TSX: SPF.UN
CALGARY, Feb. 28 /CNW/ -
Highlights
- Fourth quarter performance was strong with operating distributable
cash flow from continuing operations up by 14% and overall
distributable cash flow per trust unit up by 11% from the fourth
quarter of 2006.
- Distributable cash flow per trust unit for the year-ended
December 31, 2007 was $1.97, which exceeded the Fund's 2007 annual
guidance range of $1.80-$1.90 per unit.
- Distributions paid per trust unit in 2007 remained stable at
$0.13 per month ($1.56 annualized) and resulted in an annual payout
ratio of 79%.
- Superior Plus announces a distribution increase of 4% to $0.135 per
trust unit per month ($1.62 annualized) as a result of solid
operating and financial results commencing with the April 15, 2008
payment.
- Superior Propane results were at the high-end of the guidance range,
an increase of 22% over the fourth quarter of 2006 and an annual
increase of 10% from 2006 driven by increased volumes and value-added
services revenue.
- ERCO Worldwide results exceeded the forecast range, an increase of
13% over the fourth quarter of 2006 and an increase of 5% from 2006
primarily due to strong chemical volumes and higher prices.
- Winroc results were at the high-end of the guidance range, marginally
lower than the fourth quarter of 2006 and consistent with the 2006
record results despite weaker residential housing demand in the
United States.
- Superior Energy Management results were as forecast, consistent with
the fourth quarter of 2006 and a 17% increase from 2006.
- Total debt outstanding decreased by $72.8 million from December 31,
2006 levels resulting in Senior Debt to EBITDA ratio of 1.9x and
Total Debt to EBITDA ratio of 3.0x as at December 31, 2007.
- Superior's US denominated cash flows are hedged 94% for 2008 and 50%
for 2009.
Financial Summary
-------------------------------------------------------------------------
(millions of dollars, Three Months Ended Years Ended
except per trust unit Dec. 31 Dec. 31
amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
Financial
Operating distributable
cash flow
Superior Propane 39.9 32.6 99.6 90.6
ERCO Worldwide ("ERCO") 22.6 20.0 79.3 75.7
Winroc 10.1 10.7 34.6 34.6
Superior Energy Management
("SEM") 2.8 3.0 12.1 10.3
-------------------------------------------------------------------------
75.4 66.3 225.6 211.2
Discontinued operations -
JW Aluminum ("JWA") - 8.1 - 38.9
-------------------------------------------------------------------------
75.4 74.4 225.6 250.1
Interest (10.7) (16.4) (44.7) (63.3)
Corporate costs (1.7) (2.4) (10.5) (6.4)
-------------------------------------------------------------------------
Distributable cash flow 63.0 55.6 170.4 180.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow per
trust unit, basic and
diluted $0.72 $0.65 $1.97 $2.11
Average number of trust
units outstanding
(millions) 87.3 85.5 86.5 85.5
Distributions paid per trust
unit $0.39 $0.39 $1.56 $1.82
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For Superior Plus, 2007 was an excellent year with strong results from each of the four divisions. The Fund is well diversified and consists of high-quality, businesses with growth opportunities in each of its core sectors: Propane Distribution, Specialty Chemicals, Construction Products Distribution, and Fixed-Price Energy Services. All of Superior's businesses have an inventory of efficiency improvement projects and growth opportunities, positioning the Fund to execute on its long-term objective of stability of distributions with value growth. The strong performance in 2007 and the positive outlook going forward supported the Board's decision to increase the monthly cash distribution rate by 4%.
Over the past year, we increased efficiencies in our core businesses, strengthened our balance sheet, and proactively managed risk factors. In addition, we improved our corporate governance processes and enhanced our Board of Directors with the addition of three new members. The new members provided valuable expertise and relevant experience to the Board and their respective business advisory committees on which they sit.
Execution of the Growth Strategy
2007 marked the launch of Superior's corporate growth strategy which included the following major accomplishments:
- Superior Propane increased sales volumes by 3% as a result of
customer improvement initiatives and weather conditions consistent
with the historical five-year average.
- Superior Propane's customer service initiative was enhanced with a
reorganization of the business into six regional markets allowing for
increased focus on customer retention and growth through improved
service.
- Superior Propane's total gross profit increased to $294.2 million
from $272.9 million representing an increase of 8% over the prior
year primarily driven from increases in volumes, margins and value-
added services.
- ERCO achieved a 98% average utilization rate at its facilities
demonstrating excellent operational management and continued progress
on its efficiency improvement projects.
- ERCO announced the US$95 million Port Edwards modernization and
expansion project.
- SEM expanded into the British Columbia fixed-price natural gas market
and entered the Ontario fixed-price electricity market penetrating
two new growth channels.
- SEM established long-term supply partnerships with Bruce Power LP and
Constellation Energy Commodities Group, Inc. providing increased
financial flexibility and stability of supply for its customers.
- Winroc added two new greenfield locations and completed two regional
tuck-in acquisitions while maintaining a strict focus on
relationship, margin and expense management.
Stability of Distributions
The Fund continued to invest in efficiency improvement projects in each of the four businesses providing a foundation for long-term, stable distributions in 2007. Total cash distributions in 2007 were $1.56 per trust unit representing a constant $0.13 per trust unit per month. A targeted payout ratio of 85-90% was established in 2006 in order to provide increased financial flexibility for future growth. Distributable cash flow of $1.97 per trust unit resulted in an actual payout ratio of 79% in 2007, which was well below our targeted range. The Fund continues to forecast a payout ratio well below 90%, following the announced distribution increase to $0.135 per trust unit per month. ($1.62 annualized). Superior will also be suspending its distribution reinvestment program commencing with the April 15, 2008 payment due to forecast surplus cash flows and declining debt levels. In addition, we consider this program to be dilutive for our unitholders at this time.
Income Funds New Tax Regime
On October 31, 2006, the Minister of Finance (Canada) announced new tax proposals concerning the taxation of income trusts and other flow-through entities (the "SIFT Rules") which received Royal Assent on June 22, 2007. Following the announcement, Superior Plus completed a five-year business plan incorporating its tax pools and announced growth projects to assess the impact of the new tax. The results of the detailed planning model indicated Superior Plus will have growth opportunities to more than offset the impact of the new SIFT tax post 2011 resulting in stable distributions for its unitholders over the long-term.
Financial Position
In 2007, Superior Plus continued to improve and maintain a strong balance sheet. The Fund established a new syndicated credit facility of $595 million with enhanced debt covenants and increased financial capacity maturing in 2010. Superior Plus has conservative leverage target ranges with its Senior Debt to EBITDA ratio between 1.5x-2.0x and its Total Debt to EBITDA ratio between 2.5x-3.0x. In 2008, the Fund has forecast it will be at the mid-point of the target ranges, which are significantly lower than its lenders' covenants. As at December 31, 2007, Superior Plus had $670 million of credit capacity with 11 chartered banks and approximately $330 million of undrawn credit availability. (Excluding its securitization program).
Financial Outlook
-------------------------------------------------------------------------
(millions of dollars,
except per trust unit
amounts) 2007E 2007A 2008P(3) 2009P(3)
-------------------------------------------------------------------------
Operating distributable
cash flow
Superior Propane 95-100 99.6 100-105 105-110
ERCO 70-75 79.3 75-80 78-83
Winroc 30-35 34.6 32-37 32-37
SEM 12-15 12.1 15-18 18-23
-------------------------------------------------------------------------
Distributable cash per
trust unit 1.80-1.90 1.97 1.90-2.10 2.05-2.25
Payout ratio 84% 79% 80%(1) 75%(1)
-------------------------------------------------------------------------
Average Senior Debt/
EBITDA Ratio (target
of 1.5 to 2.0x) 2.0(2) 1.9(2) 1.7(2) 1.6(2)
Average Total Debt/
EBITDA Ratio (target
of 2.5 to 3.0x) 3.1(2) 3.0(2) 2.8(2) 2.7(2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Based on mid-point of the distributable cash flow per trust unit
range and includes distribution increase effective April 15, 2008.
(2) Superior's debt ratios take into account the impact of the off-
balance sheet receivable sales program amounts, cash on hand,
suspension of DRIP program, and the Port Edwards Project.
(3) The assumptions relating to the Financial Outlook are discussed
in the Financial Discussion of 2007 Fourth Quarter and 2007 Year-End
Results.
Consolidated Outlook
Superior's operating distributable cash flow per trust unit was $1.97 in 2007, exceeding the Fund's expectations due to strong performance from all of its core businesses. Superior Propane continues to expand its product offering and increase propane volumes while experiencing average weather conditions. ERCO Worldwide continues to operate at a high level of utilization due to increased demand in the sodium chlorate industry with most of its volumes contracted in 2008 and 2009. Winroc's market and geographic diversification strategy continues to provide stability to its business during a US housing downturn. SEM continues to penetrate the fixed-price electricity market in Ontario while expanding its fixed-price natural gas presence in British Columbia.
Given the strong momentum achieved in 2007 and our positive outlook, we have increased our 2008 expectations of consolidated distributable cash flow per trust unit to the range of $1.90 to $2.10, increasing in 2009 to the range of $2.05 to $2.25. The improved operating environments of our core businesses, reduced payout ratio, increased financial capacity, and inventory of efficiency and expansion projects provide our unitholders a platform for distribution stability and growth over the long term.
Strategic Operational Review
Propane Distribution
Superior Propane contributed $99.6 million in operating distributable cash flow in 2007, an increase of 10% over 2006. The increase in sales volumes and value-added services revenue contributed to a total gross profit of $294.2 million or 20.6 cents per litre. These results reflect considerable improvement in all areas of the business due to the implementation of several initiatives as described below.
The reorganization of the business into six regional centres has already shown early signs of improving customer retention and growth. This new structure allows for relationships to be managed with direct customer contact at the local level while receiving benefits of standardized processes and a technology platform.
During 2006, Superior completed the installation of on-board bulk truck computers which reduced driver and office administration in 2007. This on-board technology improves our ability to reduce out-of-gas occurrences and is expected to improve distribution efficiencies for routing and scheduling logistics. The implementation of asset management, real-time communications and GPS technology are scheduled for 2008 with forecasting of routing and scheduling improvements to be completed in 2009.
Superior expanded its master lease program adding 134 new bulk and service trucks in 2007 with another 113 trucks expected to be brought into service into 2008. This level of fleet renewel is approximately double the amount invested compared to prior years. The reduction in maintenance capital and lower repair costs is expected to offset the increase in lease costs over the life of the fleet. The dollar value equivalent of trucks brought into service during 2007 by way of operating lease was $20 million.
Our wholesale natural gas liquids marketing business continues to provide transportation, storage, risk management, supply, logistics and fixed-price offerings for Superior Propane as well as to third parties in Canada and the United States.
Superior continues to expand its service offerings such as preventative maintenance and warranty programs and has separated its service business from the propane delivery business to gain further efficiencies and implement best practices across Canada.
We continue to implement these initiatives and forecast an operating distributable cash flow for 2008 in the range of $100-$105 million, increasing in 2009 to $105-$110 million. We are encouraged by the significant improvements made in the propane distribution business and expect further growth to be achieved over the long term.
Specialty Chemicals
ERCO Worldwide contributed $79.3 million in operating distributable cash flow in 2007, compared to $75.7 million in 2006. Total gross profit increased to $207.7 million due to higher chemical volumes and strong pricing received on sodium chlorate and chloralkali/potassium products. Pulp prices continued to rise throughout 2007 resulting in increased demand for North American sodium chlorate. Total chemical sales volumes were 768,000 tonnes, representing an increase of 12,000 tonnes over the prior year as ERCO's Chilean facility completed its first full year of operations. ERCO was able to achieve a 1% increase in average sodium chlorate prices over the prior year despite an 18% increase in the appreciation of the Canadian dollar against the United States dollar due to the Fund's proactive hedging program.
ERCO achieved a 98% average utilization rate at its facilities based upon total production capacity of approximately 733,000 metric tonnes. ERCO is the second largest producer of sodium chlorate in North America and has patented technology utilizing industry leading equipment and processes required by pulp producers. This proprietary technology allows ERCO to have an early look on investment opportunities both domestically and internationally.
ERCO continues to invest growth capital into the business with half of the expenditures allocated to its on-going electrical cell replacement program which provides for a reduction in overall electrical consumption. In addition, ERCO has several projects which capture hydrogen, replace fossil fuels, and reduce greenhouse gas emissions. With the closure of two high cost facilities in 2006, ERCO is now well positioned as a low-cost manufacturer with facilities close to its customers.
Strategic diversification of our chemical sales volumes towards higher volume of chloralkali products has reduced our portfolio weighting to sodium chlorate and our dependency on the North American pulp and paper industry over the past three years. ERCO's chlorine, hydrochloric acid, potassium hydroxide and potassium carbonate production, and approximately 94% of its caustic soda production are sold to end markets not related to the pulp and paper industry.
In August of 2007, ERCO announced the conversion of its Port Edwards, Wisconsin potassium/chloralkali facility from a mercury-based process to membrane technology at a cost of approximately US $95 million and with a projected completion date in the second half of 2009. This project will allow ERCO to further enhance its diversification strategy and will improve the facility's capacity and process efficiency. The project is expected to reduce plant costs by approximately 25% and increase facility capacity by an additional 30% generating a forecast after tax rate of return over 15%. This plant was anticipated to be closed within 4-6 years before the Fund made the decision to convert the facility.
Based on the current inventory of efficiency improvement and growth projects, the stability of sodium chlorate market, and a proactive hedging program, we expect ERCO's operating distributable cash flow net of maintenance capital expenditures to be $75-$80 million for 2008, increasing in 2009 to be $78-$83 million.
Construction Products Distribution
Winroc contributed operating distributable cash flow of $34.6 million in 2007, matching the record distributable cash flow in 2006 despite a significant downturn in United States residential housing demand. Total revenue and total gross profit were $512.3 million and $129.8 million, respectively, a decrease of 1% and 2%, respectively, from the prior year.
Strong Western Canada residential and commercial sales demand continued to primarily offset weakness in United States residential markets and some softness in Ontario markets. Winroc's geographical diversification provides stability of sales volumes as different geographical regions should experience changes in end-use demand at different rates. Winroc's end-use market split is approximately 50% residential new construction and renovation and 50% commercial.
While Winroc is a distribution business, providing premium service is the key to its continued success. It is a productivity partner for its installing contractor customers utilizing a stock and scatter delivery model. Winroc estimates its gypsum board market position at an average market share between 10%-20% in Canada and 8%-10% in the four states of Utah, Nevada, Arizona and Minnesota. These significant market positions are important both to suppliers and customers during changes in the economic cycle. Winroc continues to focus on improving its core operating areas including: service, contractor and supplier relationships, margin and operating expense, and working capital management.
Winroc continues to invest in the business expanding its master lease program by adding 19 new trucks in 2007 with an additional 35 trucks expected to be brought into service in 2008. The reduction in maintenance capital and lower repair costs are expected to offset the increase in lease costs while lowering the average age of the fleet. For 2007, Winroc entered into an equivalent dollar value of $3.6 million worth of leases, replacing previously owned trucks.
The fragmented nature of the specialty buildings distribution industry continues to provide attractive consolidation opportunities. Winroc has identified a number of acquisition and expansion opportunities which are expected to add value over the long term. In 2007, Winroc added two new greenfield locations and completed two regional acquisitions, increasing its branch network to 42 locations.
For 2008, we expect continued weakness in the new home construction market in the United States to be supported by strength in the Western Canada residential and commercial markets. We are estimating operating distributable cash flow after maintenance capital expenditures in the range of $32 - $37 million for both 2008 and 2009, with some improvement in the new home construction segment in 2009.
