For the six months ended June 30, 2008
VANCOUVER, Aug. 7 /CNW/ - The earnings and distributable cash of Westshore Terminals Income Fund (the "Fund") are wholly dependent on the results of Westshore Terminals Limited Partnership ("Westshore"). Westshore's results are determined largely by the volume of coal shipped by its coal mine customers for sale in the export market, the U.S. dollar denominated price received by Westshore's customers for coal, the Canadian-U.S. dollar exchange rate and Westshore's costs. Westshore's throughput charges for approximately 45% of the coal it handles are calculated at present by reference to coal prices (see particulars under "Outlook" section on page 7). Higher prices for hard coking coal have resulted in Elk Valley Coal Partnership (the "Coal Partnership"), which is Westshore's principal customer, achieving higher average settlement prices for the 2008/09 coal year compared to the 2007/08 coal year. The weighted average price of 2008 calendar year coal sales by the Coal Partnership is expected to be approximately US$200 per tonne, up over 100% from US$96 in 2007. As Westshore has some exposure to fluctuations in exchange rates (as a result of pricing mechanisms under its customer contracts), Westshore engages in periodic currency hedging arrangements to provide partial shielding from material short-term swings in the CDN/US dollar exchange rate.
Westshore Terminals Income Fund
- Management's Discussion and Analysis of Financial Condition and
Results of Operations
This management's discussion and analysis refers to certain measures other than those prescribed by Canadian Generally Accepted Accounting Principles ("GAAP"). These measures do not have standardized meanings and may not be comparable to similar measures presented by other trusts or corporations. They are determined by reference to the Fund's financial statements. These non-GAAP measures are discussed because the Fund believes that they provide investors with information in understanding the results of the Fund's operations and financial position. The unaudited financial results along with management's discussion and analysis contained in this report should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Fund's Annual Report for the year ended December 31, 2007. The date of this management's discussion and analysis and results of operations is August 7, 2008.
The following table sets out selected consolidated financial information for the Fund for the quarter ended June 30, 2008. As at August 7, 2008, the Fund has 74,250,016 issued and outstanding trust units.
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(In thousands of dollars except Three Months Three Months
per unit amounts) Ended Ended
June 30, June 30,
2008 2007
$ $
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REVENUE
Coal 62,762 45,790
Other 1,083 2,370
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63,845 48,160
EXPENSES
Operating 19,213 17,906
Administrative 6,982 1,583
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26,195 19,489
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Earnings before depreciation and income taxes 37,650 28,671
Depreciation 5,572 5,552
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Earnings before income taxes 32,078 23,119
Provision for income taxes 190 6,589
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Net earnings for the period 31,888 16,530
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Net earnings per trust unit 0.429 0.223
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Standardized Distributable Cash(1) 35,008 20,250
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Distributions declared 34,898 18,563
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Distributions declared per trust unit 0.470 0.250
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The following tables set out selected consolidated financial information
for the Fund on a quarterly basis for the last eight quarters.
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(In thousands of dollars except Three Months Ended
per unit amounts) --------------------------------------
June 30, Mar 31, Dec 31, Sept 30,
2008 2008 2007 2007
$ $ $ $
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Revenue
Coal 62,762 35,145 37,437 36,937
Other 1,083 2,052 3,167 2,361
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63,845 37,197 40,604 39,298
Expenses
Operating 19,213 18,137 18,146 16,870
Administration 6,982 1,874 2,982 1,798
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26,195 20,011 21,128 18,668
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Earnings before depreciation
and income taxes 37,650 17,186 19,476 20,630
Depreciation 5,572 5,572 5,646 5,553
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Earnings before income taxes 32,078 11,614 13,830 15,077
Provision for (recovery of)
income taxes 190 281 (264) 413
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Net earnings for the period 31,888 11,333 14,094 14,664
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Net earnings per trust unit 0.429 0.153 0.190 0.197
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Cash Distributions declared(1) 34,898 20,790 26,730 21,533
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Cash Distributions per unit 0.470 0.280 0.360 0.290
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(1) Refer to page 6 for a comparison of cash distributions to
Standardized Distributable Cash.
