TSX: SPF.UN
CALGARY, Nov. 8 /CNW/ -
<<
- Q3 Distributable Cash Flow per trust unit before strategic plan costs
was $0.40, a $0.02 decrease from the prior year period.
- Improved performance at Superior Propane, SEM and the addition of JW
Aluminum, was partially offset by lower results from ERCO's North
American sodium chlorate business.
- Progress continues on execution of strategic plan announced on
July 10th.
- November 2006 regular distribution declared of $0.13 per unit or $1.56
annualized.
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Three Months Ended Nine Months Ended
(millions of dollars, except September 30 September 30
per trust unit amounts) 2006 2005 2006 2005
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Financial
Operating distributable cash flow
before strategic plan costs
Superior Propane 10.0 8.6 58.0 62.3
ERCO Worldwide 20.8 25.1 55.7 68.9
Winroc 9.1 10.3 23.9 21.5
Superior Energy Management ("SEM") 2.9 0.5 7.3 3.5
Discontinued operations
- JW Aluminum ("JWA") 11.1 - 30.8 -
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53.9 44.5 175.7 156.2
Corporate costs (2.8) (2.8) (4.0) (6.0)
Interest (17.3) (8.3) (46.9) (23.2)
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Distributable cash flow before
strategic plan costs 33.8 33.4 124.8 127.0
Strategic plan costs (8.5) - (14.4) -
-------------------------------------------------------------------------
Distributable cash flow (see
Management Discussion & Analysis) 25.3 33.4 110.4 127.0
Distributable cash flow per trust
unit (before strategic plan costs),
basic $0.40 $0.42 $1.46 $1.63
Distributable cash flow per trust
unit, basic $0.30 $0.42 $1.29 $1.63
Average number of trust units
outstanding (millions) 85.5 79.0 85.5 77.7
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Operating
Propane retail sales volumes
(millions of litres) 261 277 979 1,048
Propane retail sales margin
(cents per litre) 14.9 15.4 15.3 15.9
Total chemical sales (thousands
of metric tonnes "MT") 190 203 565 538
Average chemical selling price
(dollar per MT) 541 551 536 551
Natural gas sold (millions of
gigajoules "GJ") 11 9 30 27
Natural gas sales margin
(cents per GJ) 52.7 36.2 51.6 37.2
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Q3 Highlights:
- Distributable cash flow per trust unit (before strategic plan costs)
of $0.40, down $0.02 from Q3 last year due to a 1% increase in
distributable cash flow before strategic plan costs offset by an 8%
increase in the average number of trust units outstanding.
- Superior Propane results improved due to increased service fee revenue
and lower maintenance capital spending, partially offset by lower
sales volumes.
- ERCO Worldwide results reflect continued adverse currency impacts,
lower sodium chlorate sales due to weakness in the North American
bleached pulp industry and lower chloralkali product prices.
- Winroc results reflect sales and gross profit improvement in Western
Canada and the United States offset by weaker performance in the
Ontario market.
- SEM's operating results reflect continued profitable growth momentum
in the higher margin residential sector.
- Interest expense increased due to higher interest rates and financing
of 2005 growth capital expenditures.
- Non-cash charges totaling $23.1 million were recorded comprised of a
JWA carrying value impairment charge of $56.3 million after tax
partially offset by a Canadian future income tax recovery of
$33.2 million resulting from the completion of the Fund's "trust over
partnership" internal reorganization.
>>
Cash Distribution Notice
------------------------
The Fund announced today its cash distribution for the month of November
2006 of $0.13 (13 cents) per trust unit, payable on December 15, 2006, to
Unitholders of record at the close of business on November 30, 2006. The
ex-distribution date will be November 28, 2006. For income tax purposes, the
cash distribution of $0.13 per trust unit is expected to be substantially
taxable as "other income" to Unitholders. 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 2006 Third Quarter Results
------------------------------------------------------------------
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 its wholly owned partnership,
Superior Plus LP ("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 and Other Non-GAAP Measures
---------------------------------------------------
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 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. 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.
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. Superior's calculation of EBITDA may
differ from similar calculations used by comparable entities.
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, 2005, and the Fund's First and Second Quarter Reports for
the periods ended March 31, 2006 and June 30, 2006, respectively.
Update on Strategic Plan Implementation
On July 10, 2006, the Fund announced the results of its Strategic Plan
developed to maximize unitholder value and provide a road map for achieving
long-term goals. Superior will continue as a diversified income trust with a
focus on stability of distributions with value growth driven from its existing
businesses. Good progress was achieved towards executing the strategic plan
during the 3rd quarter as follows:
<<
- RBC Capital Markets and TD Securities have been engaged to assist in
the disposition of JW Aluminum ("JWA") in order to focus on our
Canadian based businesses. Proceeds will be used to reduce debt
levels. The sales process is well advanced. Accordingly, JWA's
financial results have been classified as discontinued operations in
the Fund's interim consolidated financial statements effective July 1,
2006.
- On August 8th, Superior and the Fund completed the arrangement of
$250 million of new bank credit facilities which were used to retire
$200 million of Medium Term Notes providing enhanced covenant and debt
repayment flexibility.
- On September 30th, the Fund completed its internal reorganization to a
"trust over partnership" structure which is anticipated to enhance its
future distributable cash flow.
- In October, ERCO Worldwide announced that its Valdosta, Georgia sodium
chlorate facility had been granted access to electricity supply by
Georgia Power pursuant to their industrial interruptible tariff
enabling the Valdosta facility to move forward with its plans to
operate as a swing production facility. Also in October, ERCO
completed the previously announced closure of its Bruderheim, Alberta
sodium chlorate facility.
- Wayne M. Bingham was appointed Executive Vice President and Chief
Financial Officer, effective November 1, 2006.
- Divisional advisory committees of the Fund's Board of Directors have
been formed to provide enhanced focus on the execution of each
business unit's strategic plan.
>>
Third Quarter and Year to Date Results
Third quarter distributable cash flow (before strategic plan costs of
$8.5 million) was $33.8 million ($25.3 million after strategic plan costs), an
increase of $0.4 million over the prior year period. Operating distributable
cash flow increased by $9.4 million due to the contribution from JWA acquired
on October 19, 2005, and improved results from Superior Propane and SEM. This
was partially offset by lower results from ERCO Worldwide. Interest costs
increased by $9.0 million due to increased debt levels incurred to finance
growth capital investments made during 2005, and higher interest rates.
Distributable cash flow per trust unit (before strategic plan costs) was
$0.40 in the third quarter ($0.30 after strategic plan costs), a decrease of
$0.02 (5%) from the prior year quarter due to a 1% increase in distributable
cash flow and an 8% increase in the average number of trust units outstanding.
The increase in the number of trust units outstanding is due to trust units
issued to partially finance the acquisition of JWA and the conversion of
Debentures and Warrants into trust units during 2005.
Distributable cash flow for the nine month period ended September 30,
2006 reached $124.8 million ($110.4 million after strategic plan costs), a
decrease of $2.2 million (2%) from the prior year period. The addition of JWA
and improved results from Winroc and SEM were more than offset by lower
results at Superior Propane reflecting depressed heating demand in the first
quarter due to unseasonably warm weather and challenging conditions
experienced by ERCO's North American sodium chlorate operations. Interest
costs increased for the same reasons as in the third quarter. Distributable
cash flow per trust unit (before strategic plan costs) was $1.46 ($1.29 after
strategic plan costs), down $0.17 per trust unit (10%) from the prior year
period, due to the 2% decrease in distributable cash flow and a 10% increase
in the number of trust units outstanding.
Net earnings for the third quarter were $1.7 million, a decrease of
$22.3 million from the prior year quarter due to a non-cash impairment charge
of $56.3 million net of tax, recorded with respect to the Fund's carrying
value of JWA (See Note 3 to the Interim Consolidated Financial Statements)
partially offset by the recovery of Canadian future income taxes of $33.2
million recorded in connection with the Fund's internal reorganization into a
"trust over partnership" structure (See Note 10 to the Interim Consolidated
Financial Statements). The remaining changes in net earnings (loss) for the
third quarter compared to the prior year quarter are due to similar factors
that contributed to the changes in distributable cash flow. Net loss for the
nine months ended September 30, 2006 was $117.3 million, a reduction in
earnings of $201.7 million from the prior year period. In addition to factors
impacting third quarter earnings, year to date 2006 earnings are lower than
the prior year period principally as a result of the $170.8 million non-cash
charge impairment charge, net of tax, recorded by ERCO Worldwide in the second
quarter (See Note 5 to the Interim Consolidated Financial Statements).
Outlook
For the remainder of 2006, the Fund anticipates distributable cash flow
per trust unit to be lower than 2005 as lower results from ERCO and increased
interest and strategic plan costs are anticipated to outpace a full period
contribution from JWA. Divisional distributable cash flow guidance for 2006
and 2007 is the same as was provided in the July 10, 2006 Strategic Plan
announcement. For the full year 2006, consolidated distributable cash flow
before strategic plan costs is expected to be between $2.00 per trust unit and
$2.15 per trust unit ($1.80 to $1.95 per trust unit after strategic plan
costs).
