TORONTO, Feb. 19 /CNW/ - Chemtrade Logistics Income Fund (TSX: CHE.UN)
today announced results for the three months and year ended December 31, 2008.
High prices and margins for sulphuric acid throughout the year resulted in
significant increases in annual revenue and earnings for Chemtrade's Sulphur
Products & Performance Chemicals and International segments. Although a fall
in demand late in the year for most of Chemtrade's products negatively
impacted fourth quarter results, revenue and earnings for the full year were
the highest since Chemtrade's formation in 2001.
Mark Davis, President and Chief Executive Officer of Chemtrade, said, "We
were pleased with the outstanding financial results achieved for 2008 in spite
of our Beaumont plant being off-line for the last four months of the year and
the impact of the deepening recession in the fourth quarter."
Adjusted cash flow from operating activities for the fourth quarter was
$18.7 million (2007: $18.8 million) and distributable cash after maintenance
capital expenditures for the period was $11.5 million, or $0.35 per unit
(2007: $16.1 million, or $0.48 per unit), generated from revenue of $292.8
million (2007: $144.6 million). Earnings before interest, income taxes,
depreciation and amortization ("EBITDA") for the fourth quarter were $24.2
million (2007: $23.0 million) and net loss was $2.5 million compared with net
earnings of $9.1 million in the same period in 2007. Operating results for the
fourth quarter of 2008 reflected the Beaumont plant situation and a $3.4
million increase in allowance for doubtful debts. Maintenance capital
expenditure was $4.4 million higher than in 2007, and net earnings were
impacted by unrealized foreign exchange losses of $12.2 million.
For the full year, adjusted cash flow from operating activities was $99.0
million (2007: $54.4 million) and distributable cash after maintenance capital
expenditures was $83.5 million (2007: $47.5 million), or $2.50 per unit (2007:
$1.41 per unit). EBITDA was $118.9 million (2007: $68.6 million) and net
earnings for 2008 were $40.3 million (2007: $20.6 million).
Sulphur Products & Performance Chemicals ("SPPC") generated EBITDA of
$16.5 million in the fourth quarter compared with $12.9 million in 2007 and
net earnings of $5.1 million in the fourth quarter of 2008 compared with $3.6
million in the fourth quarter of 2007. Increased revenue from higher prices
and margins for sulphuric acid and the effect of the weaker Canadian dollar
more than offset the impact of lower volumes from the Beaumont plant being
off-line for the entire quarter and reduced demand late in the quarter. EBITDA
was also impacted by additional spending on maintenance while the Beaumont
plant was being repaired.
Pulp Chemicals reported fourth quarter EBITDA of $3.4 million, compared
with $5.3 million in 2007 and net earnings of $0.6 million in the fourth
quarter of 2007 compared with $2.5 million earned in the same quarter of 2007.
The decrease reflected lower volumes during the quarter as a result of reduced
demand towards the end of the quarter including the largest customer's
decision to take downtime during December.
International reported revenue of $134.2 million for the fourth quarter,
compared with $56.1 million in 2007. Strong prices for sulphuric acid and
sulphur that prevailed during the year continued for most of the quarter,
although global demand and prices began to decline during the period. Spot
sales of uncommitted volumes early in the quarter generated high margins.
International generated EBITDA for the quarter of $10.5 million compared with
$9.4 million last year.
Mr. Davis said, "Chemtrade's excellent 2008 financial results reflected
the strong operating performances of our underlying businesses resulting from
the initiatives implemented in recent years including improvements to the
operational reliability of our facilities. The results are also indicative of
our ability to capitalize on the prices and margins for sulphuric acid that
strengthened throughout most of the year. Our strong cash generation during
the year also enabled us to strengthen our balance sheet and enhance our
financial flexibility by paying off our operating line of credit, thereby
reducing our net debt by US$41 million.
"It is difficult to forecast demand for our products in 2009, but we
foresee no appreciable increase in demand over the fourth quarter of 2008,
until at least the second half of 2009. Our business model and certain of our
contracts do mitigate the effects of some commodity movements, but a sustained
decrease in demand would have an adverse impact on Chemtrade. We believe that
we will generate distributable cash after maintenance capital expenditures
during 2009 at least equal to our current distribution rate. This is possible
because we have strengthened and repositioned certain of our businesses since
2007. Even though we plan on higher levels of capital expenditure in 2009
relative to 2007, and even if the economy does not recover from what we have
seen since December, we believe that we will achieve distributable cash in
excess of our $1.20 per unit distribution rate."
Distributions
Distributions declared in the fourth quarter totalled $0.30 per unit,
comprised of monthly distributions of $0.10 per unit declared in October,
November and December 2008.
Chemtrade operates a diversified business providing industrial chemicals
and services to customers in North America and around the world. Chemtrade is
one of the world's largest suppliers of sulphuric acid, liquid sulphur dioxide
and sodium hydrosulphite, and a leading processor of spent acid. Chemtrade is
also a leading regional supplier of sulphur, sodium chlorate, phosphorous
pentasulphide, and zinc oxide.
