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CALGARY, ALBERTA--(Marketwire - Aug. 4, 2011) - Superior Plus Corp. SPB
Second Quarter Highlights
- Adjusted operating cash flow (AOCF) per share for the second quarter increased 50% to $0.18 per share compared to $0.12 in the prior year quarter.
- Energy Services results were positively impacted by higher industrial volumes due to improvements in the economy, sales and marketing activities and lower operating costs, offset in part, by modestly lower average margins.
- Specialty Chemicals had a strong performance due to improved chloralkali gross profits as a result of higher utilization rates at its Port Edwards, Wisconsin facility combined with improved average selling prices.
- Construction Products Distribution results were modestly improved and were consistent with management's expectations. However, results continue to be impacted by weakness in the U.S. housing market and slower commercial activity.
- The financial outlook for 2011 has been maintained at AOCF per share of $1.55 to $1.90.
Financial Summary (1)
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Three months Six months ended
(millions of dollars except per ended June 30, June 30,
share amounts) 2011 2010 2011 2010
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Revenue 898.4 791.2 2,037.2 1,757.1
Gross profit 176.0 165.9 414.4 383.5
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EBITDA from operations (2) 44.6 34.0 139.7 115.6
Interest (20.8) (17.5) (39.3) (33.5)
Cash income tax recovery (expense) (0.1) 0.1 (0.2) (0.4)
Corporate costs (3.9) (3.6) (7.1) (7.7)
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Adjusted operating cash flow (2) 19.8 13.0 93.1 74.0
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Adjusted operating cash flow per
share, basic and diluted (2)(3)(4) $ 0.18 $ 0.12 $ 0.86 $ 0.71
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Dividends paid per share $ 0.30 $ 0.405 $ 0.67 $ 0.81
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(1) Superior's 2010 financial results have been restated in accordance with
International Financial Reporting Standards (IFRS). See Superior's
Second Quarter Management's Discussion and Analysis for additional
details.
(2) EBITDA from operations and adjusted operating cash flow are key
performance measures used by management to evaluate the performance of
Superior. These measures are defined under "Non-IFRS Financial Measures"
in Superior's 2011 Second Quarter Management's Analysis and Discussion.
(3) The weighted average number of shares outstanding for the three months
ended June 30, 2011 is 108.9 million (2010 - 105.0 million) and for the
six months ended June 30, 2011 is 108.5 million (2010 - 104.1 million).
(4) For the three and six months ended June 30, 2011 and 2010, there were no
dilutive instruments.
Segmented Information
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Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2011 2010 2011 2010
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EBITDA from operations:
Energy Services 13.4 3.3 79.0 58.9
Specialty Chemicals 24.8 24.7 50.5 46.0
Construction Products Distribution 6.4 6.0 10.2 10.7
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44.6 34.0 139.7 115.6
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Energy Services
- EBITDA from operations for the second quarter was $13.4 million compared to $3.3 million in the prior year quarter due to improved results from all of the Energy Services business, particularly the U.S. refined fuels business.
- The Canadian propane business generated gross profit of $45.6 million in the second quarter compared to $43.9 million in the prior year quarter. Canadian propane distribution sales volumes were 11 million litres or 4% greater than the prior year quarter, with increases in all lines of business except for automotive. Increases came from higher industrial volumes as a result of strong oil field volumes, improvements in the economic environment and the impact of colder weather. Residential and commercial volumes were higher than the prior year due to the impact of weather and ongoing sales and marketing initiatives.
- Sales volumes benefitted from colder than average weather, as temperatures across Canada for the second quarter, measured by degree days, were 15% colder than the prior year and 7% colder than the five-year average. Due to the seasonality of heating volumes, colder weather in the second and third quarters does not have the same impact as weather in the first and fourth quarters.
- Canadian propane average sales margins were 17.5 cents per litre in the second quarter compared to 17.6 cents per litre in the prior year quarter. The decrease in average sales margins was due to a higher proportion of lower margin industrial volumes.
- The U.S. refined fuels business generated gross profits of $23.7 million in the second quarter compared to $21.8 million in the prior year quarter.
- U.S refined fuels results benefitted from colder temperatures across the northeast U.S., as average temperatures, measured by degree days, for the second quarter were 16% colder than the prior year, but 15% warmer than the five-year average.
- U.S. refined fuels average sales margins were 5.9 cents per litre in the second quarter, consistent with the prior year quarter.
- The fixed-price energy services business generated gross profits of $9.0 million compared to $6.8 million in the prior year quarter. Higher natural gas gross profits came from the contribution of increased transportation revenues and favourable natural gas market pricing.
- The supply portfolio management business generated gross profits of $3.2 million in the second quarter compared to $0.7 million in the comparative period due to improved market trading opportunities throughout the quarter relative to the prior year quarter.
- Operating expenses were $76.2 million in the quarter compared to $79.7 million in the prior year quarter. The reduction in operating expenses is due principally to costs savings within the U.S. refined fuels business as a result of the integration activities through out the past year, and the absence of one-time integration costs incurred in the prior year quarter.
- Superior expects EBITDA from operations for its Energy Services business for 2011 to be between $120 and $140 million, consistent with the outlook provided in the first quarter of 2011. The Energy Services business continues to perform consistent with management expectations.
Specialty Chemicals
- EBITDA from operations for the second quarter was $24.8 million compared to $24.7 million in the prior year quarter due to improved chloralkali sales volumes and higher average realized selling prices.
- Chloralkali sales volumes benefited from the incremental contribution of the Port Edwards chloralkali facility which was operating at higher operating rates throughout the current year quarter compared to the prior year quarter. The facility expansion was completed in the fourth quarter of 2009 and continued process debottlenecking has supported operating levels modestly above the original design capacity. Additionally, average realized selling prices were higher than the prior year period due to improvements in general economic conditions throughout North America.
- Sodium chlorate gross profits were lower than the prior year quarter. A 3% increase in sales volumes due to improved North American demand was more than offset by reduced gross margins due to higher effective electricity rates, and external product purchase requirements as a result of the carry over impact of temporary production line issues. The production line issues have been resolved and will not negatively impact future quarter gross margins. Average realized sodium chlorate selling prices were modestly higher than the prior year as improved market conditions were partially offset by the appreciation of the Canadian dollar on U.S.-denominated sales.
- Superior expects EBITDA from operations for its Specialty Chemicals business for 2011 to be between $100 and $115 million, consistent with the outlook provided in the first quarter of 2011. Superior continues to see a stable market for sodium chlorate as a result of strong pulp market fundamentals. Superior also expects continued improvement in chloralkali sales volumes and pricing due to improved North American chemical demand and the full year impact of the expanded Port Edwards facility.
Construction Products Distribution
- EBITDA from operations for the second quarter was $6.4 million compared to $6.0 million in the prior year quarter.
- Construction Products Distribution's results were modestly improved from the prior year but continue to be impacted by ongoing weakness in the residential and commercial construction markets which resulted in reduced sales volumes of both gypsum and commercial and industrial insulation. Overall sales margins were modestly higher than the prior year due to improved supply chain management and favourable supplier arrangements, offset in part, by the impact of ongoing competitive pressures due to reduced sales volumes.
- Volumes in select U.S. regions benefitted from the introduction of the full interiors product line into markets that were previously acoustical ceiling focused. This strategy will continue to be assessed on a branch-by-branch basis as market conditions allow.
- Superior expects EBITDA from operations for its Construction Products Distribution Business Services business for 2011 to be between $27 and $37 million, consistent with the outlook provided in the first quarter of 2011. Superior's assessment of the overall market is generally consistent with the first quarter in that the outlook for Canadian residential and commercial markets is for stable to modestly lower activity levels. In the U.S., the recovery in the residential housing markets continues to be uncertain, although recent annualized housing starts for May of 625,000 provided positive indications of a modest improvement, it is still unclear when a sustained recovery will begin. U.S. commercial activity remains weak although management remains optimistic that improvements may occur throughout the second half of 2011, while the insulation markets are stable to modestly improving. As a result of the significant restructuring activities undertaken throughout 2010, the Construction Products Distribution business is well positioned to take advantage of future improvements to the U.S. construction market.
Corporate Related
- Total interest expense for the second quarter was $20.8 million compared to $17.5 million in the prior year quarter. Interest expense was higher in the current year quarter due to higher average debt levels and higher average effective interest rates.
- During the second quarter, Superior extended its syndicated credit facility with ten lenders, increasing the size of the facility to $615 million from $450 million, with no changes to the financial covenant ratios. The facility matures on June 27, 2014 and can be expanded up to $750 million. Additionally, in conjunction with the extension of the syndicate credit facility, Superior terminated its accounts receivable securitization program which provided up to $130 million of additional credit on a seasonally adjusted basis.
- Superior's dividend re-investment program (DRIP) generated proceeds of $7.2 million during the second quarter ($16.4 million year-to-date). Proceeds from the DRIP will be used to reduce existing debt levels and fund existing and future accretive growth opportunities. The DRIP provides Superior's shareholders with the opportunity to reinvest their cash dividends in the future growth of the business at a 5% discount to the market price of Superior's common shares.
- Superior's Total Debt (including convertible debentures) to Compliance EBITDA was 5.3X as at June 30, 2011, compared to 6.1X as at December 31, 2010. Superior continues to make progress on reducing its total leverage through a combination of higher EBITDA and debt reduction. Based on the mid-point of Superior's 2011 Financial Outlook and the continuation of Superior's DRIP, Superior anticipates that its total leverage as at December 31, 2011 will be approximately 4.5X to 5.0X.
Financial Outlook
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2011 Outlook 2011 Outlook
(millions of dollars except per share amounts) Current (1) Prior
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EBITDA from operations:
Energy Services 120-140 120-140
Specialty Chemicals 100-115 100-115
Construction Products Distribution 27-37 27-37
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Adjusted operating cash flow per share $1.55-$1.90 $1.55-$1.90
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(1) The assumptions, definitions, risk factors and explanation of the 2011
Financial Outlook are discussed in Superior's 2011 Second Quarter
Management's Discussion and Analysis.
2011 Second Quarter Results
Superior's 2011 Second Quarter Management's Discussion and Analysis is attached and is also available on Superior's website at: www.superiorplus.com under the Investor Relations section.
Conference Call
Superior will be conducting a conference call and webcast for investors, analysts, brokers and media representatives to discuss the 2011 Second Quarter Results at 8:30 a.m. MDT on Friday, August 5, 2011. To participate in the call, dial: 1-866-226-1792. An archived recording of the call will be available for replay until midnight, Monday, September 12, 2011. To access the recording, dial: 1-800-408-3053 and enter pass code 7585178 followed by the # key. Internet users can listen to the call live, or as an archived call, on Superior's website at: www.superiorplus.com.
Forward Looking Information
Certain information included herein is forward-looking, within the meaning of applicable Canadian securities laws. Forward-looking information includes, without limitation, statements regarding the future financial position, business strategy, market conditions, budgets, litigation, projected costs, capital expenditures, financial results, adjusted operating cash flow, EBITDA from operations, taxes and plans and objectives of or involving Superior and Superior Plus LP. Forward-looking information is often, but not always, identified by the use of words such as "anticipate", "believe", "expect", "plan", "intend", "forecast", "target", "project", "guidance", "may", "will", "should", "could", "estimate", "predict" or similar words suggesting future outcomes or language suggesting an outlook. Forward-looking information in this press release, including the attached 2011 Second Quarter Management's Discussion and Analysis, includes but is not limited to, consolidated and business segment outlooks, product production, expected EBITDA from operations, expected AOCF, expected AOCF per share, expected leverage ratios, future capital expenditures, future economic conditions, business strategy and objectives, dividend strategy, future dividend payments, future cash flows, anticipated taxes, benefits and synergies resulting from corporate and asset acquisitions, commodity prices and costs, expected life of facilities and statements regarding the future financial position of Superior and Superior Plus LP. Superior believes the expectations reflected in such forward-looking information are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.
Forward-looking information is based on various assumptions. Those assumptions are based on information currently available to Superior, including information obtained from third party industry analysts and other third party sources concerning the historic performance of Superior's businesses, anticipated financial performance, current business and economic trends, the amount of future dividends paid by Superior, business prospects, availability and utilization of tax basis, regulatory developments, currency, exchange and interest rates, trading data, cost estimates, our ability to obtain financing on acceptable terms, and the other assumptions set forth under the "Outlook" sections contained in the attached 2011 Second Quarter Management's Discussion and Analysis. Readers are cautioned that the preceding list of assumptions is not exhaustive.
By their very nature, forward-looking information involve inherent risks and uncertainties, both general and specific, and risks that predictions, forecasts, projections and other forward-looking information will not be achieved, some of which are described herein and in the attached 2011 Second Quarter Management's Discussion and Analysis. Such forward-looking information necessarily involves known and unknown risks and uncertainties, which may cause Superior's or Superior Plus LP's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking information. We caution readers not to place undue reliance on this information as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking information. These risks and uncertainties include but are not limited to the risks referred to under the section entitled "Risk Factors to Superior", in the attached 2011 Second Quarter Management's Discussion and Analysis, the risks associated with the availability and amount of the tax basis and the risks identified in Superior's 2010 Annual Information Form under the heading "Risk Factors".
Readers are cautioned that the foregoing lists of factors that may affect future results is not exhaustive. When relying on our forward-looking information to make decisions with respect to Superior, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Any forward-looking information is made as of the date hereof and, except as required by law, Superior does not undertake any obligation to publicly update or revise such information to reflect new information, subsequent or otherwise. For more information about Superior, visit our website at www.superiorplus.com.
Management's Discussion and Analysis of 2011 Second Quarter Results
August 4, 2011
The following Management's Discussion and Analysis (MD&A) is a review of the financial performance and position of Superior Plus Corp. (Superior) as at and for the three and six months ended June 30, 2011 and 2010. The information in this MD&A is current to August 4, 2011. This MD&A should be read in conjunction with Superior's audited consolidated financial statements and notes to those statements as at and for the year ended December 31, 2010, its December 31, 2010 MD&A and its unaudited condensed consolidated financial statements as at and for the three and six months ended June 30, 2011.
On January 1, 2011, Superior adopted International Financial Reporting Standards (IFRS) for Canadian publicly accountable enterprises. Prior to the adoption of IFRS, Superior followed Canadian Generally Accepted Accounting Principles (GAAP). While IFRS has many similarities to GAAP, some of our accounting policies have changed as a result of our transition to IFRS. The most significant accounting policy changes that have had an impact on the results of our operations are discussed within the applicable sections of this MD&A, and in more detail in the Adoption of IFRS section of this MD&A. Superior unaudited condensed consolidated financial statements as at June 30, 2011 and the three and six months ended June 30, 2011 and 2010 were prepared in accordance with IFRS.
The accompanying unaudited condensed consolidated financial statements of Superior have been prepared by and are the responsibility of Superior's management. Superior's unaudited condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting as issued by the International Accounting Standards Board (IASB). Dollar amounts in this MD&A are expressed in Canadian dollars and millions except where otherwise noted.
Overview of Superior
Superior is a diversified business corporation. Superior holds 100% of Superior Plus LP (Superior LP), a limited partnership formed between Superior General Partner Inc. (Superior GP) as general partner and Superior as limited partner. Superior owns 100% of the shares of Superior GP. The cash flow of Superior is solely dependent on the results of Superior LP and is derived from the allocation of Superior LP's income to Superior by means of partnership allocations. Superior, through its ownership of Superior LP, has three operating segments: the Energy Services segment which includes a Canadian propane distribution business, a U.S. refined fuels distribution business, a fixed-price energy services business and a supply portfolio management business; the Specialty Chemicals segment; and the Construction Products Distribution segment.
Second Quarter Results
Summary of Adjusted Operating Cash Flow (1)(5)
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Three months ended Six months ended
(millions of dollars except per June 30, June 30,
share amounts) 2011 2010 2011 2010
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EBITDA from operations: (2)
Energy Services 13.4 3.3 79.0 58.9
Specialty Chemicals 24.8 24.7 50.5 46.0
Construction Products Distribution 6.4 6.0 10.2 10.7
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44.6 34.0 139.7 115.6
Interest (20.8) (17.5) (39.3) (33.5)
Cash income tax (expense) recovery (0.1) 0.1 (0.2) (0.4)
Corporate costs (3.9) (3.6) (7.1) (7.7)
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Adjusted operating cash flow(2) 19.8 13.0 93.1 74.0
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Adjusted operating cash flow per
share (2), basic (3) and diluted (4) $ 0.18 $ 0.12 $ 0.86 $ 0.71
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(1) Superior has restated its 2010 results in accordance with IFRS, see
"Adoption of IFRS" for the impact of IFRS on Superior's 2010 results.
(2) EBITDA and adjusted operating cash flow are not IFRS measures. See
"Non-IFRS Financial Measures."
(3) The weighted average number of shares outstanding for the three months
ended June 30, 2011, is 108.9 million (2010 - 105.0 million) and for the
six months ended June 30, 2011, is 108.5 million (2010 - 104.1 million).
(4) For the three and six months ended June 30, 2011 and 2010, there were no
dilutive instruments.
(5) Superior has reclassified all finance lease interest costs from EBITDA
from operations and included any such costs with interest. Previously
Superior had deducted finance lease interest costs from EBITDA from
operations.
Adjusted Operating Cash Flow Reconciled to Cash Flow from Operating
Activities (1)
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Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2011 2010 2011 2010
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Net cash flow from operating
activities 104.4 11.2 162.1 117.2
Add: Increase (decrease) in
non-cash working capital (65.0) 17.4 (29.5) (11.6)
Other expenses - 0.7 - 2.3
Non cash interest expense 1.5 1.9 3.3 3.4
Less: Income taxes (expense)
recovery (0.1) 0.1 (0.2) (0.4)
Finance costs recognized
in net earnings (21.0) (18.3) (42.6) (36.9)
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Adjusted operating cash flow 19.8 13.0 93.1 74.0
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(1) See the Unaudited Condensed Consolidated Financial Statements for net
cash flows from operating activities and changes in non-cash working
capital.
Second quarter adjusted operating cash flow was $19.8 million, an increase of $6.8 million or 52% from the prior year quarter. The increase in adjusted operating cash flow was due to higher operating results at Energy Services and Construction Products Distribution offset in part by higher interest costs. Adjusted operating cash flow was $0.18 per share, compared to $0.12 per share in the prior year quarter due to a 52% increase in adjusted operating cash flow offset in part by a 4% increase in the weighted average number of shares outstanding. The average number of shares outstanding increased in 2011 as a result of shares issued from Superior's Dividend Reinvestment Program and Optional Share Purchase Plan (DRIP).
Adjusted operating cash flow for the six months ended June 30, 2011 was $93.1 million, an increase of $19.1 million or 26% compared to the prior year period. The increase in adjusted operating cash flow was due to increased EBITDA from operations of Energy Services and Specialty Chemicals offset in part by higher interest costs. Adjusted operating cash flow per share was $0.86 per share for the six months ended June 30, 2011, an increase of $0.15 per share or 21% due to the increase in adjusted operating cash flow as noted above offset in part by a 4% increase in the weighted average number of shares outstanding. The average number of shares outstanding increased in 2011 as a result of shares issued from the DRIP.
Net earnings for the second quarter were $1.1 million, compared to net losses of $5.5 million in the prior year quarter. Net losses were impacted by higher operating and interest costs offset in part by $14.3 million in unrealized gains on financial instruments in the current quarter, compared to unrealized losses of $4.2 million in the prior year quarter. The change in the unrealized gains and losses on financial instruments was due principally to gains in the current quarter on Superior's natural gas financial derivatives compared to losses in the prior year as a result of fluctuations in the spot and forward price for natural gas. Revenues of $898.4 million were $107.2 million higher than the prior year quarter due principally to higher Energy Services revenue as a result of higher sales volumes and commodity prices along with higher Specialty Chemicals revenue. Gross profit of $176.0 million was $10.1 million higher than the prior year quarter due principally to higher Energy Services and Specialty Chemicals gross profits. Total income tax for the second quarter was a recovery of $1.4 million compared to an income tax recovery of $20.2 million in the prior year quarter. The income tax recovery in 2011 was impacted by higher net earnings before taxes due to gains on derivative financial instruments and higher operating results.
Net earnings for the six months ended June 30, 2011 were $42.2 million, compared to net losses of $6.0 million in the prior year period. Net earnings were impacted by $28.7 million in unrealized gains on financial instruments in the current period, compared to unrealized losses of $32.4 million in the prior year period. The change in the unrealized gains and losses on financial instruments was due principally to reduced gains on Energy Services natural gas financial derivatives compared to the prior year as a result of fluctuations in the spot price for natural gas. Revenues of $2,037.2 million were $280.1 million higher than the prior year period due principally to higher Energy Services revenue as a result of the contribution of the acquisition of Griffith Holdings Inc. (Griffith) and higher commodity prices. Gross profit of $414.4 million was $30.9 million higher than the prior year period due to improved gross profit at Energy Services due to higher sales volumes and contribution from acquisitions along with higher Specialty Chemicals gross profit. Total income tax expense for the six months ended June 30, 2011 was $13.0 million compared to an income tax recovery of $22.4 million in the prior year period. The income tax expense in 2011 was impacted by higher net earnings before taxes due to gains on derivative financial instruments and higher operating results.
Energy Services
Energy Services' condensed operating results for 2011 and 2010 are provided
in the following table.
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Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2011 2010 (2) 2011 2010 (2)
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Revenue(1) 594.3 492.9 1,435.9 1,181.4
Cost of sales(1) (504.7) (409.9) (1,192.8) (959.6)
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Gross profit 89.6 83.0 243.1 221.8
Less: Cash operating and
administration costs(1) (76.2) (79.7) (164.1) (162.9)
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EBITDA from operations 13.4 3.3 79.0 58.9
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(1) In order to better reflect the results of its operations, Superior has
reclassified certain amounts for purposes of this management's
discussion analysis to present its results as if it had accounted for
various transactions as accounting hedges. See "Reconciliation of
Divisional Segmented Revenue and Cost of Sales to EBITDA" for detailed
amounts.
(2) Superior has restated its 2010 results in accordance with IFRS, see
"Adoption of IFRS" for the impact of IFRS on Superior's 2010 results.
Revenues for the second quarter of 2011 were $594.3 million, an increase of $101.4 million from revenues of $492.9 million in 2010. The increase in revenues is primarily due to higher commodity prices and increased sales volumes. Total gross profit for the second quarter of 2011 was $89.6 million, an increase of $6.6 million or 8% over the prior year quarter. The increase in gross profit is due to higher sales volumes, higher gross margins and favourable market conditions. A summary and detailed review of gross profit is provided below.
Gross Profit Detail
Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2011 2010 2011 2010
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Canadian propane distribution 45.6 43.9 115.3 109.7
U.S. refined fuels distribution 23.7 21.8 84.1 70.8
Other services 8.1 9.8 19.6 21.0
Supply portfolio management 3.2 0.7 6.8 6.0
Fixed-price energy services 9.0 6.8 17.3 14.3
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Total gross profit 89.6 83.0 243.1 221.8
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Canadian Propane Distribution
Canadian propane distribution gross profit for the second quarter was $45.6 million, an increase of $1.7 million or 4% from 2010, due to higher sales volumes offset in part by lower gross margins. Residential and commercial sales volumes in 2011 were consistent with the prior year quarter. Average weather across Canada for the quarter, as measured by degree days, was 15% colder than the prior year and 7% colder than the five-year average. However, heating related volumes in the second and third quarters are generally not materially impacted by average weather due to the seasonality of Canadian propane distributions operations. Industrial volumes increased by 14 million litres or 9%, due to the impact of improved economic activity as compared to the prior year quarter and sales initiatives. Automotive propane volumes declined by 6 million litres or 21%, due to the continued structural decline in this end-use market.
Average propane sales margins for the second quarter decreased slightly to 17.5 cents per litre from 17.6 cents per litre in the prior year quarter. The decline in average margins compared to the prior year quarter is principally due to a higher proportion of lower margin sales volumes.