Fixed-Price Energy Services
Superior Energy Management contributed $12.1 million of operating distributable cash flow in 2007, representing an increase of 17% over the prior year. These results reflect SEM's successful strategy of increased focus on lower volume, higher margin residential customers. The improvement in margins contributed to a total gross profit of $30.1 million or 81.3 cents per gigajoule.
During 2007, SEM made substantial progress in expanding the infrastructure to support its growth plans beyond the Ontario residential market and the Ontario and Quebec commercial natural gas markets. SEM expanded into the newly deregulated natural gas market in British Columbia on May 1, 2007 resulting in the addition of 13,100 customers with the natural gas flow commencing November 1, 2007. On January 7, 2008, SEM announced it had entered into a long-term fixed-price natural gas agreement with Constellation Energy Commodities Group, Inc. This partnership provides SEM with stability of supply and increased financial capacity to achieve its long-term growth objectives.
In addition, SEM entered the high-growth fixed-price retail electricity market by establishing a long-term electricity supply agreement with Bruce Power LP, one of Ontario's largest independent electricity generators. SEM is marketing fixed-price electricity contracts to residential and commercial customers in Ontario, which will result in the electricity flow in 2008. This market has approximately four million customers and a low penetration rate relative to the mature Ontario natural gas market and thereby represents a significant growth opportunity for SEM.
SEM invested $10.9 million in customer costs exiting 2007 with 94,400 residential and 6,400 commercial natural gas customers and 1,630 electricity customers. SEM incurred $1.5 million in growth capital expenditures related to its entrance into the fixed-price electricity market in Ontario during 2007.
Based on the growth profile in its existing business, SEM is expected to generate operating distributable cash flow for 2008 of $15-$18 million, increasing in 2009 to $18-$23 million. SEM continues to assess the potential of entering certain United States markets in the future to further enhance its growth platform.
Key Corporate Items
Corporate costs for the year were $10.5 million compared to $6.4 million in the prior year. The prior year included a $5.3 million reversal of executive stock-based compensation and short-term bonuses as a result of a decline in the unit price in the prior year.
Interest expense of $44.7 million for 2007 decreased by $18.6 million from the prior year due to lower debt levels, the benefit of the appreciation of the Canadian dollar on US denominated debt, and the sale of JW Aluminum on December 7, 2006.
Superior had total credit facilities of $670 million at December 31, 2007 creating an estimated undrawn credit availability of $430 million. (This includes $100 million average utilization available under the terms of the securitization program).
2007 Fourth Quarter and 2007 Year-End Results
The Fund's Financial Discussion of 2007 Fourth Quarter and 2007 Year-End Results is available on Superior's website at: www.superiorplus.com under 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 2007 Fourth Quarter and Year-End Results at 5:00 p.m. EST (3:00 p.m. MST) on Thursday, February 28, 2008. To participate in the call, dial: 1-800-733-7560. An archived recording of the call will be available for replay until midnight, April 2, 2008. To access the recording, dial: 1-877-289-8525 and enter pass code 21259076 followed by the number key. Internet users can listen to the call live, or as an archived call, on Superior's website at: www.superiorplus.com under the Events and Presentations section.
2007 Annual Financial Statements and Management's Discussion and Analysis
The Fund intends to file its 2007 Annual Report, including its 2007 Management's Discussion and Analysis, its 2007 Annual Financial Statements and its 2007 Annual Information Form with securities regulators on March 10, 2008. Hard copies of the 2007 Annual Report are expected to be available on March 12, 2008.
Financial Discussion of 2007 Fourth Quarter and 2007 Year-End Results
February 28, 2008
Forward Looking Information
Certain information included or incorporated by reference herein is forward-looking, within the meeting of applicable Canadian securities laws. Forward-looking information includes, without limitation, statements regarding the future financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, distributable cash flow, taxes and plans and objectives of or involving Superior Plus Income Fund (the "Fund") or Superior Plus LP ("Superior LP" or the "Partnership"). Much of this 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 Financial Discussion includes but is not limited to, outlooks, capital expenditures, business strategy and objectives. The Fund 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 not a guarantee of future performance and involves a number of risks and uncertainties some of which are described herein. Such forward-looking information necessarily involves known and unknown risks and uncertainties, which may cause the Fund'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 identified in the Fund's 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 the Fund nor Superior LP undertakes any obligation to publicly update or revise such information to reflect new information, subsequent or otherwise.
Non-GAAP Financial Measures
Distributable Cash Flow
Distributable cash flow of the Fund available for distribution to Unitholders, is equal to cash generated from operations, adjusted for changes in non-cash working capital and natural gas and electricity customer acquisition costs, less maintenance capital expenditures. Maintenance capital expenditures are equal to capital expenditures incurred to maintain the capacity of Superior's operations and are deducted from the calculation of distributable cash flow. Acquisitions and other capital expenditures incurred to expand the capacity of Superior's operations or to increase its profitability ("growth capital"), are excluded from the calculation of distributable cash flow. The Fund may deduct or include additional items to its calculation of distributable cash flow, these items would generally, but not necessarily, be items of a non-recurring nature. Distributable cash flow is the main performance measure used by management and investors to evaluate the performance of the Fund and its businesses. Readers are cautioned that distributable cash flow is not a defined performance measure under Canadian generally accepted accounting principles ("GAAP"), and that distributable cash flow cannot be assured. The Fund's calculation of distributable cash flow, maintenance capital and growth capital may differ from similar calculations used by comparable entities. Operating distributable cash flow is distributable cash flow before corporate and interest expenses. It is also a non-GAAP measure and is used by management to assess the performance of the operating divisions.
Standardized Distributable Cash Flow
During 2007, the CICA published an interpretive release, Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure, in order to provide its recommendations related to the measurement and disclosure of cash available for distributions. The guidance was issued in an effort to improve the consistency, comparability, and transparency of the reporting of the measure commonly referred to as distributable cash flow. Superior's calculation of standardized distributable cash flow is, in all material respects, in accordance with the recommendations provided by the CICA.
Superior views the CICA recommendations as a positive step in providing stakeholders with meaningful information, but consistent with the guidance provided by the CICA, Superior has determined, that due to the nature of Superior's businesses, certain adjustments to standardized distributable cash flow are required to better reflect the cash flow available to be distributed to Unitholders. Superior's adjusted standardized distributable cash flow is referred to as distributable cash flow, and is unchanged from Superior's previous definition or measurement of distributable cash flow. Superior's distribution policy is based on distributable cash flow on an annualized basis, accordingly, the seasonality of Superior's individual quarterly results must be assessed in the context of annualized distributable cash flow. Adjustments recorded by Superior as part of its calculation of distributable 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 from quarter to quarter differ significantly. Superior's calculation also distinguishes between capital expenditures that are maintenance related and those that are growth related, in addition to allowing for the proceeds received on the sale of certain capital items. Adjustments are also made to reclassify the cash flows related to natural gas and electricity customer acquisition costs in a manner consistent with the income statement recognition of these costs.
EBITDA
EBITDA represents earnings before interest, taxes, depreciation and amortization 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, and is not a defined performance measure under GAAP. Superior's calculation of EBITDA may differ from similar calculations used by comparable entities.
Overview of the Fund
Superior Plus Income Fund is a diversified business trust. The Fund holds 100% of Superior Plus LP ("Superior"), a limited partnership formed between Superior Plus Inc., as general partner and the Fund as limited partner. The distributable cash flow of the Fund is solely dependent on the results of Superior LP and is derived from the allocation of Superior LP's income to the Fund by means of partnership allocations. Superior 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"; 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" or "SEM".
Fourth Quarter and Year-to-Date Results
Fourth quarter distributable cash flow was $63.0 million, an increase of $7.4 million (13%) over the prior year quarter. The increase in distributable cash flow was due to improved operating cash flow at Superior Propane and ERCO and lower interest and corporate costs, offset in part, by the absence of a contribution from JW Aluminum as a result of its sale on December 7, 2006, and marginally lower operating cash flow at Winroc and SEM. Distributable cash flow per trust unit was $0.72 per trust unit in the fourth quarter, an increase of $0.07 per trust unit (11%) from the prior year quarter, due to the increase in distributable cash flow, offset in part, by a 2% increase in the average number of trust units outstanding.
Distributable cash flow for the year ended December 31, 2007 was $170.4 million, a decrease of $10.0 million (6%) from the prior year, as improved operating cash flow at Superior Propane, ERCO and SEM, and lower interest costs were fully offset by the absence of JW Aluminum as a result of its sale on December 7, 2006. Distributable cash flow per trust unit was $1.97 per trust unit, compared to $2.11 per trust unit in the prior year, due to a 6% decrease in distributable cash flow and a 1% increase in the weighted average number of trust units outstanding.
Net earnings for the fourth quarter were $64.5 million, compared to $38.1 million for the prior year quarter. The increase in net earnings is due principally to improved gross profit at Superior Propane due to higher sales volumes. Additionally, the current year quarter includes unrealized gains on financial instruments that were not present in the prior year quarter, due to the adoption of new accounting standards on January 1, 2007, see "Changes in Accounting Policies" for a further discussion on these changes. The unrealized gain is the result of gains on Superior Energy Management's financial natural gas derivative contracts due to changes in the forward price of natural gas, partially offset by losses on ERCO Worldwide's fixed-price electricity purchase agreement due to changes in the forecasted price of electricity in deregulated markets. Total interest expense of $10.7 million was $5.7 million lower than the prior year due principally to lower average debt levels. The change in net earnings from discontinued operations is due to the sale of JW Aluminum on December 7, 2006. Additionally, fourth quarter net earnings were affected for the same reasons as the analysis of distributable cash flow for the fourth quarter.
The Fund had net earnings for the year ended December 31, 2007 of $119.8 million, compared to a net loss of $80.8 million for the year ended December 31, 2006. The change in net earnings (loss) for 2007 compared to 2006 is due principally to non-cash impairment charges of $170.8 million (net of tax) recorded in the prior year related to the write-down of ERCO Worldwide's Bruderheim, Alberta and Valdosta, Georgia sodium chlorate facilities and ERCO Worldwide's goodwill. (See Note 10 to the Interim Consolidated Financial Statements). Additionally, Superior recorded a $56.3 million impairment on the carrying value of JWA during 2006. (See Note 10 to the Interim Consolidated Financial Statements). Consolidated revenues of $2,355.4 million were $91.1 million higher than the prior year due principally to higher revenues at Superior Propane as a result of higher sales volumes and selling prices. Gross profits of $661.8 million were $30.9 million higher than the prior year, reflecting improved operating results at Superior Propane and ERCO Worldwide. Operating expenses of $439.7 million were $15.8 million higher than the prior year and were the result of higher sales activity at Superior Propane and Superior Energy Management. Amortization is lower than the prior year due to reduced amortization at ERCO, as a result of asset impairments recorded in the prior year. Total interest expense of $44.7 million was $18.6 million lower than the prior year due principally to lower average debt levels. Future income taxes were impacted in 2006 due to the recognition of the asset impairments that were noted above. (See Note 10 to the Interim Consolidated Financial Statements). The change in net earnings from discontinued operations is due to the sale of JW Aluminum on December 7, 2006.
Distributable Cash Flow(1)
-------------------------------------------------------------------------
Three months ended Years ended
(millions of dollars except December 31 December 31
per unit amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
Cash flows from operating
activities of continuing
operations 9.2 13.9 134.3 151.7
Less: Total capital
expenditures (11.8) (7.9) (27.0) (72.3)
-------------------------------------------------------------------------
Standardized distributable
cash flow(2) (2.6) 6.0 107.3 79.4
Add:
Growth capital
expenditures 3.6 1.8 8.8 53.0
Proceeds on disposal of
capital items 3.4 4.3 4.8 5.5
Natural gas customer
acquisition costs
capitalized 3.6 1.4 10.9 8.4
Acquisitions 2.9 - 4.3 -
Management
internalization costs - - 0.5 1.3
Strategic plan costs 3.5 5.3 5.7 19.7
Distributable cash flow
from discontinued
operations(3) - 8.1 - 38.9
Increase in non-cash
working capital 50.2 29.6 34.7 -
Less:
Decrease in non-cash
working capital - - - (22.6)
Amortization of natural
gas customer acquisition
costs (1.6) (0.9) (6.6) (3.2)
-------------------------------------------------------------------------
Distributable cash flow 63.0 55.6 170.4 180.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow 63.0 55.6 170.4 180.4
Distributable cash flow
borrowed (reinvested)(6) (28.9) (22.2) (35.5) (24.7)
-------------------------------------------------------------------------
Distributed cash flow 34.1 33.4 134.9 155.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow per
trust unit, basic(4) and
diluted(5) $0.72 $0.65 $1.97 $2.11
Distribution payout ratio(6) 54% 60% 79% 86%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See the Interim Consolidated Financial Statements for cash flows from
operating activities of continuing operations, management
internalization costs, capital expenditures/proceeds (maintenance,
growth and acquisitions), natural gas customer acquisition costs, and
changes in non-cash working capital.
(2) Standardized distributable cash flow is a measure defined by the
Canadian Institute of Chartered Accountants (CICA). See Non-GAAP
Financial Measures.
(3) See JWA discussion.
(4) The weighted average number of trust units outstanding for the three
months ended December 31, 2007 is 87.3 million (2006 - 85.5 million)
and for the twelve months ended December 31, 2007 is 86.5 million
(2006 - 85.5 million).
(5) For the three and twelve months ended December 31, 2007 and 2006,
there were no dilutive instruments.
(6) See Distributions Paid to Unitholders.
Superior Propane
Superior Propane generated operating distributable cash flow of $39.9 million in the fourth quarter, an increase of $7.3 million (22%) from the prior year quarter due to higher gross profit, offset in part, by higher operating costs.
Condensed operating results for the three months and years ended December 31, 2007 and 2006 are provided in the following table. See "Segmented Distributable Cash Flow" for detailed comparative business segment results.
-------------------------------------------------------------------------
(millions
of dollars
except per Three months ended Years ended
litre December 31 December 31
amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
cents/ cents/ cents/ cents/
litre litre litre litre
------- ------- ------- -------
Revenue 357.3 85.6 279.9 68.8 1,075.7 75.3 985.4 71.1
Cost of
sales (268.0) (64.1) (201.7) (49.6) (781.5) (54.7) (712.5) (51.4)
-------------------------------------------------------------------------
Gross
profit 89.3 21.5 78.2 19.2 294.2 20.6 272.9 19.7
Less: cash
operating,
admini-
stration
and tax
costs (50.2) (12.1) (47.6) (11.7) (194.8) (13.6) (182.6) (13.2)
-------------------------------------------------------------------------
Cash
generated
from
operations
before
changes
in net
working
capital 39.1 9.4 30.6 7.5 99.4 7.0 90.3 6.5
Maintenance
capital
proceeds
(expend-
itures),
net 0.8 - 2.0 0.5 0.2 - 0.3 -
-------------------------------------------------------------------------
Operating
distri-
butable
cash flow 39.9 9.4 32.6 8.0 99.6 7.0 90.6 6.5
Propane
retail
volumes
sold
(millions
of litres) 416 407 1,429 1,386
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 13 to the Interim Consolidated Financial
Statements). In order to provide meaningful comparative results,
these amounts have been reclassified in a manner consistent with the
accounting treatment in the comparative period. As such, included in
revenue for the three and twelve months ended December 31, 2007 is
$0.7 million and $1.2 million in realized foreign currency forward
contract gains.