For 2007, we anticipate distributable cash flow per trust unit to decline
to $1.60 to $1.80 per trust unit as lower results at ERCO and the sale of JWA
are anticipated to be partially offset by lower interest costs and stable to
modestly improved results from Superior's other businesses.
On October 31, 2006, the Government of Canada announced proposed changes
that would result in the taxation of "specified investment flow-throughs",
which includes income trusts. The proposed changes would take effect in 2011.
The Fund has not completed its assessment of the potential implications that
these proposed changes may have.
<<
Distributable Cash Flow(1)
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Three Months Ended Nine Months Ended
September 30 September 30
2006 2005 2006 2005
-------------------------------------------------------------------------
Cash generated from continuing
operations before natural gas
customer acquisition costs and
changes in working capital 19.6 41.7 92.6 141.3
Add: Management internalization
costs - - 1.3 1.3
Distributable cash flow from
discontinued operations
(See "JWA" discussion) 11.1 - 30.8 -
Less: Maintenance capital
expenditures, net (4.5) (7.7) (12.0) (13.9)
Amortization of natural gas
customer acquisition costs (0.9) (0.6) (2.3) (1.7)
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Distributable cash flow 25.3 33.4 110.4 127.0
Strategic plan costs 8.5 - 14.4 -
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Distributable cash flow before
strategic plan costs 33.8 33.4 124.8 127.0
Distributable cash flow 25.3 33.4 110.4 127.0
Distributable cash flow (reinvested)
funded from debt 8.1 14.0 11.9 12.9
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Distributed cash flow 33.4 47.4 122.3 139.9
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Distributable cash flow per trust
unit (before strategic plan costs),
basic(2) $0.40 $0.42 $1.46 $1.63
Distributable cash flow per trust
unit (before strategic plan costs),
diluted(3) $0.40 $0.42 $1.46 $1.59
Distributable cash flow per trust
unit, basic(2) $0.30 $0.42 $1.29 $1.63
Distributable cash flow per trust
unit, diluted(3) $0.30 $0.42 $1.29 $1.59
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(1) See the Interim Consolidated Financial Statements for cash generated
from operations before natural gas customer acquisition costs and
changes in working capital, management internalization costs,
maintenance capital expenditures, and amortization of natural gas
customer acquisition costs.
(2) The weighted average number of trust units outstanding for the
quarter ended September 30, 2006 is 85.5 million (2005 -
79.0 million) and for the nine months ended September 30, 2006 is
85.5 million (2005 - 77.7 million).
(3) For the three months and nine months ended September 30, 2006, there
were no dilutive instruments. For the prior year quarter, the
dilutive impact of the convertible debentures, trust unit options and
trust unit warrants was 4.7 million trust units (83.7 million total
trust units on a diluted basis) with a resulting impact on
distributable cash flow of $1.4 million ($34.8 million total on a
diluted basis). For the prior nine months ended September 30, 2005,
the dilutive impact of the convertible debentures, trust unit options
and trust unit warrants was 5.4 million trust units (83.1 million
total trust units on a diluted basis) with a resulting impact on
distributable cash flow of $5.2 million ($132.2 million total on a
diluted basis).
Segmented Distributable Cash Flow(1)
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Discon-
For the three tinued
months ended Opera- Total
September 30, Superior Corp- tions- Consol-
2006 Propane ERCO Winroc SEM orate JWA(2) idated
-------------------------------------------------------------------------
Net earnings (loss)
from continuing
operations 70.1 94.6 24.3 6.9 (149.0) - 46.9
Add:
Amortization of
property, plant
and equipment,
intangible assets
and convertible
debenture issue
costs 4.6 9.7 0.9 - 0.5 - 15.7
Future income
tax expense
(recovery) (63.6) (85.2) (14.1) (4.2) 123.2 - (43.9)
Distributable
cash from
discontinued
operations - - - - - 11.1 11.1
Less:
Maintenance
capital
expenditures,
net (1.7) (0.8) (2.0) - - - (4.5)
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Distributable
cash flow 9.4 18.3 9.1 2.7 (25.3) 11.1 25.3
Strategic plan
costs 0.6 2.5 - 0.2 5.2 - 8.5
-------------------------------------------------------------------------
Distributable cash
flow before
strategic plan
costs 10.0 20.8 9.1 2.9 (20.1) 11.1 33.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Discon-
For the three tinued
months ended Opera- Total
September 30, Superior Corp- tions- Consol-
2005 Propane ERCO Winroc SEM orate JWA(2) idated
-------------------------------------------------------------------------
Net earnings from
continuing
operations 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)
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Distributable
cash flow 8.6 25.1 10.3 0.5 (11.1) - 33.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Discon-
For the nine tinued
months ended Opera- Total
September 30, Superior Corp- tions- Consol-
2006 Propane ERCO Winroc SEM orate JWA(2) idated
-------------------------------------------------------------------------
Net earnings (loss)
from continuing
operations 94.1 (69.9) 35.7 9.7 (148.9) - (79.3)
Add:
Amortization of
property, plant
and equipment,
intangible assets
and convertible
debenture
issue costs 14.2 39.5 3.0 - 1.7 - 58.4
Future income
tax expense
(recovery) (49.2) (130.7) (8.9) (2.6) 85.1 - (106.3)
Trust unit
incentive plan
recovery - - - - (1.2) - (1.2)
Management
internalization
costs - - - - 1.3 - 1.3
Impairment of
property, plant
and equipment,
and goodwill(3) - 218.7 - - - - 218.7
Distributable cash
from discontinued
operations - - - - - 30.8 30.8
Less:
Maintenance
capital
expenditures,
net (1.7) (4.4) (5.9) - - - (12.0)
-------------------------------------------------------------------------
Distributable
cash flow 57.4 53.2 23.9 7.1 (62.0) 30.8 110.4
Strategic plan
costs 0.6 2.5 - 0.2 11.1 - 14.4
-------------------------------------------------------------------------
Distributable cash
flow before
strategic plan
costs 58.0 55.7 23.9 7.3 (50.9) 30.8 124.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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Discon-
For the nine tinued
months ended Opera- Total
September 30, Superior Corp- tions- Consol-
2005 Propane ERCO Winroc SEM orate JWA(2) idated
-------------------------------------------------------------------------
Net earnings from
continuing
operations 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
-------------------------------------------------------------------------
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(1) See the Interim Consolidated Financial Statements for net earnings
(loss), amortization of property, plant and equipment, intangible
assets and 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, and maintenance capital expenditures.
(2) See Note 3 to the Interim Consolidated Financial Statements.
(3) See Note 5 to the Interim Consolidated Financial Statements.
>>
Superior Propane
Superior Propane generated operating distributable cash flow of
$10.0 million (before strategic plan costs of $0.6 million) in the third
quarter, an increase of $1.4 million from the prior year quarter due to higher
other services gross profit and reduced operating and maintenance capital
expenses, offset by reduced propane gross profits. Condensed operating results
for the three and nine months periods ended September 30, 2006 and 2005 are
provided in the following table:
<<
-------------------------------------------------------------------------
(millions of Three Months Ended Nine Months Ended
dollars except September 30 September 30
per litre
amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
cents/ cents/ cents/ cents/
Gross Profit litre litre litre litre
----- ----- ----- -----
Propane sales 38.8 14.9 42.6 15.4 150.0 15.3 166.8 15.9
Other
services 15.4 5.9 13.1 4.7 44.7 4.6 37.7 3.6
-------------------------------------------------------------------------
Total Gross
Profit 54.2 20.8 55.7 20.1 194.7 19.9 204.5 19.5
Less:
Cash operating,
admin & cash
tax costs (42.5) (16.3) (43.8) (15.8) (135.0) (13.8) (137.5) (13.1)
-------------------------------------------------------------------------
Cash generated
from operations
before changes
in net working
capital 11.7 4.5 11.9 4.3 59.7 6.1 67.0 6.4
Maintenance
capital
expenditures,
net (1.7) (0.7) (3.3) (1.2) (1.7) (0.2) (4.7) (0.4)
-------------------------------------------------------------------------
Operating
distributable
cash flow 10.0 3.8 8.6 3.1 58.0 5.9 62.3 6.0
-------------------------------------------------------------------------
Propane retail
volumes sold
(millions of
litres) 261 277 979 1,048
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Propane sales gross profit of $38.8 million, declined $3.8 million (9%)
from the prior year quarter, as sales volumes declined by 16 million litres
(6%) and sales margins decreased by 0.5 cents per litre (3%). Auto propane
volumes declined by 7 million litres (14%), consistent with decline trends in
this end-use market. Industrial volumes were lower by 7 million litres as
generally soft demand was partially offset by stronger oil patch activity.
Propane sales margins declined principally due to the outsourcing of primary
transportation services following the sale of the Energy Transportation
primary transportation fleet operations in the fourth quarter of 2005. Other
services gross profit was $15.4 million for the third quarter, an increase of
$2.3 million (18%) over the prior year quarter, as an increased contribution
from the Superior Gas Liquids wholesale operations and increased propane
delivery fee income, offset reduced profitability from the 2005/06 fixed-price
heating program as hedging costs increased in the aftermath of the gulf coast
hurricane in the third quarter of 2005. The 2006/07 fixed-price heating
program has been successfully completed and resourced, and is expected to
return to historical profitability commencing in the fourth quarter.