Canadian Propane Distribution Sales Volumes
Volumes by End-Use Application (1) Volumes by Region (2)
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Three months Three months
ended June 30, ended June 30,
(millions of litres) 2011 2010 (millions of litres) 2011 2010
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Residential 20 19 Western Canada 141 127
Commercial 46 45 Eastern Canada 96 100
Agricultural 8 7 Atlantic Canada 23 22
Industrial 164 150
Automotive 22 28
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260 249 260 249
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Volumes by End-Use Application (1) Volumes by Region (2)
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Six months Six months
ended June 30, ended June 30,
(millions of litres) 2011 2010 (millions of litres) 2011 2010
----------------------------------------------------------------------------
Residential 72 70 Western Canada 390 338
Commercial 153 139 Eastern Canada 250 239
Agricultural 29 27 Atlantic Canada 58 52
Industrial 406 347
Automotive 38 46
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698 629 698 629
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(1) Regions: Western Canada region consists of British Columbia, Alberta,
Saskatchewan, Manitoba, Northwest Ontario, Yukon and Northwest
Territories; Eastern Canada region consists of Ontario (except for
Northwest Ontario) and Quebec; and Atlantic Canada consists of New
Brunswick, Newfoundland & Labrador, Nova Scotia and Prince Edward
Island.
U.S. Refined Fuels Distribution
U.S. refined fuels gross profit for the second quarter was $23.7 million, an increase of $1.9 million from the prior year quarter. The increase in gross profit is due higher sales volumes. Average U.S. refined fuels sales margins of 5.9 cents per litre for the second quarter were consistent with the prior year quarter. Sales volumes of 405 million litres, increased by 34 million litres or 9% over the prior year quarter. The increase in sales volumes was primarily due to colder weather as weather measured by heating degree days for the second quarter was 16% colder than the prior year. Sales volumes also benefitted from new customer sales initiatives and growth in commercial and wholesale customer volumes.
U.S. Refined Fuels Distribution Sales Volumes
Volumes by End-Use Application (1) Volumes by Region (2)
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Three months Three months
ended June 30, ended June 30,
(millions of litres) 2011 2010 (millions of litres) 2011 2010
----------------------------------------------------------------------------
Residential 46 40 Northeast United
Commercial 81 78 States 405 371
Wholesale 278 253
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405 371 405 371
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Volumes by End-Use Application (1) Volumes by Region (2)
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Six months Six months
ended June 30, ended June 30,
(millions of litres) 2011 2010 (millions of litres) 2011 2010
----------------------------------------------------------------------------
Residential 219 197 Northeast United
Commercial 185 163 States 957 840
Wholesale 553 480
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957 840 957 840
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(1) Volume: Volume of heating oil, propane, diesel and gasoline sold
(millions of litres).
(2) Regions: Northeast United States region consists of Pennsylvania,
Connecticut, New York, and Rhode Island.
Other Services
Other services gross profit was $8.1 million in the second quarter, a decrease of $1.7 million or 17% from the prior year quarter. The decrease in other services gross profit is due to lower demand.
Supply Portfolio Management
Supply portfolio management gross profits were $3.2 million in the second quarter, an increase of $2.5 million from the prior year quarter due to increased market related opportunities and a favourable pricing environment.
Fixed-Price Energy Services
Fixed-Price Energy Services Gross Profit
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Three months ended June 30, 2011
(millions of dollars except Gross
volume and per unit amounts) Profit Volume Per Unit
----------------------------------------------------------------------------
Natural Gas (1) 7.5 5.5 GJ 136.4 cents/GJ
Electricity (2) 1.5 146.1 KWh 1.03 cents/KWh
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Total 9.0
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Three months ended June 30, 2010
(millions of dollars except Gross
volume and per unit amounts) Profit Volume Per Unit
----------------------------------------------------------------------------
Natural Gas (1) 5.9 6.8 GJ 86.6 cents/GJ
Electricity (2) 0.9 73.4 KWh 1.23 cents/KWh
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Total 6.8
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Six months ended June 30, 2011
(millions of dollars except Gross
volume and per unit amounts) Profit Volume Per Unit
----------------------------------------------------------------------------
Natural Gas (1) 14.6 11.1 GJ 131.5 cents/GJ
Electricity (2) 2.7 263.2 KWh 1.03 cents/KWh
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Total 17.3
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Six months ended June 30, 2010
(millions of dollars except Gross
volume and per unit amounts) Profit Volume Per Unit
----------------------------------------------------------------------------
Natural Gas (1) 12.5 14.2 GJ 88.0 cents/GJ
Electricity (2) 1.8 194.2 KWh 0.93 cents/KWh
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Total 14.3
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(1) Natural gas volumes and per unit amounts are expressed in millions of
gigajoules (GJ).
(2) Electricity volumes and per unit amounts are expressed in millions of
kilowatt hours (KWh).
Fixed-price energy services gross profit was $9.0 million in the second quarter, an increase of $2.2 million (32%) from $6.8 million in the prior year quarter. Natural gas gross profit was $7.5 million, an increase of $1.6 million from the prior year quarter due to higher margins offset in part by lower volumes. Gross profit per unit was 136.4 cents per gigajoules (GJ), an increase of 49.8 cents per GJ (58%) from the prior year quarter. The increase in natural gas gross margin was due to increased residential renewal margins, higher transportation revenue, lower transportation costs and lower charges associated with load balancing. Sales volumes of natural gas were 5.5 million GJ, 1.3 million GJ (19%) lower than the prior year quarter due to lower than expected commercial customer aggregation and the continued decline in residential volumes as a result of focusing marketing efforts towards the commercial segment. Electricity gross profit in the second quarter of 2011 was $1.5 million, an increase of $0.6 million or 67% percent from the prior year quarter due to the aggregation of additional commercial customers in the Ontario market and higher sales volumes. Fixed-price energy services continues to grow in the newly entered Pennsylvania electricity market due to successfully launching a residential electricity offering that is being sold to existing heating oil and propane customers.
Operating costs
Cash operating and administrative costs were $76.2 million in second quarter of 2011, a decrease of $3.5 million or 4% from the prior year quarter. The decrease in expenses was primarily due to lower U.S. Refined Fuels operating expenses as the prior year quarter included integration, severance and other costs associated with completing the integration of various acquisitions completed during the prior three quarters.
System Upgrade
During the second quarter of 2010, Superior's Canadian propane distribution business upgraded their JD Edwards enterprise system to the most recent version in order to enhance efficiencies and core business functions. As a result of the upgrade, Superior experienced complications with processing certain sales transactions and producing accurate invoices which delayed customer collections and increased net working capital. As at June 30, 2011, net working capital was approximately $25 million to $35 million higher than the prior year due to the system upgrade complications. The delay in customer collections has resulted in significantly higher past due receivables which Superior has provided for through an increase to the allowance for doubtful accounts. Early in the second quarter Superior resolved the remaining technical issues associated with the system upgrade and the system is now fully operational. Superior expects net working capital to return to historical levels during the second half of 2011.
Outlook
Energy Services expects EBITDA from operations for 2011 to be between $120 million and $140 million, consistent with Superior's previous financial outlook as provided in the 2011 first quarter Management's Discussion and Analysis. Significant assumptions underlying its current outlook are:
- Average temperatures across Canada and the northeast United States are expected to be consistent with the recent five-year average;
- Total propane and U.S. refined fuels-related sales volumes in 2011 compared to 2010 are anticipated to increase due to colder than average weather experienced during the first half of 2011, anticipated average weather during the third and fourth quarters of 2011, economic improvement, and sales and marketing initiatives;
- Wholesale propane, and U.S. refined fuels-related prices are not anticipated to significantly impact demand for propane, refined fuels and related services;
- Supply portfolio management market opportunities are expected to return to historic levels for the remainder of 2011;
- Fixed price energy services is expected to be able to access sales channel agents on acceptable contract terms and expects gross profit to modestly increase from 2010 levels. The financial benefit from entering the retail electricity and natural gas markets in the northeast U.S. in 2011 is expected to be offset by reduced residential customer revenues due to the exit of the B.C. residential natural gas market in 2010 and lack of volatility in the price of natural gas; and
- The commercial electricity market in Ontario is expected to provide growth opportunities in 2011.
In addition to the significant assumptions detailed above, refer to "Risk Factors to Superior" for a detailed review of significant business risks affecting Energy Services' businesses.
Specialty Chemicals
Specialty Chemicals' condensed operating results for 2011 and 2010 are
provided in the following table.
(millions of
dollars except
per metric tonne Three months ended June 30, Six months ended June 30,
(MT) amounts) 2011 2010(2) 2011 2010(2)
----------------------------------------------------------------------------
$ per MT $ per MT $ per MT $ per MT
Chemical
Revenue(1) 125.7 655 118.8 649 256.5 661 228.7 648
Chemical Cost of
Sales (1) (71.1) (371) (64.8) (354) (145.6) (375) (123.7) (351)
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Chemical Gross
Profit 54.6 284 54.0 295 110.9 286 105.0 297
Less: Cash
operating and
administrative
costs(1) (29.8) (155) (29.3) (160) (60.4) (156) (59.0) (167)
----------------------------------------------------------------------------
EBITDA from
operations 24.8 129 24.7 135 50.5 130 46.0 130
Chemical volumes
sold (thousands
of MTs) 192 183 388 353
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(1) In order to better reflect the results of its operations, Superior has
reclassified certain amounts for purposes of this management's
discussion analysis related to derivative financial instruments,
non-cash amortization and foreign currency translation losses/gains
related to U.S.-denominated working capital. See "Reconciliation of
Divisional Segmented Revenue and Cost of Sales to EBITDA" for detailed
amounts.
(2) Superior has restated its 2010 results in accordance with IFRS, see
"Adoption of IFRS" for the impact of IFRS on Superior's 2010 results.
Chemical revenue for the second quarter of $125.7 million was $6.9 million or 6% higher than the prior year quarter primarily as a result of increased sodium chlorate and chloralkali/potassium sales volumes and higher chloralkali/potassium pricing. Second quarter gross profit of $54.6 million was $0.6 million higher than the prior year quarter due to increased chloralkali/potassium gross profits. Sodium chlorate sales volumes increased by 3,000 tonnes or 3% compared to the prior year quarter due to higher demand from North America and Chile as a result of increased demand for pulp. Sodium chlorate gross profits were slightly lower than the prior year quarter due to higher costs associated with external product purchases offset in part by higher realized pricing. Chloralkali/potassium gross profits were higher than the prior year quarter as a result of increased sales volumes and higher gross margins. Chloralkali/potassium sales volumes increased by 5,000 tonnes or 7% compared to the prior year quarter due to continued strong demand and an increase in production levels from the Port Edwards expansion completed in the fourth quarter of 2009. Gross margins were higher than the prior year quarter due to lower electricity costs and higher pricing for some products.
Cash operating and administrative costs of $29.8 million were $0.5 million or 2% higher than the prior year quarter due to higher wages.
Outlook
Specialty Chemicals expects EBITDA from operations for 2011 to be between $100 million and $115 million, consistent with Superior's previous financial outlook as provided in the 2011 first quarter Management's Discussion and Analysis. Significant assumptions underlying the current outlook are:
- Supply and demand fundamentals for sodium chlorate are expected to remain strong in 2011, resulting in increased sales volumes as compared to 2010. Pricing is expected to remain consistent or slightly improved as compared to 2010 levels;
- Chloralkali revenues in 2011 are expected to increase due to higher selling prices and higher sales volumes and favourable product mix from the Port Edwards facility; and
- Average plant utilization will approximate 95% in 2011.
In addition to the significant assumptions detailed above, refer to "Risk Factors to Superior" for a detailed review of the significant business risks affecting Superior's Specialty Chemicals' segment.
Construction Products Distribution
Construction Products Distribution's condensed operating results for 2011
and 2010 are provided in the following table.
Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2011 2010(3) 2011 2010(3)
----------------------------------------------------------------------------
Revenue
Gypsum Specialty Distribution (GSD)
revenue (1) (2) 122.4 127.0 233.1 237.7
Commercial and Industrial Insulation
(C&I) revenue (2) 55.9 52.6 111.3 108.9
Cost of sales
GSD cost of sales(2) (95.2) (99.3) (181.1) (185.4)
C&I cost of sales(2) (40.5) (38.8) (81.0) (80.6)
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Gross profit 42.6 41.5 82.3 80.6
Less: Cash operating and administrative
costs (36.2) (35.5) (72.1) (69.9)
----------------------------------------------------------------------------
EBITDA from operations 6.4 6.0 10.2 10.7
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(1) In order to better reflect the results of its operations, Superior has
reclassified certain amounts for purposes of this management's
discussion analysis to present its results as if it had accounted for
various transactions as accounting hedges.
See "Reconciliation of Divisional Segmented Revenue and Cost of Sales to
EBITDA" for detailed amounts.
(2) Certain reclassifications of 2010 amounts have been made to conform to
current presentation. Specifically, for the three and six months ended
June 30, 2010, $127.0 million and $237.7 million has been reclassified
to GSD revenue from distribution and direct sales revenue to provide
comparative presentation of Construction Products Distribution's
revenue, respectively. For the three and six months ended June 30, 2010,
$52.6 million and $108.9 million has been reclassified to C&I revenue
from distribution and direct sales revenue to provide comparative
presentation of Construction Products Distribution revenue,
respectively. For the three and six months ended June 30, 2010, $99.3
million and $185.4 million has been reclassified to GSD cost of sales
from distribution and direct cost of sales to provide comparative
presentation of Construction Products Distribution's cost of sales,
respectively. For the three and six months ended June 30, 2010, $38.8
million and $69.9 million has been reclassified to C&I cost of sales
from distribution and direct cost of sales to provide comparative
presentation of Construction Products Distribution's cost of sales,
respectively.
(3) Superior has restated its 2010 results in accordance with IFRS, see
"Adoption of IFRS" for the impact of IFRS on Superior's 2010 results.
GSD and C&I revenues of $178.3 million for the second quarter of 2011 were $1.3 million (1%) lower than the prior year quarter. The decrease in revenue was due to weakness in some Canadian based GSD regions offset in part by higher U.S. based GSD revenue from expansion of the GSD product line into existing U.S. based branches. The improvement in C&I revenue was due to the full quarter contribution from the acquisition of the Burnaby Assets on June 28, 2010.
Gross profit of $42.6 million in the second quarter was $1.1 million higher than the prior year quarter, due principally to the impact of higher gross margins due to contribution from the U.S. GSD expansion, implementation of a strategic procurement strategy and favourable negotiations with suppliers. Sales margins and average selling prices continue to be challenged as a result of ongoing competitive pressures, supplier price increases and slow economic activity.
Cash operating and administration costs were $36.2 million in the second quarter, an increase of $0.7 million or 2% from the prior year quarter due to additional costs associated with expanding the GSD product lines into some U.S. based branches, higher fuel costs and employee compensation costs.
Outlook
Construction Products Distribution expects EBITDA from operations for 2011 to be between $27 million and $37 million, consistent with Superior's previous financial outlook as provided in the 2011 first quarter Management's Discussion and Analysis. Significant assumptions underlying its current outlook are:
- GSD sales revenue from Canada is expected to decline from 2010 levels due to competitive conditions. GSD sales revenue from the U.S. is expected to increase from 2010 due to higher pricing and the expansion of existing GSD product lines into some U.S. branches. C&I sales revenue is expected to decrease from 2010 due to lower contribution from U.S. regions as a result of challenging market conditions. The decrease in C&I revenue will be offset in part by the full year contribution from the acquisition of the Burnaby Assets; and
- Sales margins for GSD and C&I as compared to 2010 are expected to increase due to volume improvement in some markets, procurement initiatives and supplier negotiations offset in part by competitive pressures and supplier price increases.
In addition to the Construction Products Distribution segment's significant assumptions detailed above, refer to "Risk Factors to Superior" for a detailed review of the significant business risks affecting Superior's Construction Products Distribution segment.
Consolidated Capital Expenditure Summary
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2011 2010 2011 2010
----------------------------------------------------------------------------
Efficiency, process improvement and
growth related 2.8 6.5 7.4 12.1
Other capital 4.0 4.6 7.2 6.0
----------------------------------------------------------------------------
6.8 11.1 14.6 18.1
Acquisition of Griffith - - - 142.6
Acquisition of Burnaby Assets (Burnaby) - 17.8 - 17.8
Other acquisitions 0.3 (0.1) 4.9 0.3
Proceeds on disposition of capital (0.6) (1.3) (1.6) (1.8)
----------------------------------------------------------------------------
Total net capital expenditures 6.5 27.5 17.9 177.0
Investment in finance leases 0.9 4.8 4.2 9.1
----------------------------------------------------------------------------
Total expenditures 7.4 32.3 22.1 186.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Efficiency, process improvement and growth related expenditures were $2.8 million in the second quarter compared to $6.5 million in the prior year quarter. These were incurred primarily in relation to Energy Services' purchases of rental assets, system upgrades and truck related expenditures. Other capital expenditures were $4.0 million in the second quarter compared to $4.6 million in the prior year quarter, consisting primarily of required maintenance and general capital across all of Superior's segments. During the second quarter Energy Services' completed the acquisition of a small heating oil distributor for $0.3 million. Proceeds on the disposal of capital were $0.9 million in the second quarter and consisted of Superior's disposition of surplus tanks, cylinders and other assets. During the second quarter Superior entered into new leases with capital equivalent value of $0.9 million primarily related to delivery vehicles for the Energy Services and Construction Products Distribution segments.
Corporate and Interest Costs
Corporate costs for the second quarter were $3.9 million, compared to $3.6 million in the prior year quarter. Corporate costs were impacted by higher employee long term incentive compensation, higher capital tax, higher professional and consulting fees.
Interest expense on revolving term bank credit and term loans for the second quarter was $12.1 million, an increase of $2.1 million from the prior year quarter. Interest costs increased due to higher average debt levels associated with increased net working capital requirements and realized losses on interest rate swaps. See "Liquidity and Capital Resources" discussion for further details on the change in average debt levels.
Interest on Superior's convertible unsecured subordinated debentures ("Debentures" which includes all series of convertible unsecured subordinated debentures) was $8.7 million for the second quarter of 2011, $1.2 million higher than the prior year quarter of $7.5 million. The increase in debenture interest is primarily due to the issuance of $150.0 million, 6.00% convertible debentures on December 23, 2010 for general corporate purposes.
Taxation
Total income tax recovery for the second quarter was $1.4 million, and consists of $0.1 million in cash income tax expense and $1.5 million in deferred income tax recovery, compared to a total income tax recovery of $20.2 million in the prior year quarter, which consisted of $0.1 million in cash income tax recoveries and a $20.1 million deferred income tax recovery.
Cash income and withholding taxes for the second quarter was $0.1 million and consisted of income tax expense in the U.S. of $0.1 million (2010 Q2 - $0.1 million of U.S. cash tax recovery). Deferred income tax recovery for the second quarter was $1.5 million (2010 Q2 - $20.1 million deferred income tax recovery), resulting in a corresponding net deferred income tax asset of $244.5 million as at June 30, 2011. Deferred income taxes for the second quarter were impacted by unrealized gains and losses on derivative financial instruments and an increase in operating results.
Consolidated Outlook
Superior expects adjusted cash flow from operations for 2011 to be between $1.55 and $1.90 per share, consistent with Superior's previous financial outlook as provided in the 2011 first quarter Management's Discussion and Analysis. Superior's consolidated adjusted operating cash flow outlook is dependent on the operating results of its three operating segments. See the discussion of operating results by segment for additional details on Superior's 2011 guidance. In addition to the operating results of Superior's three operating segments, significant assumptions underlying Superior's current 2011 outlook are:
- The economic recovery in Canada and the United States is expected to continue with slow growth through 2011;
- Superior is expected to continue to attract capital and obtain financing on acceptable terms;
- The foreign currency exchange rate between the Canadian and US dollar is expected to be US$0.97 per Canadian dollar in 2011 on all unhedged foreign currency transactions;
- Financial and physical counterparties are expected to continue fulfilling their obligations to Superior;
- Regulatory authorities are not expected to impose any new regulations impacting Superior;
- Superior's average interest rate on floating-rate debt is expected to increase modestly towards the end of 2011;
- The per share outlooks for 2011 include the impact of the DRIP; and
- U.S. based cash taxes are expected to be minimal in 2011 and have been based on existing statutory income tax rates. Canadian based cash taxes are also expected to be minimal in 2011 and have been based on existing statutory income tax rates.
In addition to Superior's significant assumptions detailed above, refer to the section "Risk Factors to Superior" for a detailed review of Superior's significant business risks.
Liquidity and Capital Resources
Superior's revolving syndicated bank facility (Credit Facility), term loans and finance lease obligations (Borrowings) before deferred financing fees totaled $706.1 million as at June 30, 2011, a decrease of $33.9 million from December 31, 2010. Overall Borrowings decreased as compared to year end due lower net working capital requirements offset in part due to funding requirements for finance lease repayments, dividends payments and net capital expenditures. Net working capital levels continue to trend higher than normal as a result of accounts receivables levels within the Canadian propane distribution business due to delayed invoicing associated with a system upgrade (refer to "System Upgrade" for additional details). On June 20, 2011, Superior completed an extension of its Credit Facility with ten lenders and increased the size of the facility from $450 million to $615 million. The secured revolving credit facility matures on June 27, 2014 and can be expanded up to $750 million. Financial covenant ratios were unchanged with Consolidated Secured Debt to Consolidated EBITDA ratio and Consolidated Debt to Consolidated EBITDA ratio of 3.0x and 5.0x, respectively. Additionally, in conjunction with the extension of the syndicated credit facility, Superior has terminated its accounts receivable securitization program which provided up to $130 million of additional credit on a seasonally adjusted basis. See "Summary of Cash Flows" for details on Superior's sources and uses of cash.
As at June 30, 2011, Debentures (before deferred issue costs) issued by Superior totaled $638.1 million which was consistent with the $637.8 million outstanding as at December 31, 2010. See Note 15 to the Unaudited Condensed Consolidated Financial Statements for additional details on Superior's Debentures.
As at June 30, 2011, approximately $243.4 million was available under the Credit Facility which Superior considers sufficient to meet its net working capital funding requirements and expected capital expenditures.
Consolidated net working capital was $365.3 million as at June 30, 2011, a decrease of $34.5 million from net working capital of $399.8 million as at December 31, 2010. The decrease in net working capital was primarily due to impact of the seasonal reduction in net working capital requirements at Energy Services offset in part by the ongoing delayed cash collections issues associated with the system upgrade completed in the second quarter of 2010 at Canadian propane distribution (refer to "System Upgrade" for additional details). Superior's net working capital requirements are financed from revolving term bank credit facilities.
In May 2010, Superior reestablished its DRIP, commencing with the payment of the May 2010 dividend. The DRIP provides Shareholders with the opportunity to reinvest their cash dividends at a 5% discount to the market price of Superior's shares. Proceeds received from the DRIP were $7.2 million (Q2 2010 - $1.5 million) and $16.4 million (2010 - $1.5 million)for the three and six months ended June 30, 2011.
As at June 30, 2011, when calculated in accordance with the Credit Facility, the Consolidated Secured Debt to Compliance EBITDA ratio was 2.2 to 1.0 (December 31, 2010 - 2.6 to 1.0) and the Consolidated Debt to Compliance EBITDA ratio was 2.8 to 1.0 (December 31, 2010 - 3.2 to 1.0). For both of these covenants all outstanding Debentures are not considered. These ratios are within the requirements contained in Superior's debt covenants, which restrict its ability to pay dividends. In accordance with the Credit Facility, Superior must maintain a Consolidated Secured Debt to Compliance EBITDA ratio of not more than 3.0 to 1.0 and not more than 3.5 to 1.0 as a result of acquisitions. In addition, Superior must maintain a Consolidated Debt to Compliance EBITDA ratio of not more than 5.0 to 1.0, excluding convertible unsecured subordinated debentures. Distributions (including payments to Debenture holders) cannot exceed Compliance EBITDA less cash income taxes, plus $35.0 million on a trailing twelve month rolling basis.
As at June 30, 2011 proceeds of $nil million (December 31, 2010 - $90.1 million) had been raised under the accounts receivable securitization program. During the month of June Superior terminated the accounts receivable securitization program. (See Note 13 to the Unaudited Condensed Consolidated Financial Statements).