Revenues for the fourth quarter of 2007 were $357.3 million, an increase of $77.4 million from revenues of $279.9 million in 2006. The increase in revenues was due to higher propane sales volumes in conjunction with higher retail propane prices. Total gross profit for the fourth quarter of 2007 was $89.3 million, an increase of $11.1 million (14%) over the prior year. Total gross profit per litre for the fourth quarter of 2007 was 21.5 cents per litre, an increase of 2.3 cents per litre (12%) compared to the prior year, due to Superior Propane's on-going efforts to increase total gross profit per litre by unbundling the price of propane and the price of value-added services to its customers. Traditionally, Superior Propane had included a portion of its service offerings in the base price of its retail propane. As the price of propane and other services are unbundled, Superior Propane will continue to benefit from the focus on its service business, ensuring that value added services are separately billed.
Gross Profit by Segment
-------------------------------------------------------------------------
Three months ended Years ended
December 31 December 31
(millions of dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Retail propane and delivery 71.3 69.0 246.1 239.0
Other services 8.6 6.6 24.7 20.8
Wholesale and related 9.4 2.6 23.4 13.1
-------------------------------------------------------------------------
Total gross profit 89.3 78.2 294.2 272.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Propane sales gross profit for the fourth quarter was $71.3 million, an increase of $2.3 million (3%) from the prior year quarter, as sales volumes increased by 9 million litres (2%) and sales margins increased by 0.1 cents per litre (1%). Residential and commercial volumes increased by 3 million litres (2%), due principally to colder than average weather, as weather across Canada was 3% colder than the prior year quarter and 4% colder than the five year average. In addition to the impact of the colder weather, residential and commercial volumes, continued to benefit from higher customer growth and retention levels, as a result of customer service initiatives implemented throughout 2006 and 2007. Industrial volumes increased by 7 million litres (4%), due principally to improved heating related volumes as a result of the colder than average weather. Automotive propane volumes declined by 4 million litres (12%), consistent with historical decline trends in this end-use market. Propane continued to actively manage sales margins in the fourth quarter, resulting in average retail propane and delivery sales margins of 17.1 cents per litre, which was 0.1 cents per litre higher than the prior year quarter average margin of 17.0 cents per litre. Average margins compared to the prior year quarter were positively impacted by an increased percentage of higher margin heating related sales volumes, offset in part, by the continued competitive pressures on automotive margins.
Other services gross profit was $8.6 million for the fourth quarter, an increase of $2.0 million (30%) over the prior year quarter, due to higher service, rental and hardgood revenues. The improvement in service and rental gross profits is due in part, to Superior Propane's continued focus on its service business. Wholesale and related gross profits were $9.4 million for the fourth quarter, an increase of $6.8 million compared to the prior year quarter due to the difference in timing with respect to the recognition of gross profits by Superior Propane's trading business, as a significant amount of gross profit was recognized in the fourth quarter in 2007, as opposed to the third quarter in 2006.
Superior Propane Annual Sales Volumes and Gross Profit:
Volumes by End-Use Application(1)
-------------------------------------------------------------------------
Three months
ended December 31 Years ended December 31
2007 2006 2007 2006
---------------------------------- -----------------------------------
Residential 54 54 Residential 171 163
Commercial 91 88 Commercial 315 296
Agricultural 44 41 Agricultural 92 89
Industrial 198 191 Industrial 716 686
Automotive 29 33 Automotive 135 152
---------------------------------- -----------------------------------
416 407 1,429 1,386
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Volume of retail propane sold (millions of litres)
Volumes by Region(1)(2)
-------------------------------------------------------------------------
Three months
ended December 31 Years ended December 31
2007 2006 2007 2006
---------------------------------- -----------------------------------
Western Canada 226 230 Western Canada 768 747
Eastern Canada 162 152 Eastern Canada 556 542
Atlantic Canada 28 25 Atlantic Canada 105 97
---------------------------------- -----------------------------------
416 407 1,429 1,386
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 $50.2 million, increased by $2.6 million (5%) from the prior year quarter, due to higher wages and benefits, and higher truck leasing costs as a result of the implementation of a comprehensive operating lease program in 2007, offset in part, by lower equipment maintenance costs.
Net maintenance capital proceeds for the quarter were $0.8 million, which was $1.2 million lower than the prior year quarter, and was comprised of expenditures of $1.7 million and proceeds on disposal of $2.5 million. Proceeds on disposal consisted of the sale of excess land and surplus fleet, tanks and cylinders. Maintenance capital for 2007 is lower than historical levels due to the implementation of a comprehensive operating lease program. Superior Propane had been leasing a portion of its service trucks, crane trucks and tandem tractors for several years, and has now expanded and streamlined its leasing programs with a master lease and other lease arrangements at competitive rates. Superior has expanded the program to include bulk trucks to accelerate the fleet renewal for 2007 and 2008, resulting in 134 new trucks being brought into service during 2007, with a further 113 trucks anticipated to be brought into service throughout 2008. Increasing lease costs are anticipated to be offset over time by lower operating costs, resulting from lower repair and maintenance costs and lower maintenance capital expenditures. Additional benefits are also expected in relation to fleet reliability, improved productivity, safety and corporate image. The program is designed to better align the cost structure with Superior Propane's ongoing operations and result in customer service improvements.
Outlook
Superior Propane expects operating distributable cash flow for 2008 to be between $100 million and $105 million, increasing in 2009 to between $105 million and $110 million. Superior Propane's significant assumptions underlying its outlook are:
- Superior Propane forecasts average temperatures across Canada to be
consistent with the most recent five year average.
- Superior Propane expects that wholesale propane prices will not
significantly impact demand for propane and related propane services.
- Total gross profit for Superior Propane is projected to increase due
to the on-going implementation of customer service programs and an
increase in propane volumes.
- Market opportunities for Superior Propane's wholesale trading
division are expected to be consistent with the prior years.
In addition to Superior Propane's significant assumptions detailed above, refer to the Fund's Annual Information Form for a detailed review of Superior Propane's operations and its significant business risks.
ERCO Worldwide
ERCO Worldwide generated operating distributable cash flow in the fourth quarter of $22.6 million, an increase of $2.6 million (13%) from the prior year quarter, predominantly due to lower operating expenditures.
Condensed operating results for the three months and years ended December 31, 2007 and 2006 are provided in the following table. See "Segmented Distributable Cash Flow" for detailed comparative business segment results.
-------------------------------------------------------------------------
(millions of
dollars except
per metric Three months ended Years ended
tonne (MT) December 31 December 31
amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue $ per MT $ per MT $ per MT $ per MT
Chemi-
cal(1) 110.7 570 105.9 554 430.3 560 408.6 540
Techno-
logy 5.4 28 9.6 50 30.3 40 28.6 38
Cost of
Sales
Chemi-
cal(1) (58.6) (301) (52.8) (276) (231.9) (301) (214.9) (284)
Techno-
logy (2.8) (14) (6.3) (33) (21.0) (27) (18.2) (24)
-------------------------------------------------------------------------
Gross
Profit 54.7 283 56.4 295 207.7 272 204.1 270
Less: Cash
operating,
administ-
rative &
tax costs (29.5) (152) (33.3) (174) (119.7) (156) (120.9) (160)
-------------------------------------------------------------------------
Cash
generated
from
operations
before
changes in
net
working
capital 25.2 131 23.1 121 88.0 116 83.2 110
Maintenance
capital
expendi-
tures (2.6) (18) (3.1) (16) (8.7) (11) (7.5) (10)
-------------------------------------------------------------------------
Operating
distribu-
table cash
flow 22.6 113 20.0 105 79.3 105 75.7 100
-------------------------------------------------------------------------
Chemical
volumes
sold
(thousands
of MTs) 194 191 768 756
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 13 to the Interim Consolidated Financial
Statements). In order to provide meaningful comparative results,
these amounts have been reclassified in a manner consistent with the
accounting treatment in the comparative period. As such, included in
revenue for the three and twelve months ended December 31, 2007 is
$5.2 million and $13.6 million in realized foreign currency forward
contract gains and included in chemical cost of sales for the three
and twelve months ended December 31, 2007 is $2.0 million and
$7.6 million in realized fixed-price electricity gains.
Chemical and technology revenues for the fourth quarter of $116.1 million were $0.6 million higher than the prior year quarter due to higher chemical revenue as a result of higher sales volumes and pricing, offset in part, by lower technology revenue. Fourth quarter gross profit was $54.7 million, comprised of $52.1 million from chemical sales and $2.6 million from technology projects. Chemical sales gross profit was $1.0 million lower than the prior year quarter, due to marginally lower sodium chlorate and chloralkali/potassium gross profits. Sodium chlorate gross profits were lower than the prior year as a 6% increase in sodium chlorate sales volumes and product price increases were more than offset by the impact of the appreciation of the Canadian dollar on US denominated sales and the impact of reduced hedging gains. Sodium chlorate volumes were higher than prior year quarter, as the impact of volumes at ERCO's Chilean facility which began commercial production in the fourth quarter of 2006 and higher other international volumes, more than offset the impact of reduced North American sales volumes. Chloralkali/potassium gross profits were lower than the prior year quarter, as a reduction in sales volumes was partially offset by higher realized selling prices. Technology gross profit was $0.7 million lower than the prior year quarter due to reduced project activity and the normal course expiration of royalty revenues.
Cash operating, administration and tax costs of $29.5 million were $3.8 million (11%) lower than the prior year quarter, due principally to a reduction in US denominated expenses as a result of the appreciation of the Canadian dollar and the impact of cost savings due to the closure of ERCO's Bruderheim, Alberta sodium chlorate facility in the prior year quarter. Maintenance capital expenditures of $2.6 million were $0.5 million lower than the prior year quarter due to the timing of projects.
Growth capital expenditures of $3.3 million were incurred in the fourth quarter, with $1.9 million incurred in relation to a number of small projects, including continued work related to anode cell replacement. ERCO incurred $1.4 million (USD and CDN) related to its Port Edwards, Wisconsin chloralkali facility.
During 2007, ERCO determined that it will convert its Port Edwards, Wisconsin chloralkali facility from mercury based technology to membrane technology. 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 $95 million. See the press release, "ERCO Worldwide Announces US $95 million Expansion of Port Edwards Chloralkali Facility", dated August 8, 2007, for further details.
During the fourth quarter, ERCO renegotiated in the normal course, its union contract at its Saskatoon, Saskatchewan facility. The revised contract expires on September 30, 2010.
Outlook
ERCO Worldwide expects operating distributable cash flow for 2008 to be between $75 million and $80 million, increasing in 2009 to between $78 million and $83 million. ERCO Worldwide's significant assumptions underlying its outlook are:
- Current supply and demand fundamentals for both sodium chlorate and
potassium/chloralkali products will remain stable, resulting in no
significant changes to total chemical sales prices and sales volumes.
- ERCO's average plant utilization is expected to be greater than 90%.
- The foreign currency exchange rate between the Canadian and United
States dollar is expected to be par 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 $95
million is expected to be completed on-budget in the second half of
2009.
In addition to ERCO Worldwide's significant assumptions detailed above, refer to the Fund's Annual Information Form for a detailed review of ERCO Worldwide's operations and its significant business risks.
Winroc
Winroc generated operating distributable cash flow of $10.1 million, a decrease of $0.6 million (6%) from the prior year quarter, as higher operating expenses were partially offset by higher gross profit and lower maintenance capital expenditures.
Condensed operating results for the three months and years ended December 31, 2007 and 2006 are provided in the following table. See "Segmented Distributable Cash Flow" for detailed comparative business segment results.
-------------------------------------------------------------------------
Three months ended Years ended
December 31 December 31
(millions of dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Distribution and direct
sales revenue 125.4 118.8 512.3 518.7
Distribution and direct
sales cost of sales (91.0) (85.5) (382.5) (386.5)
-------------------------------------------------------------------------
Distribution and direct
sales gross profit 34.4 33.3 129.8 132.2
Less: Cash operating,
administrative & cash
tax costs (24.2) (21.9) (94.6) (91.0)
-------------------------------------------------------------------------
Cash generated from
operations before changes
in net working capital 10.2 11.4 35.2 41.2
Maintenance capital
expenditures, net (0.1) (0.7) (0.6) (6.6)
-------------------------------------------------------------------------
Operating distributable
cash flow 10.1 10.7 34.6 34.6
-------------------------------------------------------------------------
Distribution and direct sales revenues of $125.4 million for the fourth quarter of 2007 were $6.6 million (6%) higher than the prior year quarter as increased selling prices more than offset the impact of reduced sales volumes. Distribution and direct sales gross profit of $34.4 million in the fourth quarter was $1.1 million (3%) higher than the prior year quarter, as increased sales volumes and gross profit in Western Canada, was offset by reduced sales volumes and gross profits in the United States due to competitive pressures and reduced residential construction demand. Gross profits and sales volumes in Ontario were consistent with the prior year quarter. Drywall sales volumes, an indicator of overall sales volumes, decreased 4% compared to the prior year quarter. The decrease in sales volumes was due to weaker sales volumes in the United States outpacing the increase in sales volumes in Western Canada and a modest increase in Ontario. Cash operating and administrative costs were $2.3 million (11%) higher than the prior year quarter due to higher sales volumes in Western Canada, partially offset by lower costs in Ontario and the United States. Additionally, operating expenses were impacted by increased occupancy costs due to additional operating branches and the implementation of a comprehensive operating lease program in 2007, which results in higher operating expenses and lower maintenance capital.
Maintenance capital expenditures were $0.1 million for the fourth quarter, $0.6 million lower than the prior year quarter due to the timing of expenditures and the implementation of a master leasing agreement. Both Superior Propane and Winroc have entered into master lease arrangements for the ongoing requirements of its delivery fleet, resulting in 19 new Winroc trucks being brought into service during 2007, with a further 35 trucks anticipated to be brought into service during 2008.
During the fourth quarter of 2007, Winroc acquired the assets of a gypsum supply dealer for consideration of $2.9 million.
Outlook
Winroc expects operating distributable cash flow for 2008 and 2009 to between $32 million and $37 million. Winroc's significant assumptions underlying its outlook are:
- The current economic conditions in Canada and the United States are
expected to prevail in 2008 with slight improvement in 2009.
- Gross profit is expected to be stable as, strong demand in Western
Canada for residential and commercial sales volumes, continues to
offset weakness in Ontario and United States residential sales
volumes.
In addition to Winroc's significant assumptions detailed above, refer to the Fund's Annual Information Form for a detailed review of Winroc's operations and its significant business risks.
Superior Energy Management ("SEM")
SEM's condensed operating results for the three months and years ended December 31, 2007 and 2006 are provided below. See "Segmented Distributable Cash Flow" for detailed comparative business segment results.
-------------------------------------------------------------------------
(millions
of dollars
except per
gigajoule Three months ended Years ended
("GJ") December 31 December 31
amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
cents cents cents cents
per GJ per GJ per GJ per GJ
------ ------ ------ ------
Revenue 76.9 854.4 78.8 788.0 320.4 865.9 325.6 814.0
Cost of
sales(1) (69.5) (772.2) (72.6) (726.0) (290.3) (784.6) (303.9) (759.7)
-------------------------------------------------------------------------
Gross
profit 7.4 82.2 6.2 62.0 30.1 81.3 21.7 54.3
Less:
Operating,
admin. &
selling
costs (4.6) (51.1) (3.2) (32.0) (18.0) (48.6) (11.4) (28.5)
-------------------------------------------------------------------------
Operating
distribu-
table cash
flow 2.8 31.1 3.0 30.0 12.1 32.7 10.3 25.8
-------------------------------------------------------------------------
Natural gas
sold
(millions
of GJs) 9 10 37 40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 13 to the Interim Consolidated
Financial Statements). In order to provide meaningful comparative
results, these amounts have been reclassified in a manner consistent
with the accounting treatment in the comparative period. As such,
included in cost of sales for the three and twelve months ended
December 31, 2007 is $6.8 million and $19.3 million in realized
foreign currency forward contract losses and $5.1 million and
$14.9 million related to natural gas commodity realized fixed price
losses.
