TSX: SPF.UN
CALGARY, Nov. 3 /CNW/ -
- Q3 and year to date Distributable Cash Flow, down 9% and 1% from
prior year comparable periods.
- Business diversification advanced with the $412 million acquisition
of JW Aluminum ("JWA") on October 19, a leading manufacturer of
specialty flat-rolled aluminum products.
- 42 million pound expansion of JWA Russellville facility approved.
- Monthly distributions increased by 2.5% to $0.205 per trust unit,
($2.46 on an annualized basis) effective with the November
distribution, payable on December 15.
<<
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Three Months Ended Nine Months Ended
(millions of dollars, except September 30 September 30
per trust unit amounts) 2005 2004(1) 2005 2004(1)
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Financial
Operating distributable cash flow
Superior Propane 8.6 13.3 62.3 72.5
ERCO Worldwide 25.1 23.2 68.9 67.4
Winroc 10.3 6.7 21.5 8.1
Superior Energy Management 0.5 1.7 3.5 5.9
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44.5 44.9 156.2 153.9
Corporate costs (2.8) (1.1) (6.0) (3.5)
Interest and debenture
distributions (8.3) (7.1) (23.2) (21.8)
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Distributable cash flow
(see Note 1 to the Interim
Consolidated Financial
Statements) 33.4 36.7 127.0 128.6
Distributable cash flow per
trust unit, basic $0.42 $0.50 $1.63 $1.79
Distributable cash flow per
trust unit, diluted $0.42 $0.49 $1.59 $1.70
Average number of trust units
outstanding (millions) 79.0 73.3 77.7 72.0
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Operating
Litres of propane sold
(millions of litres) 277 290 1,048 1,106
Propane retail sales margin
(cents per litre) 15.4 16.0 15.9 16.0
Total chemical sales (thousands
of metric tonnes "MT") 224 163 562 478
Average chemical selling price
(dollars per MT) 500 577 528 572
Gigajoules ("GJ") of natural
gas sold (millions) 9 7 27 21
Natural gas sales margin
(cents per GJ) 36.2 42.3 37.2 48.8
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(1) Restated to give retroactive effect to change in accounting for
natural gas customer acquisition costs. (See Note 2(b) to the
Interim Consolidated Financial Statements).
Q3 Highlights:
- Distributable cash flow per trust unit of $0.42, down 16% from
Q3 last year, due to a 9% decline in distributable cash flow and an
8% increase in the average number of trust units outstanding.
- Superior Propane results impacted by weather, equipment maintenance
and fuel costs, and maintenance capital expenditures.
- ERCO Worldwide results benefit from Port Edwards
chloralkali/potassium operations acquired in June 2005.
- Winroc results benefit from the expansion of its distribution network
into the Ontario market.
- Corporate costs impacted by United States inter-divisional income tax
allocations and compensation costs.
- Interest expense increased due primarily to financing of growth
capital expenditures.
- Increase in trust units due to conversion of debentures and warrants
which strengthened the balance sheet.
Forward Looking Statements
--------------------------
Except for the historical and present factual information, certain
statements contained herein are forward-looking. Such forward-looking
statements are not guarantees of future performance and involve a number of
known and unknown risks and uncertainties which may cause the actual results
of the Superior Plus Income Fund (the "Fund") or Superior Plus Inc.
("Superior") in future periods to differ materially from any projections
expressed or implied by such forward-looking statements and therefore should
not be unduly relied upon. Any forward-looking statements are made as of the
date hereof and neither the Fund nor Superior undertakes any obligation to
publicly update or revise such statements to reflect new information,
subsequent events or otherwise.
Distributable Cash Flow
-----------------------
Distributable cash flow of the Fund available for distribution to
Unitholders, is equal to cash generated from operations before natural gas
customer acquisition costs and changes in working capital, less amortization
of natural gas customer acquisition costs and maintenance capital
expenditures. Maintenance capital expenditures are equal to capital
expenditures incurred to sustain the ongoing capacity of Superior's operations
and are deducted from the calculation of distributable cash flow. Acquisitions
and other capital expenditures incurred to expand the capacity of Superior's
operations or to increase its profitability, are excluded from the calculation
of distributable cash flow. See Note 1 to the Interim Consolidated Financial
Statements for the calculation of distributable cash flow. Distributable cash
flow is the main performance measure used by management and investors to
evaluate the performance of the Fund and its businesses. Readers are cautioned
that distributable cash flow is not a defined performance measure under
Canadian generally accepted accounting principles ("GAAP"), and that
distributable cash flow cannot be assured. The Fund's calculation of
distributable cash flow may differ from similar calculations used by
comparable entities. Operating distributable cash flow is distributable cash
flow before corporate and interest expenses. It is also a non-GAAP measure and
is used by management to assess the performance of the operating divisions.
Cash Distribution Notice
------------------------
The Fund announced today its cash distribution for the month of
November 2005 of $0.205 (20.5 cents) per trust unit, payable on December 15,
2005, to unitholders of record at the close of business on November 30, 2005.
The regular monthly distribution has been increased by 2.5%, reflecting
expected sustainable distributable cash flow, including accretion from the
acquisition of JWA. The ex-distribution date will be November 28, 2005. For
income tax purposes, the cash distribution of $0.205 per trust unit is
considered to be a dividend of $0.0435 and other income of $0.1615 per trust
unit. A cash distribution summary since inception of the Fund, together with
tax information, is posted on our website at www.superiorplus.com.
Management's Discussion and Analysis of 2005 Third Quarter Results
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The following should be read in conjunction with the Fund's Interim
Consolidated Financial Statements contained herein, along with the Management
Discussion and Analysis and Consolidated Financial Statements for the year
ended December 31, 2004, and the Fund's First and Second Quarter Reports for
the periods ended March 31, 2005 and June 30, 2005, respectively.
Third Quarter and Year to Date Results
Third quarter distributable cash flow was $33.4 million, down
$3.3 million (9%) from the prior year period. Improved results from
acquisitions completed in the second quarter of 2005 by ERCO Worldwide and
Winroc, were more than offset by lower results at Superior Propane and
Superior Energy Management, and increased corporate and borrowing costs.
Distributable cash flow per trust unit was $0.42 for the third quarter,
down $0.08 per trust unit (16%) from the prior year period due to the 9%
decline in distributable cash flow combined with an 8% increase in the average
number of trust units outstanding. The conversion of the Fund's convertible
unsecured subordinated debentures ("Debentures") and exercise of warrants into
trust units has contributed to the increase in trust units outstanding and
continues to strengthen the Fund's balance sheet.
Distributable cash flow for the nine month period ended September 30,
2005 was $127.0 million, down $1.6 million (1%) from the prior year period.
The acquisition of Winroc in June 2004 and subsequent expansion of its
distribution network into Ontario, contributed an incremental $13.4 million of
operating distributable cash flow, which was more than offset by lower results
from Superior Propane in the second and third quarters, lower year to date
results from Superior Energy Management, and increased corporate and borrowing
costs. Distributable cash flow per trust unit was $1.63, down $0.16 per trust
unit (9%) from the prior year period, due to the decrease in distributable
cash flow, combined with an 8% increase in the average number of trust units
outstanding due to the conversion of Debentures and warrants into trust units.
Net earnings for the third quarter were $24.0 million, up $3.2 million
(15%) from the prior year period. Net earnings for the nine month period ended
September 30, 2005 reached $84.4 million, an increase of $5.5 million (7%)
over the prior year period. Net earnings have improved relative to the change
in distributable cash flow in the third quarter and for the nine month period
ended September 30, 2005 compared to the prior year periods, due to non-cash
recoveries of trust unit incentive plan compensation expense and future income
tax, partially offset by increased non-cash amortization charges. The recovery
of trust unit incentive plan compensation expense was driven by the decline in
the market value of the Fund's trust units experienced during the third
quarter. The increase in amortization expense reflects ERCO Worldwide's
August 30, 2005 announcement to close their Thunder Bay sodium chlorate plant
in the first quarter of 2006, resulting in the acceleration of amortization of
the plant's $40 million net book value over its remaining expected period of
operation. Additionally, year to date expenses include $1.3 million of
management retention bonuses (2004 - $2.6 million), which were in turn used to
repay trust unit purchase loans issued as part of the May 2003 management
internalization transaction. These costs have been excluded from the
calculation of distributable cash flow, consistent with the accounting for
management internalization costs in 2003.