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(In thousands of dollars except Three Months Ended
per unit amounts) --------------------------------------
June 30, Mar 31, Dec 31, Sep 30,
2007 2007 2006 2006
$ $ $ $
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Revenue
Coal 45,790 36,553 41,067 36,741
Other 2,370 1,058 (1,212) 1,184
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48,160 37,611 39,855 37,925
Expenses
Operating 17,906 17,113 16,287 17,980
Administration 1,583 1,947 2,700 1,857
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19,489 19,060 18,987 19,837
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Earnings before depreciation
and income taxes 28,671 18,551 20,868 18,088
Depreciation 5,552 5,553 5,470 5,405
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Earnings before income taxes 23,119 12,998 15,398 12,683
Provision for (recovery of)
income taxes 6,589 - - (9)
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Net earnings for the period 16,530 12,998 15,398 12,692
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Net earnings per trust unit 0.223 0.182 0.219 0.180
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Cash Distributions declared (1) 18,563 19,305(2) 23,578 21,818
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Cash Distributions per unit 0.250 0.260(2) 0.335 0.310
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Distribution of units in lieu of
cash - - 6,194 -
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Distribution of units in lieu of
cash per unit - - 0.088 -
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(1) Refer to page 6 for a comparison of cash distributions to
Standardized Distributable Cash.
(2) Includes an extraordinary distribution of $0.035. Refer to page 6.
Results of Operations
In the second quarter of 2008, Westshore shipped 5.4 million tonnes of coal, compared with 5.7 million tonnes shipped during the same period in 2007. Based on information currently available, for 2008 Westshore is anticipating shipping throughput volumes between 21 and 22 million tonnes at higher average loading rates than 2007 rates.
Coal loading revenue increased by 37% to $62.8 million in the second quarter of 2008 from $45.8 million in the second quarter of 2007. The increase in revenue was due to higher throughput rates, partially offset by lower volumes. Higher rates in Q2 2008 reflect the higher coal prices for the 2008/09 coal contract year compared to the 2007/08 coal year. Other revenue was $1.1 million in the second quarter of 2008 compared to $2.4 million in the second quarter of 2007. Foreign exchange gains, which includes both realized gains and changes in the mark-to-market adjustment for unrealized gains, decreased to a $0.1 million loss in the three months ended June 30, 2008 from a $0.4 million gain in the second quarter of 2007. Interest income for the quarter decreased by approximately $0.3 million because the Fund has spent some of the funds on hand from the equity financings undertaken in 2007 to fund the equipment upgrade project (See "Equipment Upgrade Project"). Demurrage and train detention costs decreased by $0.1 million from the same period in 2007.
Operating expenses in the second quarter of 2008 increased by approximately $1.3 million from 2007. This increase was due to higher maintenance costs. Administrative expenses increased from $1.6 million in 2007 to $7.0 million in 2008. This increase is due to the Fund accruing $5.7 million in the second quarter of 2008 for incentive fees.
As a result of the foregoing, Westshore's earnings before depreciation and income taxes increased to $37.7 million for the second quarter of 2008 compared to $28.7 million for the same period in 2007.
Contract Rate Review
Westshore announced on April 15, 2008 that it had received a decision from the Court of Appeal for British Columbia concerning the appeal by Elk Valley Coal Partnership of the arbitrator's decision covering the contract for coal shipped from the Elkview Mine. The Court of Appeal ruled that no appeal lies from the arbitrator's decision. The arbitrator's decision was rendered in July 2006 in favour of Westshore. The arbitrator determined that there was no basis on which to order a revision in the rates. Accordingly, the formula for determining the loading rate which has been in force under the contract since 2000 continues for the remaining term of the contract to 2010. The Elk Valley Coal Partnership has sought leave to appeal to the Supreme Court of Canada. A decision on the leave application is anticipated during Q4 2008.
In late August 2006, the Coal Partnership sent notice to Westshore requesting a review of the charges under the Port Services Contract that governs coal from the Fording River, Greenhills and Coal Mountain mines. No progress has been made to date on this matter.
Equipment Upgrade Project
Westshore is proceeding with the upgrade to its existing equipment previously announced. The cost of the upgrade is still expected to be on budget at approximately $49 million. The project consists of new conveyors, an upgrade to the tandem rotary rail car dumper and a fourth stacker reclaimer. The conveyors and rail car dumper upgrade have been completed and the stacker reclaimer is due to be operational by the end of 2009. Funding for the upgrade has been provided principally through $40 million in equity financing, which was completed in March 2007. The balance of the funds required will be sourced from Westshore's cash on hand.
