TSX: SPF.UN
CALGARY, March 8 /CNW/ -
- Q4 Distributable Cash Flow per trust unit declined 5% from the prior
year period.
- Business diversification advanced with the $405 million acquisition
of JW Aluminum ("JWA") on October 19, a leading manufacturer of
specialty flat-rolled aluminum products.
- $200 million, 5.50% 10 year senior secured debentures issued on
March 3, strengthening the balance sheet and diversifying credit
sources.
- March 2006 distribution reduced to $0.185 per trust unit ($2.22
annualized) due to challenging business conditions.
<<
-------------------------------------------------------------------------
Three Months Ended Years Ended
(millions of dollars, except per December 31 December 31
trust unit amounts) 2005 2004(1) 2005 2004(1)
-------------------------------------------------------------------------
Financial
Operating distributable cash flow
Superior Propane 31.9 33.5 94.2 106.0
ERCO Worldwide 24.2 23.9 93.1 91.3
JW Aluminum 8.6 - 8.6 -
Winroc 8.7 6.3 30.2 14.4
Superior Energy Management 1.8 1.8 5.3 7.7
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75.2 65.5 231.4 219.4
Corporate costs (2.7) (2.4) (8.7) (5.9)
Interest (12.5) (7.3) (35.7) (29.1)
-------------------------------------------------------------------------
Distributable cash flow (see
Note 1 to the Interim Consolidated
Financial Statements) 60.0 55.8 187.0 184.4
Distributable cash flow per trust
unit, basic $0.70 $0.74 $2.35 $2.54
Distributable cash flow per trust
unit, diluted $0.67 $0.70 $2.27 $2.40
Average number of trust units
outstanding (millions) 85.4 75.0 79.7 72.7
-------------------------------------------------------------------------
Operating
Propane retail sales volumes
(millions of litres) 420 438 1,468 1,544
Propane retail sales margin
(cents per litre) 15.5 15.1 15.8 15.7
Total chemical sales (thousands
of metric tonnes "MT") 225 170 787 649
Average chemical selling price
(dollars per MT) 496 566 519 571
Aluminum sales (millions of
pounds) 71 - 71 -
Aluminum gross profit per pound
sales (cents per pound) 17.5 - 17.5 -
Gigajoules ("GJ") of natural gas
sold (millions) 9 7 37 28
Natural gas sales margin (cents
per GJ) 47.8 48.9 39.2 47.9
-------------------------------------------------------------------------
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(1) Restated to give retroactive effect to change in accounting for
natural gas customer acquisition costs. (See Note 2(b) to the Interim
Consolidated Financial Statements).
Q4 Highlights:
- Distributable cash flow per trust unit of $0.70, down 5% from Q4 last
year as an 8% increase in distributable cash flow was more than
offset by a 14% increase in the average number of trust units
outstanding.
- Superior Propane results impacted by weather, equipment maintenance
and fuel costs, partially offset by maintenance capital recoveries.
- ERCO Worldwide results continue to benefit from Port Edwards
chloralkali/potassium operations acquired in June 2005.
- JW Aluminum contributes $8.6 million since being acquired on
October 19, 2005 consistent with acquisition assumptions.
- Winroc results benefit from the expansion of its distribution network
into the Ontario market during the first half of 2005.
- Interest expense increased due to financing of growth capital
expenditures and higher interest rates.
- Increase in trust units outstanding due to JW Aluminum acquisition
financing combined with conversion of debentures and warrants earlier
in 2005.
Management's Letter to Unitholders
2005 Highlights
- Soft results from Superior Propane and Superior Energy Management
outpaced growth achieved by ERCO Worldwide and Winroc
- Growth capital investments of over $500 million made to acquire JW
Aluminum and expand existing businesses, advanced platform for
profitable growth and diversification
- Rapid rise and volatility of energy costs require repositioning of
some of our businesses
- Expanded management capabilities to support long-term profitability
and growth
For Superior Plus, 2005 was a year of achievements and challenges. We
made substantial growth capital investments, expanded our business platforms
and added management depth to position Superior Plus for long-term
profitability and growth. At the same time, the rapid rise in energy prices,
warm weather and the strengthening of the Canadian dollar and resulting
impacts on our customers have negatively affected the results of some of our
businesses. In response to these new realities, we are adapting our strategies
to improve the operating performance of these businesses.
While distributable cash flow grew modestly to $187.0 million compared to
$184.4 million generated in 2004, distributable cash flow per trust unit
decreased 7% to $2.35 compared to $2.54 generated on a comparable basis in
2004. This reduction reflected weaker business performance from certain of our
businesses and dilution resulting from the conversion of debentures and
warrants throughout the year.
Results from Operations
Superior Propane contributed $94.2 million in operating distributable
cash flow in 2005, compared to $106.0 million in 2004. The results were
negatively impacted by the rapid rise and high volatility of crude oil,
natural gas, and propane prices over the last two years, coupled with warm
weather across Canada. These conditions have continued into 2006. An increased
focus on customer service and retention programs is expected to result in
long-term benefits, but caused the cost structure to increase in 2005. Due to
these changing business conditions, a business review commenced in late 2005
to right-size the propane retailing business. As part of the review, John
Gleason, who joined Superior Plus in April 2005 as Senior Vice-President,
Corporate Development, took over the leadership of Superior Propane as
president in January 2006. Under his leadership, the team continues to focus
on customer service to increase revenues while decreasing the cost structure
to position its product and service offerings for future growth.
To achieve greater purchasing scale and improve its operational
efficiency, Superior Propane acquired Superior Gas Liquids ("SGL") in
February, 2005 for $25.6 million. SGL is a natural gas liquids wholesale
marketer, providing transportation, storage, risk management, supply and
logistics services in Canada and the United States. The acquisition of SGL is
expected to further enhance Superior Propane's supply and logistics
competencies and increase other service revenues.
Although the propane business in Canada is mature, it continues to
provide a solid foundation for stable returns. We are confident that under
John's leadership, we can profitably grow the propane retailing business going
forward.
ERCO Worldwide, our specialty chemicals business, delivered solid results
in 2005, contributing $93.1 million in operating distributable cash flow,
compared to $91.3 million in 2004. This strong performance was fuelled by the
benefits of ERCO's acquisition of the chloralkali/potassium facility in Port
Edwards, Wisconsin in June 2005 for $22.4 million.
The combination of the rising Canadian dollar, high energy and fibre
costs has resulted in several bleached pulp plant closures and continues to
have an impact on our North American pulp customer base. In response, ERCO
announced the shut-down of its high-cost plant in Thunder Bay, Ontario,
resourcing production from its remaining network of seven lower-cost sodium
chlorate plants and continues to review opportunities to reposition its sodium
chlorate operations in the face of further declines in customer demand.
ERCO Worldwide strengthened its leadership team and advanced its
diversification strategy by expanding into potassium products and leveraging
its Western Canadian chloralkali production and sales capabilities, which now
comprises 29% of its overall cash flow. Expansion of its sodium chlorate
business internationally continues with the construction of ERCO's 55,000
tonne capacity sodium chlorate facility in Chile, scheduled to come on stream
in mid-2006. ERCO is well positioned to take advantage of opportunities in the
growing Asian and South American markets.
Winroc, our walls and ceilings construction product distribution
business, contributed record operating distributable cash flow of
$30.2 million in 2005. This was the first full-year contribution since its
acquisition by Superior Plus in June 2004. Winroc established a leading market
presence in Ontario with the acquisition of Interior Business Supplies in
December 2004, followed by the acquisition of Leon's Insulation in April 2005
for $31.7 million. In addition, Winroc expanded its product line and opened
four new branches in fast-growing areas such as Fort McMurray, Alberta, and
suburban Salt Lake City, Utah. Winroc's profitability is expected to continue
to increase due to the growth of its existing distribution operations and its
expansion into Ontario. Residential construction rates are expected to
moderate while commercial construction demand is anticipated to increase and
remodelling demand trends remains strong. Under strong management, Winroc is
well positioned to become a leading competitor in the North American specialty
building products market.
Superior Energy Management (SEM), our fixed-price natural gas retailing
business, contributed $5.3 million of operating distributable cash flow, a
decrease of $2.4 million from 2004. The rapid rise in natural gas prices
prompted high-volume commercial customers to select lower margin floating
index prices. As a result, SEM has increased its focus on growing the
residential market, and has built a solid foundation for future growth. During
the 2005 third quarter, Greg McCamus became President of SEM. His focus is on
the continued profitable growth of the business.
A New Platform for Stability and Growth
In October 2005, Superior Plus acquired JW Aluminum (JWA), a manufacturer
of specialty flat-rolled aluminum products, headquartered in Mount Holly,
South Carolina for $405 million. The acquisition of JWA adds another strong
business platform and management team to create long-term value growth for
Superior Plus. Over its 25 years of operations, JWA has developed a reputation
as a premier supplier, providing quality customer service, products, and
advanced in-house product development. JWA eliminates direct aluminum
commodity price risk by charging customers the cost of primary aluminum plus a
conversion fee. This has resulted in consistent growth in profits. In November
2005, the Board approved a US $15 million Phase II expansion of JWA's
Russellville, Arkansas facility to support increased 2006 fin stock and
converter foil demand. The 42 million pound Russellville expansion will bring
annual capacity to over 400 million pounds across JWA's three manufacturing
facilities.
Strength Through Diversification
Our diversification strategy continued to be successful in 2005 in
reducing our overall business risk, as no single business contributes more
than 35% to distributable cash flow after giving full year effect to the
acquisition of JWA. Growth capital investments exceeding $500 million, are
expected to be accretive to unitholder distributions in 2006 and beyond.
Strong Financial Position
During 2005, Superior Plus financed its growth by accessing public
markets. In June, we issued $175 million of 5.75% convertible debentures. In
October, we issued 6.2 million trust units priced at $25.75 and $75 million of
5.85% convertible debentures, raising a total of $410 million. Additionally,
the conversion of $48 million debentures and $17 million proceeds received
from the exercise of trust unit warrants, further strengthened our balance
sheet. On March 3, 2006, we completed a 10 year, $200 million 5.50% senior
secured debt issue in the Canadian public bond market. Proceeds will be used
to repay the US$145 million JW Aluminum acquisition credit facility and other
revolving bank debt.
Management Capabilities
During 2005, significant effort was directed towards expanding and
strengthening our management capabilities to provide the necessary leadership
and experience to adjust our strategies to changes in our business environment
and to provide for succession. Superior Propane added one finance and three
operating officers. Its management team now consists of seven experienced
officers led by John Gleason. ERCO added three officers to its skilled team,
guided by Paul Timmons. Winroc, led by Paul Vanderberg, augmented its team to
support the growth of its business. SEM, under the leadership of Greg McCamus,
is currently expanding its management team. To support the growth and
complexity of our businesses, we added three officers at the corporate level.
In addition, the Board of Directors has extended the employment agreement of
the President and CEO to 2009 and the Executive Chairman will move to the role
of the Chairman of the Board. Equipped with strong management capabilities, we
approach the future with confidence.
Distributions
In November, the Fund increased its cash distribution by 2.5% to $0.205
per month, or $2.46 on an annualized basis, reflecting accretion from the
acquisition of JWA. Distributions of $2.41 per trust unit paid in 2005
resulted in a payout ratio of 103%, due to soft performance from Superior
Propane and ERCO Worldwide's sodium chlorate business in the fourth quarter.