This new release contains non-GAAP measures such as EBITDA (earnings
before any deduction for net interest and accretion expense, taxes,
depreciation and amortization and other non-cash charges such as minority
interest) and distributable cash after maintenance capital expenditures.
Further information on these measures and reconciliations with appropriate
GAAP measures are contained in the Fund's Management, Discussion and Analysis
for the year ended December 31, 2008.
This news release contains certain statements which may constitute
"forward-looking" statements within the meaning of certain securities laws,
including the "safe harbour" provisions of the Securities Act (Ontario). The
use of any of the words "anticipate", "continue", estimate", "expect", "may",
"will", "project", "should", "believe" and similar expressions are intended to
identify forward-looking statements.
This news release contains forward-looking statements about the
objectives, strategies, financial condition, results of operations and
businesses of the Fund. These statements are "forward-looking" as they are
based on current expectations about our business and the markets we operate
in, and on various estimates and assumptions.
- Forward-looking statements in this news release describe our
expectations as of the date of this news release.
- Our actual results could be materially different from our
expectations if known or unknown risks affect our business, or if our
estimates or assumptions turn out to be inaccurate. As a result, we
cannot guarantee that any forward-looking statement will materialize.
- Forward-looking statements do not take into account the effect that
transactions or non-recurring items announced or occurring after the
statements are made may have on our business.
- We disclaim any intention or obligation to update any forward-looking
statement even if new information becomes available, as a result of
future events or for any other reason.
- Risks that could cause our actual results to differ materially from
our current expectations are discussed in the Risks and Uncertainties
section of our MD&A.
Further information can be found in the disclosure documents filed by
Chemtrade Logistics Income Fund with the securities regulatory authorities,
available at www.sedar.com.
A conference call to review the fourth quarter and full year 2008 results
will be webcast live on www.chemtradelogistics.com and www.newswire.ca/webcast
on Friday, February 20, 2009 at 10:00 a.m.
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Balance Sheets
(in thousands of dollars)
December December
31, 2008 31, 2007
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 48,050 $ 11,804
Accounts receivable 138,640 76,203
Inventories (notes 2(a)(ii) and 7) 38,124 24,331
Prepaid expenses and other assets (note 19(b)) 6,259 5,942
-------------------------------------------------------------------------
231,073 118,280
Notes receivable (note 8) 3,045 -
Property, plant and equipment (notes 5 and 9) 169,174 148,942
Other assets 2,583 1,413
Future tax asset (note 15) 13,283 10,272
Intangibles (note 10) 137,227 143,968
Goodwill (note 10) 98,840 87,700
-------------------------------------------------------------------------
$ 655,225 $ 510,575
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Operating line of credit (note 11) $ - $ 41,113
Accounts payable 122,685 42,509
Accrued and other liabilities (note 19(b)) 71,024 26,496
Distributions payable 3,178 3,358
Income taxes payable 8,157 1,563
-------------------------------------------------------------------------
205,044 115,039
Long-term debt (note 11) 185,023 155,206
Other long-term liabilities (note 19(b)) 12,706 5,081
Post-employment benefits (note 16) 4,238 3,767
Future tax liability (note 15) 30,278 25,396
Unitholders' equity
Units (note 12(b)) 389,932 412,957
Contributed surplus (note 12(c)) 5,272 -
Deficit (153,141) (153,566)
Accumulated other comprehensive income (loss)
(note 13) (24,127) (53,305)
-------------------------------------------------------------------------
217,936 206,086
Subsequent event (note 22)
Commitments and contingencies (note 17)
-------------------------------------------------------------------------
$ 655,225 $ 510,575
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Earnings
(in thousands of dollars, except per unit amounts)
Year ended Year ended
December December
31, 2008 31, 2007
-------------------------------------------------------------------------
Revenue $1,178,826 $ 546,636
Cost of sales and services (excluding
depreciation disclosed below) 1,015,945 437,263
-------------------------------------------------------------------------
Gross profit 162,881 109,373
Selling, general, administrative and other
costs (note 14) 45,183 38,738
Restructuring costs (note 6) (1,238) 1,971
-------------------------------------------------------------------------
Earnings before the under-noted 118,936 68,664
Unrealized foreign exchange loss (gain) 16,712 (776)
Depreciation and amortization 41,123 38,713
Gain on disposal of property (note 5) (250) -
Net interest and accretion expense 13,535 12,633
-------------------------------------------------------------------------
Earnings before income taxes and minority interest 47,816 18,094
Income taxes (note 15)
Current 7,613 2,219
Future (128) (4,699)
-------------------------------------------------------------------------
7,485 (2,480)
-------------------------------------------------------------------------
Earnings before minority interest 40,331 20,574
Minority interest - (22)
-------------------------------------------------------------------------
Net earnings $ 40,331 $ 20,596
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per unit (note 12(d))
Basic $ 1.21 $ 0.61
Diluted $ 1.21 $ 0.61
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cost of sales and services for the year ended December 31, 2008 does not
include $17,020 (2007 -$19,963) of depreciation relating to plant
buildings and equipment (note 2).