Taxation on Trusts in Canada
Bill C-52 Budget Implementations Act, 2007 which contains legislative provisions to implement the proposals to tax publicly traded income trusts in Canada became law on June 22, 2007. Under these rules, distributions declared by the Fund after January 1, 2011 will be taxed at a rate of 29.5% (2012 - 28%) and the distributions will be treated as taxable dividends in the hands of unitholders. Unitholders will be entitled to a dividend tax credit which will give credit for the level of taxation incurred by the Fund.
The Fund has not provided for current income taxes in 2008 as the income of the Fund is distributed to and taxed in the hands of unitholders. The future taxation of distributions makes relevant for accounting purposes the timing differences between the recognition of certain assets and liabilities for tax and accounting purposes. For the quarter ended June 30, 2007, the Fund provided for a future income tax expense of $6.6 million. This was a non-cash item and was a one time charge to set up the provision for future taxes. A non-cash provision of $0.2 million has been recorded in the quarter ended June 30, 2008 to reflect changes in assets and liabilities and their expected recognition for tax purposes. This future income tax expense does not affect current distributions.
In July 2008, the Ministry of Finance published draft legislation which allows income trusts to convert to corporations on a tax-deferred basis. Management and its tax advisors are reviewing these rules to determine the most appropriate course of action for the Fund.
Distribution Reinvestment Plan
On April 5, 2007 the Fund announced a distribution reinvestment plan (the "Plan"). Under the Plan, Canadian resident Unitholders will be able to designate that all or a portion of the quarterly distributions payable on their Fund Units be applied towards the purchase of existing Fund Units through the facilities of the Toronto Stock Exchange at prevailing market prices. No additional units will be issued from treasury under the Plan. Unitholders should contact their brokers or Computershare Investor Services Inc. if they wish to participate in the Plan. Additional information on the Plan is also available on the Fund's website at www.westshore.com.
Currency Fluctuations
Since April 1, 2003, the loading rates under most of Westshore's long-term handling contracts have depended in whole or in part on the Canadian dollar price realized for coal handled by Westshore. Since the contract price for coal is set in U.S. dollars, the exchange rate affects the Canadian dollar price and Westshore's loading rate. To mitigate the resulting risk, Westshore has engaged in hedging activities and under Westshore's formal hedging policy it will hedge, by April 30 of each year, not less than 50% of its anticipated US dollar related revenues for the ensuing coal year, based on the annual budget.
In the financial statements, the effect of currency fluctuations is shown as affecting coal loading revenues before taking into account the effect of hedging activities, the financial effect of which is accounted for as other revenue. As stated in the audited Financial Statements of the Fund for the year ending December 31, 2007, because Westshore's hedging transactions do not qualify for "hedge accounting", the value of Westshore's forward exchange contracts must be "marked to market" at each period end. Westshore is party to a Euro forward contract to hedge one of the purchase contracts for the equipment upgrade project in addition to its US dollar forward contracts. For the six months ended June 30, 2008, other income included $0.8 million of unrealized gains on forward exchange contracts, compared to a $1.0 million reduction in unrealized gains for the first six months of 2007. Unrealized gains and losses are non-cash items.
Liquidity and Capital Resources
The Fund is obliged to distribute to Unitholders its cash inflows less administrative costs of the Fund (and amounts, if any, which may be paid in connection with any cash redemption of units). The Fund has no fixed distribution requirements, distributions being solely a function of amounts received by the Fund. Because the Fund's investment in Westshore is of a passive nature, it is not anticipated that the Fund will require significant capital resources to maintain its investment in Westshore on an ongoing basis. The cost of ongoing maintenance and refurbishment of the equipment is well within Westshore's financial capacity based solely on revenues less expenses without any need for financing. The current equipment addition and upgrade is being funded almost entirely from equity, which will avoid any liquidity concerns with debt service. As a result, the Fund does not anticipate any liquidity concerns with the ongoing operations of Westshore.
Westshore has in place with a Canadian chartered bank a $1 million secured operating facility which, if required, can be utilized to meet working capital requirements. This facility was not used during the second quarter and remained undrawn at June 30, 2008. Westshore's distribution policy involves leaving sufficient earnings before depreciation and unrealized gains or losses on forward exchange contracts to cover cash requirements such as capital expenditures and pension contributions.
