------------------------------------------------------
Shareholders' equity, December 31, 2008 88.4 574.2
Net earnings - 17.9
Other comprehensive loss - (13.4)
Cumulative impact of adopting new guidance on the
valuation of financial instrument asset and
liabilities (Note 2(b)) - (0.3)
Dividends to Shareholders(2) - (71.6)
-------------------------------------------------------------------------
Shareholders' equity, June 30, 2009 88.4 506.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) On December 31, 2008, Superior redeemed its outstanding trust units
in exchange for shares as a result of its conversion from a publicly
traded income trust to a publicly corporation. (See Note 1.)
(2) Dividends to Shareholders are declared at the discretion of Superior.
Shareholders' capital, deficit and accumulated other comprehensive income
(loss) as at June 30, 2009 and December 31, 2008 consists of the
following components:
June 30, December 31,
2009 2008
-------------------------------------------------------------------------
Shareholders' capital
Share capital 1,370.9 1,370.9
-------------------------------------------------------------------------
1,370.9 1,370.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed Surplus
Conversion feature on warrants and convertible
debentures 4.8 4.8
-------------------------------------------------------------------------
4.8 4.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated deficit
Retained earnings from operations 550.7 532.8
Cumulative impact of adopting new guidance on
the valuation of financial instrument asset
and liabilities (Note 2(b)) (0.3) -
Accumulated distributions (1,407.5) (1,335.9)
-------------------------------------------------------------------------
(857.1) (803.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance at beginning of period 1.6 (20.3)
Unrealized foreign currency gains (losses) on
translation of self-sustaining foreign operations (9.0) 30.1
Reclassification of derivative gains and losses
previously deferred (4.4) (8.2)
-------------------------------------------------------------------------
(11.8) 1.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional Capital Disclosures
Superior's objectives when managing capital are: (i) to maintain a
flexible capital structure to preserve its ability to meet its financial
obligations, including potential obligations from acquisitions; and (ii)
safeguard Superior's assets while at the same time maximizing the growth
of its businesses and returns to its shareholders.
In the management of capital, Superior includes shareholders' equity
(excluding accumulated other comprehensive income) (AOCI), current and
long-term debt, convertible debentures, securitized accounts receivable
and cash and cash equivalents.
Superior manages its capital structure and makes adjustments in light of
changes in economic conditions and nature of the underlying assets. In
order to maintain or adjust the capital structure, Superior may adjust
the amount of dividends to Shareholders, issue additional share capital,
issue new debt or convertible debentures, issue new debt or convertible
debentures with different characteristics and/or increase or decrease the
amount of securitized accounts receivable.
Superior monitors its capital based on the ratio of senior debt
outstanding to net earnings before interest, taxes, depreciation,
amortization and other non-cash expenses (EBITDA), as defined by its
revolving term credit facility, and the ratio of total debt outstanding
to EBITDA. Superior's reference to EBITDA as defined by its revolving
term credit facility may be referred to as compliance EBITDA in other
public reports of Superior.
Superior is subject to various financial covenants in its credit facility
agreements, including senior debt and total debt to EBITDA ratios, which
are measured on a quarterly basis. As at June 30, 2009 and December 31
2008, Superior was in compliance with all of its financial covenants.
Superior's financial objectives and strategy related to managing its
capital as described above have remained unchanged from the prior fiscal
year. Superior believes that its debt to EBITDA ratios are within
reasonable limits, in light of Superior's size, the nature of its
businesses and its capital management objectives.