SEM generated operating distributable cash flow of $2.8 million in the fourth quarter, a decrease of $0.2 million compared to the prior year quarter. SEM's revenues were $76.9 million in the fourth quarter, compared to $78.8 million in the prior year quarter. Revenues were impacted by higher overall selling prices, offset by reduced volumes. Gross profit was $7.4 million in the fourth quarter, an increase of $1.2 million (19%) compared to the prior year quarter, as gross profit per gigajoule ("GJ") was 82.2 cents per GJ, a 33% increase from the prior year quarter, more than offsetting the 17% decrease in natural gas volume sold. The increase in gross margin per GJ and the decrease in natural gas volume sold, reflect SEM's continued strategy of increasing gross profit through growth in its lower-volume, higher-margin residential and small commercial customer base. Residential and small commercial customer volumes comprised approximately 32% of total sales volumes in the fourth quarter (2006 fourth quarter - 26%). Operating, administration and selling costs of $4.6 million were $1.4 million higher than the prior year quarter due to higher amortization of customer acquisition costs which represented approximately $0.7 million of the increase in costs. The remaining increase in costs is due to higher customer service and overhead costs, attributable to the growth in SEM's customer base, and costs associated with the entrance into the BC natural gas and Ontario electricity markets.
SEM invested $3.6 million in customer acquisition costs during the quarter ($10.9 million for the twelve months ended December 31, 2007) to grow its customer base to 94,400 residential and 6,400 commercial natural gas customers and 1,630 electricity customers. The acquisition of new customers and the retention rate of SEM's existing customers has been challenged in all of SEM's markets due principally to the low system price of natural gas, compared to the fixed-rate alternative SEM is able to offer on its long-term contracts. The system price of natural gas has been both constant and low due to the absence of volatility in the spot price of natural gas over the past year, resulting in reduced customer demand for long-term, fixed-price natural gas contracts, as the immediate perceived benefit of entering into a long-term deal is reduced at the current fixed-price rates. SEM's sign-up for fixed-price electricity customers has been lower than expected for reasons similar to the natural gas market. The average remaining term of SEM's sales contracts at December 31, 2007 was 37 months (December 31, 2006 - 42 months).
On June 13, 2007, SEM announced it had entered into a long-term electricity supply agreement with Bruce Power LP, enabling SEM to market long-term, fixed-price electricity sales contracts. SEM will begin to realize the benefits of customer electrical contracts in 2008, once electricity has begun to flow to its customers. On January 7, 2008, SEM announced it had entered into a long-term natural gas supply agreement with Constellation Energy Commodities Group, Inc., providing SEM with a dependable long-term, fixed-price natural gas supply.
Outlook
SEM expects operating distributable cash flow for 2008 to be between $15 million and $18 million, increasing in 2009 to between $18 million to $23 million. SEM's significant assumptions underlying its outlook are:
- SEM is able to access sales channel agents on acceptable contract
terms.
- Natural gas markets in Ontario and British Columbia will continue to
provide significant growth opportunities for SEM.
- The electricity market in Ontario is expected to provide an
additional growth opportunity for SEM.
In addition to SEM's significant assumptions detailed above, refer to the Fund's Annual Information Form for a detailed review of SEM's operations and its significant business risks.
Discontinued Operations - JW Aluminum ("JWA")
In July 2006, the Fund announced as part of its strategic plan, its decision to sell JWA in order to focus on its Canadian businesses and to reduce debt. As a result, JWA was sold on December 7, 2006 for net proceeds of $356.1 million, resulting in the 2006 comparative period being classified as a discontinued operation.
Operating distributable cash flow results for the three months and year ended December 31, 2006 are provided below:
-------------------------------------------------------------------------
(millions of dollars except Three months ended Years ended
per pound amounts) December 31, 2006(1) December 31, 2006(1)
-------------------------------------------------------------------------
cents/lb cents/lb
Gross profit 13.1 21.8 58.7 18.5
Less: Cash operating,
administration and tax costs (4.2) (7.0) (17.0) (5.4)
-------------------------------------------------------------------------
Cash generated from
operations before changes
in net working capital 8.9 14.8 41.7 13.1
Maintenance capital
expenditures, net (0.8) (1.3) (2.8) (0.9)
-------------------------------------------------------------------------
Operating distributable
cash flow 8.1 13.5 38.9 12.2
-------------------------------------------------------------------------
Aluminum sold
(millions of pounds) 60 317
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) JWA was sold on December 7, 2006 (See Note 4 to the Interim
Consolidated Financial Statements).
Operating distributable cash flow for the three and twelve months ended December 31, 2006 was $8.1 million and $38.9 million. As a result of the sale of JWA on December 7, 2006, the 2007 financial results of the Fund have no contribution from JWA.
Corporate
Corporate costs for the fourth quarter were $1.7 million, compared to $2.4 million in the prior year quarter. Corporate costs were impacted by a decrease in the Fund's trust unit value during the fourth quarter of 2007, decreasing the cost of the Fund's long-term incentive plans by $0.7 million compared to the prior year. Excluding the impact of trust unit based compensation, corporate costs were consistent with the prior year quarter.
Interest expense on revolving term bank credits and term loans was $6.5 million for the fourth quarter, a decrease of $4.9 million from the prior year quarter. Lower interest costs reflect lower average debt levels and the impact of the appreciation of the Canadian dollar on United States dollar denominated interest costs, offset in part, by marginally higher floating interest rates. See "Liquidity and Capital Resources" discussion for further details.
Interest on the Fund's convertible unsecured subordinated debentures (the "Debentures") was $4.2 million for the fourth quarter of 2007, a decrease of $0.8 million from the prior year quarter. The reduction in Debenture interest is due to the maturity of $8.1 million Series I, 8% Debentures on July 31, 2007 and the Fund's early redemption of $59.2 million Series II, 8% Debentures on November 5, 2007.
Taxation
Total income tax expense for the fourth quarter was $9.3 million, comprised of $1.9 million in cash income taxes and a $7.4 million future income tax expense, compared to a total income tax recovery of $0.7 million in the prior year quarter, which was comprised of $2.2 million in cash income taxes and a $2.9 million future income tax recovery.
Cash income and withholding taxes for the fourth quarter with respect to continuing operations were limited to cash taxes in the United States and were $1.9 million (2006 Q4 - $2.2 million). Cash income taxes have been charged to the businesses from which the taxable income was derived. Future income tax expense for the fourth quarter was $7.4 million (2006 Q4 - $0.7 million future income tax recovery), resulting in a corresponding future income tax asset of $20.3 million as at December 31, 2007. The change in future income tax expense compared to the prior year quarter is due principally to a reduction in the effective tax rate on future income tax timing differences from 31.5 percent to 29.5 percent in 2011 and 28.0 percent in 2012 and thereafter.
In June 2007 the Government of Canada enacted new legislation imposing additional income taxes upon publicly traded income trusts, including the Superior Plus Income Fund, effective January 1, 2011. Prior to this legislation, the Fund was only taxable on any taxable income not allocated to the Unitholders and estimated its future income tax on certain temporary differences between amounts recorded on its balance sheet for book and tax purposes at a nil effective tax rate. Under the legislation, the Fund estimates the effective tax rate on the post 2010 reversal of these temporary differences to be 29.5 percent in 2011 and 28.0 percent in 2012 and thereafter. Temporary differences reversing before 2011 will still give rise to nil future income taxes. Consistent with prior periods, the Fund also 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.
The Fund believes it will be subject to current and future income taxes under the new legislation, however, the estimated effective tax rate on temporary difference reversals after January 1, 2011 may change in future periods. As the legislation is new, future technical interpretations of the legislation may occur and could materially affect management's estimate of the future income tax asset/liability. The amount and timing of reversals of temporary differences will also depend on the Fund's future operating results, acquisitions and dispositions of assets and liabilities, and distribution policy. A significant change in any of the preceding assumptions could materially affect the Fund's estimate of the future income tax asset/liability.
As a result of the Government of Canada's enacted legislation imposing additional income taxes on the Fund for taxation years commencing January 1, 2011, the Fund is continuing to evaluate the new legislation and the Fund's organizational alternatives in order to maximize Unitholder value. As the legislation is not effective until 2011, the Fund's current financial condition is unaffected from this change. The Fund is continuing to explore opportunities to grow our businesses to offset the impact of this legislation on the distributable cash flow of the Fund. Superior currently has approximately $428 million in tax pools as at December 31, 2007. These tax pools will be impacted by adjustments to reduce tax at the Fund level due to a payout ratio below 100% and additional capital outlays.
Strategic Plan Costs
Costs associated with the completion of Superior's strategic plan were $3.5 million in the fourth quarter and were comprised of the following:
-------------------------------------------------------------------------
Three months ended Years ended
December 31 December 31
2007 2006 2007 2006
-------------------------------------------------------------------------
Operating and administrative
expenses:
Employee severance and
retention - 3.1 0.8 11.0
Partnership reorganization
costs - 0.4 - 1.9
ERCO - Bruderheim closure
costs 3.5 2.4 4.9 4.1
Advisory and other - (0.6) - 0.7
Write off of deferred financing
costs - - - 2.0
-------------------------------------------------------------------------
Total strategic plan costs 3.5 5.3 5.7 19.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On January 31, 2008, ERCO entered into an agreement to sell its Bruderheim facility, excluding a portion of the land, subject to normal purchase/sale conditions, which are anticipated to be closed during the second quarter of 2008. The sale will result in minimum proceeds of approximately $3.5 million less closing costs, with the potential for additional proceeds based on a gross overriding royalty. ERCO will continue to explore opportunities to sell the land not included in the sale of the facility. The Fund does not anticipate any strategic plan costs for 2008.
Consolidated Outlook
The Fund expects consolidated distributable cash flow per trust unit for 2008 to be between $1.90 and $2.10 per trust unit, increasing in 2009 to between $2.05 and $2.25 per trust unit. The Fund's consolidated distributable cash flow outlook is dependent on the operating results of its four divisions. See the discussion of operating results by division for additional details on the Fund's 2008 and 2009 guidance. In addition to the operating results of the Fund's four divisions, significant assumptions underlying the Fund's 2008 and 2009 outlook are:
- The Fund expects current economic conditions in Canada and the United
States to prevail for 2008 with an improved outlook for 2009.
- The Fund continues to attract capital and obtain financing on
acceptable terms.
- The foreign currency exchange rate between the Canadian and United
States dollar is expected to be par on all unhedged foreign currency
transactions.
- Superior's average interest rate on floating rate debt is expected to
remain stable to marginally lower throughout 2008, increasing
modestly in 2009.
- Financial and physical counterparties continue to fulfill their
obligations with Superior.
- Regulatory authorities do not impose any new regulations impacting
the Fund.
In addition to the Fund's significant assumptions detailed above, refer to the Fund's Annual Information Form for a detailed review of the Fund's operations and its significant business risks.
Liquidity and Capital Resources
As at December 31, 2007, revolving term bank credits and term loan borrowings before deferred financing fees totaled $340.5 million ($440.5 million including accounts receivable securitization), a decrease of $6.2 million or 2% ($1.2 million including accounts receivable securitization) from the prior year due to the repayment of existing debt facilities with operating cash flow in excess of distributions for the year and the non-cash impact of the appreciation of the Canadian dollar on United States dollar denominated debt, offset in part, by the impact of the repayment and redemption of $8.1 million Series I and $59.2 million Series II, 8% Debentures.
As at December 31, 2007, Debentures before deferred issue costs issued by the Fund totaled $247.3 million, which is $66.6 million lower than the balance at December 31, 2006, as a result of the maturity of $8.1 million, 8%, Series I Debentures on July 31, 2007 and the redemption of $59.2 million, 8% Series II Debentures on November 5, 2007.
Consolidated net working capital was $173.0 million as at December 31, 2007, a decrease of $5.9 million compared to December 31, 2006 ($178.9 million). Net working capital is consistent with the prior year as lower cash on-hand and reduced working capital requirements at ERCO, were offset by higher working capital requirements at Superior Propane due to higher sales volumes and selling prices. See Note 13 to the Interim Consolidated Financial Statements for segmented net working capital levels by division, net of the accounts receivable sales 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.
In January 2007, the Fund commenced a distribution reinvestment plan and an optional unit purchase plan (the "DRIP"). The DRIP provides Unitholders with the opportunity to reinvest their cash distributions at a 5% discount to the market price of the trust units. For the three and nine months ended December 31, 2007, proceeds of $8.0 million and $25.3 million were received from the DRIP, and were principally used to fund capital expenditures.
As at December 31, 2007, Superior's senior debt and total debt to EBITDA are 1.9 and 3.0 times, respectively, (December 31, 2006, 1.9 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 well within the requirements contained in Superior's debt covenants which restrict its ability to pay distributions. In accordance with the Fund's credit facilities, the Fund must maintain a consolidated debt to EBITDA ratio of not more than 5.0 to 1.0, a consolidated senior debt to EBITDA of not more than 3.0 to 1.0 and distributions (including payment to debenture holders) cannot exceed EBITDA (plus $25.0 million) on a trailing twelve month rolling basis. At December 31, 2007, the senior debt ratio when calculated in accordance with Superior's senior banking agreements was 2.0 to 1.0 (December 31, 2006 - 2.1 to 1.0) and the total debt ratio when calculated in accordance with Superior's senior bank agreements was 2.0 times to 1.0 (December 31, 2006 - 3.7 times to 1.0). Total debt to 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 receivable on a 30-day revolving basis to an entity sponsored by a Canadian chartered bank to finance a portion of its working capital requirements and represents an off-balance sheet obligation. The receivables are sold at a discount to face value based on prevailing money market rates. As at December 31, 2007, proceeds of $100.0 million (December 31, 2006 - $95.0 million) had been raised from this program and were used to repay revolving term bank credits. (See Note 5 to the Interim Consolidated Financial Statements). Superior is able to adjust the size of the securitization program and 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.
On April 26, 2007, DBRS confirmed Superior's senior secured notes rating at BBB (low), the Fund's stability rating at STA-3 (low) and changed Superior's negative outlook to stable. On August 2, 2007, Standard and Poor's confirmed Superior's BBB- secured long-term debt credit rating and their negative outlook.
Unitholders' Capital
The weighted average number of trust units outstanding during the fourth quarter was 87.3 million trust units, an increase of 1.8 million trust units compared to the prior year quarter, due principally to trust units issued under the DRIP.
As at December 31, 2007 and December 31, 2006, the following trust units, and securities convertible into trust units, were outstanding:
-------------------------------------------------------------------------
December 31, 2007 December 31, 2006
Convertible Trust Convertible Trust
(millions) Securities Units Securities Units
-------------------------------------------------------------------------
Trust units outstanding 87.6 85.5
Series 1, 8% Debentures
(convertible at $16 per
trust unit)(1) $- - $8.1 0.5
Series 2, 8% Debentures
(convertible at $20 per
trust unit)(2) $- - $59.2 3.0
Series 1, 5.75% Debentures
(convertible at $36 per
trust unit) $174.9 4.9 $174.9 4.9
Series 1, 5.85% Debentures
(convertible at $31.25 per
trust unit) $75.0 2.4 $75.0 2.4
Warrants (exercisable @
$20 per trust unit until
May 2008) 2.3 2.3 2.3 2.3
-------------------------------------------------------------------------
Trust units outstanding, and
issuable upon conversion of
Debenture and Warrant
securities 97.2 98.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) On July 31, 2007, $8.1 million Series I, 8% Debentures matured and
were repaid.
(2) On November 5, 2007, $59.2 million Series 2, 8% Debentures were
redeemed.