<<
Volume and Gross Profit by End-Use Market Segment
-------------------------------------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
2006 2005 2006 2005
------------------------------ ------------------------------
End-Use Volume Gross Volume Gross Volume Gross Volume Gross
Applications: (1) Profit(2) (1) Profit(2) (1) Profit(2) (1) Profit(2)
----------------------------- ------------------------------
Residential 22 7.1 23 7.2 109 37.3 125 40.7
Commercial 47 9.1 47 9.7 209 40.5 226 43.7
Agricultural 11 1.0 12 1.4 48 4.7 57 6.2
Industrial 137 15.7 144 18.3 494 52.2 502 58.9
Automotive 44 5.9 51 6.0 119 15.3 138 17.3
Other Services - 15.4 - 13.1 - 44.7 - 37.7
----------------------------- ------------------------------
261 54.2 277 55.7 979 194.7 1,048 204.5
------------------------------ ------------------------------
Average Margin(3) 14.9 15.4 15.3 15.9
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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)
Volume and Gross Profit by Region
-------------------------------------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
2006 2005 2006 2005
------------------------------ ------------------------------
Volume Gross Volume Gross Volume Gross Volume Gross
Regions: (1) Profit(2) (1) Profit(2) (1) Profit(2) (1) Profit(2)
----------------------------- ------------------------------
Atlantic 19 6.3 21 6.4 72 22.1 83 23.5
Quebec 44 10.4 49 10.8 165 32.5 181 36.9
Ontario 60 14.2 64 14.4 225 54.6 248 56.7
Sask/Man 28 5.0 27 4.9 127 18.2 142 19.3
AB/NWT 65 9.2 65 10.0 231 36.4 224 36.3
BC/YK 45 9.1 51 9.2 159 30.9 170 31.8
----------------------------- ------------------------------
261 54.2 277 55.7 979 194.7 1,048 204.5
----------------------------- ------------------------------
Average Margin(3) 14.9 15.4 15.3 15.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 $42.5 million,
decreased by $1.3 million (3%) from the prior year quarter, principally due to
the reduction of operating costs associated with the sale of Energy
Transportation and cost reduction initiatives implemented in the first quarter
of 2006. Lower equipment maintenance costs were offset by higher truck fuel
and maintenance costs. Net maintenance capital spending for the quarter
totaled $1.7 million, a $1.6 million reduction from the prior year quarter.
Strategic plan costs of $0.6 million consisted of employee retention costs.
Superior Propane continues to implement its plan for cost reductions,
revenue improvement and customer service enhancement with good progress
achieved in the third quarter. These initiatives, along with a return to a
normal winter weather pattern, are expected to improve results for 2007 with
operating distributable cash flow generated in the range of $95 million to
$100 million compared to between $90 million and $95 million for 2006.
ERCO Worldwide
ERCO Worldwide generated operating distributable cash flow in the third
quarter of $20.8 million (before strategic plan costs of $2.5 million), down
$4.3 million (17%) from the prior year quarter. Sodium chlorate operations
contributed approximately 49% of operating distributable cash flow in the
third quarter compared to 60% in the prior year quarter. Condensed operating
results for the three and nine months ended September 30, 2006 and 2005 are
provided below:
<<
-------------------------------------------------------------------------
(millions of dollars Three Months Ended Nine Months Ended
except per metric September 30 September 30
tonne ("MT") amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
Revenue $ per MT $ per MT $ per MT $ per MT
Chemical 102.6 541 112.1 551 302.7 536 296.5 551
Technology 7.6 40 5.4 27 19.1 33 18.0 33
Cost of Sales
Chemical (55.6) (293) (58.4) (287) (162.2) (287) (154.9) (289)
Technology (5.0) (28) (2.6) (13) (11.9) (21) (9.1) (15)
-------------------------------------------------------------------------
Gross Profit 49.6 260 56.5 278 147.7 261 150.5 280
Less:
Cash operating,
administrative
& tax costs (28.0) (147) (28.8) (141) (87.6) (155) (77.0) (144)
-------------------------------------------------------------------------
Cash generated from
operations before
changes in net
working capital 21.6 113 27.7 137 60.1 106 73.5 136
Maintenance capital
expenditures (0.8) (4) (2.6) (13) (4.4) (7) (4.6) (8)
-------------------------------------------------------------------------
Operating
distributable
cash flow 20.8 109 25.1 124 55.7 99 68.9 128
-------------------------------------------------------------------------
Chemical volumes sold
(thousands of MTs) 190 203(1) 565(1) 538(1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Hydrochloric acid volumes have been restated to reflect a dry basis
of measurement as compared to a wet basis of measurement to reflect
industry practice.
>>
Third quarter gross profit of $49.6 million was comprised of $47.0
million generated from chemical sales and $2.6 million from technology
services. Chemical sales gross profit declined by $6.7 million (12%) from the
prior year quarter due to a 9% decline in sodium chlorate volumes and a 6%
decline in average realized chloralkali prices compared to the prior year
period. Lower sodium chlorate sales volumes reflect the closure of a number of
bleached pulp mills in North America over the past year due to increased, low
cost, offshore production. Realized sodium chlorate prices were comparable to
the prior year period despite a 7% appreciation of the Canadian dollar
relative to the US dollar, net of hedging. Chloralkali prices remained above
historic levels during the third quarter but declined from prior year period
levels which were elevated due to the effects of hurricanes on the Gulf Coast.
Technology gross profit was comparable to the prior year period as reduced
royalty revenue due to normal course royalty license expirations was
substantially offset by increased chlorine dioxide generator project revenue.
Cash operating, administration and tax costs were $28.0 million, down
$0.8 million (3%) from the prior year quarter, due to lower United States
income taxes. Maintenance capital expenditures of $0.8 million were down $1.8
million from the prior year due to timing.
Growth capital expenditures of $12.6 million were incurred in the quarter
and were principally focused on the construction of the new 55,000 tonne
sodium chlorate plant in Chile. The project is now substantially complete at a
cumulative project cost of $69.0 million. Commercial operations and product
deliveries commenced in September. The Chile plant will be closed for
approximately six weeks in the fourth quarter, our contract with CMPC
compensates for this period and is built into our outlook.
On July 10th, Superior announced as part of its strategic plan, that ERCO
would close its 80,000 tonne sodium chlorate plant in Bruderheim, Alberta by
year end due to the impact of high electricity costs, lower realized sodium
chlorate prices resulting from the appreciation of the Canadian dollar on US
dollar denominated sales, and reduced sodium chlorate demand due to the
closure of various bleached pulp mills in North America. The plant ceased
sodium chlorate production in October and the existing fixed price power
supply agreement was transferred to ERCO's Grande Prairie, Alberta sodium
chlorate facility and will provide competitive rates until its expiry in 2017.
Severance costs of $1.7 million were incurred during the third quarter and
have been included in strategic plan costs. Additional costs of $2 million to
$3 million are expected to be incurred over the next two years as the plant is
decommissioned. ERCO also announced on July 10th that it would either mothball
its 100,000 tonne sodium chlorate plant in Valdosta, Georgia or operate it as
a swing production facility, pending the outcome of negotiations to enter into
a new electricity supply agreement effective January 2007, when electricity
costs are expected to materially increase. On October 3rd, ERCO announced that
it had been granted access to electricity supply by Georgia Power pursuant to
their industrial interruptible tariff enabling the Valdosta facility to move
forward with plans to operate as a swing production facility, augmenting its
five remaining lower cost North American chlorate facilities to meet customer
demand. Non-cash impairment charges aggregating $218.7 million ($170.8 million
net of tax) were recorded in the second quarter as a result of the Bruderheim
and Valdosta decisions (See Note 5 to the Interim Consolidated Financial
Statements).
ERCO is continuing to evaluate the economic feasibility of converting its
Port Edwards, Wisconsin potassium/chloralkali facility from a mercury based
process to membrane technology at a cost of approximately US$85 million. The
project is expected to provide significant improvement in process efficiency
and capacity. If the project does not proceed, environmental compliance
expenditures of approximately US$5 million are anticipated to meet government
regulations which become effective January 1, 2007. ERCO has applied for a one
year time extension from the government authorities which it expects to
receive so that it can complete its project evaluation. A project decision is
anticipated by the end of 2006, with expenditures expected to be incurred in
2007 and 2008.
For 2006, we expect ERCO's operating distributable cash flow to be
between $70 million and $75 million and for 2007, between $60 million and
$65 million.