See accompanying notes to consolidated financial statements
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Changes in Unitholders' Equity
(in thousands of dollars)
Year ended Year ended
December December
31, 2008 31, 2007
-------------------------------------------------------------------------
Units
Balance, beginning of year $ 412,957 $ 412,944
Repurchase of units (note 12(c)) (23,025) -
Issued on conversion of debentures (note 12(e)) - 13
-------------------------------------------------------------------------
Balance, end of year $ 389,932 $ 412,957
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus
Balance, beginning of year $ - $ -
Repurchase of units (note 12(c)) 5,272 -
-------------------------------------------------------------------------
Balance, end of year $ 5,272 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity component of convertible debentures
Balance, beginning of year $ - $ 160
Redemption of debentures (note 12(e)) - (160)
-------------------------------------------------------------------------
Balance, end of year $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deficit
Balance, beginning of year $(154,040) $(134,579)
Changes in accounting policies (note 2(a)(ii)) 474 556
-------------------------------------------------------------------------
Balance, beginning of year, as adjusted (153,566) (134,023)
Redemption of debentures (note 12(e)) - 160
Net earnings 40,331 20,596
Distributions (39,906) (40,299)
-------------------------------------------------------------------------
Balance, end of year $(153,141) $(153,566)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
(note 13)
Balance, beginning of year $ (53,305) $ (31,426)
Changes in accounting policies - 1,783
-------------------------------------------------------------------------
Balance, beginning of year, as adjusted (53,305) (29,643)
Other comprehensive income (loss) 29,178 (23,662)
-------------------------------------------------------------------------
Balance, end of year $ (24,127) $ (53,305)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Statements of Comprehensive Income
(in thousands of dollars)
Year ended Year ended
December December
31, 2008 31, 2007
-------------------------------------------------------------------------
Net earnings $ 40,331 $ 20,596
Change in unrealized loss on translation of
self-sustaining foreign operations 33,456 (21,441)
Change in unrealized loss on derivatives
designated as cash flow hedges (4,525) (2,221)
Losses on derivatives designated as cash flow
hedges in prior years transferred to net
income in the current year 247 -
-------------------------------------------------------------------------
Other comprehensive income (loss) 29,178 (23,662)
-------------------------------------------------------------------------
Comprehensive income (loss) $ 69,509 $ (3,066)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CHEMTRADE LOGISTICS INCOME FUND
Consolidated Statements of Cash Flows
(in thousands of dollars)
Year ended Year ended
December December
31, 2008 31, 2007
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings $ 40,331 $ 20,596
Items not affecting cash:
Depreciation and amortization 41,123 38,713
Future income taxes (128) (4,699)
Minority interest - (22)
Accretion expense 664 800
Gain on sale of property, plant and equipment
(note 5) (309) (232)
Early settlement of debt - 28
Change in fair value of derivatives and
unrealized foreign exchange loss (gain) 17,406 (986)
Non-cash restructuring costs - 48
-------------------------------------------------------------------------
99,087 54,246
Decrease (increase) in working capital 48,817 (6,504)
-------------------------------------------------------------------------
147,904 47,742
Financing activities:
Distributions to unitholders (40,086) (40,971)
Repurchase of units (17,753) -
Redemption of convertible debentures - (16,378)
(Decrease) increase in operating line of credit (41,113) 27,922
Financing transaction costs (628) (317)
Increase in other long-term liabilities 7,590 3,084
-------------------------------------------------------------------------
(91,990) (26,660)
Investing activities:
Additions to property, plant and equipment (19,828) (9,066)
Acquisitions - (6,535)
Proceeds from disposal of property, plant
and equipment 2,787 325
Notes receivable (2,523) -
-------------------------------------------------------------------------
(19,564) (15,276)
Effect of exchange rates on cash held in
foreign currencies (104) (149)
-------------------------------------------------------------------------
Increase in cash and cash equivalents 36,246 5,657
Cash and cash equivalents - beginning of year 11,804 6,147
-------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 48,050 $ 11,804
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental information:
Cash taxes paid $ 1,018 $ 2,103
Cash interest paid $ 13,219 $ 13,210
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CHEMTRADE LOGISTICS INCOME FUND
Notes to Consolidated Financial Statements
(in thousands of dollars, except amounts per tonne)
December 31, 2008
-------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS:
Chemtrade Logistics Income Fund ("the Fund") commenced operations on
July 18, 2001 when it completed an Initial Public Offering and
purchased various assets and related businesses from Marsulex Inc.
The Fund operates in four business segments: Sulphur Products &
Performance Chemicals ("SPPC"), Pulp Chemicals, International and
Corporate. For additional information regarding the Fund's business
segments see note 18.
2. CHANGES IN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS:
(a) Changes in Accounting Policies:
(i) Capital disclosures
Effective January 1, 2008, the Fund adopted the recommendations of
the Canadian Institute of Chartered Accountants ("CICA") Handbook
Section 1535, Capital Disclosures. This section establishes standards
for disclosing information about an entity's capital and how it is
managed. The entity's disclosure should include information about its
objectives, policies and processes for managing capital and disclose
whether or not it has complied and the consequences of non-compliance
with any capital requirements to which it is subject. This new
section relates to disclosure and did not have an impact on the
Fund's financial results. These disclosures are contained in note 20.