Quarterly Distributions
On July 15, 2008, the Fund distributed $34,897,508 (representing $0.47 per unit) in cash for the second quarter of 2008 to Unitholders of record on June 30, 2008 as compared with $18,562,504 ($0.25 per unit) in cash for the second quarter of 2007.
Standardized Distributable Cash
References to "Standardized Distributable Cash" are to cash from operating activities less capital expenditures, both measures recognized under GAAP. Standardized Distributable Cash is a financial measure that indicates the Fund's ability to make distributions. It is a measure that has been recommended by the CICA's Canadian Performance Reporting Board for use by income funds in Canada as an indicator of financial performance. As one of the factors that may be considered relevant by investors is the cash available to be distributed by the Fund relative to the price of the Units, the Fund believes that Standardized Distributable Cash is a useful supplemental measure that may assist investors to assess an investment in the Units.
The Standardized Distributable Cash of the Fund is substantially comprised of distributions from Westshore which are impacted by the operating results of Westshore. The following table sets out the Standardized Distributable Cash calculation for the six month periods ended June 30, 2008 and 2007 respectively.
3 months 6 months
ended ended
June 30 June 30
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2008 2007 2008 2007
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Cash flows from operating
activities 35,349 24,040 51,778 42,343
Less: Capital expenditures (341) (3,790) (2,255) (4,738)
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Standardized Distributable Cash 35,008 20,250 49,523 37,605
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Cash Distributions declared 34,898 18,563 55,688 37,868
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Basic and diluted Standardized
Distributable Cash per unit 0.471 0.273 0.667 0.506
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Cash Distributions per unit 0.470 0.250 0.750 0.510(1)
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(1) Includes special distribution of $0.035 per unit related to prior
year-end adjustments.
The Fund plans distributions based on its annual results and expects that any particular quarterly distribution may vary from Standardized Distributable Cash for that quarter.
Until the fourth quarter of 2005, the Fund could easily predict its exact taxable income for each period, as it was determined solely by the interest on the subordinated debt of Westshore Terminals that was then held by the Fund and any dividends paid by Westshore Terminals. Because the Fund's investments now consist of substantially all the limited partnership units of Westshore Terminals Limited Partnership, virtually all of the taxable income of Westshore for any year is automatically allocated to the Fund. While the Fund attempts both to estimate its taxable income for the year and to make distributions for the year as close as possible to that taxable income, it is normal for there to be some discrepancy between the taxable income of the Fund and cash distributions by the Fund. In order to deal with the situation where the taxable income of the Fund exceeds cash distributions, the Declaration of Trust provides that an amount equal to the excess will be distributed to unitholders in the form of additional trust units, which are then consolidated.
Change in Accounting Policies
Inventories
On January 1, 2008, the Fund adopted the new requirements of CICA Handbook Section 3031 for inventories. The standard provides more comprehensive guidance on the determination of costs and the cost formulas that are used to assign costs to inventories. Inventories are required to be valued at the lower of cost and net realizable value.
The adoption of this standard did not have a material impact on the consolidated financial statements of the Fund.
Financial Instruments
On January 1, 2008, the Fund adopted the new requirements of the CICA Handbook Section 3862 for financial instruments. The Standard requires additional disclosure on the Fund's risks with respect to financial instruments and how the Fund manages these risks. This information is presented in Note 4 to the accompanying financial statements.
Capital Disclosures
On January 1, 2008, the Fund adopted the new requirements of CICA Handbook Section 1535 for capital disclosures. The standard requires additional disclosure about the Fund's capital and how it is managed along with any external requirements or restrictions imposed on that capital. This information is provided in Note 5 to the accompanying consolidated financial statements.
Outlook
The Fund's cash inflows are entirely dependent on Westshore's operating results and are significantly influenced by four variables: the volume of coal shipped through the Terminal; the US dollar denominated price received by Westshore's customers for that coal; the Canadian-US dollar exchange rate; and Westshore's operating and administrative costs. Since the average US dollar denominated coal price for the 2008 calendar year has been announced by Fording, the major variables affecting distributions will be the volume loaded and the Canadian/US dollar exchange rate. In view of the difference in loading rates between the various contracts, Westshore cannot provide a reliable indication of the effect of changes in tonnage on distributions, because that will depend on which mines ship the tonnage. Accordingly, Westshore does not intend to provide a discussion of sensitivities.