Steps are being taken to reposition certain of our businesses in response to
the changing business environment and are expected to improve distributable
cash flow per unit as these initiatives are implemented. However, in light of
the negative impact that record warm temperatures experienced across Canada in
January and February are having on Superior Propane's 2006 results and
continuing difficulties faced by North American pulp producers, it was
considered prudent to reduce the monthly distribution rate to $0.185 per trust
unit or $2.22 on an annualized basis to ensure our payout ratio is sustainable
and our financial strength maintained, pending the improvement of results over
time.
Cash Distribution Notice
The Fund announced today its cash distribution for the month of March
2006 of $0.185 (18.5 cents) per trust unit, payable on April 13, 2006, to
unitholders of record at the close of business on March 31, 2006. The
ex-distribution date will be March 29, 2006. For income tax purposes, the cash
distribution of $0.185 per trust unit is considered to be a return of capital
of $0.0238, a dividend of $0.0233 and other income of $0.1379 per trust unit.
A cash distribution summary since inception of the Fund, together with tax
information, is posted on our website at www.superiorplus.com.
Forward Looking Statements
--------------------------
Except for the historical and present factual information, certain
statements contained herein are forward-looking. Such forward-looking
statements are not guarantees of future performance and involve a number of
known and unknown risks and uncertainties which may cause the actual results
of the Superior Plus Income Fund (the "Fund") or Superior Plus Inc.
("Superior") in future periods to differ materially from any projections
expressed or implied by such forward-looking statements and therefore should
not be unduly relied upon. Any forward-looking statements are made as of the
date hereof and neither the Fund nor Superior undertakes any obligation to
publicly update or revise such statements to reflect new information,
subsequent events or otherwise.
Distributable Cash Flow
-----------------------
Distributable cash flow of the Fund available for distribution to
Unitholders, is equal to cash generated from operations before natural gas
customer acquisition costs and changes in working capital, less amortization
of natural gas customer acquisition costs and maintenance capital
expenditures. Maintenance capital expenditures are equal to capital
expenditures incurred to sustain the ongoing capacity of Superior's operations
and are deducted from the calculation of distributable cash flow. Acquisitions
and other capital expenditures incurred to expand the capacity of Superior's
operations or to increase its profitability, are excluded from the calculation
of distributable cash flow. See Note 1 to the Interim Consolidated Financial
Statements for the calculation of distributable cash flow. Distributable cash
flow is the main performance measure used by management and investors to
evaluate the performance of the Fund and its businesses. Readers are cautioned
that distributable cash flow is not a defined performance measure under
Canadian generally accepted accounting principles ("GAAP"), and that
distributable cash flow cannot be assured. The Fund's calculation of
distributable cash flow may differ from similar calculations used by
comparable entities. Operating distributable cash flow is distributable cash
flow before corporate and interest expenses. It is also a non-GAAP measure and
is used by management to assess the performance of the operating divisions.
Financial Discussion of 2005 Fourth Quarter and 2005 Year End Results
2005 Year end Results
Distributable cash flow increased modestly for the ninth consecutive
year, reaching $187.0 million, an increase of $2.6 million (1%) over 2004
results. The full year contribution of record results from Winroc acquired in
June 2004 and the initial inclusion of JW Aluminum's ("JWA") results acquired
on October 19, 2005, were substantially offset by softer performance from
Superior Propane and higher borrowing costs incurred to finance growth capital
expenditures. Distributable cash flow per trust unit was $2.35 in 2005, down
$0.19 (7%) from 2004 as a 10% increase in the average number of trust units
outstanding outpaced the increase in distributable cash flow. The average
number of trust units outstanding increased in 2005 as a result of trust units
issued to partially finance the acquisition of JWA and the conversion of
Debentures and warrants into trust units.
The diversification of the Fund's earnings base continued in 2005 with
Superior Propane, ERCO Worldwide, JWA, Winroc and Superior Energy Management
("SEM") contributing 41%, 40%, 4%, 13% and 2% of operating distributable cash
flow, respectively and is expected to diversify further in 2006 with a full
year's contribution from JWA. After giving effect to the acquisition of JWA as
if it were owned by Superior for all of 2005, Superior Propane, ERCO
Worldwide, JWA, Winroc and SEM would have contributed 35%, 35%, 17%, 11% and
2% of operating distributable cash flow, respectively. Distributions per trust
unit paid with respect to 2005 and 2004 distributable cash flows were $2.41
and $2.28 representing a payout ratio of 103% and 90%, respectively. The
payout ratio exceeded 100% in 2005 principally due to soft performance from
Superior Propane and ERCO Worldwide's sodium chlorate business in the fourth
quarter.
Net earnings for the three months and year ended December 31, 2005 were
$21.7 million and $106.1 million respectively, compared to $33.5 million and
$112.4 million in the prior year periods. Distributable cash flow increased
relative to net earnings in the fourth quarter and for 2005 compared to the
prior year periods, due to increased non-cash amortization charges partially
offset by higher non-cash recoveries of trust unit incentive plan compensation
and future income taxes in Canada, and the inception of cash income taxes paid
in the United States. The increase in amortization expense reflects ERCO
Worldwide's announcement in August 2005 to close its Thunder Bay sodium
chlorate plant in the first quarter of 2006, resulting in the accelerated
amortization of the plant's $40 million net book value over its remaining
expected period of operation, combined with the excess of JWA's amortization
of capital equipment over cash maintenance capital expenses. The recovery of
trust unit incentive plan compensation expense was driven by the decline in
the Fund's trust unit market value during the second half of 2005. Net
earnings for 2005 were reduced by management retention bonuses paid in the
second quarter of $1.3 million (2004 - $2.6 million), which were in turn used
to repay a portion of trust unit purchase loans advanced as part of the
management internalization transaction in 2003. These costs have been excluded
from the calculation of distributable cash flow, consistent with the previous
accounting for management internalization costs.
2005 Fourth Quarter Results
Fourth quarter distributable cash flow reached $60.0 million, an increase
of $4.2 million (8%) over the prior year quarter. Operating distributable cash
flow increased by $9.7 million (15%) as the initial contribution from JWA
acquired on October 19, 2005 and improved results from Winroc, were offset by
softer performance from Superior Propane attributable to lower space heating
demand and higher operating costs. Interest costs increased by $5.2 million
due to increased debt levels incurred to finance growth capital investments
made during 2005 as well as higher interest rates.
Distributable cash flow per trust unit was $0.70 in the fourth quarter,
down $0.04 (5%) from the prior year period as the 8% increase in distributable
cash flow was more than offset by a 14% increase in the average number of
trust units outstanding.
Superior Propane
Superior Propane generated operating distributable cash flow of
$31.9 million in the fourth quarter, down $1.6 million from the prior year
period as the impact of lower sales volumes and increased operating expenses,
were only partially offset by increased average sales margins and maintenance
capital proceeds. Condensed operating results for the three months and years
ended December 31, 2005 and 2004 are provided below:
-------------------------------------------------------------------------
(millions
of dollars
except per Three Months Ended Years Ended
litre December 31 December 31
amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
Gross cents/ cents/ cents/ cents/
Profit litre litre litre litre
Propane
sales 64.9 15.5 66.0 15.1 231.7 15.8 243.2 15.7
Other
services 15.0 3.6 14.3 3.3 52.7 3.6 43.5 2.8
-------------------------------------------------------------------------
Total Gross
Profit 79.9 19.1 80.3 18.4 284.4 19.4 286.7 18.5
Less:
Cash
oper-
ating,
admin
& cash
tax
costs (49.9) (11.9) (44.2) (10.1) (187.4) (12.8) (175.1) (11.3)
-------------------------------------------------------------------------
Cash
generated
from
operations
before
changes
in net
working
capital 30.0 7.2 36.1 8.3 97.0 6.6 111.6 7.2
Maintenance
capital
expen-
ditures,
net 1.9 0.4 (2.6) (0.6) (2.8) (0.2) (5.6) (0.4)
-------------------------------------------------------------------------
Operating
distri-
butable
cash flow 31.9 7.6 33.5 7.7 94.2 6.4 106.0 6.8
-------------------------------------------------------------------------
Propane
retail
volumes
sold
(millions
of litres) 420 440 1,468 1,546
-------------------------------------------------------------------------
Propane sales gross profit was $64.9 million, down $1.1 million (2%) from
the prior year period, as sales volumes declined by 5% (20 million litres)
partially offset by a 3% (0.4 cents/litre) increase in average sales margins.
Residential and commercial volumes declined by 3% (4 million litres) as
temperatures were 7% warmer on average across Canada (5% warmer than the last
5 year comparable period average) and were also impacted by customer
conservation in response to a 33% increase in average wholesale propane costs
over the prior year period. Warmer than normal temperature trends and high
wholesale propane costs have continued into the first quarter of 2006.
Agricultural volumes declined by 28% (16 million litres) as lower crop drying
demand in the prairie regions resulted from unusually wet weather experienced
in the second quarter which significantly reduced the size of the crop
planted. Industrial sales volumes increased by 3% (6 million litres)
reflecting higher oilfield volumes and included 5 million litres of refined
fuel sales volumes acquired over the last year in south-western Ontario. Auto
propane sales volumes declined by 14% (6 million litres), consistent with
decline trends in this end use market. Average propane sales margins improved
over the prior year period despite increased and volatile wholesale propane
costs experienced during the fourth quarter. Other services gross profit
reached $15.0 million in the fourth quarter, an increase of $0.7 million (5%)
over the prior year period, as increased contribution from Superior Gas
Liquids ("SGL") wholesale operations acquired in February 2005 and
transportation surcharge fee income was partially offset by reduced
profitability of fixed price propane sales programs as hedging costs increased
in the aftermath of the gulf coast hurricanes in the third quarter.
Volume and Gross Profit by End Use Market Segment
-------------------------------------------------------------------------
Three Months Ended December 31
2005 2004
------------------- -------------------
End Use Gross Gross
Applications: Volume(1) Profit(2) Volume(1) Profit(2)
------------------- -------------------
Residential 58 18.8 60 18.6
Commercial 89 17.4 91 16.7
Agricultural 42 4.0 58 5.8
Industrial 194 20.5 188 20.2
Automotive 37 4.2 43 4.7
Other Services - 15.0 - 14.3
---------------------------------------
420 79.9 440 80.3
---------------------------------------
Average Margin(3) 15.5 15.1
-------------------------------------------------------------------------
Years Ended December 31
2005 2004
------------------- -------------------
End Use Gross Gross
Applications: Volume(1) Profit(2) Volume(1) Profit(2)
------------------- -------------------
Residential 183 59.9 192 61.6
Commercial 315 60.9 331 63.3
Agricultural 100 11.5 127 14.2
Industrial 696 78.8 692 80.1
Automotive 174 20.6 204 24.0
Other Services - 52.7 - 43.5
---------------------------------------
1,468 284.4 1,546 286.7
---------------------------------------
Average Margin(3) 15.8 15.7
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Volume and Gross Profit by Region
Three Months Ended December 31
2005 2004
------------------- -------------------
Gross Gross
Regions: Volume(1) Profit(2) Volume(1) Profit(2)
------------------- -------------------
Atlantic 27 8.8 30 8.6
Quebec 76 13.0 87 14.6
Ontario 94 23.4 95 21.9
Sask/Man 61 7.8 71 8.6
AB/NWT/YK 102 15.8 96 15.6
BC 60 11.1 61 11.0
---------------------------------------
420 79.9 440 80.3
---------------------------------------
Average Margin(3) 15.5 15.1
-------------------------------------------------------------------------
Years Ended December 31
2005 2004
------------------- -------------------
Gross Gross
Regions: Volume(1) Profit(2) Volume(1) Profit(2)
------------------- -------------------
Atlantic 110 32.3 115 32.6
Quebec 257 49.9 283 52.4
Ontario 342 80.1 350 78.4
Sask/Man 202 27.2 226 28.6
AB/NWT/YK 334 54.5 345 55.2
BC 223 40.4 227 39.5
---------------------------------------
1,468 284.4 1,546 286.7
---------------------------------------
Average Margin(3) 15.8 15.7
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(1) Volume of retail propane sold (millions of litres)
(2) Millions of dollars
(3) Average retail propane sale margin (cents per litre)
Cash operating, administrative and capital tax costs of $49.9 million
increased by $5.7 million (13%) over the prior year period due to a
$1.3 million increase in equipment maintenance costs incurred in preparation
for the winter heating season, a $0.4 million increase in fuel delivery costs,
$0.8 million of SGL operating costs and higher compensation costs. Net
maintenance capital proceeds of $1.9 million in the fourth quarter were
comprised of expenditures of $1.8 million and asset sale proceeds of
$3.7 million, providing an improvement of $4.5 million over the prior year
period. Asset sale proceeds included the sale of Superior Propane's primary
transportation fleet operations in Eastern Canada to a national trucking
company. In conjunction with the sale, a seven year transportation service
agreement was entered into with the purchaser which is anticipated to be cost
neutral going forward. Gross maintenance capital expenditures declined during
the quarter compared to the prior year period mainly due to timing as truck
fleet expenditures were incurred earlier in 2005.