As at December 31, 2007, there were 500,500 trust unit options outstanding (December 31, 2006 - 1,086,000 trust units) with a weighted average exercise price of $23.87 per trust unit (2006 Q4- $22.69 per trust unit). The number of trust units issued upon exercise of the trust unit options is equal to the growth in the value of the options at the time the options are exercised, (represented by the market price less the exercise price) times the number of options exercised, divided by the current trust unit market price.
Distributions Paid to Unitholders
The Fund distributes to holders of trust units ("Unitholders"), income earned by Superior LP, after interest payments to holders of the convertible unsecured subordinated debentures (the "Debentures") of the Fund ("Debentureholders"), and provision for administrative expenses and reserves of the Fund. The Fund's distributions to Unitholders are sourced entirely from its equity in Superior LP. See "Summary of Cash Flows" on page 21 for additional details on the sources and uses of cash. The Fund's investments are in turn financed by trust unit equity and by the Debentures.
Distributions paid to Unitholders in the fourth quarter were $34.1 million or $0.39 per trust unit ($1.56 on an annualized basis), compared to $33.4 million or $0.39 per trust unit in the fourth quarter of 2006. Distributable cash flow exceeded distributions paid to Unitholders $28.9 million in the fourth quarter (2006 Q4 - $22.2 million) resulting in a payout ratio of 54% (2006 Q4 - 60%). Superior's distributions are based on an entire fiscal year, and as such, the second and third quarters have payout ratios that are greater than 100%.
Distributions paid to Unitholders for the twelve months ended December 31, 2007 were $134.9 million or $1.56 per trust unit, compared to $155.7 million or $1.82 per trust unit from the twelve months ended December 31, 2006. Distributable cash flow exceeded distributions by $35.5 million for the twelve months ended December 31, 2007 (2006 - $24.7 million) resulting in a payout ratio of 79% (2006 - 86%).
The Fund's primary sources and uses of cash have been detailed in the
table below:
Summary of Cash Flows (1)
-------------------------------------------------------------------------
Three months ended Years ended
December 31 December 31
2007 2006 2007 2006
-------------------------------------------------------------------------
Cash flows from operating
activities of continuing
operations 9.2 13.9 134.3 151.7
Investing activities:
Maintenance capital
expenditures (1.9) (1.8) (9.1) (13.8)
Other capital expenditures
- growth (3.6) (1.8) (8.8) (53.0)
Acquisitions (2.9) - (4.3) -
Proceeds on the sale of
JW Aluminum - 354.7 1.4 354.7
-------------------------------------------------------------------------
Cash flows from investing
activities (8.4) 351.1 (20.8) 287.9
-------------------------------------------------------------------------
Financing activities:
Distributions to Unitholders (34.1) (33.4) (134.9) (155.7)
Repayment of 8%, Series 1
convertible debentures - - (8.1) -
Redemption of 8%, Series 2
convertible debentures (59.2) - (59.2) -
Proceeds from DRIP 8.0 - 25.3 -
Revolving term bank credits
and term loans 73.9 (342.8) 38.4 (290.5)
Other 12.0 15.4 5.5 (2.7)
-------------------------------------------------------------------------
Cash flows from financing
activities 0.6 (360.8) (133.0) (448.9)
-------------------------------------------------------------------------
Net increase (decrease) in
cash from continuing
operations 1.4 4.2 (19.5) (9.3)
Net increase (decrease) in
cash from discontinued
operations - 8.0 - 23.0
Cash beginning of period 12.7 21.4 33.6 19.9
-------------------------------------------------------------------------
Cash end of period 14.1 33.6 14.1 33.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See the Interim Consolidated Statements of Cash Flows 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'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.
SEM enters into NYMEX and AECO natural gas financial swaps with a variety of counterparties to manage the economic exposure of providing fixed-price natural gas to its customers. 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. Additionally, SEM enters into electricity financial swaps with a single counterparty 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 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 deregulated markets.
Superior Propane enters into various propane forward purchase and sale agreements 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. 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 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 (sales) 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.
As at December 31, 2007, SEM and Superior Propane had hedged approximately 100% of their US dollar natural gas and propane purchase (sales) obligations and ERCO Worldwide had hedged 85%(1) and 40%(1) of its estimated US dollar exposure for the remainder of 2008 and 2009. The estimated distributable cash flow sensitivity 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 is: 2008 - $0.1 million and 2009 - $0.6 million, after giving effect to United States forward contracts for 2008 and 2009, as shown in the table below. Superior's sensitivities and guidance are based on an anticipated Canadian to USD foreign currency exchange rate for 2008 of 1.00 CDN dollars to US dollars, and for 2009 1.00 CDN dollars to US dollars.
-------------------------------------------------------------------------
(US$ millions) 2008 2009 2010 2011 2012 2013 Total
-------------------------------------------------------------------------
SEM - US $
forward
purchases(1) 118.3 111.1 61.9 5.4 - - 296.7
Superior Propane
- US $ forward
purchases
(sales) 9.8 - - - - - 9.8
ERCO - US $
forward
sales(2) (88.3) (48.0) - - - - (136.3)
-------------------------------------------------------------------------
Net US $ forward
purchases 39.8 63.1 61.9 5.4 - - 170.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEM - Average
US $ forward
purchase
rate(1) 1.22 1.21 1.16 1.11 - - 1.20
Superior Propane
- Average US $
forward rate 1.00 - - - - - 1.00
ERCO - Average
US $ forward
sales rate(2) 1.11 1.06 - - - - 1.09
-------------------------------------------------------------------------
Net average
external US$/Cdn$
exchange rate 1.17 1.16 1.16 1.11 - - 1.16
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 United States dollar conversion of
ERCO's Port Edwards, Wisconsin chloralkali facility which is
anticipated to cost US $95.0 million in aggregate, of which
$1.4 million was incurred in 2007, with the remaining costs expected
in 2008 - US $37.3 million and 2009 - US $56.3 million.
Superior utilizes interest rate swaps 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. (See Notes 6, 7 and 8 to the Interim Consolidated Financial Statements).
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 through out 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 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 the Fund's financial instruments, including the amount and classification of gains and losses recorded in the Fund's Interim Consolidated Financial Statements and significant assumptions used in the calculation of the fair value of the Fund's financial instruments see Note 8 to the Interim Consolidated Financial Statements.
Superior and Superior's operating divisions are exposed to market risks and various operational risks. For a detailed discussion of these risks see our 2006 Annual Information Form filed on the Canadian Securities Administrator's web site, www.sedar.com and Superior's website, www.superiorplus.com.
Critical Accounting Policies and Estimates
The Fund'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 42 to 46 of the 2006 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.
Changes in Accounting Policies
Financial Instruments
On January 1, 2007, The Fund adopted, on a prospective basis, four new accounting standards that were issued by the Canadian Institute of Chartered Accountants ("CICA"); Handbook Section 1530, Comprehensive Income, Handbook Section 3855, Financial Instruments - Recognition and Measurement, Handbook Section 3861 Financial Instruments - Disclosure and Presentation, and Handbook Section 3865, Hedges. These standards, and the impact on our financial position and results of operations, are discussed in Note 1 to the unaudited Interim Consolidated Financial Statements.
Accounting Changes
On January 1, 2007 the Fund adopted CICA Handbook Section 1506, Accounting Changes. The amendments to this section were made to harmonize this section with current International Financial Reporting Standards. Revisions to section 1506 require that voluntary changes in accounting policy are only permitted if they result in financial statements that provide more reliable and relevant information. Accounting policy changes are applied on a retrospective basis unless impractical to do so. Corrections of prior period errors are applied retrospectively and changes in accounting estimates are applied prospectively by including the changes through net income. This section also outlines additional disclosure requirements when accounting changes are applied including justification for voluntary changes, a description of the policy, the primary source of GAAP and a detailed effect on financial statement line items.
Recent Accounting Pronouncements
Financial Instruments - Disclosure and Presentation
Effective January 1, 2008 for the Fund, The Canadian Institute of Chartered Accountants ("CICA") has replaced Handbook Section 3861 Financial Instruments Disclosure and Presentation with Handbook Section 3862 Financial Instruments - Disclosures and Handbook Section 3863 Financial Instruments - Presentation. The revised standards provide enhanced disclosure and presentation requirements, with an increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages these risks.
Capital Disclosures
Effective January 1, 2008 for the Fund, the CICA has issued Handbook Section 1535 Capital Disclosures. This section requires the disclosure of (i) the Fund's objectives, policies and processes for managing capital; (ii) quantitative data about what the Fund regards as capital; (iii) whether the Fund has complied with any capital requirements; and (iv) if the Fund has not complied, the consequences of such non-compliance.
Inventory
Effective January 1, 2008 for the Fund, the CICA has issued Handbook Section 3031 Inventories, replacing Handbook Section 3030 Inventories. This section provides increased guidance on the determination of the cost and financial statement presentation of inventory. The Fund anticipates that the calculation of the cost of inventory of ERCO Worldwide will be impacted by this revised standard, due to the requirement to inventory the cost of certain fixed overhead items, principally, the amortization of property, plant and equipment. The Fund does not anticipate that this will have a material impact on its net earnings, but rather it will affect the classification of amortization expense on the financial statements. Previously, all amortization was expensed and classified on the income statement as amortization. The revised standard requires that the amortization that is inventoried be classified as a component of cost of product sold.
Quarterly Financial and Operating Information
-------------------------------------------------------------------------
2007
(millions of dollars except Quarter
per trust unit amounts) Fourth Third Second First
-------------------------------------------------------------------------
Propane sales volumes
(millions of litres) 416 256 280 477
Chemical sales volumes
(thousands of metric tonnes) 194 187 193 194
Natural gas sales volumes
(millions of GJs) 9 9 9 10
Gross profit 185.8 145.9 144.4 185.7
Asset impairments, net of tax - - - -
Net earnings (loss) from
continuing operations 64.5 (25.9) (25.5) 106.3
Net earnings (loss) 64.5 (26.9) (25.5) 107.7
Per basic trust unit from
continuing operations $0.74 ($0.30) ($0.30) $1.24
Per diluted trust unit from
continuing operations $0.74 ($0.30) ($0.30) $1.24
Per basic trust unit $0.74 ($0.31) ($0.30) $1.26
Per diluted trust unit $0.74 ($0.31) ($0.30) $1.26
Distributable cash flow 63.0 25.7 19.4 62.3
Per basic trust unit $0.72 $0.30 $0.23 $0.73
Per diluted trust unit $0.72 $0.30 $0.23 $0.73
Net working capital(1) 173.0 141.9 134.1 162.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2006
Quarters
Fourth Third Second First
-------------------------------------------------------------------------
Propane sales volumes
(millions of litres) 407 261 270 448
Chemical sales volumes
(thousands of metric tonnes) 191 190 183 191
Natural gas sales volumes
(millions of GJs) 10 11 10 9
Gross profit 174.1 143.5 141.2 172.1
Asset impairments, net of tax - 56.3 170.8 -
Net earnings (loss) from
continuing operations 25.3 46.3 (157.4) 30.2
Net earnings (loss) 38.1 1.1 (153.3) 33.3
Per basic trust unit from
continuing operations $0.30 $0.54 ($1.84) $0.35
Per diluted trust unit from
continuing operations $0.30 $0.54 ($1.84) $0.35
Per basic trust unit $0.45 $0.01 ($1.79) $0.39
Per diluted trust unit $0.45 $0.01 ($1.79) $0.39
Distributable cash flow 55.6 33.8 34.6 56.5
Per basic trust unit $0.65 $0.40 $0.40 $0.66
Per diluted trust unit 0.65 $0.40 $0.40 $0.66
Net working capital(1) 178.9 237.9 294.8 310.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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.
Segmented Distributable Cash Flow(1)
-------------------------------------------------------------------------
For the three
months ended Total
December 31, Superior Corp- Consol-
2007 Propane ERCO Winroc SEM orate idated
-------------------------------------------------------------------------
Net earnings (loss)
from continuing
operations 32.5 2.6 8.8 29.1 (8.5) 64.5
Add: Amortization of
property, plant and
equipment, intangible
assets and accretion
of convertible
debenture issue
costs 2.0 11.1 1.0 - 1.1 15.2
Future income tax
expense (recovery) 7.0 (3.3) 0.4 3.1 0.2 7.4
Superior Propane
non-cash pension
expense 0.6 - - - - 0.6
Unrealized (gains)
losses on financial
instruments (3.0) 11.2 - (29.4) (5.1) (26.3)
Strategic plan costs
(recovery) - 3.6 - - (0.1) 3.5
Less: Maintenance
capital expenditures 0.8 (2.6) (0.1) - - (1.9)
-------------------------------------------------------------------------
Distributable cash
flow 39.9 22.6 10.1 2.8 (12.4) 63.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Discon
For the three tinued
months ended Opera- Total
December 31, Superior Corp- tions- Consol-
2006 Propane ERCO Winroc SEM orate JWA(2) idated
-------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations 23.3 10.6 10.3 2.9 (21.8) 25.3
Add: Amortization
of property,
plant and equip-
ment, intangible
assets and
accretion of
convertible
debenture issue
costs 6.2 13.1 1.1 - 0.6 - 21.0
Future income
tax expense
(recovery) - (3.2) - - 0.3 - (2.9)
Superior Propane
non-cash pension
expense 0.6 - - - - - 0.6
Distributable
cash from dis-
continued
operations - - - - - 8.1 8.1
Strategic plan
costs 0.5 2.6 - 0.1 2.1 - 5.3
Less: Maintenance
capital proceeds
(expenditures) 2.0 (3.1) (0.7) - - - (1.8)
-------------------------------------------------------------------------
Distributable
cash flow 32.6 20.0 10.7 3.0 (18.8) 8.1 55.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the year ended Total
December 31, Superior Corp- Consol-
2007 Propane ERCO Winroc SEM orate idated
-------------------------------------------------------------------------
Net earnings from
continuing
operations 103.8 22.9 33.3 17.8 (58.4) 119.4
Add: Amortization
of property, plant
and equipment,
intangible assets
and accretion of
convertible
debenture issue
costs 15.7 42.6 4.2 - 2.8 65.3
Future income tax
expense (recovery) (19.9) 12.1 (2.3) 0.8 (1.1) (10.4)
Management intern-
alization costs - - - - 0.5 0.5
Superior Propane
non-cash pension
expense 1.7 - - - - 1.7
Unrealized (gains)
losses on financial
instruments (2.3) 5.5 - (6.9) 1.0 (2.7)
Strategic plan costs 0.4 4.9 - 0.4 - 5.7
Less: Maintenance
capital expenditures 0.2 (8.7) (0.6) - - (9.1)
-------------------------------------------------------------------------
Distributable cash
flow 99.6 79.3 34.6 12.1 (55.2) 170.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Discon
For the tinued
year ended Opera- Total
December Superior Corp- tions- Consol-
31, 2006 Propane ERCO Winroc SEM orate JWA(2) idated
-------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations 115.8 (59.3) 46.0 12.6 (170.7) - (55.6)
Add: Amortization
of property,
plant and equip-
ment, intangible
assets and
accretion of
convertible
debenture issue
costs 20.4 52.6 4.1 - 2.3 - 79.4
Future income
tax expense
(recovery) (49.2) (133.9) (8.9) (2.6) 85.4 - (109.2)
Trust unit
incentive plan
recovery - - - - (1.2) - (1.2)
Management intern-
alization costs - - - - 1.3 - 1.3
Impairment of
property, plant
and equipment,
and goodwill - 218.7 - - - - 218.7
Superior Propane
non-cash pension
expense 2.2 - - - - - 2.2
Distributable
cash from dis-
continued
operations - - - - - 38.9 38.9
Strategic plan
costs 1.1 5.1 - 0.3 13.2 - 19.7
Less: Maintenance
capital proceeds
(expenditures) 0.3 (7.5) (6.6) - - - (13.8)
-------------------------------------------------------------------------
Distributable
cash flow 90.6 75.7 34.6 10.3 (69.7) 38.9 180.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See the Interim Consolidated Financial Statements for net earnings
(loss), amortization of property, plant and equipment, intangible
assets and accretion of convertible debenture issue costs, future
income tax expense (recovery), trust unit incentive plan expense
(recovery), management internalization costs, impairment of property,
plant and equipment and goodwill, non-cash pension expense,
unrealized (gains) losses on financial instruments and maintenance
capital expenditures.