The capital structure of the Superior and the calculation of its key
capital ratios are as follows:
June 30, December 31,
2009 2008
-------------------------------------------------------------------------
Total shareholders' equity 506.8 574.2
Exclude accumulated other comprehensive loss (income) 11.8 (1.6)
-------------------------------------------------------------------------
Shareholders' equity (excluding AOCI) 518.6 572.6
Current portion of term loans 5.3 13.0
Revolving term bank credits and term loans(1) 439.1 464.7
Accounts receivable securitization program 85.9 100.0
-------------------------------------------------------------------------
Total senior debt 530.3 577.7
Convertible unsecured subordinated debentures(1) 248.0 247.6
-------------------------------------------------------------------------
Total debt 778.3 825.3
Cash (14.0) (16.1)
-------------------------------------------------------------------------
Total capital 1,282.9 1,381.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Twelve Twelve
months months
ended ended
June 30, December 31,
2009 2008
-------------------------------------------------------------------------
Net earnings (loss) (205.9) 67.7
Adjusted for:
Interest on revolving term bank credits and term
loans 23.4 23.7
Interest on convertible unsecured subordinated
debentures 14.9 14.8
Accretion of convertible debenture issue costs 1.2 1.4
Amortization of property, plant and equipment 19.4 18.3
Amortization included in cost of sales 37.4 38.9
Amortization of intangible assets 5.9 5.3
Income tax expense (recovery) (32.4) 9.9
Unrealized (gains) losses on financial instruments 370.6 61.2
Gain on sale of facility (4.0) (4.0)
Superior Propane non-cash pension expense 1.9 2.4
-------------------------------------------------------------------------
EBITDA(2) 232.4 239.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
June 30, December 31,
Target 2009 2008
-------------------------------------------------------------------------
Senior debt to EBITDA(2) 1.5:1 - 2.0:1 2.3:1 2.4:1
Total debt to EBITDA(2) 2.5:1 - 3.0:1 3.3:1 3.4:1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Revolving term bank credits and term loans and convertible unsecured
subordinated debentures are before deferred issue costs.
(2) EBITDA, as defined by Superior's revolving term credit facility, is
calculated on a trailing twelve month basis taking into consideration
the proforma impact of acquisitions and dispositions in accordance
with the requirements of Superior's credit facility. Superior's
calculation of EBITDA and debt to EBITDA may differ from those of
similar entities.
11. Net Earnings per Share
Three months ended Six months ended
June 30, June 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings per share
computation, basic and
diluted(1)
Net earnings 23.4 164.3 17.9 291.5
Weighted average shares
outstanding 88.4 88.4 88.4 88.3
-------------------------------------------------------------------------
Net earnings per share,
basic and diluted $0.26 $1.86 $0.20 $3.30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) All outstanding debentures have been excluded from this calculation
as they were anti-dilutive.
12. Business Segments
Superior operates four distinct business segments: a propane distribution
and related services business operating under the Superior Propane trade
name; a specialty chemicals manufacturer operating under the ERCO
Worldwide trade name (ERCO); a construction products distribution
business operating under the Winroc trade name; and a fixed-price energy
services business operating under the Superior Energy Management trade
name (SEM). Superior's corporate office arranges intersegment foreign
exchange contracts from time to time between its business segments.
Realized gains and losses pertaining to intersegment foreign exchange
gains and losses are eliminated under the corporate cost column.
For the three
months ended Total
June 30, Superior Consoli-
2009 Propane ERCO Winroc SEM Corporate dated
-------------------------------------------------------------------------
Revenues 158.7 120.1 98.2 77.4 - 454.4
Cost of
products sold (108.9) (72.5) (73.9) (39.9) - (295.2)
Realized gains
(losses) on
financial
instruments 1.7 (3.6) - (30.1) 7.7 (24.3)
-------------------------------------------------------------------------
Gross profit 51.5 44.0 24.3 7.4 7.7 134.9