Winroc
Winroc generated operating distributable cash flow of $9.1 million, a
decrease of $1.2 million (12%) from the prior year quarter as sales and gross
profit improvements in Western Canada and the United States were offset by
weaker performance in the Ontario market and cost pressures from wages in
Western Canada. Condensed operating results for the three and nine months
ended September 30, 2006 and 2005 are provided below:
<<
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(millions of dollars) 2006 2005 2006 2005
-------------------------------------------------------------------------
Distribution sales gross profit 32.7 32.9 95.4 82.5
Direct sales gross profit 1.1 1.1 3.5 2.9
-------------------------------------------------------------------------
Gross Profit 33.8 34.0 98.9 85.4
Less: Cash operating, administrative
& cash tax costs (22.7) (21.9) (69.1) (59.3)
-------------------------------------------------------------------------
Cash generated from operations before
changes in net working capital 11.1 12.1 29.8 26.1
Capital expenditures, net (2.0) (1.8) (5.9) (4.6)
-------------------------------------------------------------------------
Operating distributable cash flow 9.1 10.3 23.9 21.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Distribution sales gross profit of $32.7 million in the third quarter was
comparable to the prior year period as an improvement in sales prices offset a
slight decrease in sales volumes. Drywall sales volumes, which are an
indicator of overall sales volumes, decreased by 3% reflecting weaker sales in
Ontario. Cash operating and administrative costs were $0.8 million (4%) higher
than the prior year quarter due to cost pressures experienced at Western
Canada operations and higher operating costs associated with an increase in
the number of distribution locations. Maintenance capital expenditures of
$2.0 million in the quarter were comparable to the prior year period.
Operating distributable cash flow is anticipated to be between
$30.0 million and $35.0 million for 2006 and 2007.
Superior Energy Management ("SEM")
SEM's condensed operating results for the three and nine months ended
September 30, 2006 and 2005 are provided below:
<<
-------------------------------------------------------------------------
(millions of dollars Three Months Ended Nine Months Ended
except per gigajoule September 30 September 30
("GJ") amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
cents cents cents cents
per GJ per GJ per GJ per GJ
------ ------ ------ ------
Gross profit 5.8 52.7 3.4 36.2 15.5 51.6 10.2 37.2
Less: Cash operating,
admin. & selling
costs (2.9) (26.4) (2.9) (30.9) (8.2) (27.3) (6.7) (24.4)
-------------------------------------------------------------------------
Operating distributable
cash flow 2.9 26.3 0.5 5.3 7.3 24.3 3.5 12.8
-------------------------------------------------------------------------
Natural gas sold
(millions of GJs) 11 9 30 27
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
SEM generated operating distributable cash flow reached $2.9 million
(before strategic plan costs of $0.2 million) in the third quarter, an
increase of $2.4 million compared to the prior year quarter. The third quarter
continued SEM's trend of increasing gross profit through growth in contracted
volumes of higher margin residential and small commercial segments which more
than replaced lower margin, floating price sales to commercial/industrial
customers in the prior year quarter. Residential and small commercial customer
volumes comprised approximately 22% of total sales volumes in the third
quarter (2005 third quarter - 13%) and contributed to a 46% increase in gross
profit margins over the prior year period. Operating, administration and
selling costs of $2.9 million were comparable to the prior year quarter due to
higher amortization of customer acquisition costs, customer servicing costs
and overhead costs attributable to the growth in SEM's customer base offset by
non-recurring management reorganization costs incurred in the prior year
period. 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, 2006 was 43 months (September 30, 2005 - 36
months).
Strong growth momentum at attractive margins is anticipated to continue,
resulting in expected operating distributable cash flow of between $10.0
million to $12.0 million in 2006, increasing to $12.0 million to $15.0 million
in 2007.
Discontinued Operations - JW Aluminum
In July, 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 consequence, JWA's financial results have been classified as discontinued
operations in the Fund's Interim Consolidated Financial Statements effective
July 1, 2006. The sales process is well advanced. A non-cash impairment charge
of $56.3 million (net of a $36.8 million tax recovery) has been recorded in
"net loss from discontinued operations" during the third quarter in order to
adjust the carrying value of the Fund's JWA investment to reflect estimated
net proceeds realized from its disposition. See Note 3 to the Fund's Interim
Consolidated Financial Statements for summarized JWA balance sheet, net
earnings (loss) and cash flow information. Condensed operating distributable
cash flow results for the three and nine months ended September 30, 2006 are
provided below:
<<
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2006 2006
-------------------------------------------------------------------------
Cash flows from discontinued operations
before changes in working capital 11.7 32.8
Less: Maintenance capital expenditures, net (0.6) (2.0)
-------------------------------------------------------------------------
Cash flows from discontinued operations 11.1 30.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Operating distributable cash flow was $11.1 million in the third quarter
and $30.8 million year to date, reflecting continued good operating
performance during the third quarter. Gross profit margins improved over year
to date levels due to improved conversion margins and the absence of
manufacturing issues experienced in the first quarter. Production and sales
volumes were consistent with second quarter levels.
For the full year 2006, operating distributable cash flow is anticipated
to be between $39.0 million and $41.0 million.
Corporate
Corporate costs for the third quarter were $2.8 million, comparable to
the prior year quarter.
Interest expense on revolving term bank credits and term loans was $10.2
million (before strategic plan costs of $2.0 million), an increase of $6.0
million from the prior year quarter. Higher interest costs reflect increased
floating interest rates and higher debt levels incurred to finance the JWA
acquisition which was completed in the fourth quarter of 2005. See "Strategic
Plan Costs" and "Liquidity and Capital Resources" discussion for further
details.
Interest on convertible debentures was $5.1 million, an increase of
$1.0 million from the prior year quarter. The increase in convertible
debenture interest expense is the result of the issuance of $75.0 million,
5.85% convertible debentures in October 2005, offset partially by the
conversion of $4.1 million, 8% convertible debentures into 0.3 million trust
units since September 30, 2005.
Cash income and withholding taxes of $1.7 million were incurred with
respect to continuing operations in the United States in the third quarter
(2005 - $2.3 million) and have been charged to the businesses from which the
taxable income was derived. In Canada, cash capital taxes were $0.4 million in
the third quarter (2005 - $0.9 million) due to the elimination of federal
large corporation taxes in 2006. As a result of Superior's conversion to a
trust on partnership structure on September 30, 2006, Superior will not be
subject to Canadian capital and income taxes prospectively as partnership
earnings will be effectively taxed in the hands of the Fund's unitholders.
(See Note 10 to the Interim Consolidated Financial Statements).
Strategic Plan Costs
Costs associated with the implementation of Superior's strategic plan
were $8.5 million in the third quarter ($14.4 million year to date) and were
comprised of the following:
<<
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2006 2006
-------------------------------------------------------------------------
Operating and administrative expenses:
Employee severance and retention $ 2.6 $ 7.9
Partnership reorganization costs 1.5 1.5
ERCO - Bruderheim closure costs 1.7 1.7
Advisory and other 0.7 1.3
Write off of deferred financing costs 2.0 2.0
-------------------------------------------------------------------------
Total Strategic Plan Costs $ 8.5 $14.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Strategic plan costs have increased from our second quarter guidance due
principally to the inclusion of Bruderheim plant closure costs and partnership
reorganization costs.
An estimated $3 million of strategic plan costs are expected to be
incurred in the fourth quarter.
Liquidity and Capital Resources
As at September 30, 2006, revolving term bank credits and term loan
borrowings by Superior totaled $648.0 million (including current portion of
$2.7 million), an increase of $23.2 million from December 31, 2005 levels.
Borrowing levels have increased as a result of year to date growth capital
expenditures of $54.5 million, the $20.1 million seasonal reduction of the
off-balance sheet accounts receivable securitization program and $11.9 million
of year to date distributions paid to unitholders in excess of distributable
cash flow. These increases have been partially offset by seasonal reductions
in net working capital and the non-cash impact of exchange rates on U.S.
dollar denominated debt.
As at September 30, 2006, subordinated convertible debentures issued by
the Fund totaled $313.7 million (including current portion of $8.1 million), a
decrease of $0.6 million from December 31, 2005 due to the conversion of
Series 1 and 2, 8% convertible debentures into trust units.
Consolidated net working capital was $216.5 million as at September 30,
2006, a decrease of $32.7 million from December 31, 2005, due principally to
the $20.1 million seasonal reduction in Superior's off-balance sheet accounts
receivable securitization program which brought the associated accounts
receivable back on to the balance sheet. Superior Propane's net working
capital requirements peak seasonally in the first quarter and then decline in
the second and third quarters before building again in the fall, consistent
with the seasonal demand profile of its heating end-use customers. See Note 13
to the Interim Consolidated Financial Statements for segmented working capital
balances, net of the accounts receivable sales program.
On July 10, 2006, Superior announced as part of its strategic plan that
it had entered into an underwriting agreement to arrange a $150.0 million,
2-year bank credit facility and that the Fund had entered into an agreement to
arrange a $100.0 million, 18-month bank credit facility. The arrangement of
these new credit facilities was completed and has been used in combination
with available committed bank credit facilities to retire the $200.0 million
Medium Term Notes on August 8, 2006, providing enhanced covenant and debt
repayment flexibility. As at September 30, 2006, Superior and the Fund had
available undrawn term bank lines of $238.2 million.