In January 2006, Superior Propane's president left the organization and
has been replaced by Mr. John Gleason. Mr. Gleason joined Superior Plus in
April 2005 as Senior Vice-President Corporate Development and brings
considerable executive experience gained over a 14 year period at MDS Inc., a
global health and life science company in the areas of finance, business
development and operations management.
ERCO Worldwide
ERCO Worldwide generated operating distributable cash flow in the fourth
quarter of $24.2 million, up $0.3 million (1%) from the prior year period as
the Port Edwards chloralkali/potassium facility acquired in June 2005,
contributed operating distributable cash flow of $7.3 million. This increase
was partially offset by lower contributions from sodium chlorate operations
and increased maintenance capital expenditures. Condensed operating results
for the three months and years ended December 31, 2005 and 2004 are provided
below:
-------------------------------------------------------------------------
(millions
of dollars
except per
metric Three Months Ended Years Ended
tonne December 31 December 31
amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
$ per $ per $ per $ per
Revenue MT MT MT MT
Chemical 111.7 496 96.5 566 408.2 519 370.3 571
Tech-
nology 5.5 24 4.2 24 23.4 30 25.7 40
Cost of
Sales
Chemical (58.3) (259) (50.4) (296) (213.2) (271) (191.2) (295)
Tech-
nology (2.5) (11) (0.9) (5) (11.5) (15) (11.6) (18)
-------------------------------------------------------------------------
Gross
Profit 56.4 250 49.4 289 206.9 263 193.2 298
Less: Cash
operating,
admin &
cash tax
costs (28.7) (128) (22.8) (134) (105.7) (134) (94.3) (145)
-------------------------------------------------------------------------
Cash
generated
from
operations
before
changes
in net
working
capital 27.7 122 26.6 155 101.2 129 98.9 153
Maintenance
capital
expen-
ditures (3.5) (16) (2.7) (15) (8.1) (10) (7.6) (12)
-------------------------------------------------------------------------
Operating
distri-
butable
cash
flow 24.2 106 23.9 140 93.1 119 91.3 141
-------------------------------------------------------------------------
Chemical
volumes
sold
(thousands
of metric
tonnes) 225 170 787 649
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Chemical sales gross profit of $53.4 million increased by $7.3 million
over the prior year period. The Port Edwards facility contributed
$12.3 million of gross profit during the fourth quarter from chemical sales of
63,000 tonnes, and benefited from a robust chloralkali pricing environment.
Chemical sales gross profit from existing operations decreased by $5.0 million
(15%) due to a 5% decrease in sodium chlorate sales volumes reflecting soft
bleached pulp market conditions in North America, a 7% decline in gross profit
margins which were impacted by the appreciation of the Canadian dollar on
sales priced in United States dollars, and higher electricity costs. The
average chemical revenue and cost of sales per tonne statistics declined in
the fourth quarter from the prior year period as a result of the addition of
potassium/chloralkali product sales from Port Edwards which have lower average
selling and production costs than ERCO Worldwide's existing product mix.
Potassium and chloralkali sales gross profit contributed 43% of total chemical
sales gross profit in the fourth quarter, up from 13% in the prior year
period, reflecting the increased diversification of ERCO Worldwide's product
line. Technology gross profit of $3.0 million, declined by $0.3 million from
the prior year period due to normal course royalty license expirations
partially offset by increased chlorine dioxide generator project revenue.
Cash operating, administrative and tax costs were $28.7 million in the
fourth quarter, increasing by $5.9 million over the prior year period due
primarily to the addition of operating costs at Port Edwards of $5.0 million
and United States cash income taxes of $0.2 million. Costs of $1.1 million
were incurred in connection with the planned closure of the Thunder Bay sodium
chlorate plant in the first quarter of 2006. Maintenance capital expenditures
of $3.5 million increased by $0.8 million over the prior year period, due to
the addition of the Port Edwards facility and timing of expenditures.
Growth capital expenditures of $17.1 million were incurred during the
quarter. Construction of the 55,000 tonne sodium chlorate plant in Chile
continues on time and on budget. The plant is scheduled to start up in
mid-2006 at a cost of $65 million and will provide CMPC Celulosa S.A. with a
long term sodium chlorate supply to its three pulp mills. Expenditures of
$11.9 million were incurred during the quarter ($28.9 million cumulatively).
Remaining construction costs are anticipated to be funded from existing
revolving term bank credit facilities. Expenditures on the five year cell
replacement program were $4.5 million during the fourth quarter ($19.5 million
cumulatively). The project is approximately two-thirds complete and is
anticipated to be completed over the next three years. Improvements in cell
design are yielding an approximate 7% increase in electrical efficiency.
JW Aluminum
Superior acquired JWA on October 19, 2005 on a debt free basis for cash
consideration of $405.4 million, a manufacturer of specialty, flat-rolled
aluminum products primarily serving the heating ventilation and air
conditioning, building and construction and flexible packaging end use markets
in the United States. The acquisition of JWA provides Superior with further
business diversification and an additional platform for value growth. JWA's
strong competitive position, history of stable and growing profitability and
experienced management team are consistent with Superior's acquisition
criteria and objectives. The accounting for the acquisition is more fully
described in Note 3 to the Interim Consolidated Financial Statements.
JWA contributed $8.6 million of operating distributable cash flow to
Superior's fourth quarter results during the 74 day period since its
acquisition, consistent with expectations. Condensed unaudited operating
results for JWA for the three months and years ended December 31, 2005 and
2004 are provided below for comparison purposes:
-------------------------------------------------------------------------
(millions of
dollars
except per October 19- Three Months Ended
pound December 31 December 31
amounts) 2005 2005 2004
-------------------------------------------------------------------------
cents cents cents
/lb /lb /lb
Gross
profit 12.5 17.6 14.8 17.8 13.3 18.7
Less: Cash
operating,
admin & cash
tax (3.4) (4.8) (4.1) (4.9) (3.0) (4.2)
-------------------------------------------------------------------------
Cash generated
from
operations
before changes
in net working
capital 9.1 12.8 10.7 12.9 10.3 14.5
Maintenance
capital
expenditures,
net (0.5) (0.7) (0.8) (1.0) (1.1) (1.5)
-------------------------------------------------------------------------
Operating
distributable
cash flow 8.6 12.1 9.9 11.9 9.2 13.0
-------------------------------------------------------------------------
Aluminum pounds
sold (millions
of pounds) 71 83 71
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-----------------------------------------------------
(millions of
dollars
except per Years Ended
pound December 31
amounts) 2005 2004
-----------------------------------------------------
cents cents
/lb /lb
Gross
profit 66.9 20.0 49.6 17.7
Less: Cash
operating,
admin & cash
tax (10.5) (3.1) (11.1) (4.0)
-----------------------------------------------------
Cash generated
from
operations
before changes
in net working
capital 56.4 16.9 38.5 13.7
Maintenance
capital
expenditures,
net (3.6) (1.1) (5.1) (1.8)
-----------------------------------------------------
Operating
distributable
cash flow 52.8 15.8 33.4 11.9
-----------------------------------------------------
Aluminum pounds
sold (millions
of pounds) 333 280
-----------------------------------------------------
-----------------------------------------------------
-------------------------------------------------------------------------
October 19- Three Months Ended Years Ended
Sales volume by December 31 December 31 December 31
product 2005 2005 2004 2005 2004
-------------------------------------------------------------------------
Fin Stock 43% 43% 30% 41% 35%
Building Sheet 26% 26% 32% 25% 29%
Convertor Foil 13% 14% 20% 16% 16%
Other Products 18% 17% 18% 18% 20%
-------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross profit earned in the fourth quarter reached $14.8 million, up
$1.5 million (11%) over the prior year period, driven by a 17% increase in
sales volumes. Higher sales volumes were enabled by the completion of the
US$26 million Russellville Phase 1 expansion project during the fourth quarter
of 2005, increasing JWA's annual production capacity by approximately
72 million pounds (24%). Higher fin stock sales used in the production of air
conditioning and heat transfer equipment, comprised the majority of increased
sales volumes as the implementation in the United States of increased minimum
energy efficiency regulations in 2006 is requiring manufacturers to use
increased aluminum fin stock content per air conditioning unit. Gross profit
margins per pound of sales of 17.8 cents in the fourth quarter were comparable
to the prior year period after adjusting for foreign exchange translation
impacts, as a 3% increase in the average conversion margin that JWA charges
its customers over the cost of primary aluminum, was offset by increased
energy costs. Cash operating, administration and cash tax costs increased by
$1.1 million due to cash income taxes payable under Superior's ownership.
Maintenance capital expenditures of $0.8 million incurred in the fourth
quarter were consistent with the prior year period.
Growth capital expenditures of $1.9 million were incurred since being
acquired by Superior and were related to the completion of the Russellville
Phase 1 expansion and initial expenditures on the US$15 million, 42 million
pound, Phase 2 expansion at Russellville that was announced in Superior's
third quarter earnings news release.
Winroc
Winroc generated operating distributable cash flow of $8.7 million in the
fourth quarter, an increase of 38% ($2.4 million) over the prior year period
mainly due to the expansion of its distribution network into the Ontario
market through the acquisition of Leon's Insulation Inc. ("Leon's") in April
2005 and Interior Building Supplies ("IBS") in December 2004. Condensed
operating results for the three months and year ended December 31, 2005 are
provided below. The prior year periods include Winroc results, from its date
of acquisition on June 11, 2004. The results for the year ended December 31,
2004 are also provided below for comparative purposes and are not included in
the Interim Consolidated Financial Statements.