Superior Propane
Superior Propane generated operating distributable cash flow of
$8.6 million, down $4.7 million from the prior year period as lower propane
sales margins, volumes and increased operating expenses and maintenance
capital costs, were only partially offset by increased other services gross
profit generated by the Superior Gas Liquids ("SGL") wholesale marketing
business acquired in February 2005. The second and third quarters tend to
reflect seasonally low and variable levels of cash generated from operations
before changes in net working capital as approximately 75% of its annual cash
generated from operations typically occurs in the October to March winter
heating season. Condensed operating results for the three and nine month
periods ended September 30, 2005 and 2004 are provided below:
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(millions of
dollars except Three Months Ended Nine Months Ended
per litre Sept 30 Sept 30
amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
cents/ cents/ cents/ cents/
litre litre litre litre
Gross Profit
Propane sales 42.6 15.4 46.3 16.0 166.8 15.9 177.2 16.0
Other
services 13.1 4.7 9.9 3.4 37.7 3.6 29.2 2.7
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Total Gross
Profit 55.7 20.1 56.2 19.4 204.5 19.5 206.4 18.7
Less:
Cash
operating,
admin &
cash tax
costs (43.8) (15.8) (41.6) (14.4) (137.5) (13.1) (130.9) (11.9)
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Cash generated
from
operations
before
changes in
net working
capital 11.9 4.3 14.6 5.0 67.0 6.4 75.5 6.8
Maintenance
capital
expenditures,
net (3.3) (1.2) (1.3) (0.4) (4.7) (0.4) (3.0) (0.3)
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Operating
distributable
cash flow 8.6 3.1 13.3 4.6 62.3 6.0 72.5 6.5
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Propane retail
volumes sold
(millions of
litres) 277 290 1,048 1,106
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Propane sales gross profit was $42.6 million, down $3.7 million (8%) from
the prior year period, as sales volumes declined by 4% (13 million litres) and
average sales margins declined by 4% (0.6 cents/litre). The continued decline
in auto propane sales contributed to 50% of the overall reduction in sales
volumes. Warm weather in Eastern Canada reduced heating volumes as did
customer conservation in response to a 15% increase in average wholesale
propane costs over the prior year period. Agricultural crop drying volumes
were lower in Western Canada due to unusually wet weather experienced in the
second quarter which prevented many farmers from planting their fields.
Increased industrial sales volumes reflected strong oilfield volumes and
included 6 million litres of refined fuel sales volumes acquired over the last
year in south-western Ontario. Propane sales margin performance improved
during the third quarter from June levels, despite the significant increase in
and volatility of crude oil, natural gas and propane commodity prices
experienced during the quarter due to hurricane related supply disruptions.
Other services gross profit reached $13.1 million in the third quarter, an
increase of $3.2 million over the prior year period, due to $2.2 million
generated from SGL and transportation surcharge fee income.
Volume and Gross Profit by End Use Market Segment
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Three Months Ended September 30
2005 2004
-------------------------------------------
Gross Gross
End Use Applications: Volume(1) Profit(2) Volume(1) Profit(2)
-------------------------------------------
Residential 23 7.2 25 8.2
Commercial 47 9.7 51 10.5
Agricultural 12 1.4 20 2.3
Industrial 144 18.3 136 18.0
Automotive 51 6.0 58 7.3
Other Services - 13.1 - 9.9
-------------------------------------------
277 55.7 290 56.2
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Average Margin(3) 15.4 16.0
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Nine Months Ended September 30
2005 2004
-------------------------------------------
Gross Gross
End Use Applications: Volume(1) Profit(2) Volume(1) Profit(2)
-------------------------------------------
Residential 125 40.7 133 42.9
Commercial 226 43.7 239 46.9
Agricultural 57 6.2 69 7.5
Industrial 502 58.9 504 59.9
Automotive 138 17.3 161 20.0
Other Services - 37.7 - 29.2
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1,048 204.5 1,106 206.4
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Average Margin(3) 15.9 16.0
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Volume and Gross Profit by Region
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Three Months Ended September 30
2005 2004
-------------------------------------------
Gross Gross
Regions: Volume(1) Profit(2) Volume(1) Profit(2)
-------------------------------------------
Atlantic 21 6.4 22 5.8
Quebec 49 10.8 53 11.4
Ontario 64 14.4 64 13.0
Sask/Man 27 4.9 37 6.3
AB/NWT/YK 67 10.4 64 10.5
BC 49 8.8 50 9.2
-------------------------------------------
277 55.7 290 56.2
-------------------------------------------
Average Margin(3) 15.4 16.0
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Nine Months Ended September 30
2005 2004
-------------------------------------------
Gross Gross
Regions: Volume(1) Profit(2) Volume(1) Profit(2)
-------------------------------------------
Atlantic 83 23.5 85 22.6
Quebec 181 36.9 196 38.0
Ontario 248 56.7 255 55.2
Sask/Man 142 19.3 155 21.5
AB/NWT/YK 232 38.7 249 39.1
BC 162 29.4 166 30.0
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1,048 204.5 1,106 206.4
-------------------------------------------
Average Margin(3) 15.9 16.0
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(1) Volume of retail propane sold (millions of litres)
(2) Millions of dollars
(3) Average retail propane sale margin (cents per litre)
Cash operating, administrative and capital tax costs of $43.8 million
increased by 5% ($2.2 million) over the prior year period due to increased
equipment maintenance costs incurred in preparation for the winter heating
season, a $0.9 million increase in fuel delivery costs, and $0.6 million of
SGL operating costs. Maintenance capital expenditures of $3.3 million,
increased by $2.0 million over the prior year period, and are anticipated to
reach the $7 million level for 2005, due to increased fleet replacement
expenditures. A refined fuels distribution business was acquired during the
third quarter in south-western Ontario for $1.7 million. This expenditure is
considered to be growth capital in nature and is included in "other capital
expenditures" on the Interim Consolidated Statement of Cash Flows and is
excluded from the calculation of distributable cash flow.
ERCO Worldwide
ERCO Worldwide generated operating distributable cash flow in the third
quarter of $25.1 million, up $1.9 million (8%) from the prior year period. The
Port Edwards chloralkali/potassium facility acquired on June 7, 2005,
contributed operating distributable cash flow of $5.3 million. This increase
was partially offset by lower contributions from sodium chlorate operations.
Condensed operating results for the three and nine month periods ended
September 30, 2005 and 2004 are provided below:
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(millions of
dollars except Three Months Ended Nine Months Ended
per metric September 30 September 30
tonne amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
Revenue $ per MT $ per MT $ per MT $ per MT
Chemical 112.1 500 94.2 577 296.5 528 273.8 572
Technology 5.4 24 5.2 32 18.0 32 21.5 45
Cost of Sales
Chemical (58.4) (261) (48.8) (300) (154.9) (276) (140.7) (294)
Technology (2.6) (12) (2.2) (13) (9.1) (16) (10.8) (22)
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Gross Profit 56.5 251 48.4 296 150.5 268 143.8 301
Less: Cash
operating,
admin &
cash tax
costs (28.8) (129) (22.6) (139) (77.0) (137) (71.5) (150)
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Cash generated
from
operations
before
changes in
net working
capital 27.7 122 25.8 157 73.5 131 72.3 151
Maintenance
capital
expenditures (2.6) (12) (2.6) (16) (4.6) (8) (4.9) (10)
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Operating
distributable
cash flow 25.1 110 23.2 141 68.9 123 67.4 141
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Chemical
volumes sold
(thousands of
metric tonnes) 224 163 562 478
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Chemical sales gross profit of $53.7 million increased by $8.3 million
over the prior year period. The Port Edwards facility contributed
$12.6 million of gross profit during the third quarter from total chemical
sales of 64,000 tonnes, and benefited from a robust chloralkali pricing
environment. Chemical sales gross profit from existing operations decreased by
$4.3 million (9%) due to a 4% decrease in sodium chlorate sales volumes due to
soft bleached pulp market conditions, and a 3% decline in gross profit margins
which were impacted by the appreciation of the Canadian dollar on sales priced
in United States dollars. The average chemical revenue and cost of sales per
tonne statistics declined in the third quarter from the prior year period as a
result of the addition of potassium/chloralkali product sales from Port
Edwards which have lower average selling and production costs than ERCO
Worldwide's existing product mix. Technology gross profit of $2.8 million,
declined by $0.2 million from the prior year period due to normal course
royalty license expirations partially offset by increased chlorine dioxide
generator project revenue.
Cash operating, administrative and tax costs were $28.8 million in the
third quarter, increasing by $6.2 million over the prior year period due to
the addition of operating costs at Port Edwards of $5.4 million and United
States income taxes of $1.4 million, partially offset by the absence of costs
incurred in the prior year period in connection with exiting the calcium
hypochlorite business. No significant costs were incurred during the third
quarter in connection with the decision to close the Thunder Bay sodium
chlorate plant in the first quarter of 2006. Maintenance capital expenditures
of $2.6 million were comparable to the prior year period and are anticipated
to reach the $8 million level for 2005.
Growth capital expenditures of $9.1 million were incurred during the
quarter. Construction of the 55,000 tonne sodium chlorate plant in Chile
continues on time and on budget. The plant is scheduled to start up in
mid-2006 at a cost of $65 million and will provide CMPC Celulosa S.A. with a
long term sodium chlorate supply to its three pulp mills. Expenditures of
$8.0 million were incurred during the quarter ($17.0 million cumulatively).
Remaining construction costs are anticipated to be funded from existing
revolving term bank credit facilities. Expenditures on the five year cell
replacement program were $0.8 million during the third quarter ($15.6 million
cumulatively). The project is approximately 60% complete and is anticipated to
be completed over the next two years. Improvements in cell design are yielding
an approximate 7% increase in electrical efficiency.