As at September 30, 2006, Superior's senior debt (including off-balance
sheet accounts receivable sales program amounts) was 2.8 times EBITDA for the
last 12 month period on a proforma basis adjusted for the acquisition of JWA,
calculated in accordance with its debt covenants (2.4 times at December 31,
2005). Superior's senior debt covenants restrict its ability to pay
distributions to the Fund's Unitholders if Senior Debt to EBITDA exceeds 3.0
times. If Superior were to borrow from the Fund's $100 million credit
facility, Superior's senior debt to EBITDA ratio would be reduced to 2.4 at
September 30, 2006, providing additional covenant flexibility to pay
distributions. Including the Fund's subordinated convertible debentures, the
Fund's total leverage ratio was 4.0 times compared to 3.5 times at December
31, 2005. Proceeds from the expected sale of JWA will be used to repay debt
and are estimated to reduce average annual senior debt levels to approximately
1.8 times EBITDA and average annual total debt levels to approximately 3.3
times. Upon closing of the JWA sale, the Fund's $100 million credit facility
will be cancelled and Superior's credit facilities will be reduced by 50% of
the amount that net proceeds received from the sale of JWA exceed $300
million.
In response to Superior's strategic review announcement on July 10, 2006,
Standard and Poor's and Dominion Bond Rating Service confirmed their April 24,
2006 ratings, pending the completion of a full credit review. Credit reviews
are expected to be completed in the fourth quarter. On April 24, 2006,
Standard and Poor's confirmed Superior's BBB- secured long-term debt credit
rating, but altered their outlook from stable to negative and Dominion Bond
Rating Service confirmed Superior's secured long-term debt at BBB(low), but
altered their outlook from stable to under review with negative implications.
Unitholders' Capital
The weighted average number of trust units outstanding during the second
quarter was 85.5 million trust units, an increase of 8% (6.5 million trust
units) over the prior year period due to 6.2 million trust units issued to
partially finance the acquisition of JWA in October 2005, and the issue of
trust units as a result of Debenture conversions described previously.
As at September 30, 2006 and December 31, 2005, the following trust
units, and securities convertible into trust units, were outstanding:
<<
-------------------------------------------------------------------------
September 30, 2006 December 31, 2005
Convertible Trust Convertible Trust
(millions) Securities Units Securities Units
-------------------------------------------------------------------------
Trust units outstanding 85.5 85.5
Series 1, 8% Debentures
(convertible at $16 per trust unit) $8.1 0.5 $8.9 0.5
Series 2, 8% Debentures
(convertible at $20 per trust unit) $59.2 3.0 $59.3 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 (at) $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 98.6 98.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
As at September 30, 2006, there were 1,088,500 trust unit options
outstanding (December 31, 2005 - 1,177,000 trust units) with a weighted
average exercise price of $22.68 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
Distributions paid to Unitholders in the third quarter were $33.4 million
or $0.39 per trust unit, compared to $47.4 million or $0.60 per trust unit
paid in the third quarter of 2005. Distributions paid to Unitholders exceeded
distributable cash flow by $8.1 million in the third quarter (2005 Q3 - $14.0
million) resulting in a payout ratio of 132% (2005 Q3 - 142%). Distributable
cash flow declines in the second and third quarters and then increases in the
fourth quarter due to the seasonal profile of Superior Propane's heating
demand.
Distributions paid to Unitholders for the nine months ended September 30,
2006 were $122.3 million or $1.43 per trust unit, compared to $139.9 million
or $1.80 per trust unit for the nine months ended September 30, 2005.
Distributions paid to Unitholders exceeded distributable cash flow by $11.9
million for the nine months ended September 30, 2006 (2005 - $12.9 million)
resulting in a payout ratio of 111% (2005 - 110%). The Fund reduced its
monthly distribution rate from $0.205 per trust unit to $0.185 effective with
the March 2006 distribution and further reduced the distribution to $0.13
effective with the May 2006 distribution. The Fund targets a payout of between
85% to 90% of its distributable cash flow on an ongoing basis.
Foreign Currency Hedging
SEM and Superior Propane contract a portion of their fixed price natural
gas and propane purchases (sales) in US dollars and enter into forward US
dollar purchase contracts to create an effective Canadian dollar fixed price
purchase cost. ERCO Worldwide enters into US dollar forward sales contracts on
an ongoing basis to mitigate the impact of foreign exchange fluctuations on
sales margins on production from its Canadian plants that is sold in US
dollars. Interest expense on Superior's US dollar debt is also used to
mitigate the impact of foreign exchange fluctuations on its US dollar
distributable cash flow. Superior's US dollar debt acts as a balance sheet
hedge against its US dollar net assets. Superior hedges its net US dollar
future cash flows with external third party contracts after first matching
internally SEM's and Superior Propane's forward US dollar purchase (sale)
requirements against ERCO Worldwide's US dollar revenues where possible.
As at September 30, 2006, SEM and Superior Propane had hedged
approximately 100% of their US dollar natural gas and propane purchase (sale)
obligations and ERCO Worldwide had hedged 93%, 72%, and 13% of its estimated
US dollar revenue stream for the remainder of 2006, 2007, and 2008
respectively, as shown in the table below. (See Note 12 to the Interim
Consolidated Financial Statements).
<<
-------------------------------------------------------------------------
(US$ millions) 2006 2007 2008 2009 2010 2011 Total
-------------------------------------------------------------------------
SEM - US $ forward
purchases 36.9 128.3 118.1 111.0 61.8 5.0 461.1
Superior Propane - US $
forward purchases (sales) 15.5 (17.2) - - - - (1.7)
ERCO - US $ forward sales (31.0) (86.6) (15.6) - - - (133.2)
-------------------------------------------------------------------------
Net US $ forward purchases 21.4 24.5 102.5 111.0 61.8 5.0 326.2
-------------------------------------------------------------------------
SEM - Average US $ forward
purchase rate 1.25 1.22 1.22 1.21 1.16 1.11 1.21
Superior Propane - Average
US $ forward rate 1.12 1.12 - - - - 1.12
ERCO - Average US $
forward sales rate 1.26 1.22 1.20 - - - 1.23
-------------------------------------------------------------------------
Net average external US$/
Cdn$ exchange rate 1.23 1.21 1.22 1.21 1.16 1.11 1.21
-------------------------------------------------------------------------
Quarterly Financial and Operating Information
-------------------------------------------------------------------------
(millions of dollars 2006 2005 2004
except per trust Quarters Quarters Quarter
unit amounts) Third Second First Fourth Third Second First Fourth
-------------------------------------------------------------------------
Propane sales volumes
(millions of
litres) 261 270 448 420 277 286 485 438
Chemical sales
volumes (thousands
of metric tonnes) 190 183 192 205 203 170 164 170
Natural gas sales
volumes
(millions of GJs) 11 10 9 9 9 9 9 7
Gross profit 143.5 156.0 186.1 1 85.5 149.6 137.2 163.8 155.2
Asset impairments,
net of tax 56.3 170.8 - - - - - -
Net earnings (loss)
from continuing
operations 46.9 (152.8) 33.8 21.7 24.0 18.9 41.5 33.5
Net earnings (loss) 1.7 (152.8) 33.8 21.7 24.0 18.9 41.5 33.5
Per basic trust unit
from continuing
operations $0.55 ($1.79) $0.40 $0.25 $0.30 $0.24 $0.54 $0.45
Per diluted
trust unit from
continuing
operations $0.55 ($1.79) $0.40 $0.25 $0.30 $0.24 $0.52 $0.44
Per basic trust
unit $0.02 ($1.79) $0.40 $0.25 $0.30 $0.24 $0.54 $0.45
Per diluted trust
unit $0.02 ($1.79) $0.40 $0.25 $0.30 $0.24 $0.52 $0.44
Distributable
cash flow 25.3 28.6 56.5 60.0 33.4 29.9 63.7 55.8
Per basic trust
unit $0.30 $0.33 $0.66 $0.70 $0.42 $0.38 $0.83 $0.74
Per diluted
trust unit $0.30 $0.33 $0.66 $0.67 $0.42 $0.38 $0.79 $0.70
Net working
capital(1) 216.5 293.8 307.4 249.2 96.4 64.3 54.9 97.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net working capital reflects amounts as at the quarter end and is
comprised of accounts receivable and inventories, less accounts
payable and accrued liabilities.
(2) JWA was acquired October 19, 2005. On July 10, 2006 the Fund
announced its intention to sell JWA.