-------------------------------------------------------------------------
June 11 -
Three Months Ended Years Ended December
December 31 December 31 31
(millions of dollars) 2005 2004 2005 2004 2004
-------------------------------------------------------------------------
Distribution sales
gross profit 30.9 20.9 113.4 79.9 46.9
Direct sales gross
profit 1.5 1.2 4.4 4.4 2.6
-------------------------------------------------------------------------
Gross Profit 32.4 22.1 117.8 84.3 49.5
Less: Cash operating,
admin & cash tax costs (22.7) (14.8) (82.0) (56.4) (32.5)
-------------------------------------------------------------------------
Cash generated from
operations before
changes in net working
capital 9.7 7.3 35.8 27.9 17.0
Maintenance capital
expenditures, net (1.0) (1.0) (5.6) (6.9) (2.6)
-------------------------------------------------------------------------
Operating distributable
cash flow 8.7 6.3 30.2 21.0 14.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distribution sales gross profit reached $30.9 million in the fourth
quarter, an increase of 48% ($10.0 million) over the prior year period. Higher
sales volumes contributed to improved gross profit performance as drywall
sales, which are an indicator of overall sales volumes, increased by 29%. More
than three quarters of the increase in sales volumes was generated by the
expansion of Winroc's distribution network into Ontario through the
acquisitions of IBS and Leon's. Distribution sales margins improved by 3% over
the prior year period, due largely to improved purchasing performance at
acquired operations. Cash operating, administration and tax costs were
$22.7 million in the fourth quarter, an increase of 53% ($7.9 million) over
the prior year period, due to increased costs associated with the growth in
Winroc's distribution network, higher variable delivery costs associated with
the growth in sales volumes, increased fuel costs and increased cash taxes on
earnings generated in the United States. Maintenance capital expenditures were
$1.0 million in the fourth quarter and were comparable to the prior year
period.
Superior Energy Management ("SEM")
Effective January 1, 2005, SEM began to capitalize customer acquisition
costs and amortize capitalized costs on a straight line basis over the term of
the customer contract. Previously, customer acquisition costs were expensed at
the time natural gas deliveries commenced under new contracts. This change in
accounting policy results in improved matching of up-front contract
acquisition costs with the economic benefits derived from gas sales over the
term of the customer contract and has been retroactively applied. Capitalized
costs are treated as "growth capital" and the amortization of capitalized
costs are deducted from distributable cash flow. This change in accounting
increased SEM's operating distributable cash flow for the three month periods
ended December 31, 2005 and 2004 by $1.5 million and $0.8 million,
respectively (years ended December 31, 2005 and 2004 by $4.6 million and
$1.9 million, respectively) as detailed below (See Note 2(b) to the Interim
Consolidated Financial Statements):
-------------------------------------------------------------------------
Three Months Ended Years Ended
(millions of dollars, except December 31 December 31
per trust unit amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating distributable cash
flow, previous accounting
policy $ 0.3 $ 1.0 $ 0.7 $ 5.8
Capitalized customer acquisition
costs 2.2 1.2 7.0 3.1
Amortization of capitalized costs (0.7) (0.4) (2.4) (1.2)
-------------------------------------------------------------------------
Operating distributable cash
flow, new accounting policy $ 1.8 $ 1.8 $ 5.3 $ 7.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEM's condensed operating results for the three months and years ended
December 31, 2005 and 2004 are provided below:
-------------------------------------------------------------------------
(millions
of dollars Three Months Ended Years Ended
except per December 31 December 31
GJ amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
cents cents cents cents
per GJ per GJ per GJ per GJ
------- ------- ------- -------
Gross
profit 4.3 47.8 3.4 48.9 14.5 39.2 13.4 47.9
Cash
operating,
admin. &
selling
costs (2.5) (27.8) (1.6) (22.9) (9.2) (24.9) (5.7) (20.4)
-------------------------------------------------------------------------
Operating
distri-
butable
cash flow 1.8 20.0 1.8 26.0 5.3 14.3 7.7 27.5
-------------------------------------------------------------------------
Gigajoules
of natural
gas sold
(millions) 9 7 37 28
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SEM generated operating distributable cash flow of $1.8 million in the
fourth quarter, comparable to the prior year period. Gross profit increased by
$0.9 million (26%) over the prior year period as increased sales volumes were
partially offset by lower margins. Sales margins in the fourth quarter
averaged 47.8 cents per GJ, a decrease of 2% from the prior year period.
Compared to the third quarter, margins increased 32% due to higher margin
residential and small commercial volume growth and contributions from gas
volume balancing activities. Residential and small commercial customer growth
continued in the fourth quarter and contributed to a 21% year over year growth
in sales volumes. Operating, administration and selling costs increased by
$0.9 million over the prior year period due to higher amortization of customer
acquisition costs, customer servicing costs and overhead costs attributable to
the growth in SEM's customer base. 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 December 31, 2005 was 45 months
(December 31, 2004 - 32 months). At December 31, 2005, residential sales
volumes comprised approximately 15% of total sales volumes (December 31, 2004 -
8%).
Corporate
Corporate costs were $2.7 million in the fourth quarter, an increase of
$0.3 million over the prior year period, due to United States inter-divisional
income tax allocations and increased compensation related costs.
Interest expense on revolving term bank credits and term loans was
$7.7 million, an increase of $3.1 million from the prior year period, due to
increased debt incurred to finance the acquisition of JW Aluminum and higher
floating interest rates. Convertible debenture interest was $4.8 million, an
increase of $2.1 million over the prior year period, due to the issuance of
$175 million, 5.75% convertible debentures in June 2005 and $75 million, 5.85%
convertible debentures in October 2005, net of the conversion of $48.3 million
of 8%, convertible debentures into 2.6 million trust units since December 31,
2005.
Cash income taxes of $3.4 million were incurred with respect to
operations in the United States in the fourth quarter (2004 - Nil) and have
been charged to the business from which the taxable income was derived. In
Canada, cash taxes were limited to federal and provincial capital taxes of
$0.8 million, similar to the prior year period, as Canadian income taxes were
fully deferred. Capital taxes have been allocated to Superior's four business
segments operating in Canada based on net capital deployed.
Liquidity and Capital Resources
As at December 31, 2005, revolving term bank credits and term loans
totaled $624.8 million, up $271.6 million from September 30, 2005 levels.
Approximately $200 million was incurred to partially finance the acquisition
of JWA and other growth capital expenditures of $18.5 million incurred during
the fourth quarter. The remaining increase in borrowings of approximately
$72 million was incurred principally to finance the seasonal increase in
Superior Propane's net working capital requirements. This was funded from a
US$145 million (CDN$170.8 million), two year, non-revolving floating interest
rate borrowing facility that was entered into with a syndicate of 9 banks and
borrowings under revolving term bank lines. Superior's revolving trade
accounts receivable is also used to finance a portion of its working capital
requirements and represents an off-balance sheet obligation. Proceeds from the
sale of accounts receivable increased seasonally during the fourth quarter by
$14.0 million to $100.0 million (December 31, 2004 - $100.0 million). 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 11 to the Interim Consolidated Financial
Statements for segmented working capital balances, net of the accounts
receivable sales program. As at December 31, 2005, Superior had available
undrawn revolving term bank lines of $154 million.
As at December 31, 2005, convertible debentures totaled $314.3 million,
up $71.2 million from September 30, 2005 as $75 million, 5.85% Series 1
Debentures due October 31, 2015 were issued to partially finance the
acquisition of JW Aluminum, partially offset by the conversion of $3.2 million
of Series 1 and 2, 8% convertible debentures into 0.2 million trust units
(2005 YTD - $48.4 million converted into 2.6 million trust units).
For 2005, financing requirements totaled $591.0 million, including
increased working capital requirements of $58.7 million, growth capital
expenditures of $525.3 million and $7.0 million of capitalized natural gas
customer acquisition costs. Growth capital expenditures were comprised of
$485.1 million of acquisitions and $40.2 million of other capital
expenditures. Total 2005 financing requirements were funded by net proceeds
received from the issue of trust units and conversion of warrants of
$167.9 million, net proceeds received from the issue of convertible debentures
of $239.4 million, and additional revolving term debt and term loan borrowings
of $169.8 million and $13.9 million of notes payable and deferred
consideration issued to vendors of businesses acquired in 2005.
Superior continues to enjoy a strong balance sheet as senior debt
(including off-balance sheet accounts receivable sales program amounts) at
December 31, 2005 was 2.4 times earnings before interest, taxes and
amortization for the last 12 month period on a pro forma basis adjusted for
acquisitions, calculated in accordance with its debt covenants (December 31,
2004 - 2.2 times). Including the Fund's convertible debentures, Superior's
total leverage ratios increased to 3.5 times from 3.1 times at December 31,
2004. On December 20, 2005, Standard & Poor's confirmed Superior's BBB-
secured long term credit rating with a stable outlook. Previously, the rating
had been on credit watch with negative implications. Dominion Bond Rating
Service rates Superior's secured long term debt at BBB (low) with a stable
outlook.
On March 3, 2006, Superior completed a 10 year, $200 million 5.50% senior
secured debt issue in the Canadian public bond market. Proceeds will be used
to repay the JW Aluminum bank acquisition credit facility and other revolving
bank debt.
Unitholders' Capital
The weighted average number of trust units outstanding during the fourth
quarter was 85.4 million trust units, an increase of 14% (10.4 million trust
units) over the prior year period due to 6.2 million trust units issued to
partially finance the acquisition of JW Aluminum on October 19, 2005, the
issue of 0.8 million trust units resulting from the exercise of trust unit
warrants in 2005, and the issue of 2.6 million trust units in 2005 as a result
of Debenture conversions described previously.
As at December 31, 2005 and 2004, the following trust units, and
securities convertible into trust units, were outstanding:
-------------------------------------------------------------------------
December 31, 2005 December 31, 2004
Convert- Convert-
ible ible
Secur- Trust Secur- Trust
(millions) ities Units ities Units
-------------------------------------------------------------------------
Trust units outstanding 85.5 75.9
Series 1, 8% Debentures
(convertible at $16 per trust
unit) $9.0 0.5 $13.9 0.9
Series 2, 8% Debentures
(convertible at $20 per trust
unit) $62.4 3.1 $102.6 5.1
Series 1, 5.75% Debentures
(convertible at $36 per trust
unit) $174.9 4.9 - -
Series 1, 5.85% Debentures
(convertible at $31.25 per
trust unit) $75.0 2.4 - -
Warrants (exercisable (at)
$20 per trust unit) 2.3 2.3 3.1 3.1
-------------------------------------------------------------------------
Trust units outstanding, and
issuable upon conversion of
Debenture and Warrant securities 98.7 85.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The trust unit warrants are exercisable until May 2008 and represent a
potential $46.0 million source of future equity capital. In addition, as at
December 31, 2005, there were 1,177,000 trust unit options outstanding
(December 31, 2004 - 960,000 trust units) with a weighted average exercise
price of $22.82 per trust unit. The number of trust units issued upon exercise
of the trust unit options is equal to the growth in the value of the options
at the time the options are exercised, (represented by the market price less
the exercise price) times the number of options exercised, divided by the
current trust unit market price.
Foreign Currency Hedging
SEM and Superior Propane contract a portion of their fixed price natural
gas and propane purchases in US dollars and enter into forward US dollar
purchase contracts to create an effective Canadian dollar fixed price purchase
cost. ERCO Worldwide enters into US dollar forward sales contracts on an
ongoing basis to mitigate the impact of foreign exchange fluctuations on sales
margins on production from its Canadian plants that is sold in US dollars.
Interest expense on Superior's US dollar debt is also used to mitigate the
impact of foreign exchange fluctuations on its US dollar distributable cash
flow. Superior's US dollar debt acts as a balance sheet hedge against its US
dollar net assets. Superior hedges its net US dollar future cash flows with
external third party contracts after first matching internally SEM's and
Superior Propane's forward US dollar purchase requirements against ERCO
Worldwide's US dollar revenues where possible.