On January 20, 2010, DBRS confirmed Superior LP's senior secured notes and senior unsecured debenture ratings at BBB(low) and BB(high), respectively, both with stable trends. On September 9, 2010, DBRS confirmed Superior LP's senior secured long-term debt credit rating at BBB(low) and its senior unsecured rating at BB(high), but changed the trend of both from stable to negative. On March 8, 2011, Standard and Poor's lowered both Superior's and Superior LP's, long-term corporate credit rating to BB- from BB and reduced the secured debt rating to BB+ from BBB-. The outlook rating for both Superior and Superior LP remains stable and the credit rating on Superior's unsecured debt is unchanged at BB-.
At June 30, 2011, Superior had an estimated defined benefit pension solvency deficiency of approximately $24.0 million (December 31, 2010 - $23.7 million) and a going concern solvency deficiency of approximately $13.3 million (December 31, 2010 - $17.7 million). Funding requirements required by applicable pension legislation are based upon going concern and solvency actuarial assumptions. These assumptions differ from the going concern actuarial assumptions used in Superior's financial statements. Superior has sufficient liquidity through existing revolving term bank credits and anticipated future operating cash flow to fund this deficiency over the prescribed funding period.
In the normal course of business, Superior is subject to lawsuits and claims. Superior believes the resolution of these matters will not have a material adverse effect, individually or in the aggregate, on Superior's liquidity, consolidated financial position or results of operations. Superior records costs as they are incurred or when they become determinable.
Shareholders' Capital
The weighted average number of shares outstanding during the second quarter was 108.9 million shares, an increase of 3.9 million shares compared to the prior year quarter due to the issuance of 2,949,364 common shares over the past twelve months and the resulting impact on weighted average number of shares outstanding. The following table provides a detailed breakdown of the common shares issued over the last twelve months:
----------------------------------------------------------------------------
Issued Number
Issuance of Common
Price per Shares
Closing Date Share (Millions)
----------------------------------------------------------------------------
As at June 30, 2010 106.2
Issuance of common shares under
Superior's DRIP July 15, 2010
through June 15,
2011 $ 10.97 3.0
----------------------------------------------------------------------------
As at June 30, 2011 109.2
----------------------------------------------------------------------------
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As at August 4, 2011, June 30, 2011 and December 31, 2010, the following common shares and securities convertible into common shares were outstanding:
August 4, 2011 June 30, 2011 December 31, 2010
Convertible Convertible Convertible
(millions) Securities Shares Securities Shares Securities Shares
----------------------------------------------------------------------------
Common shares
outstanding (1) 109.4 109.2 107.7
5.75% Debentures
(2) $174.9 4.9 $174.9 4.9 $174.9 4.9
5.85% Debentures
(3) $75.0 2.4 $75.0 2.4 $75.0 2.4
7.50% Debentures
(4) $69.0 5.3 $69.0 5.3 $69.0 5.3
5.75% Debentures
(5) $172.5 9.1 $172.5 9.1 $172.5 9.1
6.00% Debentures
(6) $150.0 9.9 $150.0 9.9 $150.0 9.9
----------------------------------------------------------------------------
Shares outstanding
and issuable
upon conversion of
Debentures 141.0 140.8 139.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Common shares outstanding as at August 4, 2011, includes 211,489 common
shares issued under Superior's DRIP program during the month of July.
(2) Convertible at $36.00 per share.
(3) Convertible at $31.25 per share.
(4) Convertible at $13.10 per share.
(5) Convertible at $19.00 per share.
(6) Convertible at $15.10 per share.
Dividends Paid to Shareholders
Superior's dividends paid to its shareholders are dependent on its cash flow from operating activities with consideration for changes in working capital requirements, investing activities and financing activities of Superior. See "Summary of Adjusted Operating Cash Flow" and "Summary of Cash Flows" for additional details on the sources and uses of Superior's cash flow.
Dividends declared to shareholders in the second quarter were $32.7 million (before DRIP proceeds of $7.2 million) or $0.30 per share, a decrease of $10.1 million as compared to the second quarter of 2010 due to the revision of Superior's dividend rate to $0.10 per share per month effective with the March 2011 dividend payment. Superior annualized dividend rate is $1.20 per share which decreased from the prior level of $0.135 per share per month or $1.62 per share on an annualized basis effective with Superior's March 2011 dividend. Dividends to shareholders are declared at the discretion of Superior.
Superior's primary sources and uses of cash are detailed below:
Summary of Cash Flows (1)
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
(millions of dollars) 2011 2010 2011 2010
----------------------------------------------------------------------------
Cash flows from (used in) operating
activities 68.3 (15.0) 121.7 84.4
Investing activities:
Purchase of property, plant and
equipment (2) (6.8) (11.1) (14.6) (18.1)
Proceeds on disposal of property,
plant and equipment 0.6 1.3 1.6 1.8
Acquisition of Griffith - - - (142.6)
Other acquisitions (0.3) (17.7) (4.9) (18.1)
----------------------------------------------------------------------------
Cash flows used in investing
activities (6.5) (27.5) (17.9) (177.0)
----------------------------------------------------------------------------
Financing activities:
Net proceeds (repayment) of borrowings 60.5 93.7 68.8 (73.6)
Repayment of finance lease obligation (3.8) (3.1) (7.9) (6.1)
Net proceeds (repayment) of accounts
receivable securitization program (89.3) (24.0) (90.1) (7.3)
Proceeds from the issuance of 5.75%
convertible debentures - - - 172.5
Costs incurred for the issuance of
5.75% convertible debentures - (0.5) - (6.9)
Issuance of common shares - 15.7 - 82.2
Proceeds from the dividend
reinvestment plan 7.2 1.5 16.4 1.5
Dividends paid to shareholders (32.7) (42.8) (72.7) (84.6)
Increase (decrease) in non-cash
financing working capital - (0.1) (3.6) 0.9
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Cash flows from (used in) financing
activities (58.1) 40.4 (89.1) 78.6
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Net increase (decrease) in cash and
cash equivalents 3.7 (2.1) 14.7 (14.0)
Cash and cash equivalents, beginning
of period 19.5 11.9 8.9 24.3
Effect of translation of foreign
denominated cash and cash
equivalents - 0.8 (0.4) 0.3
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Cash and cash equivalents, end of
period 23.2 10.6 23.2 10.6
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(1) See the Consolidated Statements of Cash Flows for additional details.
(2) See "Consolidated Capital Expenditure Summary" for additional details.
Financial Instruments - Risk Management
Derivative and non-financial derivatives are used by Superior to manage its exposure to fluctuations in foreign currency exchange rates, interest rates and commodity prices. Superior assesses the inherent risks of these instruments by grouping derivative and non-financial derivatives related to the exposures these instruments mitigate. Superior's policy is not to use derivative or non-financial derivative instruments for speculative purposes. Superior does not formally designate its derivatives as hedges and, as a result, Superior does not apply hedge accounting and is required to designate its derivatives and non-financial derivatives as held for trading.
Effective 2008, Energy Services entered into natural gas financial swaps primarily with Macquarie Cook Energy Canada Ltd. (formerly, Constellation Energy Commodities Group Inc.) for distributor billed natural gas business in Canada to manage its economic exposure of providing fixed-price natural gas to its customers. Additionally, Energy Services maintains its natural gas swap positions with seven additional counterparties. Energy Services monitors its fixed-price natural gas positions on a daily basis to evaluate compliance with established risk management policies. Superior maintains a substantially balanced fixed-price natural gas position in relation to its customer supply commitments.
Energy Services entered into electricity financial swaps with three counterparties to manage the economic exposure of providing fixed-price electricity to its customers. Energy Services monitors its fixed-price electricity positions on a daily basis to evaluate compliance with established risk management policies. Energy Services maintains a substantially balanced fixed-price electricity position in relation to its customer supply commitments.
Energy Services entered into various propane forward purchase and sale agreements with more than 20 counterparties to manage the economic exposure of its wholesale customer supply contracts. Energy Services monitors its fixed-price propane positions on a daily basis to monitor compliance with established risk management policies. Energy Services maintains a substantially balanced fixed-price propane gas position in relation to its wholesale customer supply commitments.
Specialty Chemicals has entered into fixed-price electricity purchase agreements to manage the economic exposure of certain of its chemical facilities to changes in the market price of electricity, in markets where the price of electricity is not fixed. Substantially all of the fair value with respect to these agreements is with a single counterparty.
Superior, on behalf of its operating divisions, entered into foreign currency forward contracts with twelve counterparties to manage the economic exposure of Superior's operations to movements in foreign currency exchange rates. Energy Services contracts a portion of its fixed-price natural gas, propane and heating oil purchases and sales in US dollars and enters into forward US dollar purchase contracts to create an effective Canadian dollar fixed-price purchase cost. Specialty Chemicals 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.
As at June 30, 2011, Energy Services had hedged approximately 100% of its US dollar natural gas and propane purchase (sales) obligations for the remainder of 2011. Overall Superior has hedged approximately 95% and 90% of its estimated US dollar exposure for the remainder of 2011 and 2012. The estimated sensitivity on adjusted operating cash flow for Superior, including divisional US exposures and the impact on US-denominated debt with respect to a $0.01 change in the Canadian to United States exchange rate for 2011 is $0.1 million, respectively after giving effect to United States forward contracts for 2011, as shown in the table below. Superior's sensitivities and guidance are based on an anticipated average Canadian to US dollar foreign currency exchange rate for 2011 of 0.97.
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(US$ millions except 2016 and
exchange rates) 2011 2012 2013 2014 2015 Thereafter Total
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Energy Services - US$
forward purchases (1) (0.4) - - - - - (0.4)
Energy Services - US$
forward purchases (sales) 13.9 45.5 44.0 - - - 103.4
Construction Products
Distribution - US$ forward
sales 9.0 24.0 24.0 - - - 57.0
Specialty Chemicals - US$
forward sales 72.5 122.5 84.0 72.0 - - 351.0
Corporate - US$ forward
purchases (37.2) - - - - - (37.2)
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Net US $ forward sales 57.8 192.0 152.0 72.0 - - 473.8
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Energy Services - Average
US$ forward purchase
rate (1) 1.13 - - - - - 1.13
Energy Services - Average
US$ forward sales rate 1.05 1.05 1.06 - - - 1.05
Construction Products
Distribution - Average US$
forward sales rate 1.06 1.06 1.07 - - - 1.06
Specialty Chemicals - US$
forward sales rate 1.10 1.05 1.06 1.05 - - 1.06
Corporate - US$ forward
purchases 1.00 - - - - - 1.00
----------------------------------------------------------------------------
Net average external
US$/Cdn$ exchange rate 1.14 1.05 1.06 1.05 - - 1.06
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Specialty Chemicals - Euro
forward sales 2.4 - - - - - 2.4
----------------------------------------------------------------------------
Specialty Chemicals -
Average Euro forward sales
rate 1.40 - - - - - 1.40
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Fixed-price energy services is now sourcing its fixed-price natural gas
requirements in Canadian dollars; as such, fixed-price energy services
will no longer be required to use US-dollar forward contracts to fix
its Canadian dollar exposure.
Superior has interest rate swaps with four counterparties to manage the interest rate mix of its total debt portfolio and related overall cost of borrowing. Superior manages its overall liquidity risk in relation to its general funding requirements by utilizing a mix of short-term and longer-term maturity debt instruments. Superior reviews its mix of short-term and longer-term debt instruments on an on-going basis to ensure it is able to meet its liquidity requirements.
Superior utilizes a variety of counterparties in relation to its derivative and non-financial derivative instruments in order to mitigate its counterparty risk. Superior assesses the credit worthiness of its significant counterparties at the inception and throughout the term of a contract. Superior is also exposed to customer credit risk. Energy Services and Construction Products Distribution deal with a large number of small customers, thereby reducing this risk. Specialty Chemicals, due to the nature of its operations, sells its products to a relatively small number of customers. Specialty Chemicals mitigates its customer credit risk by actively monitoring the overall credit worthiness of its customers. Energy Services fixed-price energy services business has minimal exposure to customer credit risk as local natural gas and electricity distribution utilities have been mandated, for a nominal fee, to provide invoicing, collection and the assumption of bad debts risk for residential and small commercial customers. Fixed-price energy services actively monitor the credit worthiness of its direct bill industrial customers. All of Superior's business segments have credit risk policies in place in order to minimize credit exposures.
For additional details on Superior's financial instruments, including the amount and classification of gains and losses recorded in Superior's third quarter Consolidated Financial Statements, summary of fair values, notional balances, effective rates and terms, and significant assumptions used in the calculation of the fair value of Superior's financial instruments, see Note 17 to the Unaudited Condensed Consolidated Financial Statements.
Disclosure Controls and Procedures and Internal Controls Over Financial Reporting
No changes have been made in Superior's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Superior's internal control over financial reporting in the quarter ended June 30, 2011.
During 2010, the Canadian propane distribution business completed a system upgrade of their JD Edwards enterprise system to the most recent version. Superior has experienced improvements in areas such as process efficiency and certain internal controls as a result of the upgrade. The Canadian propane distribution management team resolved all the remaining technical issues with the JD Edwards enterprise system during the second quarter. Superior is focused on reducing any outstanding accounts receivable balances associated with the system conversion and expects accounts receivable levels to return to historical levels during the second half of 2011.
Critical Accounting Policies and Estimates
Superior's Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with IFRS. The significant accounting policies are described in the unaudited Condensed Consolidated Financial Statements for the period ended June 30, 2011. Certain of these accounting policies, as well as estimates made by management in applying such policies, are recognized as critical because they require management to make subjective or complex judgments about matters that are inherently uncertain. Our critical accounting estimates relate to the allowance for doubtful accounts, employee future benefits, future income tax assets and liabilities, the valuation of derivatives and non-financial derivatives and asset impairments and the assessment of potential asset retirement obligations.
Adoption of IFRS
The Accounting Standards Board of Canada (AcSB) announced plans in 2008 which require the convergence of GAAP with IFRS for publicly accountable enterprises, including Superior. The changeover date from GAAP to IFRS is for annual and quarterly financial statements relating to fiscal years beginning on or after January 1, 2011.
The initial adoption of IFRS has required Superior to review each of its accounting policies and determine whether or not a change is required or permitted under IFRS and whether any amended policy is required to be applied on a retrospective or prospective basis. This review was performed in accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards which provides guidance for initial adoption, policy choice option and exemptions available.
IFRS accounting standards are similar to the conceptual framework of GAAP, although significant differences exist in certain matters of recognition, measurement and disclosure. The adoption of IFRS has had a material impact on Superior's consolidated balance sheets and statement of comprehensive income
Transition to IFRS
Superior has restated previously reported unaudited financial figures for 2010 under GAAP to reflect the impact of adopting IFRS. Superior's financial information has been compiled from the underlying IFRS basis of financial information included in the accompanying financial statements as at June 30, 2011 and for the three and six months periods ended June 30, 2011 and 2010. See Note 28 to Superior's Unaudited Condensed Consolidated Financial Statements for the details on Superior's transition to IFRS.
Superior will continue to assess the impact of changes to IFRS on its opening balance sheet adjustments and other reporting periods. The actual adjustments recorded in Superior's opening balance sheet as at January 1, 2010 for the year ending December 31, 2011, may differ from those presented in the Unaudited Condensed Consolidated Financial Statements as a June 30, 2011 pending changes to IFRS accounting standards.
Reconciliation from GAAP to IFRS
The following table reconciles Superior's audited financial information for the three and six months ended June 30, 2010 under GAAP to that under IFRS. Superior has also provided additional analysis describing the reconciling items affecting AOCF for the period.
To view the Reconciliation of Net Earnings (Loss) for the Three and Six Months Ended June 30, 2010 tables, please visit the following link: http://media3.marketwire.com/docs/804spb1.pdf
In the above table, any amounts under IFRS adjustments represents changes made to GAAP information due to the adoption of IFRS. See Note 28 to Superior's Unaudited Condensed Consolidated Financial Statements as at and for the three and six months ended June 30, 2011 for details of these changes.
Reconciliation from AOCF under GAAP to AOCF under IFRS
----------------------------------------------------------------------------
Three months Six months Year ended
ended June 30, ended June 30, December 31,
(millions of dollars) 2010 2010 2010
----------------------------------------------------------------------------
AOCF as reported under GAAP 7.5 (1) 64.0 (1) 143.4 (1)
IFRS Adjustments:
Finance leases 3.1 6.1 12.8
Employee future benefits 1.1 1.9 1.5
Capitalization of major
inspections and overhauls 0.7 1.4 4.0
Add back of non-recurring
other expenses - - 1.2
Non-IFRS Adjustments:
Revenue recognition adjustment 0.6 0.6 -
----------------------------------------------------------------------------
AOCF as revised under IFRS 13.0 74.0 162.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In order to better reflect the results of its operations, Superior has
revised the treatment of customer contract related costs and non-cash
interest expenses in the prior year AOCF.
Adjustments:
Finance leases: Under IFRS, Superior is required to capitalize leases which qualify as finance leases based on the criteria set out in IAS 17 Leases. AOCF has increased by an amount equal to the principal repayment of leases treated as finance under IFRS. Also Superior has increased borrowings by $69.7 million as at December 31, 2010 due to the recognition of finance leases under IFRS.
Employee Future Benefits: Under IFRS, Superior was required to revalue its employee benefit obligation as at January 1, 2010, which reduced the period expense for employee future benefits during 2010.
Capitalization of major inspections and overhauls: Under IFRS, Superior has capitalized various expenditures for major inspections and overhauls which did not qualify for capitalization under GAAP. As such AOCF have increased due to the capitalization of those types of costs.
Revenue Recognition Adjustment: Superior has adjusted the amount of previously recorded revenue and cost of goods sold for the three months ended June 30, 2010 and the impact will reverse in the third quarter of 2010 comparative figures.
Quarterly Financial and Operating Information
----------------------------------------------------------------------------
2011 Quarters 2010 Quarters (2)
---------------------------------------
(millions of dollars except per
share amounts) Second First Fourth Third
----------------------------------------------------------------------------
Canadian propane sales volumes
(millions of litres) 260 439 372 234
U.S. refined fuels sales volumes
(millions of litres) 405 552 499 331
Natural gas sales volumes
(millions of GJs) 6 6 6 7
Electricity sales volumes
(millions of KwH) 146 117 133 86
Chemical sales volumes
(thousands of metric tonnes) 192 196 193 189
Revenues (millions of dollars) 898.4 1,138.8 1,011.2 769.1
Gross profit 176.0 238.4 224.7 172.4
Net earnings (loss) 1.1 41.1 (74.0) 3.0
Per share, basic and diluted $ 0.01 $ 0.38 $ (0.69) $ 0.03
Adjusted operating cash flow
(millions of dollars) 19.8 73.3 62.5 26.5
Per share, basic and diluted $ 0.18 $ 0.68 $ 0.58 $ 0.25
Net working capital (1)
(millions of dollars) 365.3 416.1 399.8 280.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010 Quarters (2) 2009 Quarters (3)
-----------------------------------------
(millions of dollars except per
share amounts) Second First Fourth Third
----------------------------------------------------------------------------
Canadian propane sales volumes
(millions of litres) 249 380 390 244
U.S. refined fuels sales volumes
(millions of litres) 371 469 - -
Natural gas sales volumes
(millions of GJs) 7 7 8 8
Electricity sales volumes
(millions of KwH) 73 74 68 56
Chemical sales volumes
(thousands of metric tonnes) 183 170 160 188
Revenues (millions of dollars) 791.2 965.9 747.5 441.3
Gross profit 165.9 217.6 193.1 152.8
Net earnings (loss) (5.1) (0.5) (19.9) (203.9)
Per share, basic and diluted $ (0.05) $ (0.00) $ (0.23) $ (2.31)
Adjusted operating cash flow
(millions of dollars) 12.9 61.0 65.0 33.5
Per share, basic and diluted $ 0.12 $ 0.59 $ 0.74 $ 0.38
Net working capital (1)
(millions of dollars) 268.3 228.8 152.2 227.4
----------------------------------------------------------------------------
(1) Net working capital reflects amounts as at the quarter-end and is
comprised of accounts receivable and inventories, less trade and other
payables and deferred revenue.
(2) All 2010 figures have been restated for the adoption of IFRS.
(3) All 2009 figures are based on GAAP.
Non-IFRS Financial Measures
Adjusted Operating Cash Flow
Adjusted operating cash flow is equal to cash flow from operating activities as defined by IFRS, adjusted for changes in non-cash working capital. Superior may deduct or include additional items to its calculation of adjusted operating cash flow; these items would generally, but not necessarily, be items of a non-recurring nature. Adjusted operating cash flow is the main performance measure used by management and investors to evaluate the performance of Superior. Readers are cautioned that adjusted operating cash flow is not a defined performance measure under IFRS and that adjusted operating cash flow cannot be assured. Superior's calculation of adjusted operating cash flow may differ from similar calculations used by comparable entities. Adjusted operating cash flow represents cash flow generated by Superior that is available for, but not necessarily limited to, changes in working capital requirements, investing activities and financing activities of Superior.
The seasonality of Superior's individual quarterly results must be assessed in the context of annualized adjusted operating cash flow. Adjustments recorded by Superior as part of its calculation of adjusted operating cash flow include, but are not limited to, the impact of the seasonality of Superior's businesses, principally the Energy Services segment, by adjusting for non-cash working capital items, thereby eliminating the impact of the timing between the recognition and collection/payment of Superior's revenues and expense, which can differ significantly from quarter to quarter. Adjustments are also made to reclassify the cash flows related to natural gas and electricity customer contract related costs in a manner consistent with the income statement recognition of these costs. Adjusted operating cash flow is reconciled to cash flow from operating activities on page 8.
EBITDA
EBITDA represents earnings before taxes, depreciation, amortization, finance expense and other non-cash expenses, and is used by Superior to assess its consolidated results and the results of its operating segments. EBITDA is not a defined performance measure under IFRS. Superior's calculation of EBITDA may differ from similar calculations used by comparable entities. EBITDA of Superior's operating segments may be referred to as EBITDA from operations. Net earnings are reconciled to EBITDA from operations on page 29.
Compliance EBITDA
Compliance EBITDA represents earnings before interest, taxes, depreciation, amortization and other non-cash expenses calculated on a 12 month trailing basis giving pro forma effect to acquisitions and divestitures and is used by Superior to calculate its debt covenants and other credit information. Compliance EBITDA is not a defined performance measure under IFRS. Superior's calculation of Compliance EBITDA may differ from similar calculations used by comparable entities. See Note 19 to the Unaudited Condensed Consolidated Financial Statements for a reconciliation of net earnings (loss) to Compliance EBITDA.
Reconciliation of Net Earnings (Loss) to EBITDA from Operations (1) (2)
----------------------------------------------------------------------------
Construction
For the three months ended Energy Specialty Products
June 30, 2011 Services Chemicals Distribution
----------------------------------------------------------------------------
Net earnings 1.6 12.2 3.1
Add: Amortization of property,
plant and equipment,
intangible assets and
accretion 16.6 1.7 2.8
Amortization included in cost
of sales - 10.9 -
Amortization of customer
contract costs 1.2 - -
Customer contract related
costs (0.2) - -
Finance costs 2.0 - 0.5
Unrealized losses on
derivative financial
instruments (7.8) - -
----------------------------------------------------------------------------
EBITDA from operations 13.4 24.8 6.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Construction
For the three months ended Energy Specialty Products
June 30, 2010 Services Chemicals Distribution
----------------------------------------------------------------------------
Net earnings 9.9 12.5 2.7
Add: Amortization of property,
plant and equipment,
intangible assets and
accretion 13.9 1.7 2.9
Amortization included in cost
of sales - 12.5 -
Amortization of customer
contract costs 1.6 - -
Customer contract related
costs (0.8) - -
Finance costs 2.0 0.2
Other expenses 0.5 - 0.2
Unrealized gains on derivative
financial instruments (23.8) (2.0) -
----------------------------------------------------------------------------
EBITDA from operations 3.3 24.7 6.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Construction
For the six months ended Energy Specialty Products
June 30, 2011 Services Chemicals Distribution
----------------------------------------------------------------------------
Net earnings 66.8 19.4 5.0
Add: Amortization of property,
plant and equipment,
intangible assets and
accretion 31.8 3.3 4.7
Amortization included in cost
of sales - 22.3 -
Amortization of customer
contract costs 2.4 - -
Customer contract related
costs (1.0) - -
Finance costs 2.0 0.1 0.5
Unrealized losses on
derivative financial
instruments (23.0) 5.4 -
----------------------------------------------------------------------------
EBITDA from operations 79.0 50.5 10.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Construction
For the six months ended Energy Specialty Products
June 30, 2010 Services Chemicals Distribution
----------------------------------------------------------------------------
Net earnings (loss) 6.4 16.1 3.6
Add: Amortization of property,
plant and equipment,
intangible assets and
accretion 28.6 3.3 6.7
Amortization included in cost
of sales - 24.3 -
Amortization of customer
contract costs 3.2 - -
Finance costs 2.0 0.1 0.2
Customer contract related
costs (1.4) - -
Other expenses 2.1 - 0.2
Unrealized losses on
derivative financial
instruments 18.0 2.2 -
----------------------------------------------------------------------------
EBITDA from operations 58.9 46.0 10.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See the Unaudited Condensed Consolidated Financial Statements for net
earnings (loss), amortization of property, plant and equipment,
intangible assets and accretion of convertible debenture issue costs,
amortization included in cost of sales, amortization of customer
contract costs, customer contract related costs and unrealized (gains)
losses on derivative financial instruments.