(ii) Inventories
Effective January 1, 2008, the Fund adopted the recommendations of
CICA Handbook Section 3031, Inventories. Under the new section,
inventories are required to be measured at the "lower of cost and net
realizable value", which is different from the previous guidance of
the "lower of cost and market". The new section requires the reversal
of any write-downs previously recognized, if applicable. Certain
minimum disclosures are also required, including the accounting
policies used, carrying amounts, amounts recognized as an expense,
write-downs, and the amount of any reversal of any write-downs
recognized as a reduction in expenses.
The new section also clarifies the definition of cost to include all
costs of purchase, costs of conversion and other costs incurred to
bring inventories to their present location and condition. Costs of
conversion include a systematic allocation of fixed and variable
production overheads that are incurred in converting materials into
finished goods. The allocation of fixed production overheads is based
on normal production capacity of the production facilities.
The new section requires that depreciation be included in the fixed
costs of conversion when costing inventories. Previously, the Fund
had excluded depreciation from its cost of inventory. The Fund has
elected to apply this section retrospectively and has adjusted the
comparative figures to comply with the new section. As a result, the
opening deficit balances as of January 1, 2008 and 2007 have been
decreased by $474 and $556 respectively. The closing inventory and
deficit balances as at December 31, 2007 have also been adjusted by
$474 to comply with the new section. Depreciation and amortization
expense for the year ended December 31, 2008, includes the
depreciation expense related to cost of sales and services of $17,020
(2007 - $19,963).
(iii) Financial instruments
Effective January 1, 2008, the Fund adopted the recommendations of
CICA Handbook Sections 3862, Financial Instruments - Disclosures, and
3863, Financial Instruments - Presentation. Section 3862 modifies the
disclosure requirements of Section 3861, Financial Instruments -
Disclosure and Presentation, including required disclosure of the
assessment of the significance of financial instruments for an
entity's financial position and performance and of the extent of
risks arising from financial instruments to which the Fund is exposed
and how the Fund manages those risks, whereas Section 3863 carries
forward the presentation related requirements of Section 3861. These
new sections relate to disclosure and presentation only and did not
have an impact on the Fund's financial results. These disclosures are
contained in note 19.
(b) Recent Accounting Pronouncements:
(i) Convergence to international financial reporting standards
("IFRS")
In January 2006, the CICA Accounting Standards Board ("AcSB") adopted
a strategic plan for the direction of accounting standards in Canada.
The AcSB has recently confirmed that accounting standards in Canada
for public companies are to converge with IFRS effective for fiscal
periods beginning on or after January 1, 2011. The Fund has assembled
an IFRS transition team which has started to assess the impact of the
convergence of Canadian GAAP and IFRS, and will implement the new
IFRS standards.
(ii) Goodwill and intangible assets
In February 2008, the CICA issued Handbook Section 3064, Goodwill and
Intangible Assets. Section 3064 states that upon their initial
identification, intangible assets are to be recognized as assets if
they meet the definition of an intangible asset and if they satisfy
the recognition criteria contained in the Handbook section. This
section also provides further information on the recognition of
internally generated intangible assets (including research and
development costs).
Section 3064 carries forward the requirements of the old
Section 3062, Goodwill and Other Intangible Assets with regards to
the subsequent measurement of intangible assets, goodwill, and
disclosure. The new section will become effective on January 1, 2009
for the Fund. The Fund is still in the process of evaluating the
effect of the adoption of this new section on the consolidated
financial statements; however it does not expect it to have a
material impact.
(iii) Fair value of financial assets and financial liabilities
On January 20, 2009, the CICA published EIC-173, entitled Credit Risk
and the Fair Value of Financial Assets and Financial Liabilities,
which provides further information on the determination of the fair
value of financial assets and financial liabilities under
Section 3855, entitled Financial Instruments - Recognition and
Measurement. This EIC states that an entity's own credit and the
credit risk of the counter-party should be taken into account in
determining the fair value of financial assets and financial
liabilities, including derivative instruments. This recommendation
should be applied retrospectively without restatement of prior
periods to all financial assets and liabilities measured at fair
value in interim and annual financial statements for periods ending
on or after the date of issuance of the Abstract, that is January 20,
2009. The new section will become effective on January 1, 2009 for
the Fund. The Fund is currently evaluating the effect of the adoption
of this new section on the consolidated financial statements; however
it does not expect it to have a material impact.
3. SIGNIFICANT ACCOUNTING POLICIES:
These consolidated financial statements have been prepared by
management in accordance with accounting principles generally
accepted in Canada.
(a) Basis of consolidation:
These consolidated financial statements include the accounts of
the Fund and its wholly owned subsidiaries from their respective
dates of acquisition. The principal operating subsidiaries are:
Chemtrade Logistics Inc., Chemtrade Logistics (US), Inc., BCT
Chemtrade Corporation, Kemmax GmbH, RuhrTrans Transport GmbH,
Chemtrade Performance Chemicals Canada Inc., Chemtrade
Performance Chemicals US, LLC, Chemtrade Pulp Chemicals Limited
Partnership, Chemtrade Refinery Services Inc. and Chemtrade
Phosphorous Specialties L.L.C. All significant inter-company
balances and transactions have been eliminated for the purposes
of these consolidated financial statements.