>>
Analyst Conference Call
Superior Plus will be conducting a conference call and webcast for
investors, analysts, brokers and media representatives to discuss the 2006
Third Quarter Results at 9:30 a.m. EST (7:30 a.m. MST) on Thursday, November
9, 2006. To participate in the call, dial: 1-800-814-4890. An archived
recording of the call will be available for replay until midnight, November
16, 2006. To access the recording, dial: 1-877-289-8525 and enter pass code
21203505 followed by the (number sign) 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) 2006 2005
-------------------------------------------------------------------------
Assets
Current Assets
Accounts receivable (Note 6) 221.4 250.4
Inventories 120.8 146.3
Current assets of discontinued operations (Note 3) 153.1 132.8
-------------------------------------------------------------------------
495.3 529.5
Property, plant and equipment (Note 5) 582.3 708.3
Intangible assets 58.8 59.3
Goodwill (Note 5) 451.7 541.3
Future income tax asset (Note 10) 6.3 -
Long term assets of discontinued operations (Note 3) 361.7 489.4
-------------------------------------------------------------------------
1,956.1 2,327.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current Liabilities
Accounts payable and accrued liabilities 219.0 232.4
Distributions and interest payable to Unitholders
and Debentureholders 17.6 25.0
Current portion of term loans and convertible
debentures (Note 7 and 8) 10.8 2.0
Current liabilities of discontinued operations
(Note 3) 59.8 47.9
-------------------------------------------------------------------------
307.2 307.3
Revolving term bank credits and term loans (Note 7) 645.3 622.8
Convertible unsecured subordinated debentures
(Note 8) 305.6 314.3
Future employee benefits 18.8 17.7
Future income tax liability (Note 10) - 100.6
Future income tax liability of discontinued
operations (Note 3) 114.8 162.2
-------------------------------------------------------------------------
Total Liabilities 1,391.7 1,524.9
Unitholders' Equity
Unitholders' capital (Note 9) 1,340.0 1,338.3
Retained earnings from operations 251.1 368.4
Accumulated distributions on trust unit equity (1,025.4) (903.1)
-------------------------------------------------------------------------
Deficit (774.3) (534.7)
Currency translation account (1.3) (0.7)
-------------------------------------------------------------------------
Total Unitholders' Equity 564.4 802.9
-------------------------------------------------------------------------
1,956.1 2,327.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
SUPERIOR PLUS INCOME FUND
Consolidated Statements of Net Earnings (Loss) and Deficit
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
(unaudited, millions of dollars September 30 September 30
except per trust unit amounts) 2006 2005 2006 2005
-------------------------------------------------------------------------
Revenues 531.8 501.9 1,671.5 1,474.2
Cost of products sold 388.3 352.3 1,214.7 1,023.6
-------------------------------------------------------------------------
Gross profit 143.5 149.6 456.8 450.6
-------------------------------------------------------------------------
Expenses
Operating and administrative 105.4 93.4 310.1 278.2
Amortization of property, plant
and equipment 14.0 29.1 52.9 65.6
Amortization of intangible assets 1.2 1.3 3.8 4.0
Interest on revolving term bank
credits and term loans 12.2 4.2 31.7 15.1
Interest on convertible unsecured
subordinated debentures 5.1 4.1 15.2 8.1
Amortization of convertible
debenture issue costs 0.5 0.5 1.7 1.1
Management internalization costs - - 1.3 1.3
Impairment of property, plant and
equipment and goodwill (Note 5) - - 218.7 -
Income tax recovery of Superior
(Note 10) (41.8) (7.0) (99.3) (7.2)
-------------------------------------------------------------------------
96.6 125.6 536.1 366.2
-------------------------------------------------------------------------
Net earnings (loss) from continuing
operations 46.9 24.0 (79.3) 84.4
Net loss from discontinued
operations (Note 3) (45.2) - (38.0) -
-------------------------------------------------------------------------
Net Earning (Loss) 1.7 24.0 (117.3) 84.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit, Beginning of Period (742.6) (480.9) (534.7) (448.8)
Net earnings (loss) 1.7 24.0 (117.3) 84.4
Distributions to Unitholders (33.4) (47.4) (122.3) (139.9)
-------------------------------------------------------------------------
Deficit, End of Period (774.3) (504.3) (774.3) (504.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings (loss) per trust unit
from continuing operations, basic
(Note 11) $0.55 $0.30 ($0.93) $1.09
Net earnings (loss) per trust unit
from continuing operations, diluted
(Note 11) $0.55 $0.30 ($0.93) $1.08
Net (loss) per trust unit from
discontinuing operations, basic
(Note 11) ($0.53) - ($0.44) -
Net (loss) per trust unit from
discontinuing operations, diluted
(Note 11) ($0.53) - ($0.44) -
Net earnings (loss) per trust unit,
basic (Note 11) $0.02 $0.30 ($1.37) $1.09
Net earnings (loss) per trust unit,
diluted (Note 11) $0.02 $0.30 ($1.37) $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) 2006 2005 2006 2005
-------------------------------------------------------------------------
Operating Activities
Net earnings (loss) from continuing
operations 46.9 24.0 (79.3) 84.4
Items not affecting cash:
Amortization of property, plant
and equipment, intangible assets
and convertible debenture issue
costs 15.7 30.9 58.4 70.7
Amortization of natural gas
customer acquisition costs 0.9 0.6 2.3 1.7
Trust unit incentive plan
compensation recovery - (3.6) (1.2) (3.3)
Impairment of property, plant and
equipment and goodwill (Note 5) - - 218.7 -
Future income tax recovery of
Superior (43.9) (10.2) (106.3) (12.2)
-------------------------------------------------------------------------
Cash generated from continuing
operations before natural gas
customer acquisition costs and
changes in working capital 19.6 41.7 92.6 141.3
Natural gas customer acquisition
costs capitalized (2.6) (1.4) (7.0) (4.8)
Decrease (increase) in non-cash
operating working capital items 30.5 (23.4) 52.2 34.8
-------------------------------------------------------------------------
Cash flows from operating activities
of continuing operations 47.5 16.9 137.8 171.3
-------------------------------------------------------------------------
Investing Activities
Maintenance capital expenditures,
net (4.5) (7.7) (12.0) (13.9)
Other capital expenditures, net (12.6) (11.4) (51.2) (21.7)
Acquisitions (Note 4) - - - (65.8)
-------------------------------------------------------------------------
Cash flows from investing activities
of continuing operations (17.1) (19.1) (63.2) (101.4)
-------------------------------------------------------------------------
Financing Activities
Revolving term bank credits and
term loans (Note 7) 138.0 42.6 218.6 (101.4)
Issuance of Medium Term Notes
(Note 7) - - 197.2 -
Repayment of Medium Term Notes
(Note 7) (197.2) - (197.2) -
Repayment of JW Aluminum Company
acquisition credit facility - - (167.8) -
Net proceeds (repayment) of
accounts receivable sales program 44.9 (7.3) (20.1) (14.0)
Net proceeds from issue of 5.75%
Series I convertible unsecured
subordinated debentures (Note 8) - 0.1 - 167.6
Receipt of management
internalization loans receivable - - 1.8 1.3
Proceeds from exercise of trust
unit warrants - 14.2 0.2 16.5
Distributions to Unitholders (33.4) (47.4) (122.3) (139.9)
-------------------------------------------------------------------------
Cash flows from financing activities
of continuing operations (47.7) 2.2 (89.6) (69.9)
-------------------------------------------------------------------------
Net decrease in cash from
continuing operations (17.3) - (15.0) -
Net increase in cash from
discontinued operations (Note 3) 17.3 - 15.0 -
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 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 and include the
accounts of the Superior Plus Income Fund (the "Fund"), its wholly owned
subsidiaries and partnership, 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 interim
financial statements as certain information and disclosures included in
the annual financial statements notes have been condensed or omitted. The
accounting principles applied are consistent with those as set out in the
Fund's annual financial statements for the year ended December 31, 2005.
These interim financial statements and notes thereto should be read in
conjunction with the Fund's financial statements for the year ended
December 31, 2005. All significant transactions and balances between the
Fund, the Fund's subsidiaries, 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, 2006 and December 31, 2005 and
the consolidated results of its operations for the three and nine months
ended September 30, 2006 and 2005.
(b) Business Segments
Superior operates four continuing 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 specialty chemicals and related products and services operating under
the ERCO Worldwide trade name ("ERCO"); 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
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 classified as a discontinued
operations. (See Note 3).
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. Discontinued Operations - 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.
In addition, during the third quarter, the assets and liabilities of JWA
were valued at the lower of cost or estimated net fair value, resulting
in an impairment charge of $56.3 million (net of income tax recovery of
$36.8 million) included in net loss from discontinued operations.
The results of discontinued operations presented in the consolidated
statements of net earnings (loss) were as follows:
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2006 2006
-------------------------------------------------------------------------
Revenue 161.1 463.1
Cost of product sold 144.3 417.5
-------------------------------------------------------------------------
Gross profit 16.8 45.6
-------------------------------------------------------------------------
Operating and administrative 2.0 7.1
Amortization of property, plant,
equipment, and intangibles - 19.1
Impairment of property, plant and equipment,
(net of $36.8 million in taxes) 56.3 56.3
Income tax expense 3.7 1.1
-------------------------------------------------------------------------
Net loss from discontinued operations (45.2) (38.0)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The balance sheet information for the discontinued operations was as
follows:
-------------------------------------------------------------------------
September 30, 2006 December 31, 2005
-------------------------------------------------------------------------
Assets
Accounts receivable 107.0 85.7
Inventories 46.1 47.1
-------------------------------------------------------------------------
153.1 132.8
Property, plant, equipment and
intangibles, net 361.7 489.4
-------------------------------------------------------------------------
514.8 622.2
Liabilities
-------------------------------------------------------------------------
Accounts payable and accrued
liabilities 59.8 47.9
Future income tax liability 114.8 162.2
-------------------------------------------------------------------------
174.6 210.1
-------------------------------------------------------------------------
Net assets of discontinued operations 340.2 412.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cash flows from (used in) discontinued operations were as follows:
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2006 2006
-------------------------------------------------------------------------
Cash flows from discontinued
operations before changes in
working capital 11.7 32.8
Decrease (increase) in non-cash
operating working capital items 6.5 (12.5)
-------------------------------------------------------------------------
Cash flows from discontinued operations 18.2 20.3
-------------------------------------------------------------------------
Maintenance capital expenditures, net (0.6) (2.0)
Other capital expenditures, net (0.3) (3.3)
-------------------------------------------------------------------------
Cash flows used in investing activities (0.9) (5.3)
Cash flows from financing activities - -
-------------------------------------------------------------------------
Cash flows from discontinued operations 17.3 15.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
JWA was acquired on October 19, 2005.