(2) See "Non-IFRS Financial Measures" for additional details.
Reconciliation of Divisional Segmented Revenue, Cost of Sales and cash
operating and administrative costs included in this MD&A
----------------------------------------------------------------------------
For the three months ended June 30, 2011
Construction
Energy Specialty Products
Services Chemicals Distribution
----------------------------------------------------------------------------
Revenue per Financial
Statements 594.3 125.8 177.8
Foreign currency gains (losses)
related to working capital - (0.1) 0.5
----------------------------------------------------------------------------
Revenue per the MD&A 594.3 125.7 178.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cost of products sold per
Financial Statements (504.7) (82.0) (135.7)
Non-cash amortization - 10.9 -
----------------------------------------------------------------------------
Cost of products sold per the
MD&A (504.7) (71.1) (135.7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross profit 89.6 54.6 42.6
Cash operating and
administrative (94.8) (31.6) (39.3)
Costs per Financial Statements
Amortization and depreciation
expenses 16.6 1.7 2.8
Amortization of customer
contract related costs 1.2 - -
Customer contract related costs (0.2) - -
Interest reclassification
impact 1.0 - 0.3
Reclassification of foreign
currency (gains) and losses
related to working capital - 0.1 -
----------------------------------------------------------------------------
Cash operating and
administrative
costs per the MD&A (76.2) (29.8) (36.2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended June 30, 2010
Construction
Energy Specialty Products
Services Chemicals Distribution
----------------------------------------------------------------------------
Revenue per Financial
Statements 493.3 118.3 179.6
Foreign currency gains (losses)
related to working capital (0.4) 0.5 -
----------------------------------------------------------------------------
Revenue per the MD&A 492.9 118.8 179.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cost of products sold per
Financial Statements (409.9) (77.3) (138.1)
Non-cash amortization - 12.5 -
----------------------------------------------------------------------------
Cost of products sold per the
MD&A (409.9) (64.8) (138.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross profit 83.0 54.0 41.5
Cash operating and
administrative (95.8) (30.5) (38.5)
Costs per Financial Statements
Amortization and depreciation
expenses 13.9 1.7 2.9
Amortization of customer
contract related costs 1.6 - -
Customer contract related costs (0.8) - -
Interest reclassification
impact 1.0 - 0.1
Reclassification of foreign
currency (gains) and losses
related to working capital 0.4 (0.5) -
----------------------------------------------------------------------------
Cash operating and
administrative
costs per the MD&A (79.7) (29.3) (35.5)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six months ended June 30, 2011
Construction
Energy Specialty Products
Services Chemicals Distribution
----------------------------------------------------------------------------
Revenue per Financial
Statements 1,435.9 256.9 343.6
Foreign currency gains (losses)
related to working capital - (0.4) 0.8
----------------------------------------------------------------------------
Revenue per the MD&A 1,435.9 256.5 344.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cost of products sold per
Financial Statements (1,192.8) (167.9) (262.1)
Non-cash amortization - 22.3 -
----------------------------------------------------------------------------
Cost of products sold per the
MD&A (1,192.8) (145.6) (262.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross profit 243.1 110.9 82.3
Cash operating and
administrative (197.3) (64.1) (76.8)
Costs per Financial Statements
Amortization and depreciation
expenses 31.8 3.3 4.7
Amortization of customer
contract related costs 2.4 - -
Customer contract related costs (1.0) - -
Reclassification of foreign
currency (gains) and losses
related to working capital - 0.4 -
----------------------------------------------------------------------------
Cash operating and
administrative
costs per the MD&A (164.1) (60.4) (72.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six months ended June 30, 2010
Construction
Energy Specialty Products
Services Chemicals Distribution
----------------------------------------------------------------------------
Revenue per Financial
Statements 1,181.4 229.1 346.6
Foreign currency gains (losses)
related to working capital - (0.4) -
----------------------------------------------------------------------------
Revenue per the MD&A 1,181.4 228.7 346.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cost of products sold per
Financial Statements (959.6) (148.0) (266.0)
Non-cash amortization - 24.3 -
----------------------------------------------------------------------------
Cost of products sold per the
MD&A (959.6) (123.7) (266.0)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross profit 221.8 105.0 80.6
Cash operating and
administrative (193.3) (62.7) (76.6)
Costs per Financial Statements
Amortization and depreciation
expenses 28.6 3.3 6.7
Amortization of customer
contract related costs 3.2 - -
Customer contract related costs (1.4) - -
Reclassification of foreign
currency (gains) and losses
related to working capital - 0.4 -
----------------------------------------------------------------------------
Cash operating and
administrative
costs per the MD&A (162.9) (59.0) (69.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Risk Factors to Superior
The risks factors and uncertainties detailed below are a summary of Superior's assessment of its material risk factors as identified in Superior's 2010 Annual Information Form under the heading "Risk Factors". For a detailed discussion of these risks, see Superior's 2010 Annual Information Form filed on the Canadian Securities Administrator's website, www.sedar.com and Superior's website, www.superiorplus.com.
Risks to Superior
Superior is entirely dependent upon the operations and assets of Superior LP. Superior's ability to make dividend payments to shareholders is dependent upon the ability of Superior LP to make distributions on its outstanding limited partnership units as well as the operations and business of Superior LP.
There is no assurance regarding the amounts of cash to be distributed by Superior LP or generated by Superior LP and therefore funds available for dividends to shareholders. The actual amount distributed in respect of the limited partnership units will depend on a variety of factors including, without limitation, the performance of Superior LP's operating businesses, the effect of acquisitions or dispositions on Superior LP, and other factors that may be beyond the control of Superior LP or Superior. In the event significant sustaining capital expenditures are required by Superior LP or the profitability of Superior LP declines, there would be a decrease in the amount of cash available for dividends to shareholders and such decrease could be material.
Superior's dividend policy and the distribution policy of Superior LP are subject to change at the discretion of the board of directors of Superior or the board of directors of Superior General Partner Inc., as applicable. Superior's dividend policy and the distribution policy of Superior LP are also limited by contractual agreements including agreements with lenders to Superior and its affiliates and by restrictions under corporate law.
The credit facilities of Superior LP contain covenants that require Superior LP to meet certain financial tests and that restrict, among other things, the ability of Superior LP to incur additional debt, dispose of assets or pay dividends/distributions in certain circumstances. These restrictions may preclude Superior LP from returning capital or making distributions on the limited partnership units.
The payout by Superior LP of substantially all of its available cash flow means that capital expenditures to fund growth opportunities can only be made in the event that other sources of financing are available. Lack of access to such additional financing could limit the future growth of the business of Superior LP and, over time, have a material adverse effect on the amount of cash available for dividends to Shareholders.
To the extent that external sources of capital, including public and private markets, become limited or unavailable, Superior's and Superior LP's ability to make the necessary capital investments to maintain or expand the current business and to make necessary principal payments under its term credit facilities may be impaired.
Superior maintains a substantial floating interest rate exposure through a combination of floating interest rate borrowings and the use of derivative instruments. Demand levels for approximately half of Energy Services' sales and substantially all of Specialty Chemicals' and Construction Products Distribution's sales are affected by general economic trends. Generally speaking, when the economy is strong, interest rates increase as does sales demand from Superior's customers, thereby increasing Superior's ability to pay higher interest costs and vice versa. In this way, there is a common relationship between economic activity levels, interest rates and Superior's ability to pay higher or lower rates.
A portion of Superior's net cash flows is denominated in US dollars. Accordingly, fluctuations in the Canadian/US dollar exchange rate can impact profitability. Superior attempts to mitigate this risk by hedging.
The timing and amount of capital expenditures incurred by Superior LP or by its subsidiaries will directly affect the amount of cash available to Superior for dividends to shareholders. Dividends may be reduced, or even eliminated, at times when significant capital expenditures are incurred or other unusual expenditures are made.
If the board of directors of Superior decides to issue additional common shares, preferred shares or securities convertible into common shares, existing shareholders may suffer significant dilution.
There can be no assurances that income tax laws in the numerous jurisdictions in which Superior operates will not be changed, interpreted or administered in a manner which adversely affects Superior and its shareholders. In addition, there can be no assurance that the Canada Revenue Agency (or provincial tax agency), U.S. Internal Revenue Service (or a state or local tax agency), or the Chilean Internal Revenue Service (collectively the "Tax Agencies") will agree with how Superior calculates its income for tax purposes or that the various Tax Agencies will not change their administrative practices to the detriment of Superior or its Shareholders.
Without limiting the generality of the foregoing, since the beginning of 2010, the Canada Revenue Agency has requested and reviewed information from Superior relating to the plan of arrangement (Arrangement) involving the Fund and Ballard Power Systems Inc. and the conversion of the Fund to a corporation (Conversion). While Superior is confident in the appropriateness of its tax filing position and the expected tax consequences of the Arrangement and the Conversion transaction, there remains a possibility that, if the Canada Revenue Agency elects to challenge Superior's tax filing and such challenge is successful, it could potentially affect the availability or quantum of the tax basis or other tax accounts of Superior. Although it is difficult to quantify the potential impact of any such outcome, it could be materially adverse to Superior.
Risks to Superior's segments
Energy Services
Canadian Propane Distribution and U.S. Refined Fuels
Propane is sold in competition with other energy sources such as fuel oil, electricity and natural gas, along with alternative energy sources that are currently under development. In addition to competition from other energy sources, Superior competes with other retail marketers. Superior's ability to remain an industry leader depends on its ability to provide reliable service at competitive selling prices.
Competition in the U.S. Refined Fuels business markets generally occurs on a local basis between large full service, multi-state marketers and smaller local independent marketers. Although the industry has seen a continued trend of consolidation over the past several years, the top ten multi-state marketers still generate only one-third of total retail sales in the United States. Marketers primarily compete based upon price and service and tend to operate in close proximity to customers, typically within a 35-mile marketing radius from a central depot, to lower delivery costs and provide prompt service.
Weather and general economic conditions affect propane and refined fuels market volumes. Weather influences the demand for propane and heating oil used primarily for space heating uses and also for agricultural applications.
The trend towards increased conservation measures and technological advances in energy efficiency may have a detrimental effect on propane and heating oil demand and Superior's sales. Further, increases in the cost of propane encourage customers to conserve fuel and to invest in more energy-efficient equipment, reducing demand. Changes in propane supply costs are normally passed through to customers, but timing lags (the time between when Superior purchases the propane and when the customer purchases the propane) may result in positive or negative gross margin fluctuations.
Superior offers its customers various fixed-price propane and heating oil programs. In order to mitigate the price risk from offering these services, Superior uses its physical inventory position, supplemented by forward commodity transactions with various third parties having terms and volumes substantially the same as its customers' contracts. In periods of high propane price volatility the fixed price programs create exposure to over or under supply positions as the demand from customers may significantly exceed or fall short of supply procured. In addition, if propane prices decline significantly subsequent to customers signing up for a fixed price program there is a risk that customers will default on their commitments.
Superior's operations are subject to the risks associated with handling, storing and transporting propane in bulk. Slight quantities of propane may also be released during transfer operations. To mitigate risks, Superior has established a comprehensive program directed at environmental, health and safety protection. This program consists of an environmental policy, codes of practice, periodic self-audits, employee training, quarterly and annual reporting and emergency prevention and response.
The U.S. refined fuels business, through a centralized safety and environment management system, ensures that safety practices and regulatory compliance are an important part of its business. The storage and delivery of refined fuels poses the potential for spills which impact the soils and water of storage facilities and customer properties.
Superior's fuel distribution businesses are based and operate in Canada and the United States, and, as a result, such operations could be affected by changes to laws, rules or policies which may either be more favourable to competing energy sources or increase costs or otherwise negatively affect the operations of Energy Services in comparison to such competing energy sources. Any such changes could have an adverse effect on the operations of Energy Services.
Approximately 14% of Superior's Canadian propane distribution and U.S. refined fuels distribution businesses employees are unionized. Collective bargaining agreements are renegotiated in the normal course of business. While labour disruptions are not expected, there is always risk associated with the re-negotiation process that could have an adverse impact to Superior.
Fixed-price energy services business
New entrants in the energy retailing business may enter the market and compete directly for the customer base that Superior targets, slowing or reducing its market share.
Fixed-price energy services purchases natural gas to meet its estimated commitments to its customers based upon their historical consumption. Depending on a number of factors, including weather, customer attrition and poor economic conditions affecting commercial customers' production levels, customers' combined natural gas consumption may vary from the volume purchased. This variance must be reconciled and settled at least annually and may require Superior to purchase or sell natural gas at market prices, which may have an adverse impact on the results of this business. To mitigate balancing risk, Superior closely monitors its balancing position and takes measures such as adjusting gas deliveries and transferring gas between pools of customers, so that imbalances are minimized. In addition, Superior maintains a reserve for potential balancing costs. The reserve is reviewed on a monthly basis to ensure that it is sufficient to absorb any losses that might arise from balancing.
Fixed-price energy services matches its customers' estimated electricity requirements by entering into electricity swaps in advance of acquiring customers. Depending on several factors, including weather, customer energy consumption may vary from the volumes purchased by Superior. Superior is able to invoice existing commercial electricity customers for balancing charges when the amount of energy used is greater than or less than the tolerance levels set initially. In certain circumstances, there can be balancing issues for which Superior is responsible when customer aggregation forecasts are not realized.
Fixed-price energy services resources its fixed-price term natural gas sales commitments by entering into various physical natural gas and US dollar foreign exchange purchase contracts for similar terms and volumes to create an effective Canadian dollar fixed-price cost of supply. Superior transacts with nine financial and physical natural gas counterparties. There can be no assurance that any of these counterparties will not default on any of their obligations to Superior. However, the financial condition of each counterparty is evaluated and credit limits are established to minimize Superior's exposure to this risk. There is also a risk that supply commitments and foreign exchange positions may become unmatched; however, this is monitored daily in compliance with Superior's risk management policy.
Fixed-price energy services must retain qualified sales agents in order to properly execute its business strategy. The continued growth of fixed-price energy services is reliant on the services of agents to sign up new customers. There can be no assurance that competitive conditions will allow these agents to achieve these customer additions. Lack of success in the marketing programs of fixed-price energy services would limit future growth of cash flow.
Fixed-price energy services operates in the highly regulated energy industry in Ontario and Quebec. Changes to existing legislation could impact this business' operations. As part of the current regulatory framework, local delivery companies are mandated to perform certain services on behalf of fixed-price energy services, including invoicing, collection, assuming specific bad debt risks and storage and distribution of natural gas. Any elimination or changes to these rules could have a significant adverse effect on the results of this business.
The Ontario Energy Board issued an update to the revised Codes of Conduct supporting the Energy Consumer Protection Act. Although the industry had anticipated automatic renewal of natural gas accounts on a month-to-month basis, the OEB has confirmed that the automatic renewal of natural gas contracts will be allowed for a period of one year capped at the customer's existing rate. Only one automatic renewal will be allowed emphasizing the need to positively convert automatic renewals to other products before the customer is returned to the utility at the end of the renewal term. Renewal notifications will require a standard disclosure form and a price comparison between fixed-price energy service's renewal price and the utility default rate.
Specialty Chemicals
Specialty Chemicals competes with sodium chlorate, chloralkali and potassium producers on a worldwide basis. Key competitive factors include price, product quality, logistics capability, reliability of supply, technical capability and service. The end-use markets for products are correlated to the general economic environment and the competitiveness of customers, all of which are outside of its control along with market pricing for pulp.
Specialty Chemicals has long-term electricity contracts or electricity contracts that renew automatically with power producers in each of the jurisdictions where its plants are located. There is no assurance that Specialty Chemicals will continue to be able to secure adequate supplies of electricity at reasonable prices or on acceptable terms.
Potassium chloride (KCL) is a major raw material used in the production of potassium hydroxide at the Port Edwards, Wisconsin facility. Substantially all of Specialty Chemicals KCL is received from Potash Corporation of Saskatchewan (Potash). Specialty Chemicals currently has a limited ability to source KCL from additional suppliers.
Specialty Chemicals is exposed to fluctuations in the US dollar and the euro versus the Canadian dollar. Specialty Chemicals manages its exposure to fluctuations between the United States and Canadian dollar by entering into hedge contracts with external third parties and internally with other Superior businesses.
Specialty Chemicals' operations involve the handling, production, transportation, treatment and disposal of materials that are classified as hazardous and are regulated by environmental and health and safety laws, regulations and requirements. The potential exists for the release of highly toxic and lethal substances, including chlorine. Equipment failure could result in damage to facilities, death or injury and liabilities to third parties. If at any time the appropriate regulatory authorities deem any of the facilities unsafe, they may order that such facilities be shut down.
Specialty Chemicals' operations and activities in various jurisdictions require regulatory approvals for the handling, production, transportation and disposal of chemical products and waste substances. The failure to obtain or comply fully with such applicable regulatory approvals may materially adversely affect Specialty Chemicals.
Approximately 25% of Specialty Chemicals' employees are unionized. Collective bargaining agreements are renegotiated in the normal course of business. While labour disruptions are not expected, there is always risk associated with the re-negotiation process that could have an adverse impact to Superior.
Construction Products Distribution
Activity in the Construction Products Distribution segment is subject to changes in the level of general economic activity and in particular to the level of activity in residential and non-residential construction subsectors. New construction in residential markets is subject to such factors as household income, employment levels, customer confidence, population changes and the supply of residential units in any local area. Non-residential activity can be subdivided into commercial, industrial and institutional. New construction activity in these sectors is subject to many of the same general economic factors as for residential activity. In the industrial and institutional subsectors, government and regulatory programs can also have a significant impact on the outlook for product distribution, particularly as related to our insulation businesses. As a result, changes to the level of general economic activity or any of the above mentioned factors that affect the amount of construction or renovations in residential and non-residential markets can have an adverse affect on the CPD business and Superior.
Construction Products Distribution competes with other specialty construction distributors servicing the builder/contractor market, in addition to big-box home centres and independent lumber yards. The ability to remain competitive depends on its ability to provide reliable service at competitive prices.
The gypsum specialty distributor (GSD) market is driven largely by residential and non-residential construction. Demand for wall and ceiling building materials is affected by changes in general and local economic factors including demographic trends, employment levels, interest rates, consumer confidence and overall economic growth. These factors in turn impact the level of existing housing sales, new home construction, new non-residential construction, and office/commercial space turnover, all of which are significant factors in the determination of demand for products and services.
The commercial & industrial (C&I) market is driven largely by C&I construction spending and economic growth. Sectors within the C&I market that are particularly influential to demand include commercial construction and renovation, construction or expansion of industrial process facilities, such as oil refineries and petrochemical plants, as well as institutional facilities (e.g., government, health care and schools).
The distribution of walls and ceilings and C&I products involves risks, including the failure or substandard performance of equipment, human error, natural disasters, suspension of operations and new governmental statutes, regulations, guidelines and policies. Operations are also subject to various hazards incidental to the handling, processing, storage and transportation of certain hazardous materials, including industrial chemicals. The business maintains safe working practices through proper procedures and direction and utilization of equipment such as forklifts, boom trucks, fabrication equipment and carts/dollies. The business handles and stores a variety of construction materials and maintains appropriate material handling compliance programs in accordance with local, state/provincial and federal regulations.
Approximately 4% of Construction Products Distribution's employees are unionized. Collective bargaining agreements are renegotiated in the normal course of business. While labour disruptions are not expected, there is always risk associated with the re-negotiation process that could have an adverse impact to Superior.
SUPERIOR PLUS CORP.
Condensed Consolidated Balance Sheets
----------------------------------------------------------------------------
(unaudited, millions of June 30, December 31, January 1,
Canadian dollars) Notes 2011 2010(1) 2010(1)
----------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents 23.2 8.9 24.3
Trade and other receivables 5 & 17 471.6 552.4 395.2
Prepaid expenses 18.2 23.3 21.3
Inventories 6 156.1 167.1 143.5
Unrealized gains on derivative
financial instruments 17 24.1 31.4 22.2
----------------------------------------------------------------------------
Total current assets 693.2 783.1 606.5
----------------------------------------------------------------------------
Non-Current Assets
Property, plant and equipment 7 871.8 910.2 880.0
Intangible assets and
investment property 8 163.9 182.2 185.6
Goodwill 9 470.5 471.7 527.5
Notes and finance lease
receivable 10.0 12.1 -
Deferred tax 18 298.6 340.1 326.6
Unrealized gains on derivative
financial instruments 17 23.7 26.6 28.5
----------------------------------------------------------------------------
Total non-current assets 1,838.5 1,942.9 1,948.2
----------------------------------------------------------------------------
Total assets 2,531.7 2,726.0 2,554.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Current Liabilities
Trade and other payables 11 264.1 320.7 296.3
Deferred revenue 12 4.8 6.8 5.8
Borrowings 13 & 14 46.2 136.2 108.9
Dividends and interest payable
to shareholders and
debentureholders 11.7 15.5 14.2
Unrealized losses on derivative
financial instruments 17 53.8 78.6 77.8
----------------------------------------------------------------------------
Total current liabilities 380.6 557.8 503.0
----------------------------------------------------------------------------
Non-Current Liabilities
Borrowings 13 & 14 652.4 596.7 680.1
Convertible unsecured
subordinated debentures 15 620.9 619.1 308.4
Provisions 10 10.6 11.0 6.9
Employee future benefits 16 49.0 45.5 30.1
Deferred tax liabilities 18 54.1 84.9 38.5
Unrealized losses on derivative
financial instruments 17 45.1 57.8 52.6
----------------------------------------------------------------------------
Total non-current liabilities 1,432.1 1,415.0 1,116.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total liabilities 1,812.7 1,972.8 1,619.6
----------------------------------------------------------------------------
Equity
Capital 1,622.8 1,606.4 1,507.3
Deficit 19 (829.6) (799.1) (551.1)
Accumulated other comprehensive
loss 19 (74.2) (54.1) (21.1)
----------------------------------------------------------------------------
Total equity 719.0 753.2 935.1
----------------------------------------------------------------------------
Total liabilities and equity 2,531.7 2,726.0 2,554.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(See Notes to the Condensed Consolidated Financial Statements)
(1)Refer to Note 28 for impact of adopting IFRS
SUPERIOR PLUS CORP.