(b) Cash and cash equivalents:
Cash equivalents are comprised of highly liquid investments
having original terms to maturity of 90 days or less when
acquired and are valued at fair value. There were no cash
equivalents held at December 31, 2008 and 2007.
(c) Inventories:
Finished goods are valued at the lower of average cost and net
realizable value. Average cost includes all costs of purchase,
costs of conversion and other costs incurred to bring inventories
to their present location and condition. Costs of conversion
include a systematic allocation of fixed and variable production
overheads that are incurred in converting materials into finished
goods. The allocation of fixed production overheads is based on
normal production capacity of the production facilities. Raw
material inventory is recorded at the lower of cost determined on
a first-in, first-out basis, and net realizable value.
(d) Property, plant and equipment:
Property, plant and equipment are depreciated on a straight-line
basis with buildings depreciated over 15 to 20 years, equipment
depreciated over 10 to 15 years, and furniture and other
equipment depreciated over three to five years.
Facilities and equipment under construction do not begin to be
depreciated until substantially complete and ready for productive
use.
(e) Goodwill:
Goodwill is the residual amount that results when the purchase
price for an acquired business exceeds the sum of the amounts,
based on fair values, allocated to assets acquired, less
liabilities assumed. Goodwill is not amortized and is tested for
impairment at least annually.
(f) Intangibles:
Intangibles include the estimated value at the date of
acquisition of long-term customer and vendor relationships and
other intangible assets. Intangibles associated with these
relationships are amortized on a straight-line basis over 6 to 15
years and other intangible assets are amortized on a straight-
line basis over five years.
(g) Impairment of long-lived assets:
Long-lived assets, including property, plant and equipment are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets is measured by
comparing the carrying amount of an asset with the estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair
value of the asset.
(h) Income taxes:
The Fund uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, future tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Future tax assets and liabilities are
measured using the enacted or substantively enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. A
valuation allowance is recorded against a future income tax asset
if it is not anticipated that the asset will be realized in the
foreseeable future. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the date of enactment or substantive
enactment.
(i) Post-employment benefits:
The Fund provides health care and pension benefits for certain
employees upon retirement. The Fund accrues these employee future
benefits over the periods from the date of hire to the full
eligibility date. The cost of employee future benefits is
actuarially determined using the accumulated benefit method
prorated based on service. These actuarial valuations are
prepared at least every three years, with the most recent one
valuing the obligation as at December 31, 2007.
(j) Unit based compensation:
The Fund operates a Total Return Long-Term Incentive Plan ("TR
LTIP") which grants cash awards based on achieving total
Unitholder return. The two elements that comprise total
Unitholder return are: changes in unit price and distributions
paid to Unitholders, over the performance period. The Fund treats
these awards as liabilities with the value of these liabilities
being re-measured at each reporting period, based upon changes in
the intrinsic value of the awards. Any gains or losses on re-
measurement are recorded in the Consolidated Statements of
Earnings, provided that the compensation cost accrued during the
performance period is not adjusted below zero. For any forfeiture
of awards, accrued compensation costs are adjusted by decreasing
compensation costs in the period of forfeiture.
(k) Foreign currency translation:
The accounts of the Fund's foreign operations, whose functional
currency is U.S. dollars, are considered to be self-sustaining
and are translated into Canadian dollars using the current rate
method. Assets and liabilities are translated at the rates in
effect at the balance sheet date and revenue and expenses are
translated at average exchange rates for the period. Gains or
losses arising from the translation of the financial statements
of self-sustaining foreign operations are deferred in accumulated
other comprehensive income until there is a realized reduction in
the net investment.
Transactions in foreign currencies are recorded at the rate in
effect at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies
have been translated into Canadian dollars at the rate of
exchange in effect at the balance sheet date and gains or losses
are recognized in earnings.
(l) Revenue recognition:
Revenue from the sale of products is recognized upon shipment to,
or receipt by customers, depending on contractual terms. Revenue
earned on processing services is recognized when the services
have been rendered in accordance with contractual terms. Revenue
on the sale of certain commodities within the International
segment are recorded on a net basis. In all cases, revenue is
only recognized when selling prices have been fixed or are
determinable, and collection is reasonably assured.
(m) Asset retirement obligations:
The fair value of estimated asset retirement obligations is
recognized when identified and a reasonable estimate of fair
value can be made. The asset retirement cost, equal to the
estimated fair value of the asset retirement obligation, is
capitalized as part of the cost of the related long-lived asset.
The asset retirement costs are depreciated over the asset's
estimated useful life and included in depreciation and
amortization expense. Increases in the asset retirement
obligation resulting from the passage of time are recorded as
accretion of asset retirement obligation. Actual expenditures
incurred are charged against the accumulated obligation.