Critical to Westshore's ongoing success will be the ability of its customers, including the Coal Partnership in particular, to maintain and increase their coal export volumes while competing with other suppliers for sales worldwide. Based on information currently available, Westshore anticipates throughput volumes between 21 to 22 million tonnes, but at a higher average loading rate than in 2007. To date, Westshore has experienced no material impact to throughput volumes from the equipment upgrade.
As announced in a Fording news release on July 23, 2008, the Coal Partnership has achieved settlements for the 2008/09 coal year of US$275 per tonne, which reflects the average for all ranges of coal products, including thermal and PCI coals. This represents an increase of approximately 200% from the US dollar prices realized by the Coal Partnership for the 2007/08 coal year. These prices represent sales for all products, not only those exported through Westshore. The higher prices for coal over the prior years reflect extreme tightness in the metallurgical coal market. Changes in global economic conditions could change prices for the 2009 coal year.
For 2008 and based on current tonnage estimates as of the date of this report, tonnages shipped at fixed rates are expected to account for approximately 25% of the Terminal's throughput; tonnages shipped at variable rates but subject to a cap, in effect for this year, are expected to account for approximately 30% of throughput; and finally, tonnages shipped at full variable rates are expected to account for approximately 45% of throughput at the Terminal.
The second quarter distribution of 2008 was $0.47 per unit and distributions for each of Q3 and Q4 are currently anticipated to be modestly higher. Results in subsequent quarters will determine the level of distributions, either positively or negatively. If distributions for the calendar year 2008 exceed $1.035 per unit, incentive fees will be payable by Westshore to the Manager under the Management Agreement, as was the case in 2007. As a result of the higher coal prices, it is anticipated that the 2008 incentive fee payable to the Manager will be materially higher than in 2007. Those fees are computed on the following basis: 15% of Fund distributable cash between $1.035 - $1.125 per unit; 25% of Fund distributable cash between $1.125 - $1.260 per unit; and 35% of Fund distributable cash above $1.260 per unit.
Forward-looking Statements
The foregoing statements concerning tonnages, coal prices, exchange rates, loading rates and variability of distributions are forward-looking statements but reflect the current expectations of the Fund and Westshore with respect to future events and performance. Wherever used, the words "may," "will," "anticipate," "intend," "expect," "plan," "believe," and similar expressions identify forward-looking statements. Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether, or the times at which, such performance or results will be achieved.
Forward-looking statements are based on information available at the time they are made, assumptions made by management, and management's good faith belief with respect to future events, and are subject to the risks and uncertainties outlined in the Fund's Annual Information Form that could cause actual performance or results to differ materially from those reflected in the forward-looking statements, historical results or current expectations.
All forward-looking statements will be impacted by and are subject to the risks set out under Risk Factors in the Fund's Annual Information Form.
Additional Information
Additional information relating to the Fund, including the Fund's latest Annual Report and Annual Information Form, are available on SEDAR at www.sedar.com and on Westshore's website at www.westshore.com.
On behalf of the Trustees,
William W. Stinson
Chairman
August 7, 2008
The enclosed financial statements have not been reviewed by the Fund's or Westshore's auditors.