Condensed Consolidated Statement of Changes in Equity
----------------------------------------------------------------------------
(unaudited, Accumulated
millions of other
Canadian Share Contributed Total comprehensive
dollars) Capital Surplus(2) Capital Deficit loss Total
----------------------------------------------------------------------------
January 1, 2010
(1) 1,502.0 5.3 1,507.3 (551.1) (21.1) 935.1
Net loss for
the period - - - (6.0) - (6.0)
Net proceeds
on issuance of
share capital 81.7 - 81.7 - - 81.7
Option value
associated with
the issuance of
the convertible
debentures - 0.2 0.2 - - 0.2
Share issued
under Dividend
Reinvestment
Plan 1.5 - 1.5 1.5
Dividends paid
to shareholders
(Note 19) - - - (84.6) - (84.6)
Unrealized
foreign
currency gains
(losses) on
translation of
foreign
operations - - - - 10.3 10.3
Amortization
of actuarial
defined benefit
gains
(losses) - - - - (19.0) (19.0)
Reclassification
of derivative
gains and
losses
previously
deferred - - - - 4.6 4.6
Income tax on
other
comprehensive
income - - 4.8 4.8
----------------------------------------------------------------------------
June 30, 2010
(1) 1,585.2 5.5 1,590.7 (641.7) (20.4) 928.6
----------------------------------------------------------------------------
Net loss for
the period - - - (71.0) - (71.0)
Shares issued
under the
Dividend
reinvestment
plan 15.7 - 15.7 - - 15.7
Dividends paid
to shareholders
(Note 19) - - - (86.6) - (86.6)
Unrealized
foreign currency
gains (losses) on
translation of
foreign
operations - - - - (37.7) (37.7)
Amortization
of actuarial
defined benefit
gains (losses) - - - - (0.9) (0.9)
Reclassification of
derivative gains
and losses
previously
deferred - - - - 7.5 7.5
Income tax on
other
comprehensive
income - - - - (2.6) (2.6)
Prior period
adjustments - - - 0.2 - 0.2
----------------------------------------------------------------------------
December 31,
2010 (1) 1,600.9 5.5 1,606.4 (799.1) (54.1) 753.2
----------------------------------------------------------------------------
Net earnings
for the period - - - 42.2 - 42.2
Shares issued
under the
Dividend
reinvestment
plan 16.4 - 16.4 - - 16.4
Dividends paid
to shareholders
(Note 19) - - (72.7) - (72.7)
Unrealized
foreign
currency gains
(losses) on
translation of
foreign
operations - - - - (18.4) (18.4)
Amortization
of actuarial
defined benefit
gains (losses) - - - - (5.6) (5.6)
Reclassification
of derivative
gains and
losses
previously
deferred - - - - 3.5 3.5
Income tax on
other
comprehensive
income - - - - 0.4 0.4
----------------------------------------------------------------------------
June 30, 2011 1,617.3 5.5 1,622.8 (829.6) (74.2) 719.0
----------------------------------------------------------------------------
(See Notes to the Condensed Consolidated Financial Statements)
(1) Refer to Note 28 for impact of adopting IFRS
(2) Contributed surplus represents Superior's equity reserve for the option
value associated with the issuance of convertible unsecured
subordinated debentures and warrants.
SUPERIOR PLUS CORP.
Condensed Consolidated Statement of Net Earnings (Loss) and Comprehensive
Income (Loss)
----------------------------------------------------------------------------
(unaudited, millions of Three Months Ended Six Months Ended
Canadian dollars except per June 30, June 30,
share amounts) Notes 2011 2010 2011 2010
----------------------------------------------------------------------------
REVENUES 23 898.4 791.2 2,037.2 1,757.1
Cost of sales (includes
products & services) 23 (722.4) (625.3) (1,622.8) (1,373.6)
----------------------------------------------------------------------------
Gross profit 176.0 165.9 414.4 383.5
----------------------------------------------------------------------------
EXPENSES
Selling, distribution and
administrative costs 23 169.6 168.4 345.3 340.3
Other expenses - 0.7 - 2.3
Finance expense 23 21.0 18.3 42.6 36.9
Unrealized losses (gains) on
derivative financial
instruments 17 (14.3) 4.2 (28.7) 32.4
----------------------------------------------------------------------------
176.3 191.6 359.2 411.9
----------------------------------------------------------------------------
Net earnings (loss) before
income taxes (0.3) (25.7) 55.2 (28.4)
Income tax (expense)
recovery 18 1.4 20.2 (13.0) 22.4
----------------------------------------------------------------------------
Net earnings (loss) 1.1 (5.5) 42.2 (6.0)
----------------------------------------------------------------------------
Net earnings (loss) 1.1 (5.5) 42.2 (6.0)
Other comprehensive income
(loss), net of tax:
Unrealized foreign currency
gains (losses) on translation
of foreign operations 19 (5.1) 26.6 (18.4) 10.3
Amortization of actuarial
defined benefit
gains (losses) 19 (6.9) (9.8) (5.6) (19.0)
Reclassification of
Derivative gains and losses
previously deferred 19 2.9 4.9 3.5 4.6
Income tax recovery on other
comprehensive income (loss) 19 0.9 2.5 0.4 4.8
----------------------------------------------------------------------------
Total comprehensive income
(loss) for the period (7.1) 18.7 22.1 (5.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Earnings (Loss) per
Share
From operations:
Basic and diluted 20 $0.01 $ (0.05) $0.39 $(0.06)
----------------------------------------------------------------------------
(See Notes to the Condensed Consolidated Financial Statements)
(1) Refer to Note 28 for impact of adopting IFRS
SUPERIOR PLUS CORP.
Condensed Consolidated Statement of Cash Flows
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
(unaudited, millions of June 30, June 30,
Canadian dollars) Notes 2011 2010 2011 2010
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings (loss) for the
period 1.1 (5.5) 42.2 (6.0)
Adjustments for:
Depreciation included in
selling, distribution and
administrative costs 7 12.3 12.5 24.5 24.4
Amortization of intangible
assets 8 8.8 6.8 15.3 14.2
Depreciation included in
cost of sales 7 10.9 11.7 22.3 24.3
Amortization of customer
related costs 1.2 1.6 2.4 3.2
Unrealized losses (gains) on
derivative financial
instruments 17 (14.3) 4.2 (28.7) 32.4
Customer contract related
costs (0.2) (0.8) (1.0) (1.4)
Finance costs recognized in
net earnings 21.0 18.3 42.6 36.9
Income tax expense
recognized in net earnings (1.4) (20.2) 13.0 (22.4)
(Increase) decrease in
non-cash operating working
capital items 22 65.0 (17.4) 29.5 11.6
----------------------------------------------------------------------------
Net cash flows from operating
activities 104.4 11.2 162.1 117.2
Income taxes paid (0.3) (0.2) (0.4) (0.7)
Interest paid (35.8) (26.0) (40.0) (32.1)
----------------------------------------------------------------------------
Cash flows from (used in)
operating activities 68.3 (15.0) 121.7 84.4
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant
and equipment 7 (6.8) (11.1) (14.6) (18.1)
Proceeds from disposal of
property, plant and equipment 7 0.6 1.3 1.6 1.8
Acquisition of Griffith 4 - - - (142.6)
Other acquisitions 4 (0.3) (17.7) (4.9) (18.1)
----------------------------------------------------------------------------
Cash flows used in investing
activities (6.5) (27.5) (17.9) (177.0)
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds (repayment) of
borrowings and loans 60.5 93.7 68.8 (73.6)
Net payment of finance lease
obligations (3.8) (3.1) (7.9) (6.1)
Net proceeds (repayment) from
accounts receivable
sales program (89.3) (24.0) (90.1) (7.3)
Proceeds from issuance of
5.75% convertible debentures - - - 172.5
Issue costs incurred for the
5.75% convertible debentures - (0.5) - (6.9)
Proceeds from issuance of
common shares - 15.7 - 82.2
Proceeds from the dividend
reinvestment program 7.2 1.5 16.4 1.5
Dividends paid to
shareholders (32.7) (42.8) (72.7) (84.6)
(Decrease) increase in
non-cash working capital - (0.1) (3.6) 0.9
----------------------------------------------------------------------------
Cash flows (used in) from
financing activities (58.1) 40.4 (89.1) 78.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net increase (decrease) in
cash and cash
equivalents 3.7 (2.1) 14.7 (14.0)
Cash and cash equivalents,
beginning of period 19.5 11.9 8.9 24.3
Effect of translation of
foreign denominated cash and
cash equivalents - 0.8 (0.4) 0.3
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period 23.2 10.6 23.2 10.6
----------------------------------------------------------------------------
(See Notes to the Condensed Consolidated Financial Statements)
(1) Refer to Note 28 for impact of adopting IFRS
Notes to the Unaudited Condensed Consolidated Financial Statements
(unaudited, Tabular amounts in Canadian millions of dollars, unless noted otherwise, except per share amounts.)
1. Organization
Superior Plus Corp. (Superior) is a diversified business corporation, incorporated under the Canada Business Corporations Act. The address of the registered office is 840 - 7th Avenue SW, Calgary, Alberta. Superior holds 100% of Superior Plus LP (Superior LP), a limited partnership formed between Superior General Partner Inc., as general partner and Superior as limited partner. Superior holds 100% of the shares of Superior General Partner Inc. Superior does not conduct active business operations but rather distributes to shareholders the income it receives from Superior Plus LP in the form of partnership allocations, net of expenses and interest payable on the convertible unsecured subordinated debentures (the debentures). Superior's investments in Superior Plus LP are financed by share capital and debentures.
The accompanying Unaudited Condensed Consolidated Financial Statements (Consolidated Financial Statements) of Superior as at June 30, 2011 and the three months and the six months ended June 30, 2011 and 2010 were authorized for issue by the Board of Directors on August 4, 2011.
Reportable Operating Segments
Superior operates three distinct reportable operating segments: Energy Services, Specialty Chemicals and Construction Products Distribution. Superior's Energy Services operating segment provides distribution, wholesale procurement and related services in relation to propane, heating oil and other refined fuels. Energy Services also provides fixed-price natural gas and electricity supply services. Superior's Specialty Chemicals operating segment is a leading supplier of sodium chlorate and technology to the pulp and paper industries and a regional supplier of potassium and chloralkali products to the U.S. Midwest. Superior's Construction Products Distribution operating segment is one of the largest distributors of commercial and industrial insulation in North America and the largest distributor of specialty construction products to the walls and ceilings industry in Canada. (See Note 25)
2. Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with International Accounting Standards 34 Interim Financial Reporting (IAS 34) as issued by the International Accounting Standards Board (IASB) and using the accounting policies Superior expects to adopt in its annual consolidated financial statements as at and for the year ending December 31, 2011. Those accounting policies are based on the International Financial Reporting Standards (IFRS) standards and International Financial Reporting Interpretations Committee (IFRIC) interpretations that Superior expects to be applicable at that time. Superior applied IFRS 1 "first-time adoption of International Reporting Standards" (IFRS 1) as at January 1, 2010 (Transition Date). An explanation of the transition to International Financial Reporting Standards (IFRS) is provided in Note 28. The policies set out below were consistently applied to all the periods presented unless otherwise noted below.
These Consolidated Financial Statements are presented in Canadian dollars, which is Superior's functional and presentation currency. All financial information presented in Canadian dollars has been rounded to the nearest million. These Consolidated Financial Statements should be read in conjunction with Superior's 2011 first quarter interim financial statements, Superior's 2010 annual consolidated financial statements and in consideration of the IFRS transition disclosures included in Note 28 to these Consolidated Financial Statements and the additional disclosures included herein.
The Consolidated Financial Statements have been prepared on the historical cost basis except for certain financial instruments that are measured at fair value as explained in the accounting policies below and incorporate the accounts of Superior and its wholly-owned subsidiaries. Subsidiaries are all entities over which Superior has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The results of subsidiaries are included in Superior's income statement from date of acquisition, or in the case of disposals, up to the date of disposal. All transactions and balances between Superior and Superior's subsidiaries have been eliminated on consolidation. Superior's subsidiaries are all wholly owned directly or indirectly by Superior Plus Corp.
Superior's Consolidated Financial Statements were previously prepared in accordance with Canadian generally accepted accounting principles (GAAP). GAAP differs in some areas from IFRS and in preparing these Consolidated Financial Statements, management has amended certain accounting, measurements and consolidation methods previously applied in the GAAP financial statements to comply with IFRS. The comparative figures for 2010 were restated to reflect these adjustments. Note 28 contains reconciliations and descriptions of the effect of the transition from GAAP to IFRS on equity, earnings, and comprehensive income along with line-by-line reconciliations of the statement of net earnings (loss) and comprehensive income (loss) and balance sheets for the year ended December 31, 2010 as well as the interim periods relevant to the computation of theses Consolidated Financial Statements.
In preparation of these Consolidated Financial Statements in accordance with IAS 34 requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying Superior's accounting policies. The areas involving a higher degree of judgment or complexity are areas where assumptions and estimates are significant to these Consolidated Financial Statements are disclosed in (u).
Significant Accounting Policies
(a) Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid short-term investments which, on acquisition, have a term to maturity of three months or less.
(b) Accounts Receivable Sales Program
Superior terminated its revolving trade accounts receivable sales program in June 2011. Losses on sales depend in part on the previous carrying amount of trade accounts receivable involved in the sales and have been included in interest on revolving term bank credits and term loans. The carrying amount is allocated between the assets sold and retained interests based on their relative fair value at the date of the sale which is calculated by discounting expected cash flows at prevailing money market rates.
(c) Inventories
Energy Services
Energy Services inventories are valued at the lower of cost and net realizable value. Costs of inventories are determined either on a weighted average cost or first-in-first-out basis. Appliances, materials, supplies and other inventories are stated at the lower of cost and net realizable value, as appropriate. The net realizable value of inventory is based on estimated selling price in the ordinary course of business less the estimated costs necessary to complete the sale.
Specialty Chemicals
Inventories are valued at the lower of cost and net realizable value. The cost of chemical inventories is 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. The net realizable value of inventory is based on estimated selling price in the ordinary course of business less the estimated costs necessary to complete the sale.
Construction Products Distribution
Inventories of building products are valued at the lower of cost and net realizable value. Cost is calculated on a weighted average cost basis and any trade discounts and rebates are deducted from the cost. The net realizable value of inventory is based on estimated selling price in the ordinary course of business less the estimated costs necessary to complete the sale.
(d) Financial Instruments and Derivative Financial Instruments
Derivative Financial Instruments
Superior enters into a variety of derivatives to manage its exposure to certain financial risks. Further details of derivative financial instruments are disclosed in Note 17.
Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognized in net earnings. Realized gains and losses on derivatives are recognized as a component of revenue, cost of sales or finance expense/revenue, the classification of which is dependent on the underlying nature of the economic exposure being managed. Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognized in net earnings.
Superior does not formally designate and document economic hedges in accordance with the requirements of applying hedge accounting under IFRS and therefore, does not apply hedge accounting.
Financial Assets
A financial asset is classified at fair value through net earnings (loss) (FVTNL) if it is classified as held for trading or is designated as such upon initial recognition. Upon initial recognition attributable transaction costs are recognized in net earnings (loss) as incurred. Financial assets at FVTNL are measured at fair value, and changes therein are recognized in net earnings (loss).
Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses.
Separable embedded derivatives
Changes in the fair value of separable embedded derivatives are recognized immediately in net earnings (loss).
Effective Interest Method
The effective interest method is a method of calculating the amortized cost of a financial asset and of recognizing interest income or expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period.
Impairment of Financial Assets
Financial assets measured at amortized cost are assessed for indicators of impairment at each reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been negatively impacted.
For certain categories of financial assets, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include Superior's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, in addition to changes in economic conditions that correlate with defaults on receivables. For financial assets carried at amortized cost, the amount of impairment recognized is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to the statement of net earnings (loss) and comprehensive income (loss). Changes in the carrying amount of the allowance account are recognized in net earnings.
Classification as Debt or Equity
Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.
Equity Instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by Superior are recorded at the proceeds received, net of direct issue costs.
Compound Financial Instruments
The component parts of compound instruments issued by Superior are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangement. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for a similar non-convertible instrument. This amount is recorded as a liability on an amortized cost basis using the effective interest method until extinguished upon conversion or at the instrument's maturity date. The equity component is determined by deducting the amount of the liability component from the fair value of the compound instrument as a whole. This is recognized and included in equity, net of income tax, and is not subsequently remeasured.
Financial Liabilities
Financial liabilities are classified as either financial liabilities at FVTNL or other financial liabilities.
Financial Liabilities at FVTNL
Financial liabilities are classified as at FVTNL where the financial liability is held for trading or it is designated as FVTNL upon initial recognition. Financial liabilities at FVTNL are stated at fair value with any resulting gain or loss recognized in net earnings. The net gain or loss recognized in net earnings incorporates any interest expense relating to the financial liability. Upon initial recognition attributable transaction costs are recognized in net earnings or loss as incurred. Fair value is determined in the manner described in Note 17.
Other Financial Liabilities
Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective interest basis.
Derecognition of Financial Liabilities
Superior derecognizes financial liabilities when, and only when, Superior's obligations are discharged, cancelled or they expire.
(e) Property, Plant and Equipment
Cost
Property, plant and equipment is recorded at cost less accumulated depreciation and impairment losses. Major renewals and improvements which provide future economic benefits and can be reliably measured are capitalized, while repair and maintenance expenses are charged to operations as incurred. Property, plant and equipment in the course of construction are carried at cost less any recognized impairment losses. Cost includes directly attributable expenses, professional fees and, for qualifying assets, borrowing costs capitalized in accordance with Superior's accounting policy. Depreciation of these assets, on the same basis as other property assets, commences when the assets are available for their intended use. Disposals are derecognized at carrying costs less accumulated depreciation and impairment losses with any resulting gain or loss reflected in net earnings (loss).
Borrowing Costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are included in the cost of those assets, until such time as the assets are substantially available for their intended use. All other borrowing costs are recognized in net earnings (loss) in the period which they are incurred.
Depreciation
Depreciation is calculated using the straight-line method, based on the estimated useful life. Land is not depreciated. Amortization of property in the course of construction commences when the assets are ready for their intended use. In the majority of cases, residual value is estimated to be insignificant. Depreciation by class of assets is as follows:
Buildings 15 to 40 years
Leasehold improvements 10 years
Energy Services tanks and cylinders 30 years
Energy Services truck tank bodies, chassis and other
Construction Products distribution equipment 5 to 15 years
Manufacturing equipment 5 to 40 years
Furniture and fixtures 10 years
Computer equipment 3 years
Deprecation rates, residual values and depreciation methods are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
(f) Intangible Assets
Intangible assets are reported at cost less accumulated amortization and accumulated impairment losses. For intangible assets with a determinate life, amortization is charged on a straight-line basis over their estimated useful lives.
Intangible assets acquired in a business combination are identified and recognized separately from goodwill where they satisfy the recognition criteria. The initial cost of such intangible assets is their fair value at the acquisition date. Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets acquired separately.
Amortization rates, residual values and amortization methods are reviewed at least annually, with the effect of any changes in estimate being accounted for on a prospective basis.
Energy Services
Costs incurred by Energy Services to acquire natural gas and electricity customer contracts are capitalized as deferred costs at the time the cost is incurred. The costs are recognized into net earnings (loss) as an operating and administrative expense over the term of the underlying contracts. The contracts range from one to five years with the average remaining life approximately three years.
A summary of Superior's other intangible assets and related amortization
rates are as follows:
Non-competition agreements Term of the agreements (1-5 years)
Royalty agreements 1 - 10 years
Software 1-3 years
Technology patents Approximately 10 years
Investment Properties
Property that is held for a currently undetermined future use, long-term rental yields, or for capital appreciation, and that is not occupied by Superior is classified as investment property. Property that is being constructed or developed for future use as investment property is also classified as investment property.
Cost
Investment property is measured at cost, including related transaction costs and borrowing costs. After initial recognition, investment property is carried at cost less accumulated depreciation and any impairment losses.
Subsequent expenditure is capitalized to the investment property's carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to Superior and the cost of the item can be measured reliably. Repair and maintenance costs are expensed when incurred. When part of an investment property is replaced, the carrying amount of the replaced part is derecognized.
Borrowing Costs
Borrowing costs that are incurred for the purpose of acquiring, constructing or producing a qualifying investment property are capitalized as part of its cost. Borrowing costs are capitalized while acquisition or construction is actively underway and cease once the asset is substantially complete or suspended if the development of the asset is suspended.
Depreciation
Depreciation is calculated using the straight-line method, based on the estimated useful life. Land is not amortized. Depreciation of investment property in the course of construction commences when the assets are ready for their intended use. In the majority of cases, residual value is estimated to be insignificant. Investment properties are depreciated over 15 to 40 years. The estimated useful life, depreciation method, and residual values are reviewed at least annually, with the effect of any changes in estimate being accounted for on a prospective basis.
Disclosure of Fair Value
Fair value is based on active market prices, adjusted, if necessary for any difference in the nature, location or condition of the specific asset. If this information is not available, Superior uses alternative valuation methods, such as recent prices in less active markets, discounted cash flow projections, or recent property tax assessments. Valuations performed by professional valuators can be used although Superior has sufficient internal resources to determine reliable fair values.
The fair value of investment property reflects, among other things, rental income from current leases and assumptions about rental income from future leases in the light of current market conditions. The fair value also reflects, on a similar basis, any cash outflows that could be expected in respect of the property.
The fair value of investment property does not reflect future capital expenditure that will improve or enhance the property and does not reflect the related future benefits from this future expenditure other than those a rational market participant would take into account when determining the value of the property.
(g) Impairment of Property, Plant and Equipment, Intangible Assets and Investment Properties
At each balance sheet date and when circumstances indicate that the carrying value may be impaired, Superior reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, Superior estimates the recoverable amount of the cash-generating unit (CGU) to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to the smallest group of CGU's for which a reasonable and consistent allocation basis can be identified.
Recoverable amount is the higher of fair value less costs to sell and value-in-use. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized immediately in net earnings (loss). Where an impairment loss, other than an impairment loss on goodwill, subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, which cannot exceed the original carrying amount less normal depreciation.
(h) Business Combinations
All business combinations are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair values, at the acquisition date of the assets given up, the liabilities incurred or assumed and equity instruments issued by Superior in exchange for control of the acquiree. Transaction costs, other than those associated with the issue of debt or equity securities, that Superior incurs in connection with a business combination are expensed as incurred. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business Combinations are recognized at their fair values at the acquisition date, except for non-current assets that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which are recognized at fair values less costs to sell, except that:
- Deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognized and measured in accordance with IAS 12 Income taxes and IAS 19 Employee Benefits respectively;
- Liabilities or equity instruments related to the replacement by Superior of an acquiree's share-based payment awards are measured in accordance with IFRS 2 Share-based Payment; and
- Assets (or disposals) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that standard.
Also contingent liabilities acquired in a business combination are initially measured at fair value at the date of acquisition. At subsequent reporting dates, such contingent liabilities are measured at the higher of the amount that would be recognized in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognized less cumulative amortization recognized in accordance with IAS 18 Revenue.
Goodwill arising on acquisition is recognized as an asset and initially measured at cost, being the excess of the cost of the business combination over Superior's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. If the net amounts assigned to the assets acquired and liabilities assumed exceeds the cost of the purchase than Superior is required to reassess the value of the both the cost and net assets acquired and any excess remaining after this reassessment is recognized immediately in net earnings (loss). Goodwill is tested for impairment on an annual basis at the CGU level. Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, Superior will report provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see below), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that date.
The measurement period is the period from the date of acquisition to the date Superior obtains complete information about facts and circumstances that existed as of the acquisition date and is subject to a maximum of one year.
(i) Goodwill
Goodwill arising in a business combination is recognized as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
If, after reassessment, Superior's interest in the fair value of the acquiree's identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the previously held equity interest in the acquiree (if any), the excess is recognized immediately in net earnings (loss) as a bargain purchase gain.
Goodwill is not amortized but is reviewed for impairment at least annually. For purposes of impairment testing, goodwill is allocated to each of Superior's CGUs expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period.
On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the net earnings (loss) on disposal.
(j) Revenue Recognition
Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Revenue from the sale of goods is recognized when all the following conditions are satisfied:
- Superior has transferred to the buyer the significant risks and rewards of ownership of the goods;
- Superior retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
- The amount of revenue can be measured reliably;
- It is probable that the economic benefits associated with the transaction will flow to Superior; and
- The costs incurred or to be incurred in respect of the transaction can be measured reliably.
Energy Services
Revenues from sales are recognized at the time of delivery, or when related services are performed and the above conditions related to revenue from sale of goods are satisfied.
Natural gas revenues are recognized as gas is delivered to local natural gas distribution companies and when the above conditions related to revenue from sale of goods are satisfied. Costs associated with balancing the amount of gas used by Energy Services customers with the volumes delivered by Energy Services to the local distribution companies are recognized as period costs. Electricity revenues are recognized as the electricity is consumed by the end-use customer or sold to third parties.
Rental revenues arising from operating leases are accounted for based on the terms contained in the lease agreements as earned.