At December 31, 2008 $660 (2007 - $505) has been included in
other long-term liabilities.
(n) Convertible debentures:
The convertible debentures are presented partially as debt and
partially as equity. The equity component, representing the
holder's option to convert into units, is presented as part of
Unitholders' Equity. The liability component of convertible
debentures increases to its face value over the term of the
debenture. The offsetting charge to earnings is classified as
accretion expense on the Consolidated Statements of Earnings.
Conversions of debentures decrease the liability and the equity
components of convertible debentures and increase the Fund's
units. The convertible debentures were fully redeemed during
2007.
(o) Financial instruments:
Financial instruments are classified into one of these five
categories: held-for-trading, held-to-maturity, loans and
receivables, available-for-sale financial assets or other
financial liabilities.
All financial instruments, including embedded derivatives, are
initially recorded on the balance sheet at fair value. After
initial recognition, the financial instruments are measured at
their fair values, except for held-to-maturity investments, loans
and receivables and other financial liabilities, which are
measured at amortized cost. The effective interest related to the
financial liabilities and the gain or loss arising from the
change in the fair value of a financial asset or liability
classified as held-for-trading is included in net income for the
period in which it arises. If a financial asset is classified as
available-for-sale, the gain or loss is recognized in other
comprehensive income until the financial asset is de-recognized
and all cumulative gain or loss is then recognized in net income.
The Fund has classified its cash and cash equivalents and notes
receivable as held-for-trading, which are measured at fair value.
Accounts receivable are classified as loans and receivables,
which are measured at amortized cost.
Operating line of credit, accounts payable, accrued liabilities,
distributions payable and long-term debt, are classified as other
financial liabilities, which are measured at amortized cost,
using the effective interest method. The Fund had neither
available-for-sale, nor held-to-maturity investments during the
year ended December 31, 2008.
Transaction costs that are directly attributable to the
acquisition or issuance of financial assets or liabilities are
accounted for as part of the respective asset or liability's
carrying value at inception. Costs considered as commitment fees
paid to financial institutions are recorded in other assets, and
amortized on a straight-line basis over the term of the debt.
Derivative financial instruments are utilized by the Fund in the
management of its foreign currency, commodity commitments and
interest rate exposures. The Fund's policy is not to utilize
derivative financial instruments for trading or speculative
purposes. The Fund formally documents all relationships between
hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking various hedge
transactions. The Fund also formally assesses, both at the
hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are effective
in offsetting changes in fair values or cash flows of hedged
items.
The effective portion of changes in the fair value of derivatives
that are designated and qualify as cash flow hedges is recognized
in other comprehensive income. Upon settlement, the cumulative
gain or loss is recognized in net income. Any gain or loss in
fair value relating to the ineffective portion is recognized
immediately in the Consolidated Statements of Earnings in net
interest and accretion expense. All derivative instruments that
do not qualify for hedge accounting, or are not designated as a
hedge, are recorded as either an asset or liability with changes
in fair value recognized in earnings.
The Fund has designated hedge accounting for interest swap
arrangements. The Fund's foreign exchange contracts, natural gas
forward contracts and commodity forward contracts have not been
designated for hedge accounting.
(p) Use of estimates:
The preparation of financial statements in conformity with
Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the balance
sheet and reported amounts of revenue and expenses during the
period. Actual results could differ from those estimates.
The extreme pricing volatility currently being experienced in the
Fund's International business could result in future results
being affected by the non-performance of suppliers or customers.
To the extent that such non-performance is likely, the Fund has
made adequate provisions.
4. PURCHASE OF OLIN CUSTOMER CONTRACTS:
On May 1, 2007, the Fund completed the purchase of Olin Corporation's
liquid sodium hydrosulphite ("SHS") customer contracts for $6,744
(US$6,043), of which $2,248 (US$2,014) had been accrued with respect
to certain earn out provisions. During the fourth quarter of 2007,
the Fund refined its earn out provision accrual and reduced the
original accrual to $1,869 (US$1,675). As at December 31, 2008, the
total accrual is $1,206 (US$990), with $490 (US$402) classified as
other long-term liabilities and the balance as accrued liabilities.
The acquisition does not include Olin's manufacturing assets. The
Fund incurred transaction related costs of $165.
These consolidated financial statements reflect the acquired
contracts at assigned fair value as intangibles. These assets include
the value associated with the customer relationships and are being
amortized over their estimated useful lives of five years.
5. GAIN ON DISPOSAL OF PROPERTY:
During the third quarter of 2008, the Fund sold excess vacant land at
its site in Leeds, South Carolina for gross proceeds of US$2,927. As
a result of the sale, the Fund has recognized a gain on disposal of
$250 (US$245).
6. RESTRUCTURING COSTS:
During the fourth quarter of 2006, the Fund decided to discontinue
production of powder SHS and costs of $2,706 related to that decision
were recorded in that quarter. Accounting rules prescribe when costs
are to be recorded in such situations and certain costs can only be
recorded when they are incurred. Consequently, the Fund recorded an
additional $1,971 with respect to this decision during 2007. These
costs included a provision for a penalty on a long-term supply
agreement. During 2008, the penalty was waived. As a result, the Fund
reversed the penalty provision previously recorded of $1,238.