Winroc
Winroc generated operating distributable cash flow of $10.3 million in
the third quarter, an increase of 54% ($3.6 million) over the comparable prior
year period mainly due to the expansion of its distribution network into the
Ontario market through the acquisition of Leon's Insulation Inc. ("Leon's") in
April 2005 and Interior Building Supplies ("IBS") in December 2004. Condensed
operating results for the three and nine month periods ended September 30,
2005 are provided below. The prior year periods include Winroc results, from
its date of acquisition on June 11, 2004. The results for the nine month
period ended September 30, 2004 are also provided below for comparative
purposes and are not included in the Interim Consolidated Financial
Statements.
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Three Months Ended Nine Months Ended June 11 -
(millions of September 30 September 30 September 30
dollars) 2005 2004 2005 2004 2004
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Distribution sales
gross profit 32.9 21.4 82.5 59.0 26.0
Direct sales gross
profit 1.1 1.1 2.9 3.2 1.4
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Gross Profit 34.0 22.5 85.4 62.2 27.4
Less: Cash
operating, admin
& cash tax costs (21.9) (14.6) (59.3) (41.5) (17.7)
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Cash generated
from operations
before changes
in net working
capital 12.1 7.9 26.1 20.7 9.7
Capital
expenditures, net (1.8) (1.2) (4.6) (5.9) (1.6)
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Operating
distributable
cash flow 10.3 6.7 21.5 14.8 8.1
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Distribution sales gross profit reached $32.9 million in the third
quarter, an increase of 54% ($11.5 million) over the prior year period. Higher
sales volumes contributed to improved gross profit performance as drywall
sales, which are an indicator of overall sales volumes, increased by 34%.
Approximately two thirds of the increase in sales volumes was generated by the
expansion of Winroc's distribution network into Ontario through the
acquisitions of IBS and Leon's. Distribution sales margins improved by 7% over
the prior year period, due largely to improved purchasing performance at
acquired operations. Cash operating, administration and tax costs were
$21.9 million in the third quarter, an increase of 50% ($7.3 million) over the
prior year period, due to increased costs associated with the growth in
Winroc's distribution network, higher variable delivery costs associated with
the growth in sales volumes, and increased fuel costs. Maintenance capital
expenditures were $1.8 million in the third quarter, an increase of 50%
($0.6 million) over the prior year period, reflecting the growth in Winroc's
distribution network. Maintenance capital expenditures are anticipated to be
in $5 million to $6 million range for 2005.
Superior Energy Management ("SEM")
Effective January 1, 2005, SEM began to capitalize customer acquisition
costs and amortize capitalized costs on a straight line basis over the term of
the customer contract. Previously, customer acquisition costs were expensed at
the time natural gas deliveries commenced under new contracts. This change in
accounting policy results in improved matching of up-front contract
acquisition costs with the economic benefits derived from gas sales over the
term of the customer contract and has been retroactively applied. Capitalized
costs are treated as "growth capital" and the amortization of capitalized
costs are deducted from distributable cash flow. This change in accounting
increased SEM's operating distributable cash flow for the three month periods
ended September 30, 2005 and 2004 by $0.8 million and $0.6 million,
respectively (nine month periods ended September 30, 2005 and 2004 by
$3.1 million and $1.1 million, respectively) as detailed below (See Note 2(b)
to the Interim Consolidated Financial Statements):
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Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------------------------------------
Operating distributable cash flow,
previous accounting policy $ (0.3) $ 1.1 $ 0.4 $ 4.8
Capitalized customer
acquisition costs 1.4 0.9 4.8 1.9
Amortization of capitalized costs (0.6) (0.3) (1.7) (0.8)
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Operating distributable cash
flow, new accounting policy $ 0.5 $ 1.7 $ 3.5 $ 5.9
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SEM's condensed operating results for the three and nine month periods
ended September 30, 2005 and 2004 are provided below:
-------------------------------------------------------------------------
(millions of Three Months Ended Nine Months Ended
dollars except September 30 September 30
per GJ amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
cents cents cents cents
per GJ per GJ per GJ per GJ
------ ------ ------ ------
Gross profit 3.4 36.2 3.1 42.3 10.2 37.2 10.0 48.8
Cash operating,
admin. &
selling costs (2.9) (30.9) (1.4) (19.7) (6.7) (24.4) (4.1) (20.0)
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Operating
distributable
cash flow 0.5 5.3 1.7 22.6 3.5 12.8 5.9 28.8
-------------------------------------------------------------------------
Gigajoules of
natural gas
sold (millions) 9 7 27 21
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-------------------------------------------------------------------------
SEM generated operating distributable cash flow of $0.5 million in the
third quarter, a decrease of $1.2 million from the prior year period. Gross
profit increased by $0.3 million (10%) over the prior year period as increased
sales volumes were partially offset by lower margins. Sales margins in the
third quarter averaged 36.2 cents per GJ, comparable to second quarter levels
but down 14% from the prior year period as high natural gas prices experienced
since the fall of 2004, have compressed large volume, commercial/industrial
fixed price margins and encouraged consumers in this segment to purchase their
gas requirements on a lower margin, floating rate basis. Residential and small
commercial customer growth continued in the third quarter and contributed to
the 32% year over year growth in sales volumes at attractive margins.
Operating, administration and selling costs increased by $1.5 million over the
prior year period due to management reorganization costs, a $0.3 million
increase in the amortization of customer contract acquisition costs and higher
overhead costs associated with increased sales and customer activity levels.
The majority of fixed price sales contracts entered into during the quarter
were for a five year term. The average remaining term of SEM's sales contracts
at September 30, 2005 was 38 months.
During the third quarter, Mr. Greg McCamus joined SEM as President,
replacing Mr. Gerry Haggarty who resigned. Mr. McCamus has extensive executive
experience primarily in the deregulated telecommunications sector.
Corporate
Corporate costs were $2.8 million in the third quarter, an increase of
$1.7 million over the prior year period due to United States inter-divisional
income tax allocations and increased compensation related costs.
Interest expense on revolving term bank credits and term loans was
$4.2 million, an increase of $0.3 million from the prior year period, due to
increased interest rates on United States dollar and Canadian dollar floating
rate debt, partially offset by lower floating rate debt levels. Convertible
Debenture interest was $4.1 million, an increase of $0.9 million over the
prior year period, due to the issuance of $175 million, 5.75% convertible
debentures in June 2005 net of the conversion of $94.0 million of 8%,
convertible debentures into 4.9 million trust units since September 30, 2004.
Cash income taxes of $2.3 million were incurred by ERCO Worldwide and
Winroc on earnings from operations in the United States and in Canada, were
limited to federal and provincial capital taxes of $0.9 million, similar to
the prior year period, as Canadian income taxes were fully deferred. Capital
taxes have been allocated to Superior's four business segments based on net
taxable capital deployed.
Liquidity and Capital Resources
Superior's net working capital requirements increased in the third
quarter by $23.4 million, mainly due to seasonal increases in propane
inventory at Superior Propane in preparation for the winter heating season
combined with increased wholesale propane costs. On a year to date basis,
excluding working capital acquired through acquisitions, net working capital
requirements have decreased by $34.8 million. Working capital requirements for
Superior Propane peak seasonally during the first quarter and then decline
through the second and third quarters before building again in the fall,
consistent with the seasonal demand profile of its heating end use customers.
Similarly, Superior's revolving trade accounts receivable sales program, which
is used to finance a portion of its net working capital requirements, declined
by $7.3 million during the third quarter ($14.0 million year to date).
Proceeds from the sale of receivables were $86.0 million at September 30, 2005
(September 30, 2004 - $79.2 million), compared to $100.0 million at
December 31, 2004, and are an off-balance sheet obligation. During the third
quarter, Superior expanded and extended the term of its secured revolving,
three year term credit facilities with nine banks for a total borrowing
capacity of $425 million, an increase of 20% from previous levels. As at
September 30, 2005, Superior had available undrawn revolving term bank lines
of $257 million.
Superior's revolving term bank credits and term loans were $353.2 million
at September 30, 2005, down $93.0 million from December 31, 2004. The main
reasons for the reduction in debt was the receipt of net proceeds of
$167.6 million from the issuance by the Fund of the 5.75% Debentures and
$16.5 million received from the exercise of trust unit warrants, partially
offset by growth capital expenditures of $87.5 million.
Convertible Debentures of the Fund outstanding at September 30, 2005 were
$243.1 million, an increase of $127.1 million from December 31, 2004, due to
the issuance on June 14, 2005 of $175 million, 5.75% Debentures due
December 31, 2012, partially offset by the conversion of $45.2 million
Series 1 and 2, 8% Debentures into 2.4 million trust units. Issuance of the
5.75% Debentures strengthened Superior's balance sheet by extending the
repayment profile of its debt, improving its senior debt leverage ratio, and
freeing up borrowing capacity under its revolving term bank lines. At
September 30, 2005, senior debt (including off-balance sheet accounts
receivable sales program amounts) was 1.8 times earnings before interest,
taxes and amortization for the last 12 month period (including acquisitions on
a pro forma basis), calculated in accordance with Superior's debt covenants
(2.2 times at December 31, 2004). Including the Fund's Convertible Debentures,
Superior's total leverage ratios increased to 2.8 times at September 30, 2005
from 2.7 times at December 31, 2004. As at September 30, 2005, 53% of
Superior's revolving term bank credits, term loans and convertible Debentures
were not repayable for at least 5 years.