4. Acquisitions
The following acquisitions were completed by Superior in the nine month
period ended September 30, 2005:
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 $14.7 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 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
($0.8 million paid in 2006), and are treated as additional consideration
as the amounts become payable, with a corresponding increase to goodwill.
On June 7, 2005, ERCO acquired a chloralkali potassium business in Port
Edwards, Wisconsin for consideration of $22.4 million (the "Port Edwards"
acquisition).
Using the purchase method of accounting for acquisitions, Superior
consolidated the assets and liabilities from the acquisition and included
earnings as of the closing date. The consideration paid for this
acquisition has been allocated as follows:
-------------------------------------------------------------------------
Superior
ERCO's Winroc's Propane's
Acquisition of Acquisition Acquisition Total
Port Edwards of Leon's of SGL Acquisitions
-------------------------------------------------------------------------
Cash consideration paid 21.6 28.2 14.6 64.4
Transaction costs 0.8 0.5 0.1 1.4
-------------------------------------------------------------------------
Total cash consideration 22.4 28.7 14.7 65.8
Deferred consideration(1) - 3.0 10.9 13.9
-------------------------------------------------------------------------
Total consideration 22.4 31.7 25.6 79.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill - 16.2 22.7 38.9
Non-compete agreements - 2.0 1.3 3.3
Working capital, net 3.2 10.4 1.6 15.2
Property, plant and
equipment 22.1 3.1 - 25.2
Other liabilities (2.9) - - (2.9)
-------------------------------------------------------------------------
22.4 31.7 25.6 79.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Deferred consideration are unsecured obligations and have been
included in revolving term bank credits and term loans on the Interim
Consolidated Balance Sheets.
5. Asset Impairments
Superior determined in 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 the second quarter of
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. ERCO's existing power supply agreement expires at the end of
2006. Based on the status of negotiations for a new power supply
agreement at the end of the second quarter, increased power costs would
require that the plant be temporarily closed until U.S. sodium chlorate
prices improve or the facility will run as a swing production facility
when power prices are favourable.
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.
6. Accounts Receivable
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. At September 30, 2006 proceeds of $79.9 million (December 31,
2005 - $100.0 million) had been received.
7. Revolving Term Bank Credits and Term Loans
Maturity Effective Interest September December
Dates Rates(5) 30 2006 31 2005
-------------------------------------------------------------------------
Revolving term bank
credits(1)
Floating BA rate plus
Bankers Acceptances applicable credit
("BA") 2008 spread 154.5 137.7
LIBOR Loans
(US$266.7 million; Floating LIBOR rate
2005 - US$95.3 million) plus applicable
2008 credit spread 297.5 111.1
-------------------------------------------------------------------------
452.0 248.8
-------------------------------------------------------------------------
Other Debt
Notes payable 2009, Prime 7.4 8.0
2010
Deferred
consideration 2010 Non-interest bearing 9.1 11.3
Mortgage payable
(US$0.9 million;
2005 -
US$0.9 million) 2011 7.53% 1.1 1.1
-------------------------------------------------------------------------
17.6 20.4
-------------------------------------------------------------------------
Senior Secured Notes
JWA acquisition Floating LIBOR rate
credit facility plus applicable - 169.1
(US$145.0 million)(2) 2007 credit spread
Medium Term Notes(3) 2016 5.57% - -
Senior secured notes
subject to floating
interest rates
(US$85.0 million; 2005 - Floating LIBOR rate
US$85.0 million)(4) 2015 plus 1.7% 94.8 99.1
Senior secured notes
subject to fixed
interest rates
(US$75.0 million;
2005 - 2013,
US$75.0 million)(4) 2015 6.65% 83.6 87.4
-------------------------------------------------------------------------
178.4 355.6
-------------------------------------------------------------------------
Total revolving term
bank credits and loans 648.0 624.8
Less current maturities 2.7 2.0
-------------------------------------------------------------------------
Revolving term bank
credits and term loans 645.3 622.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Superior has revolving term bank credit borrowing capacity of $575.0
million. These facilities are secured by a general charge over the
assets of Superior and certain of its subsidiaries. The Fund has
non-revolving term credit borrowing capacity of $100.0 million,
which is secured by a charge over the assets of the Fund. Terms of
the Fund's credit facility require that any borrowings be repaid and
the facility cancelled upon the closing of the JWA sale.
Additionally, Superior's credit facilities will be reduced by 50%
of the amount that net proceeds received from the sale of JWA
exceeds $300.0 million.
(2) On October 19, 2005, Superior Plus US Holdings Inc. entered into a
secured non-revolving term bank facility for US$145.0 million
(Cdn$169.1 million at December 31, 2005) 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.
(3) On March 3, 2006, Superior issued $200.0 million, 5.50% coupon,
Medium Term Notes maturing on March 3, 2016 with an effective yield
to maturity of 5.57%. These facilities are 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.
(4) Senior Secured Notes (the "Notes") totaling US$160.0 million
(Cdn$178.4 million at September 30, 2006) are secured by a general
charge over the assets of Superior and certain of its subsidiaries.
Principal repayments begin in 2009. In conjunction with the issue of
the Notes, Superior swapped US$85.0 million (Cdn$94.8 million at
September 30, 2006) of the fixed rate obligation into a US dollar
floating rate obligation.
(5) The fixed interest rate obligation on $100.0 million of the Fund's
Debentures (see Note 8) was swapped into a floating rate obligation
until July, 2007.
8. Convertible Unsecured Subordinated Debentures
The Fund has issued four series of Debentures denoted as 8% Series 1,
8% Series 2, 5.75% Series 1, and 5.85% Series 1 as follows:
Total
Unamortized Carrying
Series 1 Series 2 Series 1 Series 1 Discount Value
-------------------------------------------------------------------------
July 31, November December October
Maturity date 2007 1, 2008 31, 2012 31, 2015
Fixed
distribution
rate 8.0% 8.0% 5.75% 5.85%
Conversion
price per
trust unit $16.00 $20.00 $36.00 $31.25
-------------------------------------------------------------------------
Debentures
outstanding
December 31,
2005 8.9 59.3 174.9 75.0 (3.8) 314.3
Conversion of
Debentures and
amortization
of discount
during 2006 (0.8) (0.1) - - 0.3 (0.6)
-------------------------------------------------------------------------
Debentures
outstanding
September 30,
2006 8.1 59.2 174.9 75.0 (3.5) 313.7
Current portion
of Debentures
outstanding 8.1 - - - - 8.1
-------------------------------------------------------------------------
Long term portion
of Debentures
outstanding - 59.2 174.9 75.0 (3.5) 305.6
-------------------------------------------------------------------------
Quoted market
value September
30, 2006 8.4 61.6 169.7 72.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2006, $8.1 million of Series 1, 8% Debentures due
July 31, 2007, have been included in the current portion of terms loans
and convertible debentures.
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.
9. 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, 2005 85.5 802.9
Conversion of Debentures -
(8% Series 1 - $0.8 million converted
at $16 per trust unit
8% Series 2 - $0.1 million converted
at $20 per trust unit) (Note 8) - 0.9
Exercise of trust unit warrants - 0.2
Trust unit incentive plan compensation recovery - (1.2)
Currency translation adjustment - (0.6)
Receipt of management internalization
loans receivable - 1.8
Net loss - (117.3)
Distributions to unitholders - (122.3)
-------------------------------------------------------------------------
Unitholders' equity, September 30, 2006 85.5 564.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unitholders' capital and deficit as at September 30, 2006 and December
31, 2005 consists of the following components:
2006 2005
-------------------------------------------------------------------------
Unitholders' capital
Trust unit equity 1,335.2 1,332.3
Conversion feature on warrants
and convertible debentures 4.8 4.8
Contributed surplus - 1.2
-------------------------------------------------------------------------
1,340.0 1,338.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit
Retained earnings from operations 251.1 368.4
Accumulated distributions on trust unit equity (1,025.4) (903.1)
-------------------------------------------------------------------------
(774.3) (534.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At September 30, 2006, the Fund had 2.3 million trust unit warrants
outstanding (2005 - 2.3 million), exercisable at $20 per trust unit
warrant. The trust unit warrants expire May 8, 2008.
10. Future Income Taxes
Effective September 30, 2006, Superior completed an internal
reorganization to a "trust over partnership structure" such that the
business operations previously carried on by Superior Plus Inc. and its
related subsidiaries are now conducted by Superior Plus LP, a limited
partnership between Superior Plus Inc. as general partner and the Fund as
limited partner, and its related subsidiaries. As a result of the
reorganization, the income of Superior's Canadian operations is
effectively taxed in the hands of the Funds Unitholders. Accordingly, the
Trust no longer recognizes future Canadian corporate income taxes or
liabilities on temporary differences. For the three month period ended
September 30, 2006, the income tax recovery of Superior was $41.8 million
and was comprised of $33.2 million of Canadian future income tax
liabilities which were reversed upon formation of the partnership and
$8.6 million of income tax recoveries with respect to continuing
operations of Superior.