7. INVENTORIES:
2008 2007
---------------------------------------------------------------------
Raw materials and work in process $ 4,487 $ 4,299
Finished goods 30,462 17,531
Operating supplies 3,175 2,501
---------------------------------------------------------------------
$ 38,124 $ 24,331
---------------------------------------------------------------------
---------------------------------------------------------------------
8. NOTES RECEIVABLE:
During the second quarter of 2008, the Fund invested $2,523
(US$2,500) in Meranol S.A.C.I. ("Meranol"). Meranol is based in
Buenos Aires, Argentina and is a leading Argentine producer of
sulphuric acid and other sulphur products. The investment was made in
the form of convertible notes, convertible into 10% of the equity of
Meranol. The notes bear an interest rate of 10% per annum. The Fund
also has options over a specified period of time, to increase its
investment to up to 45% of Meranol's common stock at a pre-determined
price.
9. PROPERTY, PLANT AND EQUIPMENT:
2008 2007
---------------------------------------------------------------------
Land $ 3,699 $ 5,540
Plant and equipment 278,127 230,552
Facilities and equipment under construction 17,637 4,907
---------------------------------------------------------------------
299,463 240,999
Accumulated depreciation (130,289) (92,057)
---------------------------------------------------------------------
Property, plant and equipment $ 169,174 $ 148,942
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation expense $ 20,715 $ 21,283
---------------------------------------------------------------------
---------------------------------------------------------------------
10. INTANGIBLES AND GOODWILL:
Intangibles 2008 2007
---------------------------------------------------------------------
Intangibles subject to amortization:
Customer relationships $ 214,226 $ 164,742
Vendor relationships 9,431 7,706
Other 731 595
---------------------------------------------------------------------
224,388 173,043
Accumulated amortization (87,161) (58,232)
---------------------------------------------------------------------
137,227 114,811
Intangibles not subject to amortization:
Customer relationships - 29,157
---------------------------------------------------------------------
Intangibles $ 137,227 $ 143,968
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Amortization expense $ 20,408 $ 17,430
---------------------------------------------------------------------
---------------------------------------------------------------------
During the first quarter of 2008, the Fund renewed its agreement with
Vale Inco Limited for the marketing of all sulphur by-products
produced by the Vale Inco smelter in Sudbury, Ontario. This 10-year
contract, effective as of January 1, 2008, contains similar terms to
the previous agreements between the parties.
At the time of the Fund's IPO, it had recorded intangibles of $29,157
related to the Vale Inco Limited agreement and these intangibles were
considered to have an indefinite life. Management has revised its
estimate of the useful life of this relationship to 10 years in line
with the current agreement term. As a result, the Fund has begun
amortizing these intangibles on a straight-line basis over 10 years
beginning January 1, 2008. Consequently, for the year ended
December 31, 2008, the Fund recorded amortization of $2,916.
The increase in goodwill of $11,140 is due to translation of goodwill
of foreign operations.
11. LONG-TERM DEBT:
2008 2007
---------------------------------------------------------------------
Term bank debt
US$153,138 (2007 - US$100,285) $ 186,522 $ 99,412
Canadian dollar denominated - 57,060
---------------------------------------------------------------------
186,522 156,472
Less: Transaction costs (1,499) (1,266)
---------------------------------------------------------------------
Long-term debt $ 185,023 $ 155,206
---------------------------------------------------------------------
---------------------------------------------------------------------
During the third quarter of 2008, under provisions allowed by its
credit agreement, the Fund converted its Canadian dollar denominated
term debt of $57,060 into U.S. dollar term debt and $25,200 of its
outstanding Canadian dollar lines of credit into U.S. dollar lines of
credit.
During the second quarter of 2008, the Fund extended the term of its
senior credit facilities to August 2, 2011. This was a two year
extension to the original term, on substantially the same terms as
the original agreement. The Fund incurred transaction costs of $628
related to this extension. As the Fund is treating this extension as
a modification of the debt, rather than an extinguishment, these
transaction costs have been added to the remaining unamortized
transaction costs from the pre-existing agreements.
During 2007, the Fund increased the aggregate amount that can be
borrowed under the Fund's senior credit facilities by increasing the
size of its operating lines of credit by $50,000. The Fund incurred
transaction costs of $317 with respect to this amendment. The Fund
used part of these funds to redeem the 16,378 convertible debentures
outstanding for the principal amount plus accrued and unpaid
interest.
At December 31, 2008, the Fund had senior credit facilities of
$273,907. Borrowings under these facilities may be made in Canadian
or U.S. dollars. The credit facilities are allocated as follows:
$186,522 term loan and $87,385 in revolving credit facilities. Under
the credit agreement, the Fund has operating lines of credit of
US$68,103 ($82,949) as well as bank overdraft facilities of $2,000
and US$2,000 ($2,436). The term bank debt is not due or payable until
August 2011. Interest is payable on outstanding term loans at rates
that vary with Banker's Acceptances or Libor. The related financing
costs of $3,729 have been included in the long-term debt. All
transaction costs will be expensed to net interest and accretion
expense using the effective interest method over the life of the
debt.