Expenses
Operating and
administrative 49.8 32.9 21.0 4.6 3.2 111.5
Amortization of
property, plant
and equipment 3.2 - 0.9 - - 4.1
Amortization of
intangible
assets - 1.4 0.2 - - 1.6
Interest on
revolving term
bank credits
and term loans - - - - 5.4 5.4
Interest on
convertible
unsecured
subordinated
debentures - - - - 3.7 3.7
Accretion of
convertible
debenture
issue costs - - - - 0.3 0.3
Unrealized
losses (gains)
on financial
instruments (7.8) 1.7 - (14.8) 2.3 (18.6)
-------------------------------------------------------------------------
45.2 36.0 22.1 (10.2) 14.9 108.0
-------------------------------------------------------------------------
Net earnings
(loss) before
income taxes 6.3 8.0 2.2 17.6 (7.2) 26.9
Income tax
expense - - - - (3.5) (3.5)
-------------------------------------------------------------------------
Net Earnings
(Loss) 6.3 8.0 2.2 17.6 (10.7) 23.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three
months ended Total
June 30, Superior Consoli-
2008 Propane ERCO Winroc SEM Corporate dated
-------------------------------------------------------------------------
Revenues 228.1 112.0 141.5 85.6 - 567.2
Cost of
products sold (166.2) (78.1) (105.4) (90.2) - (439.9)
Realized gains
(losses) on
financial
instruments 0.4 10.8 - 13.4 1.4 26.0
-------------------------------------------------------------------------
Gross profit 62.3 44.7 36.1 8.8 1.4 153.3
Expenses
Operating and
administrative 50.0 28.1 25.1 5.7 2.0 110.9
Amortization of
property, plant
and equipment 3.9 0.7 0.9 - - 5.5
Amortization of
intangible
assets - 1.1 0.1 0.1 - 1.3
Interest on
revolving term
bank credits
and term loans - - - - 6.1 6.1
Interest on
convertible
unsecured
subordinated
debentures - - - - 3.7 3.7
Accretion of
convertible
debenture issue
costs - - - - 0.3 0.3
Unrealized losses
(gains) on
financial
instruments (0.4) (10.3) - (142.1) 3.0 (149.8)
-------------------------------------------------------------------------
53.5 19.6 26.1 (136.3) 15.1 (22.0)
-------------------------------------------------------------------------
Net earnings
(loss) before
income taxes 8.8 25.1 10.0 145.1 (13.7) 175.3
Income tax expense - - - - (11.0) (11.0)
-------------------------------------------------------------------------
Net Earnings
(Loss) 8.8 25.1 10.0 145.1 (24.7) 164.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six
months ended Total
June 30, Superior Consoli-
2009 Propane ERCO Winroc SEM Corporate dated
-------------------------------------------------------------------------
Revenues 467.8 244.0 192.3 153.8 - 1,057.9
Cost of
products sold (311.6) (140.4) (143.6) (92.1) - (687.7)
Realized gains
(losses) on
financial
instruments (0.9) (6.7) - (47.1) 7.7 (47.0)
-------------------------------------------------------------------------
Gross profit 155.3 96.9 48.7 14.6 7.7 323.2
Expenses
Operating and
admini-
strative 106.4 62.8 43.9 10.3 6.6 230.0
Amortization
of property,
plant and
equipment 9.4 - 1.9 - - 11.3
Amortization
of intangible
assets - 2.5 0.3 0.2 - 3.0
Interest on
revolving term
bank credits and
term loans - - - - 11.9 11.9
Interest on
convertible
unsecured
subordinated
debentures - - - - 7.5 7.5
Accretion of
convertible
debenture issue
costs - - - - 0.6 0.6
Unrealized losses
(gains) on
financial
instruments (3.9) 16.8 - 40.0 1.4 54.3
-------------------------------------------------------------------------
111.9 82.1 46.1 50.5 28.0 318.6
-------------------------------------------------------------------------
Net earnings
(loss) before
income taxes 43.4 14.8 2.6 (35.9) (20.3) 4.6
Income tax
recovery - - - - 13.3 13.3
-------------------------------------------------------------------------
Net Earnings
(Loss) 43.4 14.8 2.6 (35.9) (7.0) 17.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six
months ended Total
June 30, Superior Consoli-
2008 Propane ERCO Winroc SEM Corporate dated
-------------------------------------------------------------------------
Revenues 598.8 225.4 256.9 167.5 - 1,248.6
Cost of
products sold (443.9) (155.4) (192.2) (160.1) - (951.6)
Realized gains
(losses) on
financial
instruments (0.6) 16.6 - 8.8 1.4 26.2
-------------------------------------------------------------------------
Gross profit 154.3 86.6 64.7 16.2 1.4 323.2
Expenses
Operating and
admini-
strative 104.7 54.6 48.9 11.1 5.5 224.8
Amortization
of property,
plant and