As at December 31, 2005, SEM and Superior Propane had hedged
approximately 100% of their US dollar natural gas and propane purchase
obligations and ERCO Worldwide had hedged 93%, 55%, and 10% of its estimated
US dollar revenue stream for the remainder of 2006, 2007, and 2008
respectively, as shown in the table below. (See Note 9(iv) to the Interim
Consolidated Financial Statements).
-------------------------------------------------------------------------
(US$ millions) 2006 2007 2008 2009 2010 2011 Total
-------------------------------------------------------------------------
SEM - US $ forward
purchases 148.7 124.7 112.7 107.2 52.9 1.2 547.4
Superior Propane
- US $ forward
purchases 0.8 - - - - - 0.8
ERCO - US $
forward sales (123.1) (71.0) (12.6) - - - (206.7)
-------------------------------------------------------------------------
Net US $ forward
purchases 26.4 53.7 100.1 107.2 52.9 1.2 341.5
-------------------------------------------------------------------------
SEM - Average
US $ forward
purchase rate 1.26 1.23 1.22 1.21 1.17 1.14 1.23
Superior Propane
- Average US $
forward purchase
rate 1.25 - - - - - 1.25
ERCO - Average
US $ forward
sales rate 1.27 1.24 1.23 1.21 1.17 1.14 1.26
-------------------------------------------------------------------------
Net average
external
US$/Cdn$
exchange rate 1.25 1.23 1.22 1.21 1.17 1.14 1.22
-------------------------------------------------------------------------
Quarterly Financial and Operating Information(1)
-------------------------------------------------------------------------
(millions
of
dollars
except
per trust
unit 2005 Quarters 2004 Quarters
amounts) Fourth Third Second First Fourth Third Second First
-------------------------------------------------------------------------
Propane
sales
volumes
(millions
of litres) 420 277 286 485 438 290 302 514
Chemical
sales
volumes
(thousands
of metric
tonnes) 225 224 175 164 170 163 161 155
Aluminum
sales
volumes
(millions
of
pounds) 71.0 - - - - - - -
Natural
gas sales
volumes
(millions
of GJs) 9 9 9 9 7 7 7 7
Gross
profit 185.5 149.6 137.2 163.8 155.2 130.2 116.0 141.4
Net
earnings 21.7 24.0 18.9 41.5 33.5 20.8 21.1 37.0
Per
basic
trust
unit $0.25 $0.30 $0.24 $0.54 $0.45 $0.28 $0.29 $0.53
Per
diluted
trust
unit $0.25 $0.30 $0.24 $0.52 $0.44 $0.27 $0.29 $0.49
Distri-
butable
cash
flow 60.0 33.4 29.9 63.7 55.8 36.7 31.4 60.5
Per basic
trust
unit $0.70 $0.42 $0.38 $0.83 $0.74 $0.50 $0.44 $0.86
Per
diluted
trust
unit $0.67 $0.42 $0.38 $0.79 $0.70 $0.49 $0.43 $0.77
Net
working
cap-
ital(2) 249.2 96.4 64.3 54.9 97.9 62.9 36.2 (3.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Restated to give retroactive effect of change in accounting for
natural gas customer acquisition costs. (See Note 2(b) to the Interim
Consolidated Financial Statements).
(2) Net working capital reflects amounts as at the quarter end and is
comprised of accounts receivable and inventories, less accounts
payable and accrued liabilities.
Outlook
In 2006, we anticipate distributable cash flow per trust unit to be
comparable to or lower than 2005. Increased distributable cash flow is
expected from a full year's contribution from JWA and improved results at
Winroc and SEM. Offsetting this are expected lower results at Superior Propane
as a result of record warm weather experienced to date in the first quarter,
lower results at ERCO Worldwide due to decreasing demand for sodium chlorate
from North American bleached pulp producers, and increased borrowing costs.
Distributable cash flow per trust unit is expected to improve over time with
the return of normal weather and with the repositioning of Superior Propane's
cost structure, along with a full year's contribution from ERCO's Chile
project and stability in North American pulp markets.
Over the longer term, the Fund plans to continue its disciplined
diversification strategy by taking advantage of profitable growth
opportunities within each division and to acquire other businesses that have
risk profiles appropriate for an income fund structure. Acquisitions must be
accretive to unitholder distributions and be financed in a manner that
maintains Superior's existing financial strength.
-------------------------------------------------------------------------
Analyst Conference Call: Superior Plus will be conducting a conference
call and webcast for investors, analysts, brokers and media representatives to
discuss the Fourth Quarter and 2005 Earnings Release at 10:30 a.m. EST
(8:30 a.m. MST) on Thursday, March 9, 2006. Callers may participate by
dialing: 1-800-814-4890. A recording of the call will be available for replay
until midnight, March 16, 2006 by dialing: 877-289-8525 and entering pass code
21174204 followed by the number key.
Internet users can listen to the call live, or as an archived call, on
Superior's website at: www.superiorplus.com under the "Events and
Presentations" section.
SUPERIOR PLUS INCOME FUND
Consolidated Balance Sheets
-------------------------------------------------------------------------
December 31 December 31
(unaudited, millions of dollars) 2005 2004
-------------------------------------------------------------------------
Assets (Restated)
Current Assets
Accounts receivable (Note 4) 336.1 165.0
Inventories 193.4 93.6
-------------------------------------------------------------------------
529.5 258.6
Property, plant and equipment 1,167.6 741.0
Intangible assets 89.4 49.9
Goodwill 541.3 502.6
-------------------------------------------------------------------------
2,327.8 1,552.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current Liabilities
Accounts payable and accrued liabilities 280.3 160.7
Distributions and interest payable to
Unitholders and Debentureholders 25.0 17.0
Current portion of term loans (Note 5) 2.0 -
307.3 177.7
-------------------------------------------------------------------------
Revolving term bank credits and term loans (Note 5) 622.8 446.2
Convertible unsecured subordinated
debentures (Note 6) 314.3 116.0
Future employee benefits 17.7 18.6
Future income tax liability 262.8 121.7
-------------------------------------------------------------------------
Total Liabilities 1,524.9 880.2
Unitholders' Equity
Unitholders' capital (Note 7) 1,338.3 1,122.0
Retained earnings from operations (Note 7) 368.4 262.3
Accumulated distributions on trust unit equity (903.1) (711.1)
-------------------------------------------------------------------------
Deficit (534.7) (448.8)
Currency translation account (0.7) (1.3)
-------------------------------------------------------------------------
Total Unitholders' Equity 802.9 671.9
-------------------------------------------------------------------------
2,327.8 1,552.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
SUPERIOR PLUS INCOME FUND
Consolidated Statements of Net Earnings and Deficit
-------------------------------------------------------------------------
Three Months Ended Years Ended
(unaudited, millions of dollars December 31 December 31
except per trust unit amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
(Restated) (Restated)
Revenues 697.2 465.2 2,171.4 1,552.8
Cost of products sold 511.7 310.0 1,535.3 1,010.0
-------------------------------------------------------------------------
Gross profit 185.5 155.2 636.1 542.8
-------------------------------------------------------------------------
Expenses
Operating and administrative 104.4 86.5 382.6 313.2
Amortization of property,
plant and equipment 49.7 23.1 115.3 78.2
Amortization of intangible assets 2.0 1.3 6.0 5.5
Interest on revolving term
bank credits and term loans 7.7 4.6 22.8 15.5
Interest on convertible unsecured
subordinated debentures 4.8 2.7 12.9 13.6
Amortization of convertible
debenture issue costs 0.6 0.4 1.7 1.6
Management internalization
costs (Note 10(i)) - - 1.3 2.6
Income tax expense (recovery)
of Superior (5.4) 3.1 (12.6) 0.2
-------------------------------------------------------------------------
163.8 121.7 530.0 430.4
-------------------------------------------------------------------------
Net Earnings 21.7 33.5 106.1 112.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit, Beginning of Period (504.3) (437.3) (448.8) (382.1)
Net earnings 21.7 33.5 106.1 112.4
Distributions to Unitholders (52.1) (45.0) (192.0) (179.1)
-------------------------------------------------------------------------
Deficit, End of Period (534.7) (448.8) (534.7) (448.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per trust unit,
basic (Note 8) $0.25 $0.45 $1.33 $1.55
Net earnings per trust unit,
diluted (Note 8) $0.25 $0.44 $1.32 $1.53
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(See Notes to the Interim Consolidated Financial Statements)
SUPERIOR PLUS INCOME FUND
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------
Three Months Ended Years Ended
December 31 December 31
(unaudited, millions of dollars) 2005 2004 2005 2004
-------------------------------------------------------------------------
(Restated) (Restated)
Operating Activities
Net earnings 21.7 33.5 106.1 112.4
Items not affecting cash:
Amortization of property, plant
and equipment, intangible
assets and convertible
debenture issue costs 52.3 24.8 123.0 85.3
Amortization of natural gas
customer acquisition costs 0.7 0.4 2.4 1.2
Trust unit incentive plan
compensation expense (recovery) (1.3) 1.8 (4.6) 3.2
Future income tax expense
(recovery) of Superior (9.6) 2.0 (21.8) (3.3)
-------------------------------------------------------------------------
Cash generated from operations
before natural gas customer
acquisition costs and changes
in working capital 63.8 62.5 205.1 198.8
Natural gas customer acquisition
costs capitalized (2.2) (1.2) (7.0) (3.1)
Increase in non-cash operating
working capital items (93.5) (59.1) (58.7) (28.1)
-------------------------------------------------------------------------
Cash flows from operating
activities (31.9) 2.2 139.4 167.6
-------------------------------------------------------------------------
Investing Activities
Maintenance capital
expenditures, net (3.1) (6.3) (17.0) (15.8)
Other capital expenditures, net (18.5) (3.2) (40.2) (6.2)
Acquisitions (Note 3) (405.4) (12.2) (471.2) (120.1)
-------------------------------------------------------------------------
Cash flows from investing
activities (427.0) (21.7) (528.4) (142.1)
-------------------------------------------------------------------------
Financing Activities
Revolving term bank credits
and term loans 103.0 43.7 1.6 142.9
Net proceeds from sale of
accounts receivable 14.0 20.8 - -
Distributions to Unitholders (52.1) (45.0) (192.0) (179.1)
Receipt of management
internalization loans
receivable (Note 10(i)) - - 1.3 2.6
Net proceeds from issue of 5.75%
Series 1 convertible unsecured
subordinated debentures - - 167.6 -
Net proceeds from issue of trust
units, to finance JW Aluminum
Company ("JWA") acquisition 151.4 - 151.4 -
Net proceeds from issue of 5.85%
Series 1 convertible unsecured
subordinated debentures, to
finance JWA 71.8 - 71.8 -
JWA acquisition credit facility 170.8 - 170.8 -
Proceeds from exercise of
trust unit warrants - - 16.5 8.1
-------------------------------------------------------------------------
Cash flows from financing
activities 458.9 19.5 389.0 (25.5)
-------------------------------------------------------------------------
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. Distributable Cash Flows
Three Months Ended Years Ended
December 31 December 31
2005 2004 2005 2004
-------------------------------------------------------------------------
Cash generated from operations
before natural gas customer
requisition costs and changes
in working capital
63.8 62.5 205.1 198.8
Plus:
Management internalization and
retention costs (Note 10(i)) - - 1.3 2.6
Less:
Maintenance capital
expenditures, net (3.1) (6.3) (17.0) (15.8)
Amortization of natural gas
customer acquisition costs (0.7) (0.4) (2.4) (1.2)
-------------------------------------------------------------------------
Distributable Cash Flow 60.0 55.8 187.0 184.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow per trust
unit, basic (Note 8) $0.70 $0.74 $2.35 $2.54
Distributable cash flow per trust
unit, diluted (Note 8) $0.67 $0.70 $2.27 $2.40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow of the Superior Plus Income Fund (the "Fund")
available for distribution to its unitholders ("Unitholders"), is equal
to cash generated from operations before natural gas customer acquisition
costs and changes in working capital, less amortization of natural gas
customer acquisition costs and maintenance capital expenditures.