Unitholders' Capital
The weighted average number of trust units outstanding during the third
quarter was 79.0 million trust units, an increase of 8% (5.7 million trust
units) over the prior year period due to the Debenture conversions described
previously and the issue of 0.8 million trust units resulting from the
exercise of trust unit warrants in 2005.
As at September 30, 2005 and December 31, 2004, the following trust
units, and securities convertible into trust units, were outstanding (see also
"Acquisition of JW Aluminum Holding Company" and Note 10 to the Interim
Consolidated Financial Statements):
-------------------------------------------------------------------------
September 30, 2005 December 31, 2004
Convertible Trust Convertible Trust
(millions) Securities Units Securities Units
-------------------------------------------------------------------------
Trust units outstanding 79.1 75.9
Series 1, 8% Debentures
(convertible at $16 per
trust unit) $ 9.0 0.5 $ 13.9 0.9
Series 2, 8% Debentures
(convertible at $20 per
trust unit) $ 62.4 3.1 $102.6 5.1
Series 1, 5.75% Debentures
(convertible at $36 per
trust unit) $174.9 4.9 - -
Warrants (exercisable (at) $20
per trust unit) 2.3 2.3 3.1 3.1
-------------------------------------------------------------------------
Trust units outstanding, and
issuable upon conversion of
Debenture and Warrant securities 89.9 85.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The trust unit warrants are exercisable until May 2008 and represent a
potential $46.0 million source of future equity capital. In addition, as at
September 30, 2005, there were 1,108,000 trust unit options outstanding
(December 31, 2004 - 960,000 trust units) with a weighted average exercise
price of $22.94 per trust unit. The number of trust units issued upon exercise
of the trust unit options is equal to the growth in the value of the options
at the time the options are exercised, (represented by the market price less
the exercise price) times the number of options exercised, divided by the
current trust unit market price.
Foreign Currency Hedging
SEM and Superior Propane contract a portion of their fixed price natural
gas and propane purchases in US dollars and enter into forward US dollar
purchase contracts to create an effective Canadian dollar fixed price purchase
cost. ERCO Worldwide enters into US dollar forward sales contracts on an
ongoing basis to mitigate the impact of foreign exchange fluctuations on sales
margins on production from its Canadian plants that is sold in US dollars.
Interest expense on Superior's US dollar debt is also used to mitigate the
impact of foreign exchange fluctuations on its US dollar distributable cash
flow. Superior's US dollar debt acts as a balance sheet hedge against its US
dollar net assets. Superior hedges its net US dollar future cash flows with
external third party contracts after first matching internally SEM's and
Superior Propane's forward US dollar purchase requirements against ERCO
Worldwide's US dollar revenues where possible.
As at September 30, 2005, SEM and Superior Propane had hedged
approximately 100% of their US dollar natural gas and propane purchase
obligations and ERCO Worldwide had hedged 70%, 78%, 52%, and 10% of its
estimated US dollar revenue stream for the remainder of 2005, 2006, 2007, and
2008 respectively, as shown in the table below. (See Note 8(i) to the Interim
Consolidated Financial Statements).
-------------------------------------------------------------------------
(US$ millions) 2005 2006 2007 2008 2009 2010 Total
-------------------------------------------------------------------------
SEM - US $ forward
purchases 36.1 126.9 101.9 86.2 80.6 26.2 457.9
Superior Propane -
US $ forward
purchases 0.6 28.5 - - - - 29.1
ERCO - US $
forward sales (23.2) (103.1) (69.0) (12.6) - - (207.9)
-------------------------------------------------------------------------
Net US $ forward
purchases/(sales) 13.5 52.3 32.9 73.6 80.6 26.2 279.1
-------------------------------------------------------------------------
SEM - Average US $
forward purchase
rate 1.29 1.28 1.24 1.24 1.24 1.19
Superior Propane -
Average US $
forward purchase
rate 1.23 1.18 - - - - -
ERCO - Average
US $ forward
sales rate 1.36 1.29 1.24 1.23
-------------------------------------------------------------------------
Net average
external US$/Cdn$
exchange rate 1.31 1.27 1.24 1.24 1.24 1.19
-------------------------------------------------------------------------
Quarterly Financial and Operating Information(1)
-------------------------------------------------------------------------
(millions of
dollars except 2005 Quarters 2004 Quarters 2003
per trust Quarter
unit amounts) Third Second First Fourth Third Second First Fourth
-------------------------------------------------------------------------
Propane sales
volumes (millions
of litres) 277 286 485 438 290 302 514 467
Chemical sales
volumes (thousands
of metric tonnes) 224 175 164 170 163 161 155 165
Natural gas sales
volumes (millions
of GJs) 9 9 9 7 7 7 7 6
Gross profit 149.6 137.2 163.8 155.2 130.2 116.0 141.4 137.5
Net earnings 24.0 18.9 41.5 33.5 20.8 21.1 37.0 27.1
Per basic trust
unit $0.30 $0.24 $0.54 $0.45 $0.28 $0.29 $0.53 $0.39
Per diluted
trust unit $0.30 $0.24 $0.52 $0.44 $0.27 $0.29 $0.49 $0.40
Distributable
cash flow 33.4 29.9 63.7 55.8 36.7 31.4 60.5 49.6
Per basic trust
unit $0.42 $0.38 $0.83 $0.73 $0.50 $0.44 $0.86 $0.72
Per diluted
trust unit $0.42 $0.38 $0.79 $0.69 $0.49 $0.43 $0.77 $0.68
Net working
capital(2) 96.4 64.3 54.9 97.9 62.9 36.2 (3.8) 36.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Restated to give retroactive effect of change in accounting for
natural gas customer acquisition costs. (See Note 2(b) to the Interim
Consolidated Financial Statements).
(2) Net working capital reflects amounts as at the quarter end and is
comprised of accounts receivable and inventories, less accounts
payable and accrued liabilities.
Acquisition of JW Aluminum Holding Company ("JWA")
On September 29, 2005, Superior agreed to acquire JWA, on a debt free
basis, for a purchase price of US$350 million (approximately $412 million),
subject to certain adjustments. JWA is a manufacturer of specialty, flat
rolled aluminum products, primarily serving the heating, ventilation and air
conditioning ("HVAC"), building and construction and flexible packaging end
use markets in the United States. The acquisition is expected to provide
Superior Plus with further business diversification and an additional platform
for value growth. JWA's business is well established and has fundamentals
consistent with Superior's acquisition criteria and objectives.
The acquisition closed on October 19, 2005, and was financed through the
issue by the Fund of 6,215,000 trust units for gross proceeds of $160 million
and $75 million of 5.85%, 10 year term Debentures, convertible at $31.25 per
trust unit. The remaining acquisition cost was financed through borrowings of
US$145 million on a senior secured, non-revolving, two year term credit
facility from a syndicate of nine banks and borrowings of approximately
US$15 million from existing revolving term bank facilities. After giving
effect to the acquisition of JWA as if it had occurred on September 30, 2005,
senior debt (including off-balance sheet accounts receivable sales program
amounts) would have increased marginally from 1.8 times earnings before
interest, taxes and amortization for the last 12 month period (including
acquisitions on a pro forma basis) to 2.1 times. Including the Fund's
Convertible Debentures, Superior's total leverage ratios at September 30, 2005
would have increased marginally from 2.8 times to 2.9 times. Dominion Bond
Rating Service has confirmed the credit rating of Superior's senior secured
debt at BBB(low) with a stable trend. Standard & Poor's have placed Superior's
BBB- senior secured debt ratings on credit watch with negative implications,
pending the completion of their evaluation of the business risk profile of JWA
and its impact on the overall risk profile of Superior Plus.
The acquisition is expected to be immediately accretive on a per trust
unit basis and the Fund announced that it has raised its monthly cash
distribution by 2.5% to $0.205 per trust unit ($2.46 on an annualized basis),
effective for the November distribution payable on December 15, 2005.
Superior Plus today, has approved the 42 million pound, Phase 2 expansion
of the Russellville facility at an expected cost of US $15 million. The
expansion will target expected growth in the air conditioning fin stock
market. The project is anticipated to be complete by the fourth quarter of
2006 and be accretive to distributable cash flow on a per trust unit basis.
Outlook
For 2005, we anticipate distributable cash flow per trust unit to be
comparable to distributions paid to unitholders.
Increased distributable cash flow is expected from a full year's
contribution from the acquisition of Winroc in June 2004 and Winroc's
subsequent acquisitions of IBS and Leon's, the acquisition of JWA, and ERCO's
acquisition of the Port Edwards chloralkali/potassium facility. Offsetting
this is softer performance at Superior Propane in the second and third
quarters, lower results at SEM and higher corporate and borrowing costs.
Increased distributable cash flow is anticipated to be offset by the dilutive
impact of Debenture conversions and warrants exercised into trust units during
the year.