(2) See Note 4 to the Interim Consolidated Financial Statements.
SUPERIOR PLUS INCOME FUND
Consolidated Balance Sheets
-------------------------------------------------------------------------
December December
(unaudited, millions of dollars) 31 2007 31 2006
-------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents 14.1 33.6
Accounts receivable and other (Note 5) 265.8 246.1
Inventories 105.2 142.8
Current portion of unrealized gains on
financial instruments (Note 8) 48.0 -
-------------------------------------------------------------------------
433.1 422.5
Property, plant and equipment 514.4 571.1
Customer acquisition and deferred costs 17.4 25.9
Intangible assets 23.5 31.5
Goodwill 451.8 452.4
Accrued pension asset 21.9 23.7
Future income tax asset (Note 9) 20.3 9.8
Long-term portion of unrealized gains on
financial instruments (Note 8) 60.4 -
-------------------------------------------------------------------------
1,542.8 1,536.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current Liabilities
Accounts payable and accrued liabilities 212.1 243.6
Current portion of term loans and convertible
debentures (Notes 6 and 7) 3.9 10.8
Distributions and interest payable to
Unitholders and Debentureholders 12.1 17.9
Current portion of unrealized losses on
financial instruments (Note 8) 51.1 -
-------------------------------------------------------------------------
279.2 272.3
Revolving term bank credits and term loans (Note 6) 334.1 344.0
Convertible unsecured subordinated debentures
(Note 7) 240.0 305.8
Future employee benefits 18.5 19.2
Long-term portion of unrealized losses on
financial instruments (Note 8) 54.3 -
-------------------------------------------------------------------------
Total Liabilities 926.1 941.3
Unitholders' Equity
Unitholders' capital (Note 11) 1,366.8 1,340.8
Accumulated deficit (729.8) (745.3)
Accumulated other comprehensive income
(loss) (Note 11) (20.3) 0.1
-------------------------------------------------------------------------
616.7 595.6
-------------------------------------------------------------------------
1,542.8 1,536.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
SUPERIOR PLUS INCOME FUND
Consolidated Statements of Net Earnings (Loss),
Comprehensive Income (Loss) and Deficit
-------------------------------------------------------------------------
(unaudited, millions of Three months ended Years ended
dollars except per December 31 December 31
trust unit amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
Revenues 670.5 592.8 2,355.4 2,264.3
Cost of products sold (480.7) (418.7) (1,681.8) (1,633.4)
Realized gains (losses) on
financial instruments
(Note 8) (4.0) - (11.8) -
-------------------------------------------------------------------------
Gross profit 185.8 174.1 661.8 630.9
-------------------------------------------------------------------------
Expenses
Operating and
administrative 112.4 112.1 439.7 423.8
Amortization of property,
plant and equipment 13.0 19.1 57.6 72.0
Amortization of intangible
assets 1.1 1.3 4.9 5.1
Interest on revolving
term bank credits and
term loans 6.5 11.4 25.2 43.1
Interest on convertible
unsecured subordinated
debentures 4.2 5.0 19.5 20.2
Accretion of convertible
debenture issue costs 1.1 0.6 2.8 2.3
Management internalization
costs - - 0.5 1.3
Impairment of property,
plant and equipment and
goodwill (Note 10) - - - 218.7
Unrealized losses (gains)
on financial instruments
(Note 8) (26.3) - (2.7) -
-------------------------------------------------------------------------
112.0 149.5 547.5 786.5
-------------------------------------------------------------------------
Net earnings (loss) before
income taxes from
continuing operations 73.8 24.6 114.3 (156.6)
Income tax recovery
(Note 9) (9.3) 0.7 5.1 100.0
-------------------------------------------------------------------------
Net earnings (loss) from
continuing operations 64.5 25.3 119.4 (55.6)
Net earnings (loss) from
discontinued operations
(Note 4) - 12.8 0.4 (25.2)
-------------------------------------------------------------------------
Net Earnings (Loss) 64.5 38.1 119.8 (80.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings (loss) 64.5 38.1 119.8 (80.8)
Other comprehensive income
(loss), net of tax:
Unrealized foreign
currency gains (losses)
on translation of self-
sustaining foreign
operations (1.4) - (13.6) -
Reclassification of
derivative gains and
losses previously
deferred (2.8) - 11.3 -
-------------------------------------------------------------------------
Comprehensive Income
(Loss) 60.3 38.1 117.5 (80.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit, Beginning of
Period (760.2) (750.0) (745.3) (508.8)
Cumulative impact of
adopting new accounting
requirements for
financial instruments
(Note 1(b)) - - 30.6 -
Net earnings (loss) 64.5 38.1 119.8 (80.8)
Distributions to
Unitholders (34.1) (33.4) (134.9) (155.7)
-------------------------------------------------------------------------
Deficit, End of Period (729.8) (745.3) (729.8) (745.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings (loss) per
trust unit from
continuing operations,
basic and diluted
(Note 12) $0.74 $0.30 $1.38 ($0.65)
Net earnings (loss) per
trust unit from
discontinued operations,
basic and diluted
(Note 12) - $0.15 - ($0.29)
Net earnings (loss) per
trust unit, basic and
diluted (Note 12) $0.74 $0.45 $1.38 ($0.94)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
SUPERIOR PLUS INCOME FUND
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------
Three months ended Years ended
(unaudited, millions of December 31 December 31
dollars 2007 2006 2007 2006
-------------------------------------------------------------------------
Operating Activities
Net earnings (loss) 64.5 38.1 119.8 (80.8)
Net loss (earnings) from
discontinued operations - (12.8) (0.4) 25.2
Items not affecting cash:
Amortization of property,
plant and equipment,
intangible assets and
accretion of convertible
debenture issue costs 15.2 21.0 65.3 79.4
Amortization of natural
gas customer acquisition
costs 1.6 0.9 6.6 3.2
Trust unit incentive plan
compensation recovery - - - (1.2)
Pension expense 0.6 0.6 1.7 2.2
Impairment of property,
plant and equipment, and
goodwill - - - 218.7
Unrealized losses (gains)
on financial instruments (26.3) - (2.7) -
Future income tax recovery 7.4 (2.9) (10.4) (109.2)
Natural gas customer
acquisition costs (3.6) (1.4) (10.9) (8.4)
Decrease (increase) in
non-cash operating working
capital items (50.2) (29.6) (34.7) 22.6
-------------------------------------------------------------------------
Cash flows from operating
activities of continuing
operations 9.2 13.9 134.3 151.7
-------------------------------------------------------------------------
Investing Activities
Maintenance capital
expenditures (1.9) (1.8) (9.1) (13.8)
Other capital expenditures (3.6) (1.8) (8.8) (53.0)
Acquisitions (Note 3) (2.9) - (4.3) -
Proceeds on sale of JW
Aluminum Company (Note 4) - 354.7 1.4 354.7
-------------------------------------------------------------------------
Cash flows from investing
activities (8.4) 351.1 (20.8) 287.9
-------------------------------------------------------------------------
Financing Activities
Revolving term bank
credits and term loans 73.9 (342.8) 38.4 (122.7)
Repayment of 8%, Series 1
subordinated unsecured
convertible debentures - - (8.1) -
Repayment of 8%, Series 2
subordinated unsecured
convertible debentures (59.2) - (59.2) -
Issuance of Medium Term
Notes (Note 6) - - - 197.2
Repayment of Medium Term
Notes (Note 6) - - - (197.2)
Repayment of JW Aluminum
Company acquisition credit
facility - - - (167.8)
Net proceeds (repayment)
of accounts receivable
sales program 12.0 15.1 5.0 (5.0)
Proceeds from exercise of
trust unit warrants - - - 0.2
Proceeds from trust unit
distribution reinvestment
program 8.0 - 25.3 -
Receipt of management
internalization loans
receivable - 0.3 0.5 2.1
Distributions to Unitholders (34.1) (33.4) (134.9) (155.7)
-------------------------------------------------------------------------
Cash flows from financing
activities 0.6 (360.8) (133.0) (448.9)
-------------------------------------------------------------------------
Net increase (decrease)
in cash from continuing
operations 1.4 4.2 (19.5) (9.3)
Net increase (decrease) in
cash from discontinued
operations (Note 4) - 8.0 - 23.0
Cash and cash equivalents
(bank indebtedness),
beginning of period 12.7 21.4 33.6 19.9
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period 14.1 33.6 14.1 33.6
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
Notes to Interim Consolidated Financial Statements
(unaudited, tabular amounts in millions of dollars, unless noted
otherwise, except per trust unit amounts)
1. 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 with those as set out
in the Fund's annual financial statements for the year ended December 31,
2006, except as noted below, and include the accounts of the Superior
Plus Income Fund (the "Fund"), its wholly owned subsidiaries, Superior
Plus LP ("Superior"), and Superior's subsidiaries. These 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 interim financial statements
and notes thereto should be read in conjunction with the Fund's financial
statements for the year ended December 31, 2006. All significant
transactions and balances between the Fund, the Fund's subsidiaries,
Superior, and Superior's subsidiaries have been eliminated on
consolidation.
(b) Changes in Accounting Policies
Financial Instruments
On January 1, 2007, the Fund adopted four new accounting standards that
were issued by the Canadian Institute of Chartered Accountants ("CICA");
Handbook Section 1530, Comprehensive Income, Handbook Section 3855,
Financial Instruments - Recognition and Measurement, Handbook Section
3861 Financial Instruments - Disclosure and Presentation, and Handbook
Section 3865, Hedges. The fund adopted these standards prospectively,
accordingly, comparative amounts for prior periods have not been
restated.
Comprehensive Income
Section 1530 introduces comprehensive income, which consists of net
income and other comprehensive income ("OCI"). OCI represents changes in
equity during a period arising from transactions and other events with
non-owner sources and includes unrealized gains and losses on financial
assets classified as available-for-sale, unrealized foreign currency
translation gains or losses arising from self-sustaining foreign
operations, net of hedging activities, and changes in the fair value of
the effective portion of cash flow hedging instruments. The Fund has
included in the Interim Consolidated Financial Statements a Statement of
Comprehensive Income for the changes in these items. The cumulative
changes in OCI are included in accumulated other comprehensive income
("AOCI"), which is presented as a new category of Unitholders' equity on
the Consolidated Balance Sheets.
Financial Instruments - Recognition and Measurement
Section 3855 establishes standards for recognizing and measuring
financial assets, financial liabilities and non-financial derivatives. It
requires that financial assets and financial liabilities, including
derivatives, be recognized on the Consolidated Balance Sheets when the
Fund becomes a party to the contractual provisions of the financial
instrument or non-financial derivative contract. Under this standard, all
financial instruments are required to be measured at fair value on
initial recognition except for certain related party transactions.
Measurement in subsequent periods depends on whether the financial
instrument has been classified as held-for-trading, available-for-sale,
held-to-maturity, loans and receivables, or other financial liabilities.
After initial recognition, items classified as held-for-trading or
available-for-sale are revalued at fair values, items classified as
held-to-maturity, loans and receivables, and other financial liabilities
are measured at amortized cost using the effective interest method.
Transaction costs are expensed as incurred for financial instruments
classified or designated as held-for-trading. For other financial
instruments, transaction costs are recorded as part of the underlying
financial instrument and are amortized or accreted into net income.
Derivative instruments are recorded on the Consolidated Balance Sheets at
fair value, including those derivatives that are embedded in financial or
non-financial contracts that are considered to be derivatives. Changes in
the fair values of derivative instruments are recognized in net income
with the exception of derivatives designated as effective cash flow
hedges or hedges of foreign currency exposure of a net investment in a
self-sustaining foreign operation.
Financial Instruments - Presentation and Disclosure
Section 3861 established standards for the presentation and disclosure of
financial instruments and non-financial derivatives.
Hedges
Section 3865 specifies the criteria that must be satisfied in order for
hedge accounting to be applied and the accounting for each of the
permitted hedging strategies: fair value hedges, cash flow hedges and
hedges of foreign currency exposures of net investments in
self-sustaining foreign operations. The revised standards require the
Fund to record all derivatives at fair value. Prior to January 1, 2007,
the Fund accounted for derivatives as hedges that qualified for hedge
accounting.
Impact Upon Adoption of Sections 1530, 3855, 3861 and 3865
As a result of adopting these standards, on January 1, 2007 the Fund
recorded previously unrecorded assets and liabilities of $110.1 million
and $97.6 million, respectively, resulting in a $30.6 million reduction
to the Fund's opening deficit as at January 1, 2007 and the recognition
of $18.1 million in accumulated other comprehensive income. The Fund's
opening adjustment to accumulated other comprehensive income was
$18.0 million, reflecting the transitional adjustment of $18.1 million
and the Fund's net cumulative translation adjustment on the translation
of its self-sustaining foreign operations of $0.1 million.
Additionally, on January 1, 2007, the Fund reclassified $2.9 million of
deferred financing fees previously classified as deferred costs to
revolving term bank credits and term loans, and $10.1 million of deferred
convertible debenture issue costs previously classified as deferred costs
to convertible unsecured subordinated debentures.
Effective January 1, 2007, the Fund ceased formally designating and
documenting economic hedges in accordance with the requirements of
Section 3865, accordingly, all derivative instruments are now recorded at
fair value with changes in the fair value recorded to net income.
Accounting Changes
On January 1, 2007 the Fund adopted CICA Handbook Section 1506,
Accounting Changes. Section 1506 permits voluntary changes in accounting
policy only if it results in financial statements that provide more
reliable and relevant information. Accounting policy changes are applied
retrospectively unless it is impractical to determine the period or
cumulative impact of the change. Corrections of prior period errors are
applied retrospectively and changes in accounting estimates are applied
prospectively by including the changes through net income. This section
also outlines additional disclosure requirements when accounting changes
are applied including justification for voluntary changes, a description
of the policy, the primary source of GAAP and a detailed effect on
financial statement line items.
(c) Future Accounting Changes
Financial Instruments - Disclosure and Presentation
Effective January 1, 2008 for the Fund, the CICA has replaced Handbook
Section 3861 Financial Instruments Disclosure and Presentation with
Handbook Section 3862 Financial Instruments - Disclosures and Handbook
Section 3863 Financial Instruments - Presentation. The revised standards
provide enhanced disclosure and presentation requirements, with an
increased emphasis on disclosures about the nature and extent of risks
arising from financial instruments and how the entity manages these
risks.
Capital Disclosures
Effective January 1, 2008 for the Fund, the CICA has issued Handbook
Section 1535 Capital Disclosures. This section requires the disclosure
of (i) the Fund's objectives, policies and processes for managing
capital; (ii) quantitative data about what the Fund regards as capital;
(iii) whether the Fund has complied with any capital requirements; and
(iv) if the Fund has not complied, the consequences of such
non-compliance.
Inventory
Effective January 1, 2008 for the Fund, the CICA has issued Handbook
Section 3031 Inventories, replacing Handbook Section 3030 Inventories.