Consolidated Statements of Earnings, Comprehensive Earnings and
Cumulative Earnings
(in thousands of dollars, Three months ended Six months ended
except per unit amounts) June 30 June 30
$ $
2008 2007 2008 2007
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(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUE
Coal 62,762 45,790 97,907 82,343
Other 1,083 2,370 3,135 3,428
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63,845 48,160 101,042 85,771
EXPENSES
Operating 19,213 17,906 37,350 35,019
Administrative 6,982 1,583 8,856 3,530
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26,195 19,489 46,206 38,549
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Earnings before depreciation
and income taxes 37,650 28,671 54,836 47,222
Depreciation 5,572 5,552 11,144 11,105
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Earnings before income
taxes 32,078 23,119 43,692 36,117
Provision for income taxes 190 6,589 471 6,589
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Net and comprehensive
earnings for the period 31,888 16,530 43,221 29,528
Cumulative earnings -
Beginning of period 505,718 449,097 494,385 436,099
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Cumulative earnings -
End of period 537,606 465,627 537,606 465,627
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Basic and diluted earnings
per trust unit 0.429 0.223 0.582 0.408
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Weighted average number
of trust units
outstanding 74,250,016 74,250,016 74,250,016 72,315,113
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Consolidated Statements of Cash Flows
(in thousands of dollars) Three months ended Six months ended
June 30 June 30
$ $
2008 2007 2008 2007
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(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cash flows from operating
activities
Net earnings for the
period 31,888 16,530 43,221 29,528
Items not affecting cash
Unrealized losses
(gains) on forward
exchange contracts 67 (356) (791) 973
Depreciation 5,572 5,552 11,144 11,105
Future income tax expense 190 6,589 471 6,589
Decrease in deferred
employee future benefits
costs (714) (46) (530) (185)
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37,003 28,269 53,515 48,010
Increase in non-cash working
capital (1,654) (4,229) (1,737) (5,667)
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35,349 24,040 51,778 42,343
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Cash flows from financing
activities
Distributions paid to
unitholders (20,790) (19,305) (47,520) (42,883)
Issuance of units, net of
share issuance costs - - - 40,430
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(20,790) (19,305) (47,520) (2,453)
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Cash flows from investing
activities
Additions to plant and
equipment (341) (3,790) (2,255) (4,738)
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(341) (3,790) (2,255) (4,738)
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Increase in cash and cash
equivalents 14,218 945 2,003 35,152
Cash and cash equivalents -
Beginning of period 60,527 68,762 72,742 34,555
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Cash and cash equivalents -
End of period 74,745 69,707 74,745 69,707
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Supplemental cash flow
information
Cash received for interest 434 710 1,044 1,090
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Consolidated Balance Sheets
(in thousands of dollars) June 30, December
2008 31, 2007
$ $
(Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents 74,745 72,742
Accounts receivable 16,808 11,181
Inventories 6,422 6,162
Prepaid expenses 6,828 972
Other assets 830 38
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105,633 91,095
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Plant and equipment
At cost 495,143 492,889
Accumulated depreciation (375,344) (364,200)
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119,799 128,689
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Employee future benefits 22,775 20,975
Goodwill 365,541 365,541
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613,748 606,300
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LIABILITIES & UNITHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 37,832 27,826
Distribution payable to unitholders 34,898 26,730
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72,730 54,556
Employee future benefits 20,634 19,364
Future income taxes 7,209 6,738
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100,573 80,658
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Unitholders' Equity
Capital contributions 704,032 704,032
Cumulative earnings 537,606 494,385
Cumulative distributions declared (728,463) (672,775)
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513,175 525,642
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613,748 606,300
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Notes to Financial Statements
1. Basis of presentation
These interim financial statements do not contain all the information
required for annual financial statements and should be read in
conjunction with the financial statements and notes included in the
Fund's Annual Report for the year ended December 31, 2007. These
interim financial statements have not been audited or reviewed by
external auditors.
2. Significant accounting policies
These interim financial statements have been prepared in accordance
with Canadian generally accepted accounting principles and follow the
same accounting principles and methods of application as set out in
Note 2 of the Fund's annual financial statements for the year ended
December 31, 2007.
3. Inventories
Effective January 1, 2008, the Fund adopted the new requirements of
CICA Handbook Section 3031 for inventories. The adoption of this
standard did not have a material impact on the consolidated financial
statements of the Fund.
4. Financial Instruments
The Fund's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and distributions payable to
unitholders. The carrying amounts of these financial instruments
recorded on the consolidated balance sheet are reasonable estimates
of their fair values due to the relatively short periods to maturity
and commercial terms of these instruments.
Cash and cash equivalents are classified as financial assets held for
trading and are recorded at fair value on the consolidated balance
sheet. Accounts receivable are classified as loans and receivables
and are recorded at amortized cost. Accounts payable and
distributions payable to unitholders are classified as other
financial liabilities and are recorded at amortized cost.
The Fund's financial instruments also include foreign exchange
forward contracts, which are derivative financial instruments that
are classified as held-for-trading and are recorded at fair value.
Fair value is measured using the quoted market rate for forward
contracts of a similar maturity date.
Financial risk management and exposure
The Fund is exposed to various risks associated with its financial
instruments, which include credit risk, liquidity risk and market
risk.
Credit Risk
Credit risk is the risk of financial loss to the Company if a
customer or counterparty to a financial instrument fails to meet its
contractual obligations. Credit risk arises primarily from accounts
receivable and cash and cash equivalents.