equipment 7.7 0.7 1.8 - - 10.2
Amortization
of intangible
assets - 2.1 0.2 0.1 - 2.4
Interest on
revolving term
bank credits
and term loans - - - - 12.2 12.2
Interest on
convertible
unsecured
subordinated
debentures - - - - 7.4 7.4
Accretion of
convertible
debenture issue
costs - - - - 0.8 0.8
Unrealized losses
(gains) on
financial
instruments 2.6 (26.7) - (227.2) (3.8) (255.1)
-------------------------------------------------------------------------
115.0 30.7 50.9 (216.0) 22.1 2.7
-------------------------------------------------------------------------
Net earnings
(loss) before
income taxes 39.3 55.9 13.8 232.2 (20.7) 320.5
Income tax
expense - - - - (29.0) (29.0)
-------------------------------------------------------------------------
Net Earnings
(Loss) 39.3 55.9 13.8 232.2 (49.7) 291.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Assets, Net Working Capital, Acquisitions and Purchase of Property,
Plant and Equipment
Total
Superior Consoli-
Propane ERCO Winroc SEM Corporate dated
-------------------------------------------------------------------------
As at June 30,
2009
Net working
capital(1) 33.7 4.7 56.6 9.4 (32.4) 72.0
Total assets 578.4 615.5 202.3 70.6 388.4 1,855.2
-------------------------------------------------------------------------
As at December 31,
2008
Net working
capital(1) 60.7 27.6 76.5 4.8 (22.9) 146.7
Total assets 658.2 618.3 211.3 69.5 469.6 2,026.9
-------------------------------------------------------------------------
For the three
months ended
June 30, 2009
Acquisitions - - - - - -
Purchase of
property,
plant and
equipment 2.6 33.7 0.2 - - 36.5
-------------------------------------------------------------------------
For the three
months ended
June 30, 2008
Acquisitions 3.4 - 21.2 - - 24.6
Purchase of
property, plant
and equipment 1.7 10.2 1.0 0.3 - 13.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six
months ended
June 30, 2009
Acquisitions - - - - - -
Purchase of
property, plant
and equipment 5.3 66.8 0.2 0.1 - 72.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six
months ended
June 30, 2008
Acquisitions 3.4 - 21.2 - - 24.6
Purchase of
property, plant
and equipment 3.2 18.5 1.6 0.5 - 23.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net working capital reflects amounts as at the quarter end and is
comprised of cash and cash equivalents, accounts receivable and
inventories, less bank indebtedness, accounts payable and accrued
liabilities, current portion of term loans and dividends and interest
payable to shareholders and debentureholders.
Geographic Information
Total
United Consoli-
Canada States Other dated
-------------------------------------------------------------------------
Revenues for the three
months ended June 30,
2009 339.5 90.4 24.5 454.4
Revenues for the six
months ended June 30,
2009 828.4 186.2 43.3 1,057.9
Property, plant and
equipment as at June 30,
2009 382.0 143.7 65.4 591.1
Goodwill as at June 30,
2009 455.6 17.2 - 472.8
Total assets as at
June 30, 2009 1,539.8 241.3 74.1 1,855.2
-------------------------------------------------------------------------
Revenues for the three
months ended June 30,
2008 460.9 87.5 18.8 567.2
Revenues for the six
months ended June 30,
2008 1,044.5 164.7 39.4 1,248.6
Property, plant and
equipment as at
December 31, 2008 400.3 92.4 69.6 562.3
Goodwill as at
December 31, 2008 454.6 18.1 - 472.7
Total assets as at
December 31, 2008 1,761.1 188.7 77.1 2,026.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. Comparative Figures
Certain reclassifications of prior year amounts have been made to conform
to current year presentation. Specifically, $8.5 million has been
reclassified to property, plant and equipment from inventory to provide
comparative presentation of certain of Superior Propane's rental assets.
Additionally, $25.4 million has been reclassified from current portion of
deferred credit to long-term portion of the deferred credit.
14. Subsequent Event
On August 6, 2009, Superior entered into a definitive agreement to
acquire the shares of Specialty Products & Insulation Co. (SPI), a
privately held US national distributor of insulation and architectural
products in the commercial and industrial markets for consideration of
approximately US$135 million (not including acquisition costs and normal
course closing adjustments). The acquisition is anticipated to close in
the third quarter of 2009.