Over the longer term, the Fund plans to continue its disciplined
diversification strategy by taking advantage of profitable growth
opportunities within each division and to acquire other businesses that have
risk profiles appropriate for an income fund structure. Acquisitions must be
accretive to unitholder distributions and be financed in a manner that
maintains Superior's existing financial strength.
-------------------------------------------------------------------------
Comments on Government Review of Flow Through Entity ("FTE") Tax Issues
The recent announcement by the Government to study tax issues related to
FTE's has created significant uncertainty in the income trust markets and
eroded substantial value of income trusts, including Superior Plus Income
Fund, its investors and the Canadian economy.
On October 20, 2005, Superior Plus issued a News Release in which Mr.
Grant Billing, Executive Chairman, commented on the consultation process on
FTE's being undertaken by the Federal Government's Department of Finance.
Unitholders are encouraged to read the News Release, which is posted on
our website at www.superiorplus.com and take action by contacting your Member
of Parliament: www.canada.gc.ca/directories/direct_e.html or contact the
Minister of Finance, The Honourable Ralph Goodale, Department of Finance
Canada, 140 O'Connor Street, Ottawa, Ontario K1A 0A6. Telephone:
613-996-4743/Fax: 613-996-9790/E-mail: goodale.R(at)parl.gc.ca.
-------------------------------------------------------------------------
Analyst Conference Call: Superior Plus will be conducting a conference
call and webcast for investors, analysts, brokers and media representatives to
discuss the 2005 Third Quarter Results at 10:30 a.m. EST (8:30 a.m. MST) on
Friday, November 4, 2005. Callers may participate by dialing: 1-800-814-4857.
A recording of the call will be available for replay until midnight,
November 11, 2005 by dialing: 877-289-8525 and entering pass code 21156898
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.
SUPERIOR PLUS INCOME FUND
Consolidated Balance Sheets
-------------------------------------------------------------------------
September 30 December 31
(unaudited, millions of dollars) 2005 2004
-------------------------------------------------------------------------
(Restated-
Note 2(b))
Assets
Current Assets
Accounts receivable (Note 4) 185.2 165.0
Inventories 108.9 93.6
-------------------------------------------------------------------------
294.1 258.6
Property, plant and equipment 730.8 741.0
Intangible assets 57.0 49.9
Goodwill 541.2 502.6
-------------------------------------------------------------------------
1,623.1 1,552.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current Liabilities
Accounts payable and accrued liabilities 197.7 160.7
Distributions payable to Unitholders
and Debentureholders 21.1 17.0
-------------------------------------------------------------------------
218.8 177.7
Revolving term bank credits and term loans 353.2 446.2
Convertible unsecured subordinated debentures
(Note 5) 243.1 116.0
Future employee benefits 19.2 18.6
Future income taxes 109.8 121.7
-------------------------------------------------------------------------
Total Liabilities 944.1 880.2
Unitholders' Equity
Unitholders' capital (Note 6) 1,184.2 1,122.0
Retained earnings from operations 346.7 262.3
Accumulated distributions on trust
unit equity (851.0) (711.1)
-------------------------------------------------------------------------
Deficit (504.3) (448.8)
Currency translation account (0.9) (1.3)
-------------------------------------------------------------------------
Total Unitholders' Equity 679.0 671.9
-------------------------------------------------------------------------
1,623.1 1,552.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
SUPERIOR PLUS INCOME FUND
Consolidated Statements of Net Earnings and Deficit
-------------------------------------------------------------------------
Three Months Nine Months
(unaudited, millions of dollars Ended Sept. 30 Ended Sept. 30
except per trust unit amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
(Restated- (Restated-
Note 2(b)) Note 2(b))
Revenues 501.9 401.4 1,474.2 1,087.6
Cost of products sold 352.3 271.2 1,023.6 700.0
-------------------------------------------------------------------------
Gross profit 149.6 130.2 450.6 387.6
-------------------------------------------------------------------------
Expenses
Operating and administrative 93.4 82.8 278.2 226.7
Amortization of property,
plant and equipment 29.1 20.6 65.6 55.1
Amortization of intangible assets 1.3 1.4 4.0 4.2
Interest on revolving term bank
credits and term loans 4.2 3.9 15.1 10.9
Interest on convertible unsecured
subordinated debentures 4.1 3.2 8.1 10.9
Amortization of convertible
debenture issue costs 0.5 0.4 1.1 1.2
Management internalization
costs (Note 7) - - 1.3 2.6
Income tax recovery of Superior (7.0) (2.9) (7.2) (2.9)
-------------------------------------------------------------------------
125.6 109.4 366.2 308.7
-------------------------------------------------------------------------
Net Earnings 24.0 20.8 84.4 78.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit, Beginning of Period (480.9) (414.8) (448.8) (382.1)
Net earnings 24.0 20.8 84.4 78.9
Distributions to Unitholders (47.4) (43.3) (139.9) (134.1)
-------------------------------------------------------------------------
Deficit, End of Period (504.3) (437.3) (504.3) (437.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per trust unit,
basic (Note 6) $0.30 $0.28 $1.09 $1.10
Net earnings per trust unit,
diluted (Note 6) $0.30 $0.27 $1.08 $1.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
SUPERIOR PLUS INCOME FUND
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(unaudited, millions of dollars) 2005 2004 2005 2004
-------------------------------------------------------------------------
(Restated- (Restated-
Note 2(b)) Note 2(b))
Operating Activities
Net earnings 24.0 20.8 84.4 78.9
Items not affecting cash:
Amortization of property, plant
and equipment, intangible assets
and convertible debenture issue
costs 30.9 22.4 70.7 60.5
Amortization of natural gas
customer acquisition
costs (Note 2(b)) 0.6 0.3 1.7 0.8
Trust unit incentive plan
compensation expense (recovery) (3.6) 2.2 (3.3) 1.4
Future income tax recovery of
Superior (10.2) (3.6) (12.2) (5.3)
-------------------------------------------------------------------------
Cash generated from operations
before natural gas customer
acquisition costs and changes
in working capital 41.7 42.1 141.3 136.3
Natural gas customer acquisition
costs capitalized (Note 2(b)) (1.4) (0.9) (4.8) (1.9)
Decrease (increase) in non-cash
operating working capital items (23.4) (16.6) 34.8 31.0
-------------------------------------------------------------------------
Cash flows from operating
activities 16.9 24.6 171.3 165.4
-------------------------------------------------------------------------
Investing Activities
Maintenance capital
expenditures, net (7.7) (5.1) (13.9) (9.5)
Other capital expenditures, net (11.4) (4.5) (21.7) (6.7)
Acquisitions (Note 3) - - (65.8) (104.2)
-------------------------------------------------------------------------
Cash flows from investing
activities (19.1) (9.6) (101.4) (120.4)
-------------------------------------------------------------------------
Financing Activities
Revolving term bank credits
and term loans 42.6 33.8 (101.4) 99.2
Net proceeds from sale of
accounts receivable (7.3) (6.4) (14.0) (20.8)
Distributions to Unitholders (47.4) (43.3) (139.9) (134.1)
Receipt of management
internalization loans
receivable (Note 7) - - 1.3 2.6
Net proceeds from issue of
5.75% Series 1 convertible
unsecured subordinated
debentures (Note 5) 0.1 - 167.6 -
Proceeds from exercise of trust
unit warrants 14.2 0.9 16.5 8.1
-------------------------------------------------------------------------
Cash flows from financing
activities 2.2 (15.0) (69.9) (45.0)
-------------------------------------------------------------------------
Change in Cash - - - -
-------------------------------------------------------------------------
Cash at Beginning and End
of Period - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
Notes to Interim Consolidated Financial Statements
(tabular amounts in Canadian millions of dollars, unless noted otherwise,
except per trust unit amounts)
1. Distributable Cash Flows
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
-------------------------------------------------------------------------
(Note 2(b)) (Note 2(b))
Cash generated from operations
before natural gas customer
acquisition costs and changes
in working capital 41.7 42.1 141.3 136.3
Add: Management internalization
costs (Note 7) - - 1.3 2.6
Less: Amortization of natural gas
customer acquisition costs (0.6) (0.3) (1.7) (0.8)
Maintenance capital
expenditures, net (7.7) (5.1) (13.9) (9.5)
-------------------------------------------------------------------------
Distributable Cash Flow 33.4 36.7 127.0 128.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow per
trust unit, basic (Note 6) $ 0.42 $ 0.50 $ 1.63 $ 1.79
Distributable cash flow per
trust unit, diluted (Note 6) $ 0.42 $ 0.49 $ 1.59 $ 1.70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow of the Superior Plus Income Fund (the "Fund")
available for distribution to its unitholders ("Unitholders"), is equal
to cash generated from operations before natural gas customer acquisition
costs and changes in working capital, less amortization of natural gas
customer acquisition costs and maintenance capital expenditures.
Maintenance capital expenditures are equal to capital expenditures
incurred to sustain the ongoing operating capacity of Superior Plus Inc.
("Superior") and are deducted from the calculation of distributable cash
flow. Acquisitions and other capital expenditures are incurred to expand
the capacity of Superior's operations or to increase its profitability
are excluded from the calculation of distributable cash flow.