Specialty Chemicals
Revenues from chemical sales are recognized at the time of delivery and when the above conditions related to revenue from sale of goods are satisfied.
Construction contracts
Where the outcome of a construction contract for the construction of chlorine dioxide generators can be estimated reliably, revenues and costs are recognized by reference to the percentage of completion of the contract activity at the end of the reporting period, measured based on the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs. Engineer reviews are used to determine the stage of completion of contracts in progress.
Where the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized to the extent it is probable that contract costs incurred will be recoverable. Contract costs are recognized as expenses in the period which they are incurred.
When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately.
Construction Products Distribution
Revenue is recognized when products are delivered to the customer and when the above conditions related to revenue from sale of goods are satisfied. Revenue is stated net of discounts and rebates granted.
(k) Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all of the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Assets held under finance leases are initially recognized as assets of Superior at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to Superior is included in the Balance Sheet as a finance lease obligation along with Borrowings.
Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognized immediately in net earnings (loss), unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with Superior's general policy on borrowing costs (see (e) above). Contingent rentals are recognized as expenses in the periods in which they are incurred.
Operating lease payments are recognized as an expense based on terms contained in the lease agreements. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred.
In the event lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense and amortized over the term of the lease.
(l) Rebates - Construction Products Distribution
Purchase rebates are recognized as a reduction of cost of goods sold when the related performance is completed and the inventory is sold. Vendor rebates that are contingent upon completing a specified level of purchases are recognized as a reduction of cost of goods sold based on a systematic and rational allocation of the cash consideration to each of the underlying transactions that results in progress toward earning that rebate or refund, assuming that the rebate can be reasonably estimated and it is probable that the specified target will be obtained. Otherwise, the rebate is recognized as the milestone is achieved and the inventory is sold.
(m) Provisions
Provisions are recognized when there is a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefit will be required to settle the obligation, and where the amount of the obligation can be reliably estimated.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
When some or all of the economic benefit required to settle a provision is expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
Decommissioning costs
Liabilities for decommissioning costs are recognized when Superior has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located, and when a reliable estimate of that liability can be made. Generally, the costs relate to Specialty Chemicals facilities and Energy Services assets. Decommissioning costs are provided at the present value of expected costs to settle the obligation using estimated cash flows. The cash flows are discounted at a current pre-tax rate that reflects the risks specific to the decommissioning liability. The unwinding of the discount is expensed as incurred and recognized in net earnings (loss) as a finance cost. The estimated future costs of decommissioning are reviewed annually and adjusted as appropriate. A corresponding item of property, plant and equipment of an amount equal to the provision is also created. This is subsequently amortized as part of the asset. Changes in the estimated future costs or in the discount rate applied are added to or deducted from the cost of the asset.
Environment Expenditures and Liabilities
Environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future earnings are expensed.
Liabilities for environmental costs are recognized when a clean-up is probable and the associated costs can be reliably estimated. Generally, the timing of recognition of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites.
The amount recognized is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognized is the present value of the estimated future expenditure.
Restructuring
A restructuring provision is recognized when Superior has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity.
(o) Employee Future Benefits
Superior has a number of defined benefit and defined contribution plans providing pension and other post-employment benefits to most of its employees. Superior accrues its obligations under the plans and the related costs, net of plan assets.
Contributions to defined contribution plans are recognized as an expense when employees have rendered service entitling them to the contributions.
For defined benefit plans, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in Other Comprehensive Income in the period in which they occur. The net obligation for each defined benefit plan is discounted to determine the present value using the yield at the reporting date on high quality Canadian corporate bonds. Past service costs are recognized immediately to the extent that the benefits are already vested, and otherwise are amortized on a straight-line basis over the average period until the benefits become vested.
The defined benefit obligation recognized in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognized actuarial gains and losses and unrecognized past service cost, and as reduced by the fair value of plan assets. Any asset resulting from this calculation is limited to unrecognized actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan.
(p) Income Taxes
Income tax expense represents the sum of current income taxes payable and deferred income taxes.
Current Income Taxes
The income tax currently payable is based on taxable net earnings (loss) for the year. Taxable net earnings (loss) differs from net earnings (loss) as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Superior's liability for current income tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred Income Taxes
Deferred income tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable net earnings (loss), and is accounted for using the balance sheet liability method. Deferred income tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable net earnings (loss) will be available against which those deductible temporary differences can be utilized. Deferred tax liabilities are recognized for all taxable temporary differences, except for the following:
- When the deferred tax liability arises from the initial recognition of goodwill; or
- When an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting net earnings (loss) nor taxable net earnings (loss); and
- In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled by Superior and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that they are expected to reverse in the foreseeable future and it is probable that there will be sufficient taxable net earnings (loss) against which to utilize the benefits of the temporary differences. A deferred tax asset may also be recognized for the benefit expected from unused tax losses available for carryforward, to the extent that it is probable that future taxable earnings will be available against which the tax losses can be applied.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced, via a valuation allowance, to the extent that it is no longer probable that sufficient taxable net earnings (loss) will be available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which Superior expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current liabilities and when they are related to income taxes levied by the same taxation authority and Superior intends to settle its current tax assets and liabilities on a net basis. Also Superior recognizes any benefit associated with investment tax credits as deferred tax assets to the extent they are expected to be utilized in accordance with IAS 12 Income Taxes.
Uncertain tax positions
Superior is subject to taxation in numerous jurisdictions. There are many transactions and calculations during the course of business for which the ultimate tax determination is uncertain. Superior maintains provisions for uncertain tax positions that it believes appropriately reflect its risk. These provisions are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. Superior reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date, liabilities in excess of Superior's provisions could result from audits by, or litigation with tax authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made.
Current and deferred tax for the period
Current and deferred tax are recognized as an expense in net earnings (loss), except where they relate to amounts recognized outside of net earnings (loss) (whether in other comprehensive income or directly in equity), in which case the tax is also recognized outside net earnings (loss), or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is included in the accounting for the business combination.
(q) Foreign Currencies
The financial statements of each subsidiary of Superior are translated into the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and balance sheets of each subsidiary is expressed in Canadian dollars which is the functional currency of Superior.
The accounts of the foreign operations of Energy Services, Specialty Chemicals and Construction Products Distribution in the United States and Specialty Chemicals operations in Chile, translate all assets and liabilities at the exchange rate prevailing at the balance sheet date, and revenues and expenses at average rates of exchange during the period. Exchange gains and losses arising from this translation are recorded as a component of accumulated other comprehensive income. Other monetary assets and liabilities held by Superior are converted at the exchange rate prevailing at the balance sheet date. Gains and losses are recognized on monetary assets and liabilities when those items are settled.
Transactions denominated in a foreign currency, are translated into the functional currency at rates in effect at the date of the transaction. At the balance sheet date, monetary foreign currency assets and liabilities are translated at exchange rates then in effect. The resulting translation gains or losses are recognized in the determination of net earnings (loss).
(R) Share-Based Payments
Superior has established share-based compensation plans whereby notional restricted shares and/or notional performance shares may be granted to employees. The fair value of these notional shares is estimated as the period end quoted market price and recorded as an expense with an offsetting amount to accrued liabilities, re-measured at each balance sheet date. All share-based payments are settled in cash.
(s) Government Grants
Government grants are not recognized until there is a reasonable assurance that Superior will comply with the conditions attaching to them and that the grants will be received.
Government grants whose primary condition is that Superior should purchase, construct or otherwise acquire non-current assets are recognized as a reduction of the carrying value of the related asset. Other government grants are recognized as income over the periods necessary to match them with the costs they are intended to compensate, on a systematic basis. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to Superior with no future related costs are recognized in net earnings (loss) in the period in which they become receivable.
(t) Net Earnings (Loss) per Share
Basic net earnings (loss) per share is calculated by dividing the net earnings by the weighted average number of shares outstanding during the period. The weighted average number of shares outstanding during the year is calculated using the number of shares outstanding at the end of each month during the year. Diluted net earnings (loss) per share is calculated by factoring in the dilutive impact of the dilutive instruments, including the conversion of debentures to shares using the if converted method to assess the impact of dilution. Superior uses the treasury stock method to determine the impact of dilutive options, which assumes that the proceeds from in-the-money share options are used to repurchase shares at the average market price during the period.
(u) Significant Accounting Judgments, Estimates and Assumptions
The preparation of Superior's Consolidated Financial Statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net earnings (loss) and related disclosures. The estimates and associated assumptions are based on historical experience and various other factors that are deemed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are as follows:
Fair Value of Derivative and Non-Financial Derivative Instruments
Where the fair value of derivatives and non-financial derivatives cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flow model. This requires the use of assumptions concerning the amount and timing of estimated future cash flows and discount rates. Differences between actual values and assumed values will impact net earnings in the period when the determination of the difference is made.
Allowance for Doubtful Accounts
Superior recognizes an allowance for doubtful accounts based on historical customer collection history, general economic indicators and other customer specific information, all of which require Superior to make certain assumptions. Where the actual collectability of accounts receivable differs from these estimates, such differences will have an impact on net income in the period such a determination is made.
Property, Plant and Equipment and Intangible Assets
Capitalized assets, including property, plant and equipment and intangible assets are amortized over their respective estimated useful lives. All estimates of useful lives are set out in 2(e) and 2(f) above.
Provisions
Provisions have been estimated for decommissioning costs, restructuring and environmental expenditures. These provisions are estimates and the actual costs and timing of future cash flows are dependent on future events. Any differences between estimates and the actual future liability will be accounted for in the period when such determination is made.
Employee Future Benefits
Superior has a number of defined benefits pension plans and other benefit plans. The cost of defined benefit pension plans and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions.
Income Tax Assets and Liabilities
Superior recognizes expected tax assets and liabilities based on estimates of current and future taxable net earnings, which may require significant judgment regarding the ultimate tax determination of certain items. If taxable net earnings differ from the estimates it may have an impact on current and future income tax provisions in the period when the determination of the difference is made.
Decommissioning Liabilities
The determination of decommissioning liabilities requires Superior to make estimates regarding the useful life of certain operating facilities, the timing and dollar value of future remediation activities, discount rates and the interpretation and changes to various environmental laws and regulations. Any differences between estimates and actual results will impact Superior's accrual for decommissioning liabilities and will result in an impact to net earnings.
Asset Impairments
Financial and non-financial assets are subject to impairment reviews based on whether current or future events and circumstances suggest that their recoverable amount may be less than their carrying value. Recoverable amounts are based on a calculation of expected future cash flows which include management assumptions and estimates of future performance.
Critical Judgments in Applying Accounting Policies
In the process of applying Superior's accounting policies, which are described above, management makes judgments that could significantly affect the amounts recognized in the consolidated financial statements. The most critical of these judgments are:
Impairment of Property, Plant and Equipment
An evaluation of whether or not an asset is impaired involves consideration of whether indicators of impairment exist. Factors which could indicate that impairment exists include: significant underperformance relative to historical or projected operating results, significant changes in the manner in which an asset is used or in Superior's overall business strategy, or significant negative industry or economic trends. In some cases, these events are clear. However, in many cases, a clearly identifiable event indicating possible impairment does not occur. Instead, a series of individually insignificant events occur over a period of time leading to an indication that an asset may be impaired. Events can occur in these situations that may not be known until a date subsequent to their occurrence. Management continually monitors Superior's segments, the markets, and the business environment, and make judgments and assessments about conditions and events in order to conclude whether a possible impairment exists.
Income Taxes
Preparation of the Consolidated Financial Statements involves determining an estimate of, or provision for, income taxes in each of the jurisdictions in which Superior operates. The process also involves making an estimate of taxes currently payable and taxes expected to be payable or recoverable in future periods, referred to as deferred income taxes. Deferred income taxes result from the effects of temporary differences due to items that are treated differently for tax and accounting purposes. The tax effects of these differences are reflected in the Balance Sheet as deferred income tax assets and liabilities. An assessment must also be made to determine the likelihood that Superior's future taxable income will be sufficient to permit the recovery of deferred income tax assets. To the extent that such recovery is not probable, recognized deferred income tax assets must be reduced. Judgment is required in determining the provision for income taxes and recognition of deferred income tax assets and liabilities. Management must also exercise judgment in its assessment of continually changing tax interpretations, regulations and legislation, to ensure deferred income tax assets and liabilities are complete and fairly presented. The effects of differing assessments and applications could be material.
Financial Instruments
The fair value of financial instruments are determined and classified within three categories, which are outlined below and discussed in more detail in Note 17.
Level I
Fair values in Level I are determined using inputs that are unadjusted quoted prices in active markets for identical assets or liabilities that Superior has the ability to access.
Level II
Fair values in Level II are determined, directly or indirectly, using inputs that are observable for the asset or liability.
Level III
Fair values in Level III are determined using inputs for the asset or liability that are not readily observable.
The fair value measurement of a financial instrument is included in only one of the three levels, the determination of which is based upon the lowest level input that is significant to the derivation of the fair value. Classification of financial instruments requires management to use judgment in respect of both the determination of fair value and the lowest level input of significance.
Recent Accounting Pronouncements
Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or International Financial Reporting Interpretations Committee ("IFRIC") that are mandatory for accounting periods beginning January 1, 2011 or later periods. The standards impacted that are applicable to Superior are as follows:
IFRS 7 - Financial Instruments: Disclosure, amendments regarding disclosures - Transfer of Financial Assets;
In October 2010, IASB amended IFRS 7 - Financial Instruments: Disclosures to require quantitative and qualitative disclosures for transfers of financial assets where the transferred assets are not derecognized in their entirety or the transferor retains continuing managerial involvement. The amendment also requires disclosure of supplementary information if a substantial portion of the total amount of the transfer activity occurs in the closing days of a reporting period. The amendments to IFRS 7 must be applied for annual periods beginning on or after July 1, 2011, with early adoption permitted. Superior is assessing the effect of IFRS 7 on its disclosures, however changes, if any, are not expected to be material.
IFRS 9 - Financial Instruments: Classification and Measurement;
IFRS 9, Financial Instruments, was issued in November 2009 and is intended to replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. Requirements for financial liabilities were added in October 2010 and they largely carried forward existing requirements in IAS 39, Financial Instruments - Recognition and Measurement, except that fair value changes due to credit risk for liabilities designated at fair value through profit and loss would generally be recorded in other comprehensive income. This standard is required to be applied for accounting periods beginning on or after January 1, 2013, with earlier adoption permitted. Superior is assessing the effect of IFRS 9 on its financial results and financial position, however changes, if any, are not expected to be material.
IFRS 10 - Consolidated Financial Statements;
IFRS 10, Consolidated Financial Statements, establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The revised standard is effective for Superior on January 1, 2013, with earlier adoption permitted. Superior is assessing the effect of the changes to IFRS 10 on its financial results and financial position.
IFRS 11 - Joint Arrangements;
IFRS 11, Joint Arrangements, requires a venture to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting, whereas joint operations will require the venture to recognize its share of the assets, liabilities, revenue and expenses. This standard is required to be applied for accounting periods beginning on or after January 1, 2013, with earlier adoption permitted. Superior is assessing the effect of the changes to IFRS 11 on its financial results and financial position.
IFRS 12 - Disclosure of Interest in Other Entities;
IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in other entities, such as joint arrangements, associates, special purpose vehicles and off balance sheet vehicles. The standard carries forward existing disclosures and also introduces significant additional disclosure requirements that address the nature of, and risks associated with, an entity's interests in other entities. This standard is effective for Superior on January 1, 2013, with early adoption permitted. Superior has not assessed the impact the adoption of this revised standard will have, nor has it determined if it will early adopt the standard.
IFRS 13 - Fair Value Measurements;
IFRS 13, Fair Value Measurements, defines fair value, sets out a single IFRS framework for measuring fair value and requires disclosures about fair value measurements. IFRS 13 applies to IFRSs that require or permit fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except in specified circumstances. IFRS 13 is to be applied for annual periods beginning on or after January 1, 2013. Earlier application is permitted. Superior is assessing the effect of the changes to IFRS 13 on its financial results and financial position.
IAS 12 - Income Taxes, amendments regarding Deferred Tax: Recovery of Underlying Assets;
IAS 12, Income taxes, was amended in December 2010 to remove subjectivity in determining on which basis an entity measures the deferred tax relating to an asset. The amendment introduces a presumption that an entity will assess whether the carrying amount of an asset will be recovered through the sale of the asset. The amendment to IAS 12 is effective for reporting periods beginning on or after January 1, 2012. Superior is assessing the effect of the changes to IAS 12 on its financial results and financial position.
IAS 19 - Employee Benefit, amendments;
IAS 19 amendments were issued in June 2011 that will change the accounting for defined benefit plans and termination benefits. This standard requires that the changes in defined benefit obligations are recognized as they occur, eliminating the corridor approach and accelerating the recognition of past service costs. The changes in defined benefit obligation and plan assets are to be disaggregated into three components: service costs, net interest on the net defined benefit liabilities (assets) and re-measurements of the net defined benefit liabilities (assets). This standard is required to be applied for accounting periods beginning on or after January 1, 2013, with early adoption permitted.
Superior does not anticipate that any of these changes will have a material impact on its results of operations or financial position.
3. Seasonality of Operations
Energy Services
Energy Services sales typically peak in the first quarter when approximately one-third of annual propane and other refined fuels sales volumes and gross profits are generated due to the demand from heating end-use customers. They then decline through the second and third quarters rising seasonally again in the fourth quarter with heating demand. Similarly, net working capital levels are typically at seasonally high levels during the first and fourth quarter, and normally decline to seasonally low levels in the second and third quarters. Net working capital levels are also significantly influenced by wholesale propane prices and other refined fuels.
Construction Products Distribution
Construction Products Distribution sales typically peak during the second and third quarters with the seasonal increase in building and remodeling activities. They then decline through the first and fourth quarters. Similarly, net working capital levels are typically at seasonally high levels during the second and third quarters, and normally decline to seasonally low levels in the first and fourth quarters.
4. Acquisitions
On April 29, 2011, Superior completed the acquisition of certain assets which constitutes a refined fuel and propane distribution business (Country Comfort) for an aggregate purchase price of $0.3 million including adjustments for working capital. Superior elected to not disclose a purchase price equation for the acquisition as it was considered immaterial. Superior cannot reasonably determine the net earnings amount attributable to Country Comfort had the acquisition closed on January 1, 2011 or from the date of acquisition as operations were integrated into Superior's existing operations.
On March 9, 2011, Superior completed the acquisition of certain assets (Propane Acquisition) which constitutes propane distribution business for an aggregate purchase price of $5.3 million including adjustments for working capital. The primary purposes of the acquisition are to expand Energy Services business in Ontario and benefit from synergies. The below noted fair values have been prepared on a provisional basis pending finalization of net working capital adjustments.
Propane Acquisition Fair Value Recognized on Acquisition
----------------------------------------------------------------------------
Trade and other receivables 1.3
Inventories 0.2
Property, plant and equipment 1.1
----------------------------------------------------------------------------
2.6
Trade and other payables (0.4)
----------------------------------------------------------------------------
(0.4)
Net identifiable assets and
liabilities 2.2
Goodwill arising on acquisition 3.1
----------------------------------------------------------------------------
Total consideration 5.3
----------------------------------------------------------------------------
The components of the purchase
consideration are as follows:
Cash (paid on March 9, 2011) 4.3
Deferred consideration 1.0
----------------------------------------------------------------------------
Total purchase consideration 5.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Subsequent to the acquisition date of March 9, 2011, the Propane Acquisition contributed revenue and net earnings of $2.0 million and $0.3 million, respectively for the six months ended June 30, 2011. Superior cannot reasonably determine the revenue and net earnings amount attributable to the Propane Acquisition had the acquisition closed on January 1, 2011 due to limited access to the related financial information.
On January 15, 2011, Superior completed the acquisition of certain assets which constitutes a refined fuel and propane distribution business (Butler) for an aggregate purchase price of $0.3 million including adjustments for working capital. Superior elected to not disclose a purchase price equation for the acquisition as it was considered immaterial. Superior cannot reasonably determine the net earnings amount attributable to Butler had the acquisition closed on January 1, 2011 or from the date of acquisition as operations were integrated into Superior's existing operations.
On October 25, 2010, Superior completed the acquisition of certain assets which constitutes a US retail heating oil and propane distribution business (KW Acquisition) for an aggregate purchase price of $4.9 million including adjustments for working capital. The assets provide a broad range of services, including heating, ventilation and air conditioning repair and other related services.
KW Acquisition Fair Value
Recognized on
Acquisition
----------------------------------------------------------------------------
Inventories 0.2
Property, plant and equipment 3.3
Intangible assets 2.1
----------------------------------------------------------------------------
5.6
Trade and other payables (0.7)
----------------------------------------------------------------------------
(0.7)
Net identifiable assets and liabilities 4.9
Goodwill arising on acquisition -
----------------------------------------------------------------------------
Total consideration 4.9
The components of the purchase consideration are as follows:
Cash (paid on October 25 and November 4, 2010) 4.4
Deferred consideration 0.5
----------------------------------------------------------------------------
Total purchase consideration 4.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Superior cannot reasonably determine the net earnings amount attributable to the KW Acquisition had the acquisition closed on January 1, 2011 or from the date of acquisition as operations were integrated into Superior's existing operations.
On June 28, 2010, Superior completed the acquisition of certain assets of a Western Canadian commercial and industrial insulation distributor (Burnaby) for an aggregate purchase price of $17.7 million, inclusive of $0.1 million in transaction costs which have been expensed through other expenses in the consolidated statement of comprehensive income. The assets acquired consist of three operating branches in Alberta and British Columbia and allows Construction Products Distribution to expand its commercial and industrial distribution business in Canada.
Burnaby Fair Value
Recognized on
Acquisition
----------------------------------------------------------------------------
Trade and other receivables 8.4
Inventories 2.9
Property, plant and equipment 0.5
Intangible assets(1) 2.1
----------------------------------------------------------------------------
13.9
Trade and other payables (3.0)
----------------------------------------------------------------------------
(3.0)
Net identifiable assets and liabilities 10.9
Goodwill arising on acquisition 6.8
----------------------------------------------------------------------------
Total consideration 17.7
----------------------------------------------------------------------------
The components of the purchase consideration are
as follows:
Cash (paid on June 28, 2010) 2.0
Common shares 15.7
----------------------------------------------------------------------------
Total purchase consideration 17.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Superior has reclassified $2.1 million to separable identifiable
intangible assets from goodwill as part of the finalization of the
Burnaby purchase allocation.
Superior completed the acquisition of Burnaby in order expand its commercial and industrial insulation business in Canada.
Revenue and net earnings for the six months ended June 28, 2010 would have been $20.5 million and $2.6 million, respectively, if the Burnaby acquisition had occurred on January 1, 2010. Superior cannot reasonably determine the amount of revenue and net earnings contributed to Construction Products Distribution since the closing date as the operations were integrated into Superior's operations.
On January 20, 2010, Superior acquired 100% of the shares of Griffith Holdings Inc. (Griffith) for consideration of $142.6 million, net of $2.5 million in cash assumed. Additionally, $1.6 million in transaction costs were incurred during the course of this acquisition, which has been expensed through other expenses in the consolidated statement of comprehensive income. The fair value of the identifiable assets and liabilities of Griffith as at the date of acquisition and the corresponding carrying amounts immediately before the acquisition date were:
Fair Value
Recognized on
Griffith Acquisition Acquisition
----------------------------------------------------------------------------
Trade and other receivables 41.1
Inventories 23.2
Unrealized gains on derivative financial instruments 1.2
Property, plant and equipment 83.2
Intangible assets 54.4
----------------------------------------------------------------------------
203.1
Trade and other payables (32.8)
Provisions (3.6)
Assumed deferred consideration obligations (0.6)
Deferred tax liability (41.7)
----------------------------------------------------------------------------
(78.7)
Net identifiable assets and liabilities 124.4
Goodwill arising on acquisition(1) 18.2
----------------------------------------------------------------------------
Total consideration 142.6
----------------------------------------------------------------------------
The components of the purchase consideration are as follows:
Cash paid 142.6
----------------------------------------------------------------------------
Total purchase consideration 142.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The amount of goodwill that is expected to be deductible for tax
purposes is approximately $7.0 million.
Superior completed the acquisition of Griffith in order expand its refined fuels distribution business into the north eastern U.S. The Company's business is complementary to Superior's other operations in New York state.