Maintenance capital expenditures are equal to capital expenditures
incurred to sustain the ongoing operating capacity of Superior Plus Inc.
("Superior") and are deducted from the calculation of distributable cash
flow. Acquisitions and other capital expenditures incurred to expand the
capacity of Superior's operations or to increase its profitability, are
excluded from the calculation of distributable cash flow. Distributable
cash flow is the main performance measure used by management and
investors to evaluate Fund and business segment performance. Readers are
cautioned that distributable cash flow is not a defined performance
measure under Canadian generally accepted accounting principles ("GAAP"),
and that distributable cash flow cannot be assured. The Fund targets to
pay out substantially all of its sustainable distributable cash flow
through regular monthly distributions. The Fund's calculation of
distributable cash flow may differ from similar calculations used by
comparable entities.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited Interim Consolidated Financial Statements have
been prepared according to GAAP applied on a consistent basis and include
the accounts of the Fund, its wholly owned subsidiary, Superior and
Superior's subsidiaries. The accounting principles applied are consistent
with those as set out in the Fund's annual financial statements for the
year ended December 31, 2004, except as noted below. All significant
transactions and balances (including the Shareholder Notes) between the
Fund, Superior and Superior's subsidiaries have been eliminated on
consolidation.
(b) Change in Accounting Policy
Effective January 1, 2005, the Fund retroactively adopted a new
accounting policy for Superior Energy Management's natural gas customer
acquisition costs. Previously, customer acquisition costs were expensed
at the time natural gas deliveries commenced under new contracts. Under
the new policy, customer acquisition costs are capitalized and amortized
on a straight-line basis over the term of the customer contract. This new
policy provides improved matching of up-front contract acquisition costs
with the economic benefits derived from gas sales over the term of the
customer contract. The cumulative effect of the change in policy on the
balance sheet as at December 31, 2004 was to increase intangible assets
by $3.1 million, increase the future income tax liability by $1.1 million
and increase retained earnings from operations by $2.0 million.
For the year ended December 31, 2004, the effect of the new policy on
distributable cash flow resulted in an increase of $1.9 million. The
effect on net earnings was to reduce operating and administrative costs
by $1.9 million and increase future income taxes by $0.7 million,
resulting in an increase in net earnings of $1.2 million. The effect on
basic and diluted distributable cash flow per trust unit was an increase
of $0.03 to $2.54 and $2.40 per trust unit respectively. The effect on
basic and diluted net earnings per trust unit was an increase of $0.02 to
$1.55 and $1.53 per trust unit respectively.
(c) Inventories
Superior Propane
Propane inventories are valued at the lower of weighted average cost and
market determined on the basis of estimated net realizable value.
Appliances, materials, supplies and other inventories are stated at the
lower of cost and market determined on the basis of estimated replacement
cost or net realizable value, as appropriate. Superior has an inventory
of appliances rented to customers under rental contracts. The book value
of this inventory is carried in the inventory accounts at cost less
accumulated amortization. Amortization is provided on a straight-line
basis, generally over a period of five years.
ERCO Worldwide
Inventories are valued at the lesser of cost and net realizable value,
the cost of chemical inventories are determined on a first-in, first-out
basis. Stores and supply inventories are costed on an average basis.
Transactions are entered into from time to time with other companies to
exchange chemical inventories in order to minimize working capital
requirements and to facilitate distribution logistics. Balances related
to quantities due to or payable by Superior are included in inventory.
JW Aluminum
Aluminum inventories are valued at the lesser of cost and net realizable
value. Cost is calculated on a first-in, first-out basis.
Winroc
Inventories of building products are valued at the lower of cost and net
realizable value. Cost is calculated on an average cost basis.
(d) Revenue Recognition
Superior Propane
Revenues from sales are generally recognized at the time of delivery, or
when related services are performed. Amounts billed to customers for
shipping and handling are classified as revenues, with the related
shipping and handling costs included in cost of goods sold.
ERCO Worldwide
Revenues from chemical sales are recognized as products are shipped.
Revenues associated with the construction of chlorine dioxide generators
are recognized using the percentage-of-completion method based on cost
incurred compared to total estimated cost.
JW Aluminum and Winroc
Revenue is recognized when products are delivered to the customer.
Revenue is stated net of discounts and rebates granted.
Superior Energy Management
Revenues are recognized as gas is delivered to local natural gas
distribution companies. Costs associated with balancing the amount of gas
used by SEM's customers with the volumes delivered by SEM to the local
distribution companies are recognized as period costs.
3. Acquisitions
The following acquisitions were completed by Superior during 2005 and
2004:
On October 19, 2005, Superior acquired the shares of JW Aluminum Holding
Company, a leading manufacturer of specialty flat rolled aluminum
products in the United States, for consideration of $405.4 million
(US $344.2 million).
On June 7, 2005, ERCO acquired a chloralkali potassium business in Port
Edwards, Wisconsin for consideration of $22.4 million (the "Port Edwards"
acquisition).
On April 11, 2005, Winroc acquired the shares of Leon's Insulation Inc.,
and associated entities (collectively "Leon's"), a distributor of
specialty walls and ceilings construction products for consideration of
$31.7 million of which $28.7 million was paid in cash (net of
$5.3 million in cash acquired). Notes payable of $3.0 million 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 annual
targets. Future payments will be treated as additional consideration as
the amounts become payable, with a corresponding increase to goodwill.
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 December 7, 2004, Winroc acquired the assets of Interior Building
Supplies Company Ltd. ("IBS"), for consideration of $12.2 million.
On June 11, 2004, Superior acquired all of the shares of the Winroc
Corporation, Winroc Supplies Ltd. and Allroc Building Products Ltd.
(collectively "Winroc"), a distributor of specialty walls and ceiling
construction products in North America, for consideration of
$104.2 million.
During 2004, Superior Propane acquired the assets of one propane related
business and one fuel oil distribution business, for consideration of
$3.7 million.
Using the purchase method of accounting for acquisitions, Superior
consolidated the assets and liabilities from the acquisitions and
included earnings as of the closing dates. The consideration paid for
these acquisitions has been allocated as follows:
2005
-------------------------------------------------------------------------
ERCO's Superior
Acquisition Winroc's Propane's
Acquisition of Port Acquisition Acquisition
of JWA Edwards of Leon's of SGL Total
-------------------------------------------------------------------------
Cash consideration
paid 403.6 21.6 28.2 14.6 468.0
Transaction costs 1.8 0.8 0.5 0.1 3.2
-------------------------------------------------------------------------
Total cash
consideration 405.4 22.4 28.7 14.7 471.2
Notes payable and
deferred
consideration(1) - - 3.0 10.9 13.9
-------------------------------------------------------------------------
Total consideration 405.4 22.4 31.7 25.6 485.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Property, plant
and equipment 468.9 22.1 3.1 - 494.1
Goodwill - - 16.2 22.7 38.9
Intangibles 31.0 - 2.0 1.3 34.3
Working capital, net 71.1 3.2 10.4 1.6 86.3
Future income tax
liability (165.6) - - - (165.6)
Other liabilities - (2.9) - - (2.9)
-------------------------------------------------------------------------
405.4 22.4 31.7 25.6 485.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Notes payable and deferred consideration are unsecured obligations
and have been included in revolving term bank credits and term loans
on the Consolidated Balance Sheets.
2004
-------------------------------------------------------------------------
Winroc's Superior
Acquisition Acquisition Propane
of IBS of Winroc Acquisitions Total
-------------------------------------------------------------------------
Cash consideration paid 11.9 103.2 3.7 118.8
Transaction costs 0.3 1.0 - 1.3
-------------------------------------------------------------------------
Total cash consideration 12.2 104.2 3.7 120.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Property, plant and equipment 0.9 18.2 1.4 20.5
Goodwill 6.0 52.5 1.0 59.5
Working capital, net 5.8 37.1 1.3 44.2
Other liabilities (0.5) (3.6) - (4.1)
-------------------------------------------------------------------------
12.2 104.2 3.7 120.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. Accounts Receivable
Superior sells, with limited recourse, certain trade accounts receivable
on a revolving basis to an entity sponsored by a Canadian chartered bank,
and has accounted for the sales in accordance with the CICA guidelines
relating to transfers of receivables. The accounts receivable are sold at
a discount to face value based on prevailing money market rates. Superior
has retained the servicing responsibility for the accounts receivable
sold and has therefore recognized a servicing liability. The level of
accounts receivable sold under the program fluctuates seasonally with the
level of accounts receivable. At December 31, 2005 proceeds of
$100.0 million (2004 - $100.0 million) had been received. The fair value
of the retained interest arising from the sale at December 31, 2005 was
$12.9 million (2004 - $13.1 million) and was estimated by discounting
expected cash flows at prevailing money market rates. Cash flows related
to this sales program were as follows:
2005 2004
-------------------------------------------------------------------------
Net proceeds, beginning 100.0 100.0
Proceeds from collections re-invested
in revolving period sales 1,116.0 1,164.2
Remittances of amounts collected on sales (1,116.0) (1,164.2)
-------------------------------------------------------------------------
Net proceeds from accounts receivable sales 100.0 100.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Revolving Term Bank Credits and Term Loans
Maturity Effective
Dates Interest Rates(4) 2005 2004
-------------------------------------------------------------------------
Revolving term bank
credits(1)
Floating BA rate
Bankers Acceptances plus applicable
("BA") 2008 credit spread 137.7 176.8
LIBOR Loans
(US $95.3 million; Floating LIBOR rate
2004 - plus applicable
US $58.3 million) 2008 credit spread 111.1 70.1
-------------------------------------------------------------------------
248.8 246.9
-------------------------------------------------------------------------
Other Debt
2009,
Notes payable 2010 Prime 8.0 5.0
Deferred Non-interest
consideration 2010 bearing 11.3 -
Mortgage payable
(US $0.9 million;
2004 -
US $1.4 million) 2011 7.53% 1.1 1.7
-------------------------------------------------------------------------
20.4 6.7
-------------------------------------------------------------------------
Senior Secured Notes
JWA acquisition Floating LIBOR rate
credit facility (US plus applicable
$145.0 million)(2) 2007 credit spread 169.1 -
Senior secured notes
subject to floating
interest rates
(US $85.0 million;
2004 - Floating LIBOR
US $85.0 million)(3) 2015 plus 1.7% 99.1 102.3
Senior secured notes
subject to fixed
interest rates
(US $75.0 million;
2004 - 2013,
US $75.0 million)(3) 2015 6.65% 87.4 90.3
-------------------------------------------------------------------------
355.6 192.6
-------------------------------------------------------------------------
Total revolving term
bank credits and
term loans 624.8 446.2
Less current maturities 2.0 -
-------------------------------------------------------------------------
Revolving term bank
credits and term loans 622.8 446.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) During 2005, Superior and its wholly owned subsidiaries, Superior
Plus US Holdings Inc. and Commercial e Industrial ERCO (Chile)
Limitada, renewed and expanded their secured revolving term bank
credit facilities. Superior has revolving term credit capacity of
$425.0 million, an increase of $70.0 million from December 31, 2004
levels. These facilities are secured by a general charge over the
assets of Superior and certain of its subsidiaries.