The Company's exposure to credit risk is influenced by the
profitability of coal mining companies, which is heavily impacted by
the price of the coal. The accounts receivable are concentrated with
one customer, The Coal Partnership, as this customer represented
approximately 89% of Westshore's revenues in 2007. Westshore does
not have any collateral or security over receivables. Westshore
monitors the financial health of its customers and regularly reviews
its accounts receivable for impairment. As at June 30, 2008, there
were no trade accounts receivable past due which were considered
uncollectible and no reserve in respect of doubtful accounts was set
up.
The Fund limits its exposure to credit risk arising from cash
equivalents by only investing in money market funds with a major
Canadian financial institution. The Fund does not expect any credit
losses in the event of non-performance by counter parties to its
foreign exchange forward contracts as the counter parties are the
Fund's bankers, a major Canadian financial institution.
The carrying amount of financial assets represents the maximum credit
exposure. The maximum exposure to credit risk is:
2008
Cash and cash equivalents 74,745
Accounts receivable 16,808
Forward exchange contracts used for hedging 830
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92,383
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Liquidity Risk
Liquidity risk is the risk that the Fund will not be able to meet its
obligations as they fall due. The Fund continually monitors its
financial position to ensure that it has sufficient liquidity to
discharge its obligations when due. The Fund's distribution
obligation to unitholders is funded from operating income and the
current equipment upgrade has been funded with additional equity
which will avoid liquidity concerns with debt service.
The financial liabilities of the Fund, which include accounts payable
and accrued liabilities, have a contractual maturity of less than 1
year.
Westshore also maintains a $1 million operating facility that can be
drawn down to meet short term financing needs. No amounts were
outstanding on this facility at June 30, 2008.
Market Risk
The significant market risk exposures affecting the financial
instruments held by the Fund are those related to foreign currency
exchange rates and interest rates.
Foreign currency exchange rates
The Fund is exposed to foreign currency exchange rate risk on its
foreign currency forward contracts. The value of these financial
instruments fluctuates with changes in the CDN/US dollar exchange
rate and the CDN/Euro exchange rate. The Fund is unable to estimate
the effect of these exchange rates on the value of the forward
contracts existing at June 30, 2008. From the beginning of the year
to June 30, 2008, the Euro has strengthened by approximately 8%
against the Canadian dollar and the US dollar has strengthened by
approximately 2% against the Canadian dollar. The fair market value
of the Fund's foreign currency forward contracts has increased by
$791,000.
Interest rates
The Fund has limited exposure to interest rate risk on the cash
equivalents (short-term investments). Money market fund returns are
correlated with Canadian T-bills and Bankers' Acceptances of major
Canadian financial institutions. A change in interest rates would not
have a material impact on the financial statements of the Fund.
5. Capital Disclosures
The capital of the Fund consists solely of unitholders' equity which
includes issued trust units and cumulative earnings less cumulative
distributions.
The objective of the Fund is to maintain a stable capital base and
ensure that the capital structure does not interfere with the Fund's
ability to meet its distribution requirements on the trust units. In
2008, the Fund expects that its quarterly distributions to
unitholders will be funded by earnings and operating cash flows.
The trust units are governed by the Second Amended and Restated
Declaration of Trust dated September 29, 2005, which provides that
non-residents of Canada may not own more than 49% of the trust units
at any time. The Fund continually monitors the non-resident ownership
levels to the best of its ability given the practical limitations
regarding beneficial ownership interest. The Fund believes that it
has always had substantially less than 49% non-Canadian ownership.
The Fund's trust units are not subject to externally imposed capital
requirements. There have been no changes in how the Fund manages its
capital during the period ended June 30, 2008.
6. Other Income
Other income includes the following gains and losses on financial
instruments:
Three months ended Six months ended
June 30 June 30
$ $
2008 2007 2008 2007
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(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Interest income on
cash and cash
equivalents 434 710 $ 1,044 $ 1,090
Change in fair value
of forward exchange
contracts (67) 356 791 (973)
Realized foreign
exchange gains - 632 - 2,085
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$ 367 $ 1,698 $ 1,835 $ 2,202
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7. Employee future benefits
Three months ended Six months ended
June 30 June 30
$ $
2008 2007 2008 2007
---------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Pension plan benefits $(1,533) $ (587) $(1,800) $(1,173)
Other retirement and
post-employment benefits 819 541 1,270 988
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Employee future benefits
recovery (714) (46) (530) (185)
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