Revenue and net earnings for the six months ended June 30, 2010 for Energy Services would have included $505.0 million and $16.7 million, respectively, if the Griffith acquisition had occurred on January 1, 2010. Subsequent to the acquisition date of January 20, 2010, Griffith contributed to Energy Services revenue and net earnings were $393.0 million and $9.6 million, respectively for the six months ended June 30, 2010.
5. Trade and Other Receivables
A summary of trade and other receivables are as follows:
Notes June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Trade receivables,
net of allowances 17 433.3 501.1 331.2
Accounts receivable
- other 37.7 50.7 64.0
Finance lease receivable 0.6 0.6 -
----------------------------------------------------------------------------
Trade and other
receivables 471.6 552.4 395.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Inventories
For the three and six months ended June 30, 2011 inventories of $623.5 million (2010 - $482.1 million) and $1,442.4 million (2010 - $1,074.2 million) were expensed through cost of products sold. No write-downs of inventory or reversals of write-downs were recorded during the three months ended June 30, 2011 and 2010.
7. Property, Plant and Equipment
----------------------------------------------------------------------------
Specialty Energy
Chemicals Services
Plant & Retailing
Land Buildings Equipment Equipment
----------------------------------------------------------------------------
Cost
----------------------------------------------------------------------------
Balance at January 1, 2010 22.2 129.0 719.1 481.4
----------------------------------------------------------------------------
Balance at December 31, 2010 37.1 140.3 713.8 568.4
----------------------------------------------------------------------------
Balance at June 30, 2011 36.5 138.8 712.3 561.9
----------------------------------------------------------------------------
Accumulated Depreciation and
Impairment
----------------------------------------------------------------------------
Balance at January 1, 2010 - 28.4 230.8 240.0
----------------------------------------------------------------------------
Balance at December 31, 2010 - 32.8 269.1 269.3
----------------------------------------------------------------------------
Balance at June 30, 2011 - 33.3 288.4 275.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Carrying Value
----------------------------------------------------------------------------
As at January 1, 2010 22.2 100.6 488.3 241.4
As at December 31, 2010 37.1 107.5 444.7 299.1
As at June 30, 2011 36.5 105.5 423.9 286.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Construction
Products
Distribution Leasehold
Equipment Improvements Total
----------------------------------------------------------------------------
Cost
----------------------------------------------------------------------------
Balance at January 1, 2010 45.9 2.6 1,400.2
----------------------------------------------------------------------------
Balance at December 31, 2010 38.6 8.8 1,507.0
----------------------------------------------------------------------------
Balance at June 30, 2011 38.0 8.4 1,495.9
----------------------------------------------------------------------------
Accumulated Depreciation and
Impairment
----------------------------------------------------------------------------
Balance at January 1, 2010 19.1 1.9 520.2
----------------------------------------------------------------------------
Balance at December 31, 2010 19.0 6.6 596.8
----------------------------------------------------------------------------
Balance at June 30, 2011 20.2 6.7 624.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Carrying Value
----------------------------------------------------------------------------
As at January 1, 2010 26.8 0.7 880.0
As at December 31, 2010 19.6 2.2 910.2
As at June 30, 2011 17.8 1.7 871.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depreciation per cost category:
Three Months Ended Six Months Ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Cost of sales 10.9 11.7 22.3 24.3
Selling, distribution and
administrative costs 12.3 12.5 24.5 24.4
----------------------------------------------------------------------------
Total 23.2 24.2 46.8 48.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The carrying value of Superior's property, plant, and equipment includes
$71.6 million as at June 30, 2011 (December 31, 2010 - $73.7 million and
January 1, 2010 - $59.5 million) of leased assets.
8. Intangible Assets and Investment Property
----------------------------------------------------------------------------
Energy
Services Construction Specialty
Customer Trademarks Products Chemicals
Contract & Non- Distribution Royalty
Related Compete Intangible Assets and Investment
Costs Agreements Assets Patents Property Total
----------------------------------------------------------------------------
Cost
----------------------------------------------------------------------------
Balance at
January 1,
2010 36.5 108.8 46.1 65.4 1.0 257.8
----------------------------------------------------------------------------
Balance at
December 31,
2010 38.2 163.3 21.0 65.4 1.0 288.9
----------------------------------------------------------------------------
Balance at
June 30, 2011 39.3 158.7 22.9 65.4 2.3 288.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
Amortization
and
Impairment
----------------------------------------------------------------------------
Balance at
January 1,
2010 21.8 2.0 2.4 46.0 - 72.2
----------------------------------------------------------------------------
Balance at
December 31,
2010 27.0 23.7 3.4 52.6 - 106.7
----------------------------------------------------------------------------
Balance at
June 30, 2011 29.2 33.9 5.1 55.8 0.7 124.7
----------------------------------------------------------------------------
Carrying
value
----------------------------------------------------------------------------
As at January
1, 2010 14.7 106.8 43.7 19.4 1.0 185.6
As at
December 31,
2010 11.2 139.6 17.6 12.8 1.0 182.2
As at June
30, 2011 10.1 124.8 17.8 9.6 1.6 163.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amortization per cost category:
For the three For the six
months ended month ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Selling, distribution and
administrative costs 8.8 6.8 15.3 14.2
----------------------------------------------------------------------------
Total 8.8 6.8 15.3 14.2
----------------------------------------------------------------------------
9. Goodwill
June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Balance at beginning of period 471.7 527.5 527.5
Additional amounts recognized
from business combinations
occurring during the period
(Note 4) 3.1 38.3 -
Adjustment to Purchase Price
Allocations (Note 4) (2.1) - -
Impairment losses - (88.4) -
Effect of foreign currency
differences (2.2) (5.7) -
----------------------------------------------------------------------------
Balance at end of period 470.5 471.7 527.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. Provisions
----------------------------------------------------------------------------
Decommissioning Environmental
Costs Expenditures Total
----------------------------------------------------------------------------
Balance as at January 1,
2010 6.9 - 6.9
----------------------------------------------------------------------------
Balance as at December 31,
2010 8.0 3.0 11.0
Additional provisions
recognized during the period 1.0 - 1.0
Utilization (0.1) (1.0) (1.1)
Unwinding of discount and
effect of change in discount
rate 0.1 - 0.1
Effect of foreign currency
differences (0.3) (0.1) (0.4)
----------------------------------------------------------------------------
Balance at June 30, 2011 8.7 1.9 10.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Decommissioning costs
Specialty Chemicals
Superior makes full provision for the future cost of decommissioning Specialty Chemicals' chemical facilities. The provision for decommissioning costs is on a discounted basis and is based on existing technologies at current prices or long-term price assumptions, depending on the expected timing of the activity. As at June 30, 2011 the discount rate used in Superior's calculation was 3.5% (December 31, 2010 - 4.0%). Superior estimates the total undiscounted amount of expenditures required to settle its decommissioning liabilities is approximately $19.9 million (December 31, 2010 - $20.1 million) which will be paid out over the next twenty to twenty five years. While Superior's provision for decommissioning costs is based on the best estimate of future costs and the economic lives of the chemical facilities, there is uncertainty regarding both the amount and timing of incurring these costs.
Energy Services
Superior makes full provision for the future costs of decommissioning certain assets associated with Superior's Energy Services operating segment. Superior estimates the total undiscounted amount of expenditures required to settle its decommissioning liabilities is approximately $5.1 million (December 31, 2010 - $9.8 million) which will be paid out over the next twenty to twenty five years. The risk-free rate of 3.5% (December 31, 2010 - 4.0%) was used to calculate the present value of the estimated cash flows.
Environmental Expenditures
Provisions for environmental remediation are made when a clean-up is probable and the amount of the obligation can be reliably estimated. Generally, this coincides with commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites. The provision for environmental liabilities has been estimated using existing technology, at current prices and discounted using a risk-free discount rate of 3.5% (December 31, 2010 -4.0%). The majority of these costs are expected to be incurred over the next 10 years. The extent and cost of future remediation programs are inherently difficult to estimate. They depend on the scale of any possible contamination, the timing and extent of corrective actions, and also Superior's share of the liability.
11. Trade and Other Payables
December January
A summary of trade and other June 30, 31, 1,
payables are as follows: Notes 2011 2010 2010
----------------------------------------------------------------------------
Trade payables 17 197.8 256.9 210.5
Other payables 54.0 54.3 75.7
Amounts due to customers under
construction contracts 8 1.1 0.7 1.0
Share based payments 11.2 8.8 9.1
----------------------------------------------------------------------------
Trade and other payables 264.1 320.7 296.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. Deferred Revenue
June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Balance at beginning of the
period 6.8 5.8 5.8
Deferred during the period 4.0 15.0 -
Released to net earnings (loss) (6.0) (14.0) -
----------------------------------------------------------------------------
Balance at end of period 4.8 6.8 5.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Current 4.8 6.8 5.8
Non-current - - -
----------------------------------------------------------------------------
4.8 6.8 5.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The deferred revenue relates to Energy Services unearned service revenue.
13. Borrowings
Year of Effective June 30, December 31, January 1,
Maturity Interest Rate 2011 2010 2010
----------------------------------------------------------------------------
Revolving term bank
credits (1)
Floating BA
Bankers Acceptances rate plus
(BA) applicable
2013 credit spread 229.4 100.8 174.6
LIBOR Loans Floating LIBOR
(US$112.0 million; rate plus
2010 - US$174.0 applicable
million) 2013 credit spread 108.0 173.1 152.4
----------------------------------------------------------------------------
337.4 273.9 327.0
----------------------------------------------------------------------------
Other Debt
Notes payable 2010 Prime - - 0.6
Deferred 2011- Non-interest
consideration 2012 bearing 2.4 1.2 2.4
Accounts receivable
securitization (2) - 90.1 92.7
----------------------------------------------------------------------------
2.4 91.3 95.7
----------------------------------------------------------------------------
Senior Secured
Notes(3)
----------------------------------------------------------------------------
Senior secured notes
subject to fixed
interest
rates (US$156.0
million; 2010 -
US$156.0 2011-
million) 2015 7.65% 150.4 155.1 165.4
----------------------------------------------------------------------------
Senior Unsecured
Debentures
----------------------------------------------------------------------------
Senior unsecured
debentures 2016 8.25% 150.0 150.0 150.0
----------------------------------------------------------------------------
Leasing Obligations
----------------------------------------------------------------------------
Leasing obligations
(see Note 14) 65.9 69.7 58.0
----------------------------------------------------------------------------
Total Borrowings
before deferred
financing fees 706.1 740.0 796.1
Deferred financing
fees (7.5) (7.1) (7.1)
----------------------------------------------------------------------------
Borrowings 698.6 732.9 789.0
Current maturities (46.2) (136.2) (108.9)
----------------------------------------------------------------------------
Borrowings 652.4 596.7 680.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Superior and its wholly-owned subsidiaries, Superior Plus US Financing
Inc. and Commercial e Industrial (Chile) Limitada, have revolving term
bank credit borrowing capacity of $615.0 million. The credit facilities
mature on June 28, 2013. These facilities are secured by a general
charge over the assets of Superior and certain of its subsidiaries. As
at June 30, 2011, Superior had $32.2 million of outstanding letters of
credit (December 31, 2010 - $28.6 million). The fair value of Superior's
revolving term bank credits and other debt approximates its carrying
value as a result of the market based interest rates and the short-term
nature of the underlying debt instruments.
(2) Superior sells, with limited recourse, certain trade accounts receivable
on a revolving basis to an entity sponsored by a Canadian chartered
bank. The accounts receivable are sold at a discount to face value based
on prevailing money market rates. The level of accounts receivable sold
under the program fluctuates seasonally with the level of accounts
receivable. As at June 30, 2011 proceeds of $nil million (December 31,
2010 - $90.1 million) had been received. Superior terminated the
accounts receivable securitization program in June 2011.
(3) Senior secured notes (the Notes) totaling US$156.0 million and US$156.0
million, respectively (Cdn$150.4 million at June 30, 2011 and Cdn$155.1
million at December 31, 2010) are secured by a general charge over the
assets of Superior and certain of its subsidiaries. Principal repayments
began in the fourth quarter of 2009. Management has estimated the fair
value of the Notes based on comparisons to treasury instruments with
similar maturities, interest rates and credit risk profiles. The
estimated fair value of the Notes at June 30, 2011 was Cdn$155.6 million
(December 31, 2010 - Cdn$156.6 million).
Repayment requirements of Borrowings before deferred financing costs are as
follows:
Current maturities 46.2
Due in 2012 82.8
Due in 2013 368.6
Due in 2014 29.3
Due in 2015 29.2
Subsequent to 2015 150.0
----------------------------------------------------------------------------
Total 706.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
14. Leasing Arrangements
Operating Lease Commitments
Superior has entered into leases on certain vehicles, rail cars, premises and other equipment. These leases have an average life of between three and five years with no renewal option included in the contracts. There are no restrictions placed upon Superior by entering into these leases.
Future minimum lease payments under non-cancellable operating leases are as
follows:
June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Not later than one year 27.8 27.7 26.5
Later than one year and not
later than five years 63.5 65.6 60.4
Later than five years 21.2 20.7 15.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
112.5 114.0 102.7
----------------------------------------------------------------------------
Obligations under finance lease
Finance leases relate to fuel distribution and construction products vehicles and equipment with lease terms of 5 years. Superior has options to purchase the assets for a nominal amount at the conclusion of the lease agreements. Superior's obligations under finance leases are secured by the lessor's title to the leased assets.
Minimum Lease Payments
June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Not later than one year 19.1 17.4 14.1
Later than one year and not
later than five years 53.5 55.2 45.0
Later than five years 4.9 7.3 9.1
Less: future finance charges (11.6) (10.2) (10.2)
----------------------------------------------------------------------------
Present value of minimum
lease payments 65.9 69.7 58.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Present Value of Minimum Lease Payments
June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Not later than one year 14.8 13.9 11.1
Later than one year and not
later than five years 46.5 48.8 38.0
Later than five years 4.6 7.0 8.9
Less: future finance charges - - -
----------------------------------------------------------------------------
Present value of minimum
lease payments 65.9 69.7 58.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Included in the Consolidated Financial Statements as:
June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Current portion of leasing
obligations 14.8 13.9 11.1
Non-current portion of leasing
obligations 51.1 55.8 46.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
65.9 69.7 58.0
----------------------------------------------------------------------------
15. Convertible Unsecured Subordinated Debentures
Superior's debentures are as follows:
----------------------------------------------------------------------------
December October December June June
Maturity 2012 2015 2014 2017(1) 2018(2)
Interest rate 5.75% 5.85% 7.50% 5.75% 6.0% Total
Conversion price Carrying
per share $36.00 $31.25 $13.10 $ 19.00 $ 15.10 Value
----------------------------------------------------------------------------
Face value,
December 31, 2010 174.9 75.0 69.0 172.5 150.0 641.4
Debentures issued - - - - - -
----------------------------------------------------------------------------
Face value,
June 30, 2011 174.9 75.0 69.0 172.5 150.0 641.4
----------------------------------------------------------------------------
Issue costs,
December 31, 2010 (2.8) (1.2) (2.7) (6.5) (5.7) (18.9)
Accretion of
issue costs 0.5 0.2 0.3 0.4 0.3 1.7
----------------------------------------------------------------------------
Issue costs,
June 30, 2011 (2.3) (1.0) (2.4) (6.1) (5.4) (17.2)
----------------------------------------------------------------------------
Discount value,
December 31, 2010 (0.9) (0.3) (0.4) (0.2) (1.8) (3.6)
Accretion of
discount value 0.2 - - - 0.1 0.3
----------------------------------------------------------------------------
Discount value,
June 30, 2011 (0.7) (0.3) (0.4) (0.2) (1.7) (3.3)
----------------------------------------------------------------------------
Debentures
outstanding as at
June 30, 2011 171.9 73.7 66.2 166.2 142.9 620.9
Debentures
outstanding as at
December 31, 2010 171.2 73.4 66.0 165.9 142.6 619.1
Debentures
outstanding as at
January 1, 2010 170.0 73.1 65.3 - - 308.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quoted market
value as at
June, 2011 175.3 75.0 71.4 163.0 146.3 631.0
Quoted market
value as at
December 31, 2010 175.8 74.9 71.6 162.6 144.6 629.5
Quoted market
value as at
January 1, 2010 177.1 74.4 78.3 - - 329.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Superior issued $172.5 million in 5.75% convertible unsecured
subordinated debentures during the first quarter of 2010. In conjunction
with the issuance of these debentures, Superior swapped $150 million of
the fixed rate obligation into a floating-rate obligation of floating BA
rate plus 2.65%.
(2) Superior issued $150.0 million in 6.0% convertible unsecured
subordinated debentures during the fourth quarter of 2010.
The debentures may be converted into shares at the option of the holder at any time prior to maturity and may be redeemed by Superior in certain circumstances. Superior may elect to pay interest and principal upon maturity or redemption by issuing shares to a trustee in the case of interest payments, and to the debenture holders in the case of payment of principal. The number of any shares issued will be determined based on market prices for the shares at the time of issuance. Also Superior has a cash conversion put option which allows Superior to settle any conversion of debentures in cash, in lieu of delivering common shares to the debenture holders of the June 2018 convertible debentures. The cash conversion put option has been classified as an embedded derivative and measured at fair value through net earnings and loss (see Note 17 for further details).
16. Employee Future Benefits
Amounts recognized in net earnings (loss) in respect of these defined benefit plans are as follows for the periods ended:
For the three For the six months
months ended June 30 ended June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Current service cost 0.6 0.5 1.1 1.0
Interest on obligation 2.1 2.1 4.2 4.3
Expected return on plan assets (1.8) (1.8) (3.6) (3.7)
----------------------------------------------------------------------------
0.9 0.8 1.7 1.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The total expense for the period is included in the "Selling, distribution
and administrative costs" expense in the income statement.
The amount recognized in "Other Comprehensive Income" is as follows:
For the three For the six months
months ended June 30 ended June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Actuarial gains and (losses) (6.9) (9.8) (5.6) (19.0)
Cumulative actuarial losses (25.5) (19.0)
----------------------------------------------------------------------------
17. Financial Instruments
IFRS requires disclosure around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Superior's market assumptions. These two types of inputs create the following fair value hierarchy:
- Level 1 - quoted prices in active markets for identical instruments.
- Level 2 - quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
- Level 3 - valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The fair value of a financial instrument is the amount of consideration that would be estimated to be agreed upon in an arm's-length transaction between knowledgeable, willing parties who are under no compulsion to act. Fair values are determined by reference to quoted bid or asking prices, as appropriate, in the most advantageous active market for that instrument to which Superior has immediate access. Where bid and ask prices are unavailable, Superior uses the closing price of the most recent transaction of the instrument. In the absence of an active market, Superior estimates fair values based on prevailing market rates (bid and ask prices, as appropriate) for instruments with similar characteristics and risk profiles or internal or external valuation models, such as discounted cash flow analysis using, to the extent possible, observable market-based inputs.
Fair values determined using valuation models require the use of assumptions concerning the amount and timing of estimated future cash flows and discount rates. In determining those assumptions, Superior looks primarily to available readily observable external market inputs including factors such as forecast commodity price curves, interest rate yield curves, currency rates, and price and rate volatilities as applicable.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair
Value
Effective Input
Description Notional (1) Term Rate Level
----------------------------------------------------------------------------
Natural gas financial 0.03 GJ(2) 2011 US$8.61/GJ Level 1
swaps-NYMEX
Natural gas financial 33.42 GJ(2) 2011- CDN$6.38/GJ Level 1
swaps-AECO 2015
Foreign currency forward US$473.8(3) 2011- 1.06 Level 1
contracts, net sale 2014
Foreign currency forward EURO 2011 1.40 Level 1
contracts EUR 2.4(3)
Interest rate swaps - CDN$ $150.0 2011- Six month Level 2
2017 BA rate plus
2.65%
Energy Services Propane 4.07 USG(4) 2011- $1.61/USG Level 2
wholesale purchase and sale 2012
contracts, net sale
Energy Services Butane 0.39 USG(4) 2011- $1.16/USG Level 2
wholesale purchase and sale 2012
contracts, net sale
Energy Services electricity 1.28MWh(5) 2011- $47.04/MWh Level 2
swaps 2016
Energy Services swaps and 7.2 Gallons(4) 2011 $2.80 US/Gallon Level 2
option purchase and sale
contracts
Specialty Chemicals fixed-price 12-45 MW(6) 2010- Level 3
electricity purchase agreement 2017(7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Asset (Liability)
----------------------------------------------------------------------------
June 30, December 31, January 1,
Description 2011 2010 2010
----------------------------------------------------------------------------
Natural gas financial (0.1) (101.1) (22.2)
swaps-NYMEX
Natural gas financial (78.0) (2.9) (69.3)
swaps-AECO
Foreign currency forward
contracts, net sale 39.9 33.8 12.5
Foreign currency forward
contracts - 0.1 0.4
Interest rate swaps - CDN$ 2.8 1.6 -
Energy Services Propane
wholesale purchase and sale
contracts, net sale 0.3 (1.6) (2.2)
Energy Services Butane 0.2 - (0.2)
wholesale purchase and sale
contracts, net sale
Energy Services electricity (12.5) (13.0) (9.3)
swaps
Energy Services swaps and (1.0) 1.2 0.1
option purchase and sale
contracts
Specialty Chemicals fixed-price - 5.3 10.5
electricity purchase agreement
----------------------------------------------------------------------------
(1) Notional values as at June 30, 2011
(2) Millions of gigajoules purchased
(3) Millions of dollars/EUROS purchased
(4) Millions of United States gallons purchased
(5) Millions of mega watt hours (MWh)
(6) Mega watts (MW) on a 24/7 continual basis per year purchased
(7) Specialty Chemicals fixed-price electricity purchase agreement has been
impacted by the TransAlta Corporate force majeure issued in December
2010 and the value of the agreement is estimated as $nil million.
All financial and non-financial derivatives are designated as fair value
through net earnings or loss upon their initial recognition.
----------------------------------------------------------------------------
Current Long-term Current Long-term
Description Assets Assets Liabilities Liabilities
----------------------------------------------------------------------------
Natural gas financial swaps -
NYMEX and AECO 0.4 - 44.2 34.3
Energy Services electricity swaps - - 6.0 6.5
Foreign currency forward
contracts, net 19.6 21.6 1.3 -
Interest rate swaps 2.3 2.1 - 1.6
Debenture embedded derivative - - - 2.7
Energy Services propane wholesale
purchase and sale contracts 1.4 - 1.1 -
Energy Services butane wholesale
purchase and sale contracts 0.3 - 0.1 -
Energy Services heating oil
purchase and sale contracts 0.1 - 1.1 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at June 30, 2011 24.1 23.7 53.8 45.1
As at December 31, 2010 31.4 26.6 78.6 57.8
As at January 1, 2010 22.2 28.5 77.8 52.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended For the three months ended
June 30, 2011 June 30, 2010
Realized Unrealized Realized Unrealized
Description gain(loss) gain (loss) gain(loss) gain (loss)
----------------------------------------------------------------------------
Natural gas
financial swaps -
NYMEX and AECO (17.5) 9.1 (22.6) 19.2
Energy Services
electricity swaps (1.6) (0.1) (1.0) 3.7
Foreign currency
forward contracts,
net 5.8 - (0.7) (24.7)
Interest rate swaps - 3.9 1.4 1.9
Foreign currency
forward contracts,
balance sheet
related - 1.5
Energy Services
propane wholesale
purchase and sale
contracts - (0.5) - -
Energy Services
butane wholesale
purchase and sale
contracts - 0.3 - 0.6
Energy Services
heating oil purchase
and sale contracts 1.6 (0.9) 0.2 0.2
Specialty Chemicals
fixed-price power
purchase agreements (0.3) - 1.7 2.0
----------------------------------------------------------------------------
Total realized and
unrealized gains
(losses) on
financial and
non-financial
derivatives (12.0) 13.3 (21.0) 2.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Foreign currency
translation of
senior secured notes - 1.1 - (7.1)
Change in fair value
of debenture
embedded derivative - (0.1) - -
----------------------------------------------------------------------------
Total realized and
unrealized gains
(losses) (12.0) 14.3 (21.0) (4.2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six months For the six months
ended ended
June 30 , 2011 June 30, 2010
Realized Unrealized Realized Unrealized
Description gain(loss) gain(loss) gain(loss) gain(loss)
----------------------------------------------------------------------------
Natural gas financial swaps -
NYMEX and AECO (35.4) 22.6 (37.2) (19.5)
Energy Services electricity
swaps (3.0) 0.5 (2.3) (0.2)
Foreign currency forward
contracts, net 11.6 - (1.7) (10.6)
Interest rate swaps - 1.2 1.4 0.6
Foreign currency forward
contracts, balance sheet
related - 6.0
Energy Services propane
wholesale purchase
and sale contracts - 1.9 - -
Energy Services butane
wholesale purchase
and sale contracts - 0.2 - 2.9
Energy Services heating oil
purchase and sale
contracts (0.5) (2.1) 0.2 (1.2)
Specialty Chemicals
fixed-price
power purchase
agreements (1.2) (5.4) 1.0 (2.2)
----------------------------------------------------------------------------
Total realized and unrealized
gains (losses) on financial and
non-financial derivatives (28.5) 24.9 (38.6) (30.2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Foreign currency translation
of senior secured notes - 4.7 - (2.2)
Change in fair value of
debenture embedded
derivative - (0.9) - -
----------------------------------------------------------------------------
Total realized and unrealized
gains (losses) (28.5) 28.7 (38.6) (32.4)
----------------------------------------------------------------------------
Realized gains (losses) on financial and non-financial derivatives and foreign currency translation gains (losses) on the revaluation of Canadian domiciled US-denominated working capital have been classified on the statement of net earnings (loss) based on the underlying nature of the financial statement line item and/or the economic exposure being managed.