11. Net Earnings (Loss) per Trust Unit
Three Months Ended Nine Months Ended
September 30 September 30
2006 2005 2006 2005
-------------------------------------------------------------------------
Net earnings (loss) per trust
unit computation, basic
Net earnings (loss) from
continuing operations 46.9 24.0 (79.3) 84.4
Net loss from discontinued
operations (45.2) - (38.0) -
-------------------------------------------------------------------------
Net earnings (loss) 1.7 24.0 (117.3) 84.4
Weighted average trust units
outstanding 85.5 79.0 85.5 77.7
-------------------------------------------------------------------------
Net earnings (loss) from
continuing operations per
trust unit, basic $0.55 $0.30 ($0.93) $1.09
Net loss from discontinued
operations per trust unit,
basic ($0.53) - ($0.44) -
Net earnings (loss) per trust unit,
basic $0.02 $0.30 ($1.37) $1.09
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings (loss) per trust unit
computation, diluted
-------------------------------------------------------------------------
Net earnings (loss) 11.3 24.0 (107.7) 84.4
Dilutive effect of Debentures - 1.4 - 5.2
-------------------------------------------------------------------------
Net earnings (loss), assuming
dilution 11.3 25.4 (107.7) 89.6
-------------------------------------------------------------------------
Weighted average trust units
outstanding 85.5 79.0 85.5 77.7
Dilutive effect of:
Debentures - 3.7 - 4.4
Trust unit options - 0.8 - 0.8
Trust unit warrants - 0.2 - 0.2
-------------------------------------------------------------------------
Weighted average trust units
outstanding, assuming dilution 85.5 83.7 85.5 83.1
-------------------------------------------------------------------------
Net earnings (loss) from
continuing operations per
trust unit, diluted $0.55 $0.30 ($0.93) $1.08
Net loss from discontinued
operations per trust unit,
diluted ($0.53) - ($0.44) -
Net earnings (loss) per
trust unit, diluted $0.02 $0.30 ($1.37) $1.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Trust unit options and warrants whose exercise price was greater than the
market price and Debentures that were anti-dilutive were excluded from
this calculation.
12. Commitments
As at September 30, 2006, Superior has entered into long-term forward
contracts to purchase US dollars in order to hedge US dollar out-flows of
SEM, in-flows of ERCO Worldwide and in-flows and out-flows of Superior
Propane as follows:
Net US $ Average
Purchases Conversion Rate
--------------- ---------------
2006 21.4 1.23
2007 24.5 1.21
2008 102.5 1.22
2009 111.0 1.21
2010 61.8 1.16
2011 and thereafter 5.0 1.11
As at September 30, 2006, the net mark-to-market loss on long-term
foreign currency forward contracts was $31.2 million.
13. Business Segments
Superior operates four continuing 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 specialty chemicals and related products and services operating under
the ERCO Worldwide trade name ("ERCO"); 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
the Superior Energy Management trade name ("SEM"). JW Aluminum Company
("JWA" or "JW Aluminum"), a manufacturer of specialty flat-rolled
aluminum products, has been classified as discontinued operations. (See
Note 3). 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 Total
September 30, Superior Corpo- Consoli-
2006 Propane ERCO Winroc SEM rate dated
-------------------------------------------------------------------------
Revenues 199.4 110.3 135.6 87.4 (0.9) 531.8
Cost of products
sold 145.2 60.6 101.8 81.6 (0.9) 388.3
-------------------------------------------------------------------------
Gross profit 54.2 49.7 33.8 5.8 - 143.5
Expenses
Operating and
administrative 42.9 29.6 22.1 3.1 7.7 105.4
Amortization of
property, plant
and equipment 4.6 8.5 0.9 - - 14.0
Amortization of
intangible assets - 1.2 - - - 1.2
Interest on revolving
term bank credits
and term loans - - - - 12.2 12.2
Interest on
convertible
unsecured
subordinated
debentures - - - - 5.1 5.1
Amortization of
convertible
debenture issue
costs - - - - 0.5 0.5
Income tax expense
(recovery) of
Superior (63.4) (84.2) (13.5) (4.2) 123.5 (41.8)
-------------------------------------------------------------------------
(15.9) (44.9) 9.5 (1.1) 149.0 96.6
-------------------------------------------------------------------------
Net earnings (loss)
from continuing
operations 70.1 94.6 24.3 6.9 (149.0) 46.9
Net loss from
discontinued
operations
(Note 3) (45.2)
-------------------------------------------------------------------------
Net Earnings 1.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three
months ended Total
September 30, Superior Corpo- Consoli-
2005 Propane ERCO Winroc SEM rate 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 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 from
continuing
operations 4.3 2.7 7.7 0.3 9.0 24.0
Net earnings (loss)
from discontinued
operations (Note 3) -
-------------------------------------------------------------------------
Net Earnings 24.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine
months ended Total
September 30, Superior Corpo- Consoli-
2006 Propane ERCO Winroc SEM rate dated
-------------------------------------------------------------------------
Revenues 705.5 321.8 399.9 246.8 (2.5) 1,671.5
Cost of products
sold 510.8 174.1 301.0 231.3 (2.5) 1,214.7
-------------------------------------------------------------------------
Gross profit 194.7 147.7 98.9 15.5 - 456.8
Expenses
Operating and
administrative 134.9 87.1 66.5 8.4 13.2 310.1
Amortization of
property, plant
and equipment 14.2 35.9 2.8 - - 52.9
Amortization of
intangible assets - 3.6 0.2 - - 3.8
Interest on
revolving term
bank credits
and term loans - - - - 31.7 31.7
Interest on
convertible
unsecured
subordinated
debentures - - - - 15.2 15.2
Amortization of
convertible
debenture issue
costs - - - - 1.7 1.7
Management
internalization
costs - - - - 1.3 1.3
Impairment of
property, plant,
and equipment
and goodwill - 218.7 - - - 218.7
Income tax expense
(recovery) of
Superior (48.5) (127.7) (6.3) (2.6) 85.8 (99.3)
-------------------------------------------------------------------------
100.6 217.6 63.2 5.8 148.9 536.1
-------------------------------------------------------------------------
Net earnings (loss)
from continuing
operations 94.1 (69.9) 35.7 9.7 (148.9) (79.3)
Net loss from
discontinued
operations (Note 3) (38.0)
-------------------------------------------------------------------------
Net Loss (117.3)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine
months ended Total
September 30, Superior Corpo- Consoli-
2005 Propane ERCO Winroc SEM rate 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 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 from
continuing
operations 32.3 15.2 16.4 2.0 18.5 84.4
Net earnings (loss)
from discontinued
operations (Note 3) -
-------------------------------------------------------------------------
Net Earnings 84.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Assets, Net Working Capital, Acquisitions and Other Capital
Expenditures
Discontinued Total
Superior Corpo- Operations Consol-
Propane ERCO Winroc SEM rate (Note 3) idated
-------------------------------------------------------------------------
As at September 30,
2006
Net working
capital 44.5 23.9 61.9 - (7.1) 93.3 216.5
Total assets 612.5 563.4 202.6 45.8 17.0 514.8 1,956.1
-------------------------------------------------------------------------
As at December 31,
2005
Net working
capital 101.8 (3.1) 64.1 (8.3) 9.8 84.9 249.2
Total assets 695.2 738.8 194.8 42.9 33.9 622.2 2,327.8
-------------------------------------------------------------------------
For the three
months ended
September 30, 2006
Acquisitions - - - - - - -
Other capital
expenditures,
net - 12.6 - - - 0.3 12.9
-------------------------------------------------------------------------
For the three
months ended
September 30, 2005
Acquisitions - - - - - - -
Other capital
expenditures,
net 1.7 9.7 - - - - 11.4
-------------------------------------------------------------------------
For the nine
months ended
September 30, 2006
Acquisitions - - - - - - -
Other capital
expenditures,
net - 49.6 1.6 - - 3.3 54.5
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Geographic Information Discontinued Total
United Operations Consoli-
Canada States Other (Note 3) dated
-------------------------------------------------------------------------
Revenues for the
three months ended
September 30, 2006 419.3 99.7 12.8 61.1 692.9
Revenues for the
nine months ended
September 30, 2006 1,341.2 301.1 29.2 463.1 2,134.6
Property, plant and
equipment as at
September 30, 2006 489.5 30.3 62.5 334.4 916.7
Total assets as at
September 30, 2006 1,238.4 118.2 84.7 514.8 1,956.1
-------------------------------------------------------------------------
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
December 31, 2005 591.8 92.4 24.1 459.3 1,167.6
Total assets as at
December 31, 2005 1,472.7 199.5 33.4 622.2 2,327.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
14. Subsequent Event
On October 31, 2006, the Government of Canada announced proposed changes
that would result in the taxation of "specified investment flow-
throughs", which includes income trusts. The proposed changes would take
effect in 2011. The Fund has not completed its assessment of the
potential implications that these proposed changes may have.
On November 8, 2006, Superior entered into an agreement to sell JWA for
estimated proceeds of US $310.0 million. The sale is anticipated to close
on or before December 31, 2006.
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