(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 is secured by a general charge over
the assets of Superior and certain of its subsidiaries.
(3) Senior Secured Notes (the "Notes") totaling US $160.0 million
(CDN $186.5 million at December 31, 2005) are secured by a general
charge over the assets of Superior and certain of its subsidiaries.
Principal repayments begin in 2009. The estimated fair value of the
Notes at December 31, 2005 was CDN $183.5 million. In conjunction
with the issue of the Notes, Superior swapped US $85.0 million
(CDN $99.1 million at December 31, 2005) of the fixed rate obligation
into a US dollar floating rate obligation. The estimated fair value
of the US $85.0 million interest rate swap at December 31, 2005 was a
gain of $0.2 million (2004 - $2.4 million gain).
(4) The fixed interest rate obligation on $100.0 million of the Fund's
Debentures (see Note 6) was swapped into a floating rate obligation.
The estimated fair value of this swap agreement at December 31, 2005
was a gain of $2.6 million (2004 - $5.8 million gain).
Repayment requirements of the revolving term bank credits and term loans
are as follows:
Current portion 2.0
Due in 2007 171.1
Due in 2008 251.0
Due in 2009 12.6
Due in 2010 5.1
Subsequent to 2010 183.0
-------------------------------------------------------------------------
Total 624.8
-------------------------------------------------------------------------
6. 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:
Series 1 Series 2 Series 1 Series 1
-------------------------------------------------------------------------
Maturity
date July 31, November 1, December 31, October 31,
2007 2008 2012 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, 2003 25.6 208.9
Conversion of
debentures and
amortization of
discount during 2004 (11.7) (106.3)
-------------------------------------------------------------------------
Debentures outstanding
December 31, 2004 13.9 102.6
Issuance of 5.75%
Series 1 Debentures
on June 14, 2005 175.0
Issuance of 5.85%
Series 1 Debentures
on October 19, 2005 75.0
Conversion of
debentures and
amortization of
discount during 2005 (5.0) (43.3) (0.1) -
-------------------------------------------------------------------------
Debentures outstanding
December 31, 2005 8.9 59.3 174.9 75.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Quoted market value
December 31, 2005 13.3 72.4 177.6 77.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
Unamortized Carrying
Discount Value
---------------------------------------------
Maturity
date
Fixed distribution
rate
Conversion price
per trust unit
---------------------------------------------
Debentures outstanding
December 31, 2003 (1.5) 233.0
Conversion of
debentures and
amortization of
discount during 2004 1.0 (117.0)
---------------------------------------------
Debentures outstanding
December 31, 2004 (0.5) 116.0
Issuance of 5.75%
Series 1 Debentures
on June 14, 2005 (3.1) 171.9
Issuance of 5.85%
Series 1 Debentures
on October 19, 2005 (0.6) 74.4
Conversion of
debentures and
amortization of
discount during 2005 0.4 (48.0)
---------------------------------------------
Debentures outstanding
December 31, 2005 (3.8) 314.3
---------------------------------------------
---------------------------------------------
Quoted market value
December 31, 2005
---------------------------------------------
---------------------------------------------
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.
7. 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 Unit-
of Trust Units holders'
(millions) Equity
-------------------------------------------------------------------------
Unitholders' equity,
December 31, 2003(1) 69.4 611.7
Conversion of Debentures -
(8% Series 1 - $11.7 million converted (at)
$16 per trust unit; and 8% Series 2
- $106.3 million converted (at) $20 per unit)
(Note 6) 6.0 114.4
Exercise of trust unit options 0.1 -
Exercise of trust unit warrants 0.4 8.1
Trust unit incentive plan compensation expense - 3.2
Repayment of management internalization loans
receivable (Note 10(i)) - 2.6
Currency translation adjustment - (1.4)
Net earnings(1) - 112.4
Distribution to Unitholders - (179.1)
-------------------------------------------------------------------------
Unitholders' equity, December 31, 2004(1) 75.9 671.9
-------------------------------------------------------------------------
Conversion of Debentures -
(8% Series 1 - $5.0 million converted (at)
$16 per trust unit
8% Series 2 - $43.3 million converted (at)
$20 per trust unit,
and 5.75% Series 1 - $0.1 million converted (at)
$36 per trust unit) (Note 6) 2.6 48.0
Exercise of trust unit warrants 0.8 16.5
Trust unit incentive plan compensation recovery - (4.6)
Repayment of management internalization loans
receivable (Note 10(i)) - 1.3
Trust units issued to finance the JW Aluminum
acquisition 6.2 151.4
Option value associated with the issue of 5.75% and
5.85% Series 1 Debentures - 3.7
Currency translation adjustment - 0.6
Net earnings - 106.1
Distributions to unitholders - (192.0)
-------------------------------------------------------------------------
Unitholders' equity, December 31, 2005 85.5 802.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Note 2(b)
Unitholders' capital and deficit as at December 31, 2005 and 2004
consists of the following components:
2005 2004
-------------------------------------------------------------------------
(See Note
2(b))
Unitholders' capital
Trust unity equity 1,332.3 1,114.5
Conversion feature on warrants and convertible
debentures 4.8 1.6
Contributed surplus 1.2 5.9
-------------------------------------------------------------------------
1,338.3 1,122.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit
Retained earnings from operations 368.4 262.3
Accumulated distributions on trust unit equity (903.1) (711.1)
-------------------------------------------------------------------------
(534.7) (448.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At December 31, 2005, the Fund had 2.3 million trust unit warrants
outstanding (2004 - 3.1 million), exercisable at $20 per trust unit
warrant. The trust unit warrants expire May 8, 2008.
8. Net Earnings and Distributable Cash Flow per Trust Unit
3 Months ended Year Ended
December 31 December 31
2005 2004 2005 2004
-------------------------------------------------------------------------
Net earnings per trust unit
computation, basic
Net earnings 21.7 33.5 106.1 112.4
Weighted average trust
units outstanding 85.4 75.0 79.7 72.7
-------------------------------------------------------------------------
Net earnings per trust unit,
basic $ 0.25 $ 0.45 $ 1.33 $ 1.55
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow per
trust unit computation,
basic
Distributable cash flow 60.0 55.8 187.0 184.4
Weighted average trust units
outstanding 85.4 75.0 79.7 72.7
-------------------------------------------------------------------------
Distributable cash flow per
trust unit, basic $ 0.70 $ 0.74 $ 2.35 $ 2.54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per trust unit
computation, diluted
-------------------------------------------------------------------------
Net earnings 21.7 33.5 106.1 112.4
Dilutive effect of:
Debentures 0.2 2.7 0.8 1.7
-------------------------------------------------------------------------
Net earnings, assuming dilution 21.9 36.2 106.9 114.1
-------------------------------------------------------------------------
Net earnings, weighted average
trust units outstanding 85.4 75.0 79.7 72.7
Dilutive effect of:
Debentures 0.6 6.9 0.6 1.1
Trust unit options 0.1 0.2 0.1 0.2
Trust unit warrants 0.3 0.9 0.8 0.8
-------------------------------------------------------------------------
Weighted average trust units
outstanding, assuming dilution 86.4 83.0 81.2 74.8
-------------------------------------------------------------------------
Net earnings per trust unit,
diluted $ 0.25 $ 0.44 $ 1.32 $ 1.53
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow per
trust unit computation,
diluted
-------------------------------------------------------------------------
Distributable cash flow 60.0 55.8 187.0 184.4
Dilutive effect of:
Debentures 4.9 2.7 13.1 14.1
-------------------------------------------------------------------------
Distributable cash flow,
assuming dilution 64.9 58.5 200.1 198.4
-------------------------------------------------------------------------
Distributable cash flow,
weighted average trust
units outstanding 85.4 75.0 79.7 72.7
Dilutive effect of:
Debentures 10.4 6.9 7.4 9.1
Trust unit options 0.1 0.2 0.1 0.2
Trust unit warrants 0.3 1.0 0.8 0.8
-------------------------------------------------------------------------
Weighted average trust units
outstanding, assuming dilution 96.2 83.1 88.0 82.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash flow per
trust unit, diluted $ 0.67 $ 0.70 $ 2.27 $ 2.40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Trust unit options whose exercise price was greater than the market price
and Debentures that were anti-dilutive were excluded from this
calculation.
9. Commitments
(i) Lease commitments for rail cars, premises and other equipment
for the next five years and thereafter are as follows:
2006 22.5
2007 19.1
2008 15.8
2009 10.5
2010 6.6
2011 and thereafter 17.4
(ii) Purchase commitments under long-term natural gas, aluminum and
propane contracts for the next five years and thereafter are as
follows:
Cdn$ US$ US$ US$
Natural Natural
Gas Gas Aluminum Propane
---------------------------------------------------------------
2006 63.3 155.6 44.4 12.6
2007 46.9 127.0 - -
2008 41.7 116.7 - -
2009 39.0 107.9 - -
2010 21.0 52.9 - -
2011 and thereafter 1.1 0.9 - -
Superior is similarly committed to long-term natural gas,
aluminum and propane sales contracts to supply customers.
(iii) ERCO Worldwide has entered into fixed price electricity
purchase contracts for a portion of its Alberta power
requirements, for up to twelve years at an average cost of
$45.00 per Megawatt Hour. Commitments for the next five years
and thereafter are as follows:
2006 22.0
2007 17.7
2008 17.7
2009 17.7
2010 17.7
2011 and thereafter 124.2
(iv) Superior has entered into long-term forward contracts to
purchase US dollars in order to hedge US dollar out-flows of
SEM net of in-flows of ERCO Worldwide as follows:
Net US $ Conversion
Purchases Rate
---------- -----------
2006 26.4 1.25
2007 53.7 1.23
2008 100.1 1.22
2009 107.2 `1.21
2010 52.9 1.17
2011 and thereafter 1.2 1.14
As at December 31, 2005, the net mark-to-market loss on
long-term foreign currency forward contracts was $16.3 million
(2004 - $8.7 million).
(v) ERCO Worldwide has entered into a long-term agreement with
CMPC Celulosa S.A. ("CMPC"), a division of Empresas S.A. to
supply sodium chlorate to CMPC's three pulp mills in Chile. As
part of this agreement, ERCO Worldwide will construct a sodium
chlorate manufacturing plant adjacent to the CMPC Pacifico Mill
at an estimated total cost of $65 million. The new plant is
scheduled to start-up in mid-2006. Cumulative expenditures to
December 31, 2005 were $28.9 million (2004 - $1.4 million).
10. Related Party Transactions and Agreements
(i) Management Internalization Transaction
On May 8, 2003, Superior completed the internalization of its management
and administration agreements. The internalization process resulted in
the elimination of management incentive and administration fees effective
January 1, 2003. The funds paid to the Manager and Administrator to
terminate the contracts were immediately re-invested into trust units and
warrants. As part of the internalization transaction, non-interest-
bearing loans aggregating $6.5 million were advanced to the executive
officers and were used to fund the purchase of 0.325 million trust units
at $20.00 per trust unit. The loans are repayable over a four year period
in the form of annual retention bonuses of which $1.3 million was repaid
in 2005 (2004 - $2.6 million). As at December 31, 2005, the remaining
loans receivable of $2.6 million (2004 - $3.9 million) have not been
recorded as an asset by Superior, but have been deducted directly from
unitholders' equity, in recognition of the certainty of collection over
the remaining two years.