Distributable cash flow is the main performance measure used by
management and investors to evaluate Fund and business segment
performance. Readers are cautioned that distributable cash flow is not a
defined performance measure under Canadian generally accepted accounting
principles ("GAAP"), and that distributable cash flow cannot be assured.
The Fund targets to pay out substantially all of its ongoing sustainable
distributable cash flow through regular monthly distributions. The Fund's
calculation of distributable cash flow may differ from similar
calculations used by comparable entities.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited Interim Consolidated Financial Statements have
been prepared according to Canadian GAAP applied on a consistent basis
and include the accounts of the Fund and its wholly owned subsidiary,
Superior Plus Inc. ("Superior"), and Superior's subsidiaries. Certain
information and disclosures included in the annual financial statement
notes have been condensed and updated. The accounting principles applied
are consistent with those as set out in the Fund's annual financial
statements for the year ended December 31, 2004, except for the change in
accounting policy as described below. These financial statements and
notes thereto should be read in conjunction with the Fund's financial
statements for the year ended December 31, 2004. All significant
transactions and balances (including the Shareholder Notes) between the
Fund, Superior and Superior's subsidiaries have been eliminated on
consolidation.
In the opinion of Management, the accompanying unaudited Interim
Consolidated Financial Statements include all adjustments (of a normal
recurring nature) necessary to present fairly the consolidated financial
position of the Fund as at September 30, 2005 and December 31, 2004 and
the consolidated results of its operations for the three and nine month
periods ended September 30, 2005 and 2004.
(b) Change in Accounting Policy
Effective January 1, 2005, the Fund retroactively adopted a new
accounting policy for Superior Energy Management's natural gas customer
acquisition costs. Previously customer acquisition costs were expensed at
the time natural gas deliveries commenced under new contracts. Under the
new policy, customer acquisition costs are capitalized and amortized on a
straight-line basis over the term of the customer contract. This new
policy provides improved matching of up-front contract acquisition costs
with the economic benefits derived from gas sales over the term of the
customer contract. The cumulative effect of the change in policy on the
balance sheet as at December 31, 2004 was to increase intangible assets
by $3.1 million, increase the future income tax liability by $1.1 million
and increase retained earnings from operations by $2.0 million.
For the three months ended September 30, 2004, the effect of the new
policy on distributable cash flow resulted in an increase of $0.6 million
(nine months ended September 30, 2004 - $1.1 million). For the three
months ended September 30, 2004 the effect on the statement on net
earnings was to reduce operating and administrative costs by $0.6 million
(nine months ended September 30, 2004 - $1.1 million) and increase future
income tax expense by $0.2 million (nine months ended September 30, 2004
- $0.4 million), resulting in an increase in net earnings of $0.4 million
(nine months ended September 30, 2004 - $0.7 million). For the three
months ended September 30, 2004 basic and diluted distributable cash flow
per trust unit increased $0.01 to $0.50 and $0.49 per trust unit
respectively (nine months ended September 30, 2004 an increase of $0.02
to $1.79 and $1.70 per trust unit respectively). There was no impact on
basic or diluted net earning per trust unit for the three months ended
September 30, 2004 (nine months ended September 30, 2004 an increase of
$0.01 to $1.10 and $1.08 per trust unit respectively).
(c) Customer Acquisition Costs
Superior Energy Management
Costs incurred to acquire natural gas customer contracts are capitalized
and recorded as intangible assets at the time the cost is incurred. The
costs are recognized into net earnings as an operating and administrative
expense and deducted from distributable cash flow over the term of the
underlying contracts.
(d) Revenue Recognition
Superior Propane
Revenues from sales are generally recognized at the time of delivery, or
when related services are performed. Amounts billed to customers for
shipping and handling are classified as revenues, with the related
shipping and handling costs included in cost of goods sold. Approximately
50% of Superior Propane's revenues are heating related and 50% are
related to economic activities. Propane sales typically peak in the first
quarter when approximately one-third of annual propane sales volumes and
gross profits are generated due to the demand from heating end use
customers. They then decline through the second and third quarters rising
seasonally again in the fourth quarter with heating demand. Similarly,
net working capital levels are typically at seasonally high levels at the
end of the first quarter, and normally decline to seasonally low levels
in the second and third quarters. Net working capital levels are also
significantly influenced by wholesale propane prices.
ERCO Worldwide
Revenues from chemical sales are recognized as products are shipped.
Revenues associated with the construction of chlorine dioxide generators
are recognized using the percentage of completion method based on cost
incurred compared to total estimated cost.
Winroc
Revenue is recognized when the products are delivered to the customer.
Revenue is stated net of discounts and rebates granted. Purchase rebates
are recognized as a reduction of cost of goods sold when the related
performance is completed and the inventory is sold. Vendor rebates that
are contingent upon Winroc completing a specified level of purchases are
recognized as a reduction of cost of goods sold based on a systematic and
rational allocation of the cash consideration to each of the underlying
transactions that results in progress toward earning that rebate or
refund, assuming that the rebate can be reasonably estimated and it is
probable that the specified target will be obtained. Otherwise, the
rebate is recognized as the milestone is achieved and the inventory is
sold.
Winroc's sales typically peak during the second and third quarters with
the seasonal increase in building and remodeling activities. They then
decline through the fourth and first quarters. Similarly, net working
capital levels are typically at seasonally high levels during the second
and third quarter, and normally decline to seasonally low levels in the
fourth and first quarters.
Superior Energy Management
Revenues are recognized as gas is delivered to local natural gas
distribution companies. Costs associated with balancing the amount of gas
used by SEM's customers with the volumes delivered by SEM to the local
distribution companies are recognized as period costs.
3. Acquisitions
The following acquisitions were completed by Superior during 2005 and
2004:
On June 7, 2005, ERCO acquired a chloralkali potassium business in Port
Edwards, Wisconsin for consideration of $22.4 million (the "Port Edwards"
acquisition).
On April 11, 2005, Winroc acquired the shares of Leon's Insulation Inc.
and associated entities (collectively "Leon's"), a distributor of
specialty walls and ceilings construction products for consideration of
$31.7 million of which $28.2 million was paid in cash (net of
$5.3 million in cash acquired). Deferred consideration bears interest at
the prime bank rate and is repayable over a five year period. Additional
consideration of up to $5.0 million is contingently payable over a period
of five years based upon Leon's achieving specified financial targets.
Future payments will be treated as additional consideration as the
amounts become payable, with a corresponding increase to goodwill. The
allocation of the purchase price may be adjusted based on future
contingent payments or if additional information regarding the fair
values of assets and liabilities becomes available.
On February 2, 2005, Superior Propane acquired the business of Foster
Energy Corporation, a wholesale marketer of natural gas liquids, for
consideration of $25.6 million of which $14.6 million was paid in cash
(net of $2.3 million in cash acquired). Deferred consideration is payable
over a five year period and has been recorded at its fair market value of
$10.9 million, calculated by discounting future cash payments. Foster
Energy is now being operated under the trade name Superior Gas Liquids
("SGL").
On June 11, 2004, Superior acquired all of the shares of The Winroc
Corporation, Winroc Supplies Ltd. and Allroc Building Products Ltd.
(collectively "Winroc"), a distributor of specialty walls and ceilings
construction products in North America, for consideration of
$104.2 million.
Using the purchase method for acquisitions, Superior consolidated the
assets and liabilities from the acquisitions and included earnings as of
the closing dates. The consideration for these acquisitions has been
allocated as follows:
2005 2004
-------------------------------------------------------------------------
ERCO's Winroc's Superior
Acqui- Acqui- Propane's Acqui-
sition sition Acqui- Total sition
of Port of sition Acqui- of
Edwards Leon's of SGL sitions Winroc
-------------------------------------------------------------------------
Cash consideration
paid 21.6 28.2 14.6 64.4 103.2
Transaction costs 0.8 0.5 0.1 1.4 1.0
-------------------------------------------------------------------------
Total cash
consideration 22.4 28.7 14.7 65.8 104.2
Deferred
consideration(1) - 3.0 10.9 13.9 -
-------------------------------------------------------------------------
Total consideration 22.4 31.7 25.6 79.7 104.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill - 16.2 22.7 38.9 52.5
Non-compete agreements - 2.0 1.3 3.3 -
Working capital, net 3.2 10.4 1.6 15.2 37.1
Property, plant and
equipment 22.1 3.1 - 25.2 18.2
Other liabilities (2.9) - - (2.9) (3.6)
-------------------------------------------------------------------------
22.4 31.7 25.6 79.7 104.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Deferred consideration are unsecured obligations and have been
included in revolving term bank credits and term loans on the Interim
Consolidated Balance Sheets.
4. Accounts Receivable
Superior sells, with limited recourse, certain trade accounts receivable
on a revolving basis to an entity sponsored by a Canadian chartered bank,
and has accounted for the sale in accordance with the CICA guidelines
relating to transfers of receivables. The accounts receivable are sold at
a discount to face value based on prevailing money market rates. Superior
has retained the servicing responsibility for the accounts receivable
sold and has therefore recognized a servicing liability. The level of
accounts receivable sold under the program fluctuates seasonally with the
level of accounts receivable. At September 30, 2005, net proceeds of
$86.0 million (December 31, 2004 - $100.0 million) had been received.