Borrowings under the revolving credit facilities are subject to
interest at rates that vary with Banker's Acceptances or Libor. At
December 31, 2008, $8,450 of the total facility has been utilized in
the form of standby letters of credit and there are no amounts
outstanding on the operating lines of credit (December 31, 2007 -
$31,200 and US$10,000 ($9,913)). The term bank debt facility and the
operating lines are secured by a fixed and floating charge on the
assets of the Fund and certain of its subsidiaries.
The bank agreement contains various financial covenants that if not
complied with, could result in a restriction on funds available for
distribution.
In the second quarter of 2008, the Fund entered into new swap
arrangements with its principal banker, which fix interest rates on
all of its U.S. dollar term debt and Canadian dollar denominated term
debt from August 2009, the previous maturity date of the Fund's
credit facility, until August 2010. Previously, the Fund had swap
arrangements with its principal banker which fixed interest rates on
all of its U.S. dollar term debt and Canadian dollar denominated term
debt until August 2009.
In the third quarter of 2008, the Fund collapsed its swap
arrangements on its Canadian dollar denominated term debt and
recognized a loss of $897 which has been included in net interest and
accretion expense. The Fund also entered into new swap arrangements
with its principal banker in order to fix interest rates on the
converted debt until 2010. These swap arrangements covered the entire
amount of its converted U.S. dollar term debt (US$52,853) and a
portion of its then outstanding converted operating lines of credit
(US$23,342).
During 2007, the Fund entered into a new swap arrangement with its
principal banker which fixed the interest rate on US$10,000 of its
then outstanding operating lines of credit until August 2009.
12. UNITS:
(a) Authorized:
Unlimited number of units.
(b) Outstanding:
Number of 2008 Number of 2007
Units Amount Units Amount
---------------------------------------------------------------------
Units
Balance -
beginning of
year 33,582,936 $ 412,957 33,582,040 $ 412,944
Issued on
conversion of
debentures - - 896 13
Units repurchased
for cancellation
(note 12(c)) (1,872,526) (23,025) - -
---------------------------------------------------------------------
Balance - end
of year 31,710,410 $ 389,932 33,582,936 $ 412,957
---------------------------------------------------------------------
---------------------------------------------------------------------
(c) Normal course issuer bid:
On September 19, 2008, the Fund announced that it intends to
purchase up to 3,330,094 of its units by way of a normal course
issuer bid (the "Bid") through the facilities of the Toronto
Stock Exchange ("TSX"), representing 10% of the public float on
the day thereof. The purchases commenced on September 23, 2008
and will terminate by September 22, 2009. The purchases will be
made in accordance with the policies and rules of the TSX and
units will be purchased for cancellation. The prices that
Chemtrade will pay for any units will be the market price of such
units at the time of acquisition.
During 2008, the Fund purchased 1,872,526 units at an average per
unit price of $9.48 for an aggregate purchase amount of $17,753.
This resulted in $23,025 being recorded as a reduction to the
value of units and $5,272 being recorded as contributed surplus.
(d) Net earnings per unit:
Net earnings per unit has been calculated on the basis of the
weighted average number of units outstanding for the year ended
December 31, 2008 which amounted to 33,370,769 units (2007 -
33,582,848 units).
(e) Equity component of convertible debentures:
For the year ended December 31, 2007, 13 convertible debentures
were converted into 896 units which resulted in an increase in
units of $13 and a decrease in the debt and equity components of
convertible debentures of $13 and $nil, respectively.
During 2007, the Fund redeemed the remaining 16,378 convertible
debentures, which resulted in a decrease in the debt and equity
components of convertible debentures of $16,349 and $160,
respectively. The Fund recorded a gain of $28 related to the
repayment of the debt component of the debentures in selling,
general, administrative and other costs.
The Fund also recorded a capital transaction on the equity
component of $160 in retained earnings.
(f) Distributions:
Distributions paid for the year ended December 31, 2008 were
$40,086 (2007 - $40,971). All of the Fund's distributions are
discretionary.
(g) Long-term incentive plan:
The Fund operates a Total Return Long-Term Incentive Plan ("TR
LTIP") which grants cash awards based on achieving total
Unitholder return. The two elements that comprise total
Unitholder return are: changes in unit price and distributions
paid to Unitholders, over the performance period. The Fund treats
these awards as liabilities with the value of these liabilities
being re-measured at each reporting period, based upon changes in
the intrinsic value of the awards. Any gains or losses on re-
measurement are recorded in the Consolidated Statements of
Earnings, provided that the compensation cost accrued during the
performance period is not adjusted below zero. For the year ended
December 31, 2008, the Fund recorded total expenses of $3,165
(2007 - $4,449) related to the TR LTIP. As at December 31, 2008
$5,161 is outstanding, of which $1,661 (2007 - $nil) is included
in Accrued and other liabilities, and $3,500 (2007 - $2,013) is
included in Other long-term liabilities.
13.