This section provides increased guidance on the determination of the cost
and financial statement presentation of inventory. The Fund anticipates
that the calculation of the cost of inventory of ERCO Worldwide will be
impacted by this revised standard, due to the requirement to inventory
the cost of certain fixed overhead items, principally, the amortization
of property, plant and equipment. The Fund does not anticipate that this
will have a material impact on its overall financial results, but rather
it will affect the classification of amortization expense on the
financial statements. Previously, all amortization was expensed and
classified on the income statement as amortization. The revised standard
requires that the amortization that is inventoried be classified as a
component of cost of product sold.
(d) Business Segments
Superior operates four continuing 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 13). JW Aluminum Company ("JWA"
or "JW Aluminum"), a manufacturer of specialty flat-rolled aluminum
products, has been sold and classified as a discontinued operation.
(See Note 4).
2. 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 fourth and first quarters. Similarly, net working
capital levels are typically at seasonally high levels during the second
and third quarter, and normally decline to seasonally low levels in the
fourth and first quarters.
3. Acquisitions
During 2007, Winroc acquired the assets of two gypsum supply dealers, for
consideration of $4.3 million.
There were no acquisitions completed by Superior during 2006.
4. Disposition - JW Aluminum
In July of 2006, the Fund announced the results of its strategic review
designed to maximize Unitholder value which included the decision to sell
JWA in order to reduce debt levels and refocus its operations on its
existing Canadian businesses. Accordingly, effective July 1, 2006, JWA's
balance sheet, results of operations and cash flows have been classified
as discontinued operations on a retroactive basis. As a result of its
classification as a discontinued operation, amortization of JWA's
property, plant and equipment and intangible assets ceased on
July 1, 2006.
On December 7, 2006, the Fund completed the sale of all the issued and
outstanding shares of JWA on a cash and debt free basis to Wellspring
Capital Management LLC, for total consideration of $356.1 million
(US $310.1 million), net of $4.9 million (US $4.3 million ) in
disposition costs.
The results of discontinued operations presented in the consolidated
statements of net earnings were as follows:
-------------------------------------------------------------------------
Three months ended Years ended
December 31 December 31
2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue - 110.2 - 573.3
Cost of product sold - (97.1) - (514.6)
-------------------------------------------------------------------------
Gross profit - 13.1 - 58.7
-------------------------------------------------------------------------
Operating and administrative - 2.4 - 9.5
Amortization of property,
plant, equipment,
and intangibles - - - 19.1
Impairment of property,
plant, equipment
and intangibles - - - 56.3
Gain (loss) on sale of JWA,
inclusive of final closing
adjustments - (4.7) 0.4 (4.7)
Income tax expense (recovery) - 2.6 - 3.7
-------------------------------------------------------------------------
Net earnings (loss) from
discontinued operations - 12.8 0.4 (25.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cash flows from (used in) discontinued operations were as follows:
Three months ended Years ended
December 31 December 31
2007 2006 2007 2006
-------------------------------------------------------------------------
Cash flows from discontinued
operations before changes
in working capital - 8.9 - 41.7
Decrease (increase) in
non-cash operating working
capital items - 0.3 - (12.2)
-------------------------------------------------------------------------
Cash flows from discontinued
operations - 9.2 - 29.5
-------------------------------------------------------------------------
Maintenance capital
expenditures - (0.8) - (2.8)
Other capital expenditures - (0.4) - (3.7)
-------------------------------------------------------------------------
Cash flows used in
investing activities - (1.2) - (6.5)
Cash flows from financing
activities - - - -
-------------------------------------------------------------------------
Cash flows used in
discontinued operations - 8.0 - 23.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. 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 December 31, 2007 proceeds of $100.0 million
(December 31, 2006 - $95.0 million) had been received.
Included in accounts receivable and other as at December 31, 2007 is
$15.1 million (December 31, 2006 - $15.3 million) of prepaid expenses.
6. Revolving Term Bank Credits and Term Loans
Maturity Effective Interest December December
Date Rate 31 2007 31 2006
-------------------------------------------------------------------------
Revolving term bank
credits(1)
Bankers Acceptances Floating BA rate plus
("BA") 2010 applicable credit
spread 96.5 35.0
LIBOR Loans Floating LIBOR rate
(US$66.7 million; plus applicable
2006 - US$92.3 million) 2010 credit spread 65.9 107.5
-------------------------------------------------------------------------
162.4 142.5
-------------------------------------------------------------------------
Other Debt
Notes payable 2007-2010 Prime 6.8 7.4
Deferred
consideration 2008-2010 Non-interest bearing 7.0 9.2
Loan payable 2008-2014 6.3% 5.2 -
Mortgage payable
(US$1.0 million;
2006 - US$1.0 million) 2011 7.53% 1.0 1.1
-------------------------------------------------------------------------
20.0 17.7
-------------------------------------------------------------------------
Senior Secured Notes
Senior secured notes
subject to floating
interest rates
(US$85.0 million;
2006 - US$85.0 Floating LIBOR rate
million)(2) 2015 plus 1.7% 84.0 99.1
Senior secured notes
subject to fixed
interest rates
(US$75.0 million;
2006 - US$75.0
million)(2) 2013, 2015 6.65% 74.1 87.4
JWA acquisition Floating LIBOR rate
credit facility plus credit
(US$145.0 million)(3) 2007 applicable spread - -
Medium Term Notes(4) 2016 5.57% - -
-------------------------------------------------------------------------
158.1 186.5
-------------------------------------------------------------------------
Total revolving term bank credits and term loans
before deferred financing fees 340.5 346.7
Deferred financing fees (2.5) -
-------------------------------------------------------------------------
Revolving term bank credits and term loans 338.0 346.7
Current maturities (3.9) (2.7)
-------------------------------------------------------------------------
Revolving term bank credits and term loans 334.1 344.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 $595.0 million. These facilities
are secured by a general charge over the assets of Superior and
certain of its subsidiaries.
(2) Senior Secured Notes (the "Notes") totaling US $160.0 million (CDN
$158.1 million at December 31, 2007 (2006 - CDN $186.5 million) 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 and interest rates. The
estimated fair value of the Notes at December 31, 2007 was CDN
$163.8 million (2006 - CDN $181.0 million). In conjunction with the
issue of the Notes, Superior swapped US $85.0 million (CDN $84.0
million at December 31, 2007 (2006 - CDN $99.1 million) of the fixed
rate obligation into a US dollar floating rate obligation.
(3) On October 19, 2005, Superior Plus US Holdings Inc. entered into a
secured non-revolving term bank facility for US$145.0 million to
partially finance the acquisition of JWA. The facility was secured
by a general charge over the assets of Superior and certain of its
subsidiaries. This facility was repaid and cancelled in March 2006
from proceeds raised through the issuance of Medium Term Notes.
(4) On March 3, 2006, Superior issued $200.0 million, 5.50 percent
coupon, Medium Term Notes maturing on March 3, 2016 with an effective
yield to maturity of 5.57 percent. This facility was secured by a
general charge over the assets of Superior and certain of its
subsidiaries. On August 8, 2006, Superior repaid the Medium Term
Notes from borrowings under the revolving term credit facilities
referred to in footnote 1 above, providing enhanced debt repayment
and covenant flexibility.
Repayment requirements of the revolving term bank credits and term loans
are as follows:
Current portion 3.9
Due in 2009 10.9
Due in 2010 168.5
Due in 2011 33.7
Due in 2012 32.6
Subsequent to 2012 90.9
-------------------------------------------------------------------------
Total 340.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Convertible Unsecured Subordinated Debentures
The Fund has issued four series of Debentures denoted as 8 percent
Series 1, 8 percent Series 2, 5.75 percent Series 1, and 5.85 percent
Series 1 as follows:
Total
Unamor- Carry-
tized ing
Series 1(1) Series 2(2) Series 1 Series 1 Discount Value
-------------------------------------------------------------------------
July 31, November December October
Maturity date 2007 1, 2008 31, 2012 31, 2015
Interest rate 8.0% 8.0% 5.75% 5.85%
Conversion price
per trust unit $16.00 $20.00 $36.00 $31.25
-------------------------------------------------------------------------
Debentures
outstanding
at December
31, 2006(3) 8.1 59.2 174.9 75.0 (3.3) 313.9
Conversion and
repayment
/redemption of
Debentures and
accretion of
discount
during 2007 (8.1) (59.2) - - 0.7 (66.6)
Deferred issue
costs - - (4.8) (2.5) (7.3)
-------------------------------------------------------------------------
Debentures
outstanding - - 170.1 72.5 (2.6) 240.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quoted market
value December
31, 2007 - - 152.2 67.5
Quoted market
value December
31, 2006 8.2 60.8 157.5 66.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) On July 31, 2007, $8.1 million Series I, 8% Debentures matured and
were repaid.
(2) On November 5, 2007, $59.2 million Series 2, 8% Debentures were
redeemed.
(3) As at December 31, 2006, the current portion of Series 1, 8%
Debentures oustanding was $8.1 million.
The Debentures may be converted into trust units at the option of the
holder at any time prior to maturity and may be redeemed by the Fund in
certain circumstances. The Fund may elect to pay interest and principal
upon maturity or redemption by issuing trust units to a trustee in the
case of interest payments, and to the Debentureholders in the case of
payment of principal. The number of any trust units issued will be
determined based on market prices for the trust units at the time of
issuance.
8. Financial Instruments
The fair value of a financial instrument is the amount of consideration
that would 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 the Fund has immediate access. Where bid and ask prices are
unavailable, the Fund uses the closing price of the most recent
transaction of the instrument. In the absence of an active market, the
Fund determined 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 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, the Fund
looks primarily to external readily observable market inputs including
factors such as interest rate yield curves, currency rates, and price and
rate volatilities as applicable. With respect to the valuation of ERCO's
fixed-price electricity agreements, the valuation of these agreements
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 price
of electricity has a material impact on the fair value of these
agreements. Any changes in the fair values of financial instruments
classified or designated as held-for-trading measured at fair value are
recognized in net income.
Financial and Non-Financial Derivatives
-------------------------------------------------------------------------
Fair Fair
Value Value
as at as at
December January
Description Notional Term Effective Rate 31, 2007 1, 2007
-------------------------------------------------------------------------
Natural gas
financial 2008-
swaps-NYMEX 43.6 GJ(1) 2011 $7.30/GJ USD 33.4 26.9
Natural gas
financial 2008-
swaps-AECO 36.4 GJ(1) 2012 $7.74/GJ CDN (18.7) (29.4)
SEM electricity 2008-
swaps 0.2 MW(2) 2013 $72.54/MWh (0.4) -
Foreign currency
forward con- 2007-
tracts, net $170.2 USD(3) 2011 1.17 (46.0) (15.0)
Interest rate 2013-
swaps-USD $85.0 USD(3) 2015 4.95% 2.6 (1.2)
Interest rate
swaps-CDN $100.0 CDN(3) 2007 5.33% - 0.6
Propane wholesale
purchase and sale 2007-
contracts, net 14.4 USG(4) 2008 $1.25/USG 5.5 3.2
ERCO fixed-price
electricity
purchase 2008-
agreement 45 MW(2) 2017 $45-$52/MWh 26.6 27.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Millions of gigajoules purchased
(2) Mega watts ("MW") on a 24/7 continual basis per year purchased
(3) Millions of dollars purchased
(4) Millions of United States gallons purchased
-------------------------------------------------------------------------
Current Long-term Current Long-term
Description Assets Assets Liabilities Liabilities
-------------------------------------------------------------------------
Natural gas financial swaps
- NYMEX and AECO 23.8 34.7 21.6 22.2
SEM electricity swaps - 0.1 0.3 0.2
Foreign currency forward
contracts, net 7.3 2.6 24.0 31.9
Interest rate swaps 0.7 1.9 - -
Propane wholesale purchase
and sale contracts 10.7 - 5.2 -
ERCO fixed-price power
purchase agreements 5.5 21.1 - -
-------------------------------------------------------------------------
As at December 31, 2007 48.0 60.4 51.1 54.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at January 1, 2007 upon
adoption of new financial
instruments accounting
requirements 33.7 76.4 36.1 61.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended For the twelve months ended
December 31, 2007 December 31, 2007
Realized Unrealized Realized Unrealized
Description gain (loss) gain (loss) gain (loss) gain (loss)
-------------------------------------------------------------------------
Natural gas financial
swaps - NYMEX and
AECO (5.1) 29.4 (14.9) 7.3
SEM electricity swaps - - - (0.4)
Foreign currency
forward contracts, net (0.9) 0.4 (4.5) (33.3)
Interest rate swaps - 3.2 - 3.8
Propane wholesale
purchase and sale
contracts - 3.0 - 2.3
ERCO fixed-price power
purchase agreements 2.0 (10.3) 7.6 (0.7)
-------------------------------------------------------------------------
Total realized and
unrealized gains
(losses) on financial
and non-financial
derivatives (4.0) 25.7 (11.8) (21.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign currency
translation of
senior secured
notes (Note 6) - 0.7 - 27.7
Foreign currency
translation of ERCO
royalty assets - (0.1) - (4.0)
-------------------------------------------------------------------------
Total realized and
unrealized gains
and losses (4.0) 26.3 (11.8) 2.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-Derivative Financial Instruments
The Fund's accounts receivables have been designated as available for
sale due to the Fund's accounts receivable securitization program, the
Fund's accounts payable, distributions and interest payable to
Unitholders and Debentureholders, revolving term bank credits and term
loans and Debentures have been designated as other liabilities. The
carrying value of the Fund's cash, accounts receivable, accounts payable,
and distributions and interest payable to Unitholders and
Debentureholders approximates their fair value due to the short-term
nature of these amounts. The carrying value and the fair value of the
Fund's revolving term bank credits and term loans, and Debentures, is
provided in Notes 6 and 7 of the Interim Consolidated Financial
Statements.
Financial Instruments - Risk Management
Derivative and non-financial derivatives are used by the Fund to manage
its exposure to fluctuations in foreign currency exchange rates, interest
rates and commodity prices. The Fund's policy is not to use derivative or
non-financial derivative instruments for speculative purposes. The Fund
does not formally designate its derivatives as hedges, as a result, the
Fund does not apply hedge accounting and is required to designate its
derivatives and non-financial derivatives as held for trading.
SEM enters into NYMEX and AECO natural gas financial swaps with a variety
of counterparties to manage the economic exposure of providing
fixed-price natural gas to its customers. 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 a single counterparty 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 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.
Superior Propane enters into various propane forward purchase and sale
agreements 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. 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 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 utilizes interest rate swaps 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 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 through out 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 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.
9. Income Taxes
The Fund is a Mutual Fund Trust for income tax purposes. In June 2007 the
Government of Canada enacted new legislation imposing additional income
taxes upon publicly traded income trusts, including Superior Plus Income
Fund, effective January 1, 2011. Prior to the legislation, the Fund was
only taxable on any taxable income not allocated to the Unitholders and
estimated its future income tax on certain temporary differences between
amounts recorded on its balance sheet for book and tax purposes at a nil
effective tax rate. Under the legislation, the Fund estimates the
effective tax rate on the post 2010 reversal of these temporary
differences to be 31.5%. Temporary differences reversing before 2011 will
still give rise to nil future income taxes. Accordingly, the Fund began
recording a Canadian future income tax provision effective June 30, 2007.
Consistent with prior periods, the Fund 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 tax.
For the three and twelve months ended December 31, 2007 future income tax
expense/recovery from operations in Canada, the United States and Chile
was a $7.4 million expense and a $10.4 million recovery, respectively,
compared to future income tax recoveries of $2.9 million and
$109.2 million for the comparative periods, respectively. Future income
taxes for the twelve months ended December 31, 2006 were impacted by
$47.9 million in future income tax recoveries related to asset impairment
charges. Additionally, future income taxes for the twelve months ended
December 31, 2006 were impacted by $33.2 million in future income tax
recoveries as a result of the Funds's conversion to a "trust over
partnership structure". Total income tax expense/recovery, comprised of
current and future taxes for the three and twelve months ended
December 31, 2007 was a $9.3 million expense and a $5.1 million recovery,
compared to income tax recoveries of $100.0 million and $0.7 million for
the comparative periods, respectively.