5. Convertible Unsecured Subordinated Debentures
The Fund has three issues of convertible unsecured subordinated
debentures (the "Debentures") outstanding, denoted as 8% Series 1, 8%
Series 2 and 5.75% Series 1 as follows:
Unamor- Total
8% 8% 5.75% tized Carrying
Series 1 Series 2 Series 1 Discount Value
-------------------------------------------------------------------------
Maturity date July 31, Nov. 1, Dec. 31,
2007 2008 2012
Fixed distribution
rate 8.00% 8.00% 5.75%
Conversion price
per trust unit $ 16.00 $ 20.00 $ 36.00
-------------------------------------------------------------------------
Debentures outstanding
December 31, 2004 13.9 102.6 - (0.5) 116.0
Issuance of 5.75%
Series 1 Debentures
on June 14, 2005 175.0 (3.1) 171.9
Conversion of Debentures
and amortization
of discount (4.9) (40.2) (0.1) 0.4 (44.8)
-------------------------------------------------------------------------
Debentures outstanding
September 30, 2005 9.0 62.4 174.9 (3.2) 243.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quoted market value
September 30, 2005 14.4 80.9 178.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Debentures may be converted into trust units at the option of the
holder at any time prior to maturity and may be redeemed by the Fund in
certain circumstances. The Fund may elect to pay interest and principal
upon maturity or redemption by issuing trust units to a trustee in the
case of interest payments, and to the Debentureholders in the case of
payment of principal. The number of any trust units issued will be
determined based on market prices for the trust units at the time of
issuance.
6. Unitholders' Equity
Authorized
The Fund may issue an unlimited number of trust units. Each trust unit
represents an equal undivided beneficial interest in any distributions
from the Fund and in the net assets in the event of termination or wind-
up of the Fund. All trust units are of the same class with equal rights
and privileges.
Trust Units
(millions) Equity
-------------------------------------------------------------------------
Unitholders' equity, December 31, 2004 (Note 2(b)) 75.9 671.9
Conversion of Debentures - (8% Series 1 -
$4.9 million converted (at) $16 per trust unit,
8% Series 2 - $40.2 million converted (at)
$20 per trust unit, and 5.75% Series 1 -
$0.1 million converted (at) $36 per trust unit) 2.4 44.6
Exercise of warrants 0.8 16.5
Receipt of management internalization loans
receivable - 1.3
Conversion option on 5.75% Series 1 Debentures - 3.1
Trust unit incentive plan compensation recovery - (3.3)
Currency translation adjustment - 0.4
Net earnings - 84.4
Distributions to unitholders - (139.9)
-------------------------------------------------------------------------
Unitholders' equity, September 30, 2005 79.1 679.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unitholders' equity and deficit at September 30, 2005 and December 31,
2004 consists of the following components:
2005 2004
-------------------------------------------------------------------------
Unitholders' equity
Trust unit equity 1,177.5 1,114.5
Conversion feature on warrants and
convertible debentures 4.2 1.6
Contributed surplus 2.5 5.9
-------------------------------------------------------------------------
1,184.2 1,122.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit (Note 2(b))
Retained earnings from operations 346.7 262.3
Accumulated distributions on trust unit equity (851.0) (711.1)
-------------------------------------------------------------------------
(504.3) (448.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At September 30, 2005, the Fund had 2.3 million trust unit warrants
outstanding (December 31, 2004 - 3.1 million), exerciseable at $20 per
trust unit warrant. The trust unit warrants expire May 8, 2008.
The weighted average number of trust units used in the calculation of
basic net earnings per trust unit and distributable cash flow per trust
unit was 79.0 million trust units for the three months ended
September 30, 2005 (2004 - 73.3 million) and 77.7 million for the nine
months ended September 30, 2005 (2004 - 72.0 million). The number of
trust units used in the calculation of diluted net earnings per trust
unit and distributable cash flow per trust unit, was calculated using
83.7 million trust units for the three months ended September 30, 2005
(2004 - 82.8 million) and 83.1 million for the nine months ended
September 30, 2005 (2004 - 82.7 million). The number of trust units used
in the calculation of dilutive net earnings and distributable cash flow
per trust unit for the three months ended September 30, 2005 includes the
dilutive impact of the conversion of Debentures resulting in 3.7 million
trust units (2004 - 8.6 million), the incremental dilutive impact due to
the exercise of warrants 0.8 million trust units (2004 - 0.8 million) and
the incremental dilutive impact of trust unit options of 0.2 million
trust units (2004 - 0.2 million). The number of trust units used in the
calculation of dilutive net earnings and distributable cash flow per
trust unit for the nine months ended September 30, 2004 includes the
dilutive impact of the conversion of Debentures resulting in 4.4 million
trust units (2004 - 9.8 million), the incremental dilutive impact due to
the exercise of warrants 0.8 million trust units (2004 - 0.7 million) and
the incremental dilutive impact of trust unit options 0.2 million trust
units (2004 - 0.2 million).
7. Management Internalization Transaction
On May 8, 2003, Superior completed the internalization of its management
and administration agreements. The internalization process resulted in
the elimination of management incentive and administration fees effective
January 1, 2003. The funds paid to the Manager and Administrator to
terminate the contracts were immediately re-invested into trust units and
warrants.
As part of the internalization transaction, non-interest bearing loans
aggregating to $6.5 million were advanced to the executive officers and
were used to fund the purchase of 0.325 million trust units at $20 per
trust unit. The loans are to be repaid over a four-year period in the
form of annual retention bonuses. The repayment in the second quarter of
2005 was $1.3 million (2004 - $2.6 million). On an aggregate basis
$3.9 million in loans receivable have been repaid. The loans receivable
have not been recorded as an asset by Superior, but have been deducted
directly from equity.
8. Commitments
(i) Superior has entered into long-term forward contracts to buy US
dollars in order to hedge US dollar in-flows of ERCO Worldwide and
US dollar out-flows of SEM and Superior Propane as follows:
Net US $ Purchases Conversion Rate
------------------ ---------------
2005 $13.5 1.31
2006 $52.3 1.27
2007 $32.9 1.24
2008 $73.6 1.24
2009 $80.6 1.24
2010 and thereafter $26.2 1.19
As at September 30, 2005, the net mark-to-market loss on long-term
foreign currency forward contracts was $16.7 million.
(ii) ERCO Worldwide has entered into a long-term agreement with CMPC
Celulosa S.A. ("CMPC"), a division of Empresas S.A. to supply sodium
chlorate to CMPC's three pulp mills in Chile. As part of this
agreement, ERCO Worldwide will construct a sodium chlorate
manufacturing plant adjacent to the CMPC Pacifico Mill at an
estimated total cost of $65 million. The new plant is scheduled to
start-up in mid-2006. Cumulative expenditures to September 30, 2005
were $17.0 million (December 31, 2004 - $1.4 million).
9. Business Segments
Superior operates four distinct business segments; the delivery of
propane and propane related services and accessories operating under the
Superior Propane trade name; the manufacture and sale of chemicals and
related products and services for the pulp and paper and water treatment
industries operating under the ERCO Worldwide trade name; the
distribution of walls and ceilings construction products operating under
the Winroc trade name; and the sale of natural gas under fixed price term
contracts operating under SEM. Superior's corporate office arranges
intersegment foreign exchange contracts from time to time between its
business segments. As a result, in the accompanying tables, the
elimination of intersegment revenues and cost of sales pertaining to
intersegment foreign exchange gains and losses are eliminated under the
Corporate cost column.