(ii) Management Trust Unit Purchase Plan Loan Guarantee
A number of senior employees of Superior have obtained guarantees from
Superior under the terms of the Management Trust Unit Purchase Plan
(the "MTUPP"), whereby participants may acquire trust units of the Fund
through open market purchases in pledge accounts established by
individual participants with an investment dealer. Participants borrow
directly from a chartered bank the entire cash amount required to make
the trust unit purchases with Superior guaranteeing up to 66% of the loan
amount. As at December 31, 2005, the aggregate quoted market value of
trust units owned under the MTUPP was $4.1 million (2004 - $3.0 million).
The aggregate amount of participant loans from a chartered bank was
$4.0 million (2004 - $1.9 million), which were supported by guarantees of
Superior aggregating $2.6 million (2004 - $1.2 million).
11. Business Segments
Superior operates five 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 manufacture and sale of specialty flat
rolled aluminum products operating as JW Aluminum Company
("JWA" or "JW Aluminum"); the distribution of walls and ceilings 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"). 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
December 31, Superior Corp- Consol-
2005 Propane ERCO JWA(1) Winroc SEM orate idated
-------------------------------------------------------------------------
Revenues 262.4 117.1 112.2 126.1 80.3 (0.9) 697.2
Cost of products
sold 182.5 60.7 99.7 93.7 76.0 (0.9) 511.7
-------------------------------------------------------------------------
Gross profit 79.9 56.4 12.5 32.4 4.3 - 185.5
Expenses
Operating and
administrative 49.7 27.9 2.2 21.3 2.5 0.8 104.4
Amortization of
property, plant
and equipment 2.3 39.6 7.3 0.5 - - 49.7
Amortization of
intangible
assets - 1.2 0.6 0.2 - - 2.0
Interest on term
bank credits and
term loans - - - - - 7.7 7.7
Interest on
convertible
unsecured
subordinated
debentures - - - - - 4.8 4.8
Amortization of
deferred
convertible
debenture
issue costs - - - - - 0.6 0.6
Income tax expense
(recovery) of
Superior 9.1 (4.5) (0.7) 4.7 0.4 (14.4) (5.4)
-------------------------------------------------------------------------
61.1 64.2 9.4 26.7 2.9 (0.5) 163.8
-------------------------------------------------------------------------
Net earnings 18.8 (7.8) 3.1 5.7 1.4 0.5 21.7
Add:
Amortization of
property, plant
and equipment,
intangible assets
and convertible
debenture issue
costs 2.3 40.8 7.9 0.7 - 0.6 52.3
Future income
tax expense
(recovery) 8.9 (5.3) (1.9) 3.3 0.4 (15.0) (9.6)
Trust unit
incentive plan
expense - - - - - (1.3) (1.3)
Less:
Maintenance
capital
expenditures,
net 1.9 (3.5) (0.5) (1.0) - - (3.1)
-------------------------------------------------------------------------
Distributable cash
flow 31.9 24.2 8.6 8.7 1.8 (15.2) 60.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three
months ended Total
December 31, Superior Corp- Consol-
2004 Propane ERCO JWA(1) Winroc(2) SEM(3) orate idated
-------------------------------------------------------------------------
Revenues 211.9 100.7 - 98.6 55.6 (1.6) 465.2
Cost of products
sold 131.6 51.3 - 76.5 52.2 (1.6) 310.0
-------------------------------------------------------------------------
Gross profit 80.3 49.4 - 22.1 3.4 - 155.2
Expenses
Operating and
administrative 43.7 22.3 - 14.1 1.6 4.8 86.5
Amortization of
property, plant
and equipment 6.9 14.9 - 1.3 - - 23.1
Amortization of
intangible assets - 1.3 - - - - 1.3
Interest on term
bank credits and
term loans - - - - - 4.6 4.6
Interest on
convertible
unsecured
subordinated
debentures - - - - - 2.7 2.7
Amortization of
deferred
convertible
debenture
issue costs - - - - - 0.4 0.4
Income tax
expense
(recovery)
of Superior 9.1 2.6 - 2.9 0.6 (12.1) 3.1
-------------------------------------------------------------------------
59.7 41.1 - 18.3 2.2 0.4 121.7
-------------------------------------------------------------------------
Net earnings 20.6 8.3 - 3.8 1.2 (0.4) 33.5
Add:
Amortization of
property, plant
and equipment,
intangible assets
and convertible
debenture issue
costs 6.9 16.2 - 1.3 - 0.4 24.8
Future income
tax expense
(recovery) 8.6 2.1 - 2.2 0.6 (11.5) 2.0
Trust unit
incentive plan
expense - - - - - 1.8 1.8
Less:
Maintenance
capital
expenditures,
net (2.6) (2.7) - (1.0) - - (6.3)
-------------------------------------------------------------------------
Distributable
cash flow 33.5 23.9 - 6.3 1.8 (9.7) 55.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) JWA was acquired October 19, 2005
(2) Winroc was acquired June 11, 2004
(3) See Note 2(b)
For the
year ended Total
December 31, Superior Corp- Consol-
2005 Propane ERCO JWA(1) Winroc SEM orate idated
-------------------------------------------------------------------------
Revenues 856.2 431.6 112.2 486.6 288.4 (3.6) 2,171.4
Cost of products
sold 571.8 224.7 99.7 368.8 273.9 (3.6) 1,535.3
-------------------------------------------------------------------------
Gross profit 284.4 206.9 12.5 117.8 14.5 - 636.1
Expenses
Operating and
adminis-
trative 186.6 101.9 2.2 78.6 9.2 4.1 382.6
Amortization
of property,
plant and
equipment 17.9 87.4 7.3 2.7 - - 115.3
Amortization
of intangible
assets - 5.1 0.6 0.3 - - 6.0
Interest on
revolving term
bank credits
and term loans - - - - - 22.8 22.8
Interest on
convertible
unsecured
subordinated
debentures - - - - - 12.9 12.9
Amortization
of convertible
debenture issue
costs - - - - - 1.7 1.7
Management
internalization
costs - - - - - 1.3 1.3
Income tax
expense
(recovery) of
Superior 28.8 5.1 (0.7) 14.1 1.9 (61.8) (12.6)
-------------------------------------------------------------------------
233.3 199.5 9.4 95.7 11.1 (19.0) 530.0
-------------------------------------------------------------------------
Net earnings 51.1 7.4 3.1 22.1 3.4 19.0 106.1
Add:
Amortization of
property, plant
and equipment,
intangible
assets and
convertible
debenture
issue costs 17.9 92.5 7.9 3.0 - 1.7 123.0
Future income
tax expense
(recovery) 28.0 1.3 (1.9) 10.7 1.9 (61.8) (21.8)
Trust unit
incentive
plan recovery - - - - - (4.6) (4.6)
Management
internalization
costs - - - - - 1.3 1.3
Less:
Maintenance
capital
expenditures,
net (2.8) (8.1) (0.5) (5.6) - - (17.0)
-------------------------------------------------------------------------
Distributable
cash flow 94.2 93.1 8.6 30.2 5.3 (44.4) 187.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three
months ended Total
December 31, Superior Corp- Consol-
2004 Propane ERCO JWA(1) Winroc(2) SEM(3) orate idated
-------------------------------------------------------------------------
Revenues 720.2 396.0 - 229.0 211.3 (3.7) 1,552.8
Cost of products
sold 433.5 202.8 - 179.5 197.9 (3.7) 1,010.0
-------------------------------------------------------------------------
Gross profit 286.7 193.2 - 49.5 13.4 - 542.8
Expenses
Operating and
adminis-
trative 173.9 92.2 - 31.3 5.7 10.1 313.2
Amortization
of property,
plant and
equipment 22.1 53.4 - 2.7 - - 78.2
Amortization
of intangible
assets - 5.5 - - - - 5.5
Interest on
term bank
credits and
term loans - - - - - 15.5 15.5
Interest on
convertible
unsecured
subordinated
debentures - - - - - 13.6 13.6
Amortization of
deferred
convertible
debenture
issue costs - - - - - 1.6 1.6
Management
internalization
costs - - - - - 2.6 2.6
Income tax
expense
(recovery)
of Superior 32.6 15.5 - 5.5 2.8 (56.2) 0.2
-------------------------------------------------------------------------
228.6 166.6 - 39.5 8.5 (12.8) 430.4
-------------------------------------------------------------------------
Net earnings 58.1 26.6 - 10.0 4.9 12.8 112.4
Add:
Amortization
of property,
plant and
equipment,
intangible
assets and
convertible
debenture
issue costs 22.1 58.9 - 2.7 - 1.6 85.3
Future income
tax expense
(recovery) 31.4 13.4 - 4.3 2.8 (55.2) (3.3)
Trust unit
incentive
plan expense - - - - - 3.2 3.2
Management
internalization
costs - - - - - 2.6 2.6
Less:
Maintenance
capital
expenditures,
net (5.6) (7.6) - (2.6) - - (15.8)
-------------------------------------------------------------------------
Distributable
cash flow 106.0 91.3 - 14.4 7.7 (35.0) 184.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) JWA was acquired October 19, 2005
(2) Winroc was acquired June 11, 2004
(3) See Note 2(b)
Total Assets, Net Working Capital, Acquisitions and Other Capital
Expenditures
Total
Superior Corp- Consol-
Propane ERCO JWA(1) Winroc(2) SEM(3) orate idated
-------------------------------------------------------------------------
As at December 31,
2005
Net working
capital 101.8 (3.1) 84.9 64.1 (8.3) 9.8 249.2
Total assets 695.4 738.8 622.0 194.8 42.9 33.9 2,327.8
-------------------------------------------------------------------------
As at December 31,
2004
Net working
capital 61.3 (8.1) - 50.5 (2.3) (3.5) 97.9
Total assets 603.6 754.6 - 152.9 28.6 12.4 1,552.1
-------------------------------------------------------------------------
For the three
months ended
December 31,
2005
Acquisitions - - 405.4 - - - 405.4
Other capital
expenditures,
net - 16.4 1.9 0.2 - - 18.5
-------------------------------------------------------------------------
For the year
ended
December 31,
2005
Acquisitions 14.7 22.4 405.4 28.7 - - 471.2
Other capital
expenditures,
net 1.9 36.2 1.9 0.2 - - 40.2
-------------------------------------------------------------------------
For the three
months ended
December 31,
2004
Acquisitions - - - 12.2 - - 12.2
Other capital
expenditures,
net 0.5 2.7 - - - - 3.2
-------------------------------------------------------------------------
For the year
ended
December 31,
2004
Acquisitions 3.7 - - 116.4 - - 120.1
Other capital
expenditures,
net 0.5 5.7 - - - - 6.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) JWA was acquired October 19, 2005
(2) Winroc was acquired June 11, 2004
(3) See Note 2(b)
Total
Geographic Information United Consol-
Canada States Other idated
-------------------------------------------------------------------------
Revenues for the year ended
December 31, 2005 1,670.7 476.7 24.0 2,171.4
Property, plant and equipment as at
December 31, 2005 591.8 551.7 24.1 1,167.6
Total assets as at
December 31, 2005 1,475.8 814.4 37.6 2,327.8
-------------------------------------------------------------------------
Revenues for the year ended
December 31, 2004 1,271.4 256.3 25.1 1,552.8
Property, plant and equipment as at
December 31, 2004 663.2 77.8 - 741.0
Total assets as at
December 31, 2004 1,402.6 149.5 - 1,552.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Comparative Figures
Certain reclassifications of prior period amounts have been made to
conform to current period presentations.
>>