The Fund expects it will be subject to current and future income taxes
under the new legislation, however, the estimated effective tax rate on
temporary difference reversals after January 1, 2011 may change in future
periods. As the legislation is new, future technical interpretations of
the legislation may occur and could materially affect management's
estimate of the future income tax asset/liability. The amount and timing
of reversals of temporary differences will also depend on the Fund's
future operating results, acquisitions and dispositions of assets and
liabilities, and distribution policy. A significant change in any of the
preceding assumptions could materially affect the Fund's estimate of the
future income tax asset/liability.
10. Asset Impairments
Superior determined during the second quarter of 2006 that the net book
value of ERCO's sodium chlorate facilities located in Bruderheim, Alberta
and Valdosta, Georgia and ERCO's goodwill were impaired. An aggregate
impairment charge of $218.7 million was recorded in 2006 ($170.8 million
net of tax) which was equivalent to the pre-impairment net book value of
the assets.
A pre-tax impairment charge of $73.4 million ($47.7 million net of tax)
was recorded with respect to ERCO's Bruderheim, Alberta sodium chlorate
facility, based on estimates of the future cash flows from the facility
which have been negatively impacted by high electrical prices, lower
sodium chlorate selling prices resulting from the appreciation of the
Canadian dollar on U.S. dollar denominated sales, and reduced demand for
sodium chlorate due to various bleached pulp mill closures in
North America.
A pre-tax impairment charge of $55.9 million ($33.7 million net of tax)
was recorded with respect to ERCO's Valdosta, Georgia sodium chlorate
facility based on estimates of the future cash flows from the facility
which have been negatively impacted by high electrical prices and reduced
demand for sodium chlorate due to various bleached pulp mill closures in
North America.
As part of Superior's assessment of ERCO's overall operations, the fair
value of ERCO was estimated using various valuation methods based on
current market assumptions surrounding the sodium chlorate industry which
has been negatively impacted by reduced demand for North American sodium
chlorate due to various pulp mill closures, the impact of the
appreciation of the Canadian dollar on ERCO's U.S. dollar denominated
sales and on the competitiveness of its Canadian pulp producer customer
base, and increased power costs. Based on the estimated fair values, it
was determined that ERCO's goodwill was impaired and as such an
impairment charge of $89.4 million was recorded.
11. Unitholders' Equity
Authorized
The Fund may issue an unlimited number of trust units. Each trust unit
represents an equal undivided beneficial interest in any distributions
from the Fund and in the net assets in the event of termination or
wind-up of the Fund. All trust units are of the same class with equal
rights and privileges.
Issued Number
of Trust Units Unitholders'
(millions) Equity
-------------------------------------------------------------------------
Unitholders' equity, December 31, 2006 85.5 595.6
Trust unit distribution reinvestment program 2.0 25.3
Other comprehensive income - (2.3)
Transitional adjustment to accumulated other
comprehensive income (loss) upon
implementation of financial instruments
(Note 1(b)) - (18.1)
Cumulative impact to deficit upon
implementation of financial instruments - 30.6
Conversion of 8%, Series I Debentures
($0.7 million converted at $16 per unit) - 0.7
Net earnings - 119.8
Distributions to unitholders - (134.9)
-------------------------------------------------------------------------
Unitholders' equity, December 31, 2007 87.5 616.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unitholders' capital, deficit and accumulated other comprehensive income
as at December 31, 2007 and December 31, 2006 consists of the following
components:
December 31, December 31,
2007 2006
-------------------------------------------------------------------------
Unitholders' capital
Trust unit equity 1,362.0 1,336.0
Conversion feature on warrants and
convertible debentures 4.8 4.8
-------------------------------------------------------------------------
1,366.8 1,340.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated deficit
Retained earnings from operations 433.3 313.5
Cumulative impact to deficit upon
implementation of financial instruments 30.6 -
Accumulated distributions on trust unit equity (1,193.7) (1,058.8)
-------------------------------------------------------------------------
(729.8) (745.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance at beginning of period - -
Transitional adjustment upon implementation
of financial instruments (Note 1(b)) (18.0) (0.7)
Unrealized foreign currency gains (losses)
on translation of self-sustaining foreign
operations (13.5) 0.8
Reclassification of derivative gains and
losses previously deferred 11.2 -
-------------------------------------------------------------------------
(20.3) 0.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2007, the Fund had 2.3 million trust unit warrants
outstanding (December 31, 2006 - 2.3 million), exercisable at $20 per
trust unit warrant. The trust unit warrants expire May 8, 2008.
12. Net Earnings per Trust Unit
Three months ended Years ended
December 31 December 31
2007 2006 2007 2006
-------------------------------------------------------------------------
Net earnings per trust unit
computation, basic and diluted(1)
Net earnings (loss) from
continuing operations 64.5 25.3 119.4 (55.6)
Net earnings (loss) from
discontinued operations - 12.8 0.4 (25.2)
-------------------------------------------------------------------------
Net earnings (loss) 64.5 38.1 119.8 (80.8)
Weighted average trust units
outstanding 87.3 85.5 86.5 85.5
-------------------------------------------------------------------------
Net earnings (loss) from continuing
operations per trust unit, basic
and diluted $0.74 $0.30 $1.38 ($0.65)
Net earnings from discontinued
operations per trust unit, basic
and diluted - $0.15 - ($0.29)
Net earnings (loss) per trust unit,
basic and diluted $0.74 $0.45 $1.38 ($0.94)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) All outstanding trust unit options and warrants were excluded from
this calculation as they were anti-dilutive.
13. Business Segments
Superior operates four continuing 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"). JW Aluminum Company ("JWA" or "JW
Aluminum"), a manufacturer of specialty flat-rolled aluminum products,
has been sold and classified as a discontinued operation. (See Note
4). Superior's corporate office arranges intersegment foreign
exchange contracts from time to time between its business segments.
Intersegment revenues and cost of sales pertaining to intersegment
foreign exchange gains and losses are eliminated under the Corporate
cost column.
For the three
months ended Superior Total
December 31, 2007 Propane ERCO Winroc SEM Corporate Consolidated
-------------------------------------------------------------------------
Revenues 357.3 110.9 125.4 76.9 - 670.5
Cost of products
sold (268.7) (63.4) (91.0) (57.6) - (480.7)
Realized gains
(losses) on
financial
instruments 0.7 7.2 - (11.9) - (4.0)
-------------------------------------------------------------------------
Gross profit 89.3 54.7 34.4 7.4 - 185.8
Expenses
Operating and
administrative 50.8 31.6 23.9 4.6 1.5 112.4
Amortization of
property, plant
and equipment 2.0 10.0 1.0 - - 13.0
Amortization of
intangible assets - 1.1 - - - 1.1
Interest on revolving
term bank credits
and term loans - - - - 6.5 6.5
Interest on
convertible
unsecured
subordinated
debentures - - - - 4.2 4.2
Accretion of
convertible
debenture issue
costs - - - - 1.1 1.1
Unrealized (gains)
losses on financial
instruments (3.0) 11.2 - (29.4) (5.1) (26.3)
-------------------------------------------------------------------------
49.8 53.9 24.9 (24.8) 8.2 112.0
-------------------------------------------------------------------------
Net earnings (loss)
before income taxes
from continuing
operations 39.5 0.8 9.5 32.2 (8.2) 73.8
Income tax recovery
(expense) (7.0) 1.8 (0.7) (3.1) (0.3) (9.3)
-------------------------------------------------------------------------
Net earnings (loss)
from continuing
operations 32.5 2.6 8.8 29.1 (8.5) 64.5
Net earnings (loss)
from discontinued
operations (Note 4) -
-------------------------------------------------------------------------
Net Earnings (Loss) 64.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three
months ended Superior Total
December 31, 2006 Propane ERCO Winroc SEM Corporate Consolidated
-------------------------------------------------------------------------
Revenues 279.9 115.4 118.8 78.8 (0.1) 592.8
Cost of products
sold (201.7) (59.0) (85.5) (72.6) 0.1 (418.7)
-------------------------------------------------------------------------
Gross profit 78.2 56.4 33.3 6.2 - 174.1
Expenses
Operating and
administrative 48.8 35.0 20.6 3.3 4.4 112.1
Amortization of
property, plant
and equipment 6.2 12.0 0.9 - - 19.1
Amortization of
intangible assets - 1.1 0.2 - - 1.3
Interest on term
bank credits and
term loans - - - - 11.4 11.4
Interest on
convertible
unsecured
subordinated
debentures - - - - 5.0 5.0
Accretion of
convertible
debenture
issue costs - - - - 0.6 0.6
-------------------------------------------------------------------------
55.0 48.1 21.7 3.3 21.4 149.5
-------------------------------------------------------------------------
Net earnings (loss)
before income taxes
from continuing
operations 23.2 8.3 11.6 2.9 (21.4) 24.6
Income tax recovery
(expense) 0.1 2.3 (1.3) - (0.4) 0.7
-------------------------------------------------------------------------
Net earnings from
continuing
operations 23.3 10.6 10.3 2.9 (21.8) 25.3
Net earnings from
discontinued
operations (Note 4) 12.8
-------------------------------------------------------------------------
Net Earnings 38.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the year
ended December Superior Total
31, 2007 Propane ERCO Winroc SEM Corporate Consolidated
-------------------------------------------------------------------------
Revenues 1,075.7 447.0 512.3 320.4 - 2,355.4
Cost of products
sold (782.7) (260.5) (382.5) (256.1) - (1,681.8)
Realized gains
(losses) on
financial
instruments 1.2 21.2 - (34.2) - (11.8)
-------------------------------------------------------------------------
Gross profit 294.2 207.7 129.8 30.1 - 661.8
Expenses
Operating and
administrative 196.9 120.8 93.1 18.4 10.5 439.7
Amortization of
property, plant
and equipment 15.7 38.0 3.9 - - 57.6
Amortization of
intangible assets - 4.6 0.3 - - 4.9
Interest on
revolving term
bank credits
and term loans - - - - 25.2 25.2
Interest on
convertible
unsecured
subordinated
debentures - - - - 19.5 19.5
Accretion of
convertible
debenture
issue costs - - - - 2.8 2.8
Management
internalization
costs - - - - 0.5 0.5
Unrealized (gains)
losses on financial
instruments (2.3) 5.5 - (6.9) 1.0 (2.7)
-------------------------------------------------------------------------
210.3 168.9 97.3 11.5 59.5 547.5
-------------------------------------------------------------------------
Net earnings (loss)
before income
taxes from
continuing
operations 83.9 38.8 32.5 18.6 (59.5) 114.3
Income tax recovery
(expense) 19.9 (15.9) 0.8 (0.8) 1.1 5.1
-------------------------------------------------------------------------
Net earnings from
continuing
operations 103.8 22.9 33.3 17.8 (58.4) 119.4
Net earnings from
discontinued
operations (Note 4) 0.4
-------------------------------------------------------------------------
Net Earnings 119.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the year
ended December Superior Total
31, 2006 Propane ERCO Winroc SEM Corporate Consolidated
-------------------------------------------------------------------------
Revenues 985.4 437.2 518.7 325.6 (2.6) 2,264.3
Cost of products
sold (712.5) (233.1) (386.5) (303.9) 2.6 (1,633.4)
-------------------------------------------------------------------------
Gross profit 272.9 204.1 132.2 21.7 - 630.9
Expenses
Operating and
administrative 185.3 122.1 87.1 11.7 17.6 423.8
Amortization of
property, plant
and equipment 20.4 47.9 3.7 - - 72.0
Amortization of
intangible assets - 4.7 0.4 - - 5.1
Interest on term
bank credits and
term loans - - - - 43.1 43.1
Interest on
convertible
unsecured
subordinated
debentures - - - - 20.2 20.2
Accretion of
convertible
debenture
issue costs - - - - 2.3 2.3
Management
internalization
costs - - - - 1.3 1.3
Impairment of
property, plant
and equipment,
and goodwill - 218.7 - - - 218.7
-------------------------------------------------------------------------
205.7 393.4 91.2 11.7 84.5 786.5
-------------------------------------------------------------------------
Net earnings (loss)
before income
taxes from
continuing
operations 67.2 (189.3) 41.0 10.0 (84.5) (155.6)
Income tax recovery
(expense) 48.6 130.0 5.0 2.6 (86.2) 100.0
-------------------------------------------------------------------------
Net loss from
continuing
operations 115.8 (59.3) 46.0 12.6 (170.7) (55.6)
Net loss from
discontinued
operations (Note 4) (25.2)
-------------------------------------------------------------------------
Net Loss (80.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Assets, Net Working Capital, Acquisitions and Other Capital
Expenditures
Superior
Propane ERCO Winroc SEM
-------------------------------------------------------------------------
As at December 31, 2007
Net working capital 73.9 19.0 65.7 8.8
Total assets 663.0 533.1 195.2 115.2
-------------------------------------------------------------------------
As at December 31, 2006
Net working capital 60.8 32.0 69.7 (2.6)
Total assets 679.5 566.4 202.8 46.7
-------------------------------------------------------------------------
For the three months ended
December 31, 2007
Acquisitions - - 2.9 -
Other capital expenditures - 3.3 - 0.3
-------------------------------------------------------------------------
For the three months ended
December 31, 2006
Acquisitions (dispositions) - - - -
Other capital expenditures - 1.8 - -
-------------------------------------------------------------------------
For the year ended December 31, 2007
Acquisitions - - 4.3 -
Other capital expenditures 0.4 6.0 0.9 1.5
-------------------------------------------------------------------------
For the year ended December 31, 2006
Acquisitions (dispositions) - - - -
Other capital expenditures - 51.4 1.6 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Discontinued
Operations Total
Corporate (Note 4) Consolidated
-------------------------------------------------------------------------
As at December 31, 2007
Net working capital 5.6 - 173.0
Total assets 36.3 - 1,542.8
-------------------------------------------------------------------------
As at December 31, 2006
Net working capital 19.0 - 178.9
Total assets 41.5 - 1,536.9
-------------------------------------------------------------------------
For the three months ended
December 31, 2007
Acquisitions - - 2.9
Other capital expenditures - - 3.6
-------------------------------------------------------------------------
For the three months ended
December 31, 2006
Acquisitions (dispositions) - (354.7) (354.7)
Other capital expenditures - 0.4 2.2
-------------------------------------------------------------------------
For the year ended December 31, 2007
Acquisitions - - 4.3
Other capital expenditures 0.4 - 8.8
-------------------------------------------------------------------------
For the year ended December 31, 2006
Acquisitions (dispositions) - (354.7) (354.7)
Other capital expenditures - 3.7 56.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Geographic Information
Discontinued
United Total Operations
Canada States Other Consolidated (Note 4)
-------------------------------------------------------------------------
Revenues for the
three months ended
December 31, 2007 572.4 77.5 20.6 670.5 -
Revenue for the year
ended December 31,
2007 1,934.0 346.4 75.0 2,355.4 -
Property, plant and
equipment as at
December 31, 2007 428.1 28.8 57.5 514.4 -
Total assets as at
December 31, 2007 1,360.2 117.8 64.8 1,542.8 -
-------------------------------------------------------------------------
Revenues for the
three months ended
December 31, 2006 482.7 91.5 18.6 592.8 110.2
Revenues for the
year ended December
31, 2006 1,824.0 392.5 47.8 2,264.3 573.3
Property, plant and
equipment as at
December 31, 2006 468.1 33.2 69.8 571.1 -
Total assets as at
December 31, 2006 1,305.4 148.5 83.0 1,536.9 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------