For the three
months ended ERCO Total
September 30, Superior World- Corp- Consoli-
2005 Propane wide Winroc SEM orate dated
-------------------------------------------------------------------------
Revenues 175.6 117.5 136.0 73.9 (1.1) 501.9
Cost of products
sold 119.9 61.0 102.0 70.5 (1.1) 352.3
-------------------------------------------------------------------------
Gross Profit 55.7 56.5 34.0 3.4 - 149.6
Expenses
Operating and
administrative 43.6 27.0 21.1 2.9 (1.2) 93.4
Amortization of
property, plant
and equipment 5.2 23.1 0.8 - - 29.1
Amortization of
intangible assets - 1.3 - - - 1.3
Interest on
revolving term
bank credits and
term loans - - - - 4.2 4.2
Interest on
convertible
unsecured
subordinated
debentures - - - - 4.1 4.1
Amortization of
convertible
debenture issue
costs - - - - 0.5 0.5
Income tax expense
(recovery) of
Superior 2.6 2.4 4.4 0.2 (16.6) (7.0)
-------------------------------------------------------------------------
51.4 53.8 26.3 3.1 (9.0) 125.6
-------------------------------------------------------------------------
Net earnings 4.3 2.7 7.7 0.3 9.0 24.0
Add: Amortization of
property, plant
and equipment,
intangible
assets and
convertible
debenture issue
costs 5.2 24.4 0.8 - 0.5 30.9
Future income
tax expense
(recovery) 2.4 0.6 3.6 0.2 (17.0) (10.2)
Trust unit
incentive plan
recovery - - - - (3.6) (3.6)
Less: Maintenance
capital
expenditures,
net (3.3) (2.6) (1.8) - - (7.7)
-------------------------------------------------------------------------
Distributable cash
flow 8.6 25.1 10.3 0.5 (11.1) 33.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three
months ended ERCO Total
September 30, Superior World- Corp- Consoli-
2004 Propane wide Winroc SEM(1) orate dated
-------------------------------------------------------------------------
Revenues 143.4 99.4 107.6 52.8 (1.8) 401.4
Cost of products
sold 87.2 51.0 85.1 49.7 (1.8) 271.2
-------------------------------------------------------------------------
Gross Profit 56.2 48.4 22.5 3.1 - 130.2
Expenses
Operating and
administrative 41.5 22.1 14.2 1.4 3.6 82.8
Amortization of
property, plant
and equipment 5.7 13.7 1.2 - - 20.6
Amortization of
intangible assets - 1.4 - - - 1.4
Interest on
revolving term
bank credits and
term loans - - - - 3.9 3.9
Interest on
convertible
unsecured
subordinated
debentures - - - - 3.2 3.2
Amortization of
deferred
convertible
debenture issue
costs - - - - 0.4 0.4
Income tax expense
(recovery) of
Superior 3.8 4.7 2.5 0.6 (14.5) (2.9)
-------------------------------------------------------------------------
51.0 41.9 17.9 2.0 (3.4) 109.4
-------------------------------------------------------------------------
Net earnings 5.2 6.5 4.6 1.1 3.4 20.8
Add: Amortization of
property, plant
and equipment,
intangible
assets and
convertible
debenture issue
costs 5.7 15.1 1.2 - 0.4 22.4
Future income
tax expense
(recovery) 3.7 4.2 2.1 0.6 (14.2) (3.6)
Trust unit
incentive plan
expense - - - - 2.2 2.2
Less: Maintenance
capital
expenditures,
net (1.3) (2.6) (1.2) - - (5.1)
-------------------------------------------------------------------------
Distributable cash
flow 13.3 23.2 6.7 1.7 (8.2) 36.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Note 2(b)
For the nine
months ended ERCO Total
September 30, Superior World- Corp- Consoli-
2005 Propane wide Winroc SEM orate dated
-------------------------------------------------------------------------
Revenues 593.8 314.5 360.5 208.1 (2.7) 1,474.2
Cost of products
sold 389.3 164.0 275.1 197.9 (2.7) 1,023.6
-------------------------------------------------------------------------
Gross Profit 204.5 150.5 85.4 10.2 - 450.6
Expenses
Operating and
administrative 136.9 74.0 57.3 6.7 3.3 278.2
Amortization of
property, plant
and equipment 15.6 47.8 2.2 - - 65.6
Amortization of
intangible assets - 3.9 0.1 - - 4.0
Interest on
revolving term
bank credits and
term loans - - - - 15.1 15.1
Interest on
convertible
unsecured
subordinated
debentures - - - - 8.1 8.1
Amortization of
convertible
debenture issue
costs - - - - 1.1 1.1
Management
internalization
costs - - - - 1.3 1.3
Income tax expense
(recovery) of
Superior 19.7 9.6 9.4 1.5 (47.4) (7.2)
-------------------------------------------------------------------------
172.2 135.3 69.0 8.2 (18.5) 366.2
-------------------------------------------------------------------------
Net earnings 32.3 15.2 16.4 2.0 18.5 84.4
Add: Amortization
of property,
plant and
equipment,
intangible
assets and
convertible
debenture
issue costs 15.6 51.7 2.3 - 1.1 70.7
Future income
tax expense
(recovery) 19.1 6.6 7.4 1.5 (46.8) (12.2)
Trust unit
incentive plan
recovery - - - - (3.3) (3.3)
Management
internalization
costs - - - - 1.3 1.3
Less: Maintenance
capital
expenditures,
net (4.7) (4.6) (4.6) - - (13.9)
-------------------------------------------------------------------------
Distributable cash
flow 62.3 68.9 21.5 3.5 (29.2) 127.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine
months ended ERCO Total
September 30, Superior World- Winroc Corp- Consoli-
2004 Propane wide (1) SEM(2) orate dated
-------------------------------------------------------------------------
Revenues 508.3 295.3 130.4 155.7 (2.1) 1,087.6
Cost of products
sold 301.9 151.5 103.0 145.7 (2.1) 700.0
-------------------------------------------------------------------------
Gross Profit 206.4 143.8 27.4 10.0 - 387.6
Expenses
Operating and
administrative 130.2 69.9 17.2 4.1 5.3 226.7
Amortization of
property, plant
and equipment 15.2 38.5 1.4 - - 55.1
Amortization of
intangible assets - 4.2 - - - 4.2
Interest on
revolving term
bank credits and
term loans - - - - 10.9 10.9
Interest on
convertible
unsecured
subordinated
debentures - - - - 10.9 10.9
Amortization of
deferred
convertible
debenture issue
costs - - - - 1.2 1.2
Management
internalization
costs - - - - 2.6 2.6
Income tax expense
(recovery) of
Superior 23.5 12.9 2.6 2.2 (44.1) (2.9)
-------------------------------------------------------------------------
168.9 125.5 21.2 6.3 (13.2) 308.7
-------------------------------------------------------------------------
Net earnings 37.5 18.3 6.2 3.7 13.2 78.9
Add: Amortization
of property,
plant and
equipment,
intangible
assets and
convertible
debenture
issue costs 15.2 42.7 1.4 - 1.2 60.5
Future income
tax expense
(recovery) 22.8 11.3 2.1 2.2 (43.7) (5.3)
Trust unit
incentive plan
expense - - - - 1.4 1.4
Management
internalization
costs - - - - 2.6 2.6
Less: Maintenance
capital
expenditures,
net (3.0) (4.9) (1.6) - - (9.5)
-------------------------------------------------------------------------
Distributable cash
flow 72.5 67.4 8.1 5.9 (25.3) 128.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Winroc was acquired June 11, 2004
(2) See Note 2(b)
Total Assets, Net Working Capital, Acquisitions and Other Capital
Expenditures
ERCO Total
Superior World- Corp- Consoli-
Propane wide Winroc SEM(1) orate dated
-------------------------------------------------------------------------
As at September 30,
2005
Net working
capital 48.6 (2.0) 67.0 (11.0) (6.2) 96.4
Total assets 606.0 759.1 207.9 35.9 14.2 1,623.1
-------------------------------------------------------------------------
As at December 31,
2004
Net working
capital 61.3 (8.1) 50.5 (2.3) (3.5) 97.9
Total assets 603.6 754.6 152.9 28.6 12.4 1,552.1
-------------------------------------------------------------------------
For the three months
ended September 30,
2005
Acquisitions - - - - - -
Other capital
expenditures, net 1.7 9.7 - - - 11.4
-------------------------------------------------------------------------
For the three months
ended September 30,
2004
Acquisitions - - - - - -
Other capital
expenditures, net 3.3 1.2 - - - 4.5
-------------------------------------------------------------------------
For the nine months
ended September 30,
2005
Acquisitions 14.7 22.4 28.7 - - 65.8
Other capital
expenditures, net 1.8 19.9 - - - 21.7
-------------------------------------------------------------------------
For the nine months
ended September 30,
2004
Acquisitions - - - - 104.2 104.2
Other capital
expenditures, net 3.7 3.0 - - - 6.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Note 2(b)
Geographic Information Total
United Consoli-
Canada States Other dated
-------------------------------------------------------------------------
Revenues for the three months ended
September 30, 2005 393.1 104.3 4.5 501.9
Revenues for the nine months ended
September 30, 2005 1,189.3 270.9 14.0 1,474.2
Property, plant and equipment as at
September 30, 2005 619.9 93.1 17.8 730.8
Total assets as at
September 30, 2005 1,425.7 179.1 18.3 1,623.1
-------------------------------------------------------------------------
Revenues for the three months ended
September 30, 2004 313.1 84.7 3.6 401.4
Revenues for the nine months ended
September 30, 2004 888.7 178.9 20.0 1,087.6
Property, plant and equipment as at
December 31, 2004 663.2 77.8 - 741.0
Total assets as at
December 31, 2004 (Note 2(b)) 1,402.6 149.5 - 1,552.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. Subsequent Events
On October 19, 2005, Superior acquired the shares of JW Aluminum Holding
Company ("JWA"), a leading manufacturer of specialty flat-rolled aluminum
products in the United States, for cash consideration of approximately
US $350.0 million (approximately CDN $412.0 million) before final
adjustments. The acquisition was partially financed by the sale by the
Fund of 6,215,000 trust units for gross proceeds of $160.0 million and
$75.0 million of 5.85% convertible unsecured subordinated debentures,
repayable on October 31, 2015, convertible at $31.25 per trust unit
providing net proceeds of $223.5 million. The remaining acquisition cost
has been financed through borrowings of US $145 million on a senior
secured, non-revolving, two-year term, acquisition bridge credit facility
from a syndicate of nine banks and from borrowings of approximately
US $15 million from existing revolving term bank facilities.
11. Comparative Figures
Certain reclassifications of prior period amounts have been made to
conform to current period presentations.
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