The following summarizes Superior's classification and measurement of
financial assets and liabilities:
----------------------------------------------------------------------------
Classification Measurement
----------------------------------------------------------------------------
Financial Assets
Cash and cash equivalents Loans and receivables Amortized cost
Trade and other receivables Loans and receivables Amortized cost
Inventories Loans and receivables Amortized cost
Derivative assets FVTNL Fair Value
Notes and finance lease Loans and receivables Amortized cost
receivable
Financial liabilities
Trade and other payables Other liabilities Amortized cost
Provisions Other liabilities Amortized cost
Borrowings Other liabilities Amortized cost
Convertible unsecured Other liabilities Amortized cost
subordinated debentures
Derivative liabilities FVTNL Fair Value
----------------------------------------------------------------------------
Non-Derivative Financial Instruments
The fair value of Superior's cash and cash equivalents, trade and other receivables, trade and other payables, and dividends and interest payable to shareholders and debenture holders approximates their carrying value due to the short-term nature of these amounts. The carrying value and the fair value of Superior's borrowings and debentures, is provided in Notes 13 and 15.
Financial Instruments - Risk Management
Financial derivatives and non-financial derivatives are used by Superior to manage its exposure to fluctuations in foreign currency exchange rates, interest rates and commodity prices. Superior assesses the inherent risks of these instruments by grouping derivative and non-financial derivatives related to the exposures these instruments mitigate. Superior's policy is not to use financial derivative or non-financial derivative instruments for speculative purposes. Superior does not formally designate its derivatives as hedges; as a result, Superior does not apply hedge accounting and is required to designate its financial derivatives and non-financial derivatives as fair value through profit or loss.
Effective 2008, Energy Services enters into natural gas financial swaps primarily with Macquarie Cook Energy Canada Ltd. for distributor billed natural gas business in Canada to manage its economic exposure of providing fixed-price natural gas to its customers. Additionally, Energy Services continues to maintain its historical natural gas swap positions with seven additional counterparties. Energy Services monitors its fixed-price natural gas positions on a daily basis to monitor compliance with established risk management policies. Energy Services maintains a substantially balanced fixed-price natural gas position in relation to its customer supply commitments.
Energy Services enters into electricity financial swaps with three counterparties to manage the economic exposure of providing fixed-price electricity to its customers. Energy Services monitors its fixed-price electricity positions on a daily basis to monitor compliance with established risk management policies. Energy Services maintains a substantially balanced fixed-price electricity position in relation to its customer supply commitments.
Specialty Chemicals has entered into a fixed-price electricity purchase agreement to manage the economic exposure of certain chemical facilities to changes in the market price of electricity, in a market where the price of electricity is not fixed. The fair value with respect to this agreement is with a single counterparty.
Energy Services enters into various propane forward purchase and sale agreements with more than twenty counterparties to manage the economic exposure of its wholesale customer supply contracts. Energy Services monitors its fixed-price propane positions on a daily basis to monitor compliance with established risk management policies. Energy Services maintains a substantially balanced fixed-price propane gas position in relation to its wholesale customer supply commitments.
Superior, on behalf of its operating divisions, enters into foreign currency forward contracts with ten counterparties to manage the economic exposure of Superior's operations to movements in foreign currency exchange rates. Energy Services contract a portion of their fixed-price natural gas, and propane purchases and sales in US dollars and enter into forward US dollar purchase contracts to create an effective Canadian dollar fixed-price purchase cost. Specialty Chemicals 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.
Superior has interest rate swaps with a single counterparty to manage the interest rate mix of its total debt portfolio and related overall cost of borrowing. Superior manages its overall liquidity risk in relation to its general funding requirements by utilizing a mix of short-term and longer-term maturity debt instruments. Superior reviews its mix of short-term and longer-term debt instruments on an on-going basis to ensure it is able to meet its liquidity requirements.
Superior utilizes a variety of counterparties in relation to its derivative and non-financial derivative instruments in order to mitigate its counterparty risk. Superior assesses the credit worthiness of its significant counterparties at the inception and throughout the term of a contract. Superior is also exposed to customer credit risk. Energy Services deals with a large number of small customers, thereby reducing this risk. Specialty Chemicals, due to the nature of its operations, sells its products to a relatively small number of customers. Specialty Chemicals mitigates its customer credit risk by actively monitoring the overall credit worthiness of its customers. Energy Services has minimal exposure to customer credit risk as local natural gas and electricity distribution utilities have been mandated, for a nominal fee, to provide Energy Services with invoicing, collection and the assumption of bad debts risk for residential customers. Energy Services actively monitors the credit worthiness of its commercial customers.
Allowance for doubtful accounts and past due receivables are reviewed by Superior at each reporting date. Superior updates its estimate of the allowance for doubtful accounts based on the evaluation of the recoverability of trade receivable balances of each customer taking into account historic collection trends of past due accounts and current economic conditions. Trade receivables are written-off once it is determined they are not collectable.
Pursuant to their respective terms, trade receivables, before deducting an allowance for doubtful accounts, are aged as follows:
June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Current 247.7 296.3 266.7
Past due less than 90 days 149.8 182.3 63.7
Past due over 90 days 52.7 36.5 11.0
----------------------------------------------------------------------------
Trade Receivable 450.2 515.1 341.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Superior's trade receivable are stated after deducting a provision of $16.9 million as at June 30, 2011 (December 31, 2010 - $14.0 million). The movement in the provision for doubtful accounts was as follows:
Six months Twelve months
ended ended
June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Allowance for doubtful
accounts, opening (14.0) (10.2) (10.2)
Opening adjustment due to
acquisitions - (1.0) -
Impairment losses recognized
on receivables (2.8) (6.3) -
Amounts recovered (1.2) - -
Amounts written off during
the period as uncollectible 1.1 3.5 -
----------------------------------------------------------------------------
Allowance for doubtful
accounts, ending (16.9) (14.0) (10.2)
----------------------------------------------------------------------------
Superior's contractual obligations associated with its financial liabilities
are as follows:
2015 and
2011 2012 2013 2014 Thereafter Total
----------------------------------------------------------------------------
Borrowings 46.2 82.8 368.6 29.3 179.2 706.1
Convertible unsecured
subordinated debentures - 171.9 - 66.2 382.8 620.9
CDN$ equivalent of US$
foreign currency
forward purchase
contracts 37.6 - - - - 37.6
US$ foreign currency forward
sales contracts (US$) 95.4 192.0 152.0 72.0 - 511.4
EUR foreign currency forward
sales contracts (EURO) 3.4 - - - - 3.4
Fixed-price electricity
purchase commitments 7.8 - - - - 7.8
CDN$ natural gas purchases 19.9 13.8 9.8 (1.5) (0.2) 41.8
US$ natural gas purchases
(US$) 0.1 - - - - 0.1
US$ heating oil purchases
(US$) 19.5 - - - - 19.5
US$ propane purchases (US$) 1.1 - - - - 1.1
US$ butane purchases (US$) 0.5 - - - - 0.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Superior's contractual obligations are considered to be normal course operating commitments and do not include the impact of mark-to-market fair values on financial and non-financial derivatives. Superior expects to fund these obligations through a combination of cash flow from operations, proceeds on revolving term bank credits and proceeds on the issuance of share capital. Superior's financial instruments' sensitivities to changes in foreign currency exchange rates, interest rates and various commodity prices and the impact to net earnings are detailed below:
Six months
ended
June, 2011
----------------------------------------------------------------------------
Increase (decrease) to net earnings (loss) of a $0.01
increase in the CDN$ to the US$ (3.7)
Increase (decrease) to net earnings (loss) of a 0.5%
increase in interest rates (0.9)
Increase (decrease) to net earnings (loss) of a $0.40/GJ
increase in the price of natural gas 12.5
Increase (decrease) to net earnings (loss) of a $0.04/litre
increase in the price of propane 1.5
Increase (decrease) to net earnings (loss) of a $0.10/gallon
increase in the price of heating oil 0.5
Increase (decrease) to net earnings (loss) of a $1.00/KwH
increase in the price of electricity 1.3
Increase (decrease) to net earnings of a $0.04/litre
increase in the price of butane 0.2
----------------------------------------------------------------------------
The calculation of Superior's sensitivity to changes in foreign currency exchange rates, interest rates and various commodity prices represent the change in fair value of the financial instrument without consideration of the value of the underlying variable, for example, the underlying customer contracts. The recognition of the sensitivities identified above would have impacted Superior's unrealized gain (loss) on financial instruments and would not have a material impact on Superior's cash flow from operations.
18. Income Taxes
Consistent with prior periods, Superior recognizes a provision for income taxes for its subsidiaries that are subject to current and deferred income taxes, including United States income tax and Chilean income tax.
Total income tax recovery (expense), comprised of current taxes and deferred taxes for the three and six months ended June 30, 2011 was $1.4 million and ($13.0) million, respectively, compared to a $20.2 million and a $22.4 million in the comparative period. Income taxes were impacted by the unrealized losses on derivative financial instruments, the increase in taxable income, and the excess of accounting claims over the utilization of tax pools. For the three and six months ended June 30, 2011, deferred income tax recovery (expense) from operations in Canada, the United States and Chile was $1.5 million and ($12.8) million, respectively, which resulted in a corresponding total net deferred income tax asset of $244.5 million. The deferred income tax recovery for the three and six months ended June 30, 2010 was a $20.1 million and a $22.8 million, respectively.
19. Equity
Superior is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares. The holders of common shares are entitled to dividends if, as and when declared by the Board of Directors; to one vote per share at meetings of the holders of common shares; and upon liquidation, dissolution or winding up of Superior to receive pro rata the remaining property and assets of Superior, subject to the rights of any shares having priority over the common shares, of which none are outstanding.
Preferred shares are issuable in series with each class of preferred share having such rights as the Board of Directors may determine. Holders of preferred shares are entitled, in priority to holders of common shares, to be paid rateably with holders of each other series of preferred shares the amount of accumulated dividends, if any, specified to be payable preferentially to the holders of such series upon liquidation, dissolution or winding up of Superior to be paid rateably with holders of each other series of preferred shares the amount, if any, specified as being payable preferentially to holders of such series. Superior does not have any preferred shares outstanding.
Common shares outstanding as at January 1, 2010, December 31, 2010 and June 30, 2011 have par value of $nil million. No common shares have been reserved in relation to any share option programs.
Issued Number of
Common Shares Shareholders'
(Millions) Equity
----------------------------------------------------------------------------
Shareholders' equity, January 1, 2010 99.9 935.1
----------------------------------------------------------------------------
Shareholders' equity, December 31,
2010 107.7 753.2
Net earnings for the period - 42.2
Other comprehensive loss - (20.1)
Issuance of common shares for the
dividend reinvestment plan 1.5 16.4
Dividends paid to shareholders (1) - (72.7)
----------------------------------------------------------------------------
Shareholders' equity, June 30, 2011 109.2 719.0
----------------------------------------------------------------------------
(1) Dividends to shareholders are declared at the discretion of Superior.
During the six months ended June 30, 2011, Superior paid dividends of
$72.7 million or $0.67 per share (2010: $84.6 million or $0.80 per
share).
Accumulated other comprehensive income (loss) consisted of the
following components:
June 30, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Currency translation adjustment
Balance at beginning of period (27.4) - -
Unrealized foreign currency losses
on translation of foreign
operations (18.4) (27.4) -
----------------------------------------------------------------------------
Balance at end of period (45.8) (27.4) -
----------------------------------------------------------------------------
Actuarial defined benefits
Balance at beginning of period (14.8) - -
Amortization of actuarial defined
benefit losses (5.6) (19.9) -
Income tax recovery 0.3 5.1 -
----------------------------------------------------------------------------
Balance at end of period (20.1) (14.8) -
----------------------------------------------------------------------------
Accumulated derivative gains
(losses)
Balance at beginning of period (11.9) (21.1) (21.1)
Reclassification of derivative
gains previously deferred 3.5 12.1 -
Income tax recovery (expense) 0.1 (2.9) -
----------------------------------------------------------------------------
Balance at end of period (8.3) (11.9) (21.1)
----------------------------------------------------------------------------
Accumulated other comprehensive
loss at end of period (74.2) (54.1) (21.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Capital Disclosures
Additional Capital Disclosures
Superior's objectives when managing capital are: (i) to maintain a flexible capital structure to preserve its ability to meet its financial obligations, including potential obligations from acquisitions; and (ii) to safeguard Superior's assets while at the same time maximizing the growth of its businesses and returns to its shareholders.
In the management of capital, Superior includes shareholders' equity (excluding accumulated other comprehensive income) (AOCI), current and long-term debt, convertible debentures, securitized accounts receivable and cash and cash equivalents.
Superior manages its capital structure and makes adjustments in light of changes in economic conditions and nature of the underlying assets. In order to maintain or adjust the capital structure, Superior may adjust the amount of dividends to Shareholders, issue additional share capital, issue new debt or convertible debentures, issue new debt or convertible debentures with different characteristics and/or increase or decrease the amount of securitized accounts receivable.
Superior monitors its capital based on the ratio of senior debt outstanding to net earnings before interest, taxes, depreciation, amortization and other non-cash expenses (EBITDA), as defined by its revolving term credit facility, and the ratio of total debt outstanding to EBITDA. Superior's reference to EBITDA as defined by its revolving term credit facility may be referred to as compliance EBITDA in other public reports of Superior.
Superior is subject to various financial covenants in its credit facility agreements, including senior debt and total debt to EBITDA ratios, which are measured on a quarterly basis. As at June 30, 2011, December 31, 2010 and January 1, 2010 Superior was in compliance with all of its financial covenants.
Superior's financial objectives and strategy related to managing its capital as described above have remained unchanged from the prior fiscal year. Superior believes that its debt to EBITDA ratios are within reasonable limits, in light of Superior's size, the nature of its businesses and its capital management objectives.
Non-IFRS Financial Measures utilized for bank covenant purposes
Compliance EBITDA
Compliance EBITDA represents earnings before interest, taxes, depreciation, amortization and other non-cash expenses calculated on a 12 month trailing basis giving pro forma effect to acquisitions and divestitures and is used by Superior to calculate its debt covenants and other credit information. Compliance EBITDA is not a defined performance measure under IFRS. Superior's calculation of compliance EBITDA may differ from similar calculations used by comparable entities.
The capital structure of Superior and the calculation of its key capital
ratios are as follows:
As at As at
June 30, December 31,
2011 2010
----------------------------------------------------------------------------
Total shareholders'
equity 719.0 753.2
Exclude accumulated
other comprehensive
loss 74.2 54.1
----------------------------------------------------------------------------
Shareholders' equity
(excluding AOCI) 793.2 807.3
Current borrowings 46.2 136.2
Borrowings (1) 659.9 603.8
Less: Senior
unsecured debentures (150.0) (150.0)
----------------------------------------------------------------------------
Consolidated
secured debt 556.1 590.0
Add: Senior
unsecured debentures 150.0 150.0
----------------------------------------------------------------------------
Consolidated debt 706.1 740.0
Convertible
unsecured
subordinated
debentures (1) 638.1 638.0
----------------------------------------------------------------------------
Total debt 1,344.2 1,378.0
----------------------------------------------------------------------------
Total capital 2,137.4 2,185.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Twelve months Twelve months
ended ended
June 30, December 31,
2011 2010
----------------------------------------------------------------------------
Net loss (28.8) (77.0)
Adjusted for:
Finance expense 83.6 78.1
Depreciation of property, plant and
equipment 51.5 51.4
Depreciation and amortization included
in cost of sales 44.4 46.4
Amortization of intangible assets 29.1 28.0
Impairment of goodwill and intangible
assets 89.5 89.5
Income tax expense 41.9 6.5
Unrealized (gains) losses on derivative
financial instruments (58.9) 2.2
Proforma impact of acquisitions - 4.8
----------------------------------------------------------------------------
Compliance EBITDA (2) 252.3 229.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, December 31,
2011 2010
----------------------------------------------------------------------------
Consolidated debt to Compliance
EBITDA(2) 2.8:1 3.2:1
Total debt to Compliance EBITDA(2) 5.3:1 6.0:1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Borrowings and convertible unsecured subordinated debentures are before
deferred issue costs.
(2) EBITDA, as defined by Superior's revolving term credit facility, is
calculated on a trailing 12-month basis taking into consideration the
pro forma impact of acquisitions and dispositions in accordance with the
requirements of Superior's credit facility. Superior's calculation of
EBITDA and debt to EBITDA ratios may differ from those of similar
entities.
20. Net Earnings (loss) per Share
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Net earnings (loss) per share
computation, basic and diluted (1)
Net earnings (loss) for the period 1.1 (5.5) 42.2 (6.0)
Weighted average shares outstanding 108.9 105.0 108.5 104.1
----------------------------------------------------------------------------
Net earnings (loss) per share, basic
and diluted $0.01 $(0.05) $0.39 $(0.06)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) All outstanding convertible debentures have been excluded from this
calculation as they were anti-dilutive.
The following potential ordinary shares are anti-dilutive and are therefore
excluded from the weighted average number of ordinary shares for the
purposes of diluted earnings per share.
Three months Six months
ended ended
June 30 June 30
Notes 2011 2010 2011 2010
----------------------------------------------------------------------------
Convertible Debentures
5.75% Series III 15 4.9 4.9 4.9 4.9
5.85% Series IV 15 2.4 2.4 2.4 2.4
7.50% Series V 15 5.3 5.3 5.3 5.3
5.75% Series VI 15 9.1 9.9 9.1 9.1
6.00% Series VII 15 9.9 - 9.9 -
----------------------------------------------------------------------------
Total anti-dilutive
instruments 31.6 22.5 31.6 21.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
21. Share Based Compensation
Restricted/Performance Shares
Under the terms of Superior's long-term incentive program, restricted shares (RSs) and/or performance shares (PSs) can be granted to directors, senior officers and employees of Superior. Both types of shares entitle the holder to receive cash compensation in relation to the value of a specified number of underlying notional shares. RSs vest evenly over a period of three years commencing from the date of grant, except for RSs issued to directors which vest three years from the date of grant. Payments are made on the anniversary dates of the RS to the holders entitled to receive them on the basis of a cash payment equal to the value of the underlying notional shares. PSs vest three years from the date of grant and their notional value is dependent on Superior's performance vis-a-vis other companies/trusts' performance based on certain benchmarks. As at June 30, 2011 there were 893,943 RSs outstanding (2010 - 945,181 RSs) and 842,364 PSs outstanding (2010 - 507,998 PSs). For the three months and six months ended June 30, 2011 total compensation expense related to RSs and PSs was $3.2 million (2010 - $1.2 million) and $4.7 million (2010 - $2.3 million) respectively. For the period ended June 30, 2011 the total carrying amount of the liability related to RSs and PSs was $11.2 million (December 31, 2010 - $8.8 million).
22. Supplemental Disclosure of Non-Cash Operating Working Capital Changes
Three month ended Six months ended
June 30, June 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
Changes in non-cash working capital
Trade receivable and other 109.4 (21.9) 88.0 (5.3)
Inventories 0.1 (14.8) 11.0 0.3
Trade and other payables (39.8) 2.0 (58.1) (25.1)
Purchased working capital - 8.5 1.1 39.5
Other (4.7) 8.8 (12.5) 2.2
----------------------------------------------------------------------------
65.0 (17.4) 29.5 11.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
23. Supplemental Disclosure of Condensed Consolidated Statement of
Comprehensive Income
Three months ended Six months ended
June 30 June 30
2011 2010 2011 2010
----------------------------------------------------------------------------
Revenues
Revenue from products and services 893.2 789.7 2,027.8 1,754.2
Finance income 0.2 - 0.3 -
Realized gains on derivative
financial instruments 5.0 1.5 9.1 2.9
----------------------------------------------------------------------------
898.4 791.2 2,037.2 1,757.1
----------------------------------------------------------------------------
Cost of sales (includes products and
services)
Cost of products and services (693.3) (587.4) (1,561.7) (1,305.1)
Depreciation of property, plant and
equipment (10.9) (12.5) (22.3) (24.3)
Realized losses on derivative
financial instruments (18.2) (25.4) (38.8) (44.2)
----------------------------------------------------------------------------
(722.4) (625.3) (1,622.8) (1,373.6)
----------------------------------------------------------------------------
Selling, distribution and
administration costs
Other selling, distribution and
administrative costs (147.6) (149.0) (303.8) (300.0)
Employee future benefit expense (0.9) (0.9) (1.7) (1.7)
Depreciation of property, plant and
equipment (12.3) (11.7) (24.5) (24.4)
Amortization of intangible assets (8.8) (6.8) (15.3) (14.2)
----------------------------------------------------------------------------
(169.6) (168.4) (345.3) (340.3)
----------------------------------------------------------------------------
Finance expense
Interest on borrowings (9.6) (9.2) (18.8) (20.0)
Interest on convertible unsecured
subordinated debentures (9.9) (7.5) (19.2) (12.7)
Interest on obligations under finance
leases (1.2) (1.1) (2.5) (2.2)
Unwind of discount on debentures,
borrowing and decommissioning
liabilities (1.5) (1.9) (3.3) (3.4)
Realized gains on derivative financial
instruments 1.2 1.4 1.2 1.4
----------------------------------------------------------------------------
(21.0) (18.3) (42.6) (36.9)
----------------------------------------------------------------------------
24. Related Party Transactions
Transactions between Superior and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
For the three and six months ended June 30, 2011, Superior incurred $0.2 million (2010 - $0.3 million) and $1.1 million (2010 - $0.5 million) in legal fees respectively, with Macleod Dixon LLP. Macleod Dixon LLP is a related party with Superior as a board member is a Partner at the law firm.
25. Reportable Segment Information
Superior has adopted IFRS 8 Operating Segments, which requires operating segments to be identified on the basis of internal reports about components of the Company that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segments and to assess their performance. Segment revenues reported below represents revenues generated from external customers.
----------------------------------------------------------------------------
For the three Construction
months ended Energy Specialty Products Total
June 30, 2011 Services Chemicals Distribution Corporate Consolidated
----------------------------------------------------------------------------
Revenues 594.3 125.8 178.3 - 898.4
Cost of sales
(includes
product &
services) (504.7) (82.0) (135.7) - (722.4)
----------------------------------------------------------------------------
Gross Profit 89.6 43.8 42.6 - 176.0
Expenses
Selling,
distribution and
administrative
costs 94.8 31.6 39.3 3.9 169.6
Finance expense 1.0 - 0.2 19.8 21.0
Unrealized gains
on derivative
financial
instruments (7.8) - - (6.5) (14.3)
----------------------------------------------------------------------------
88.0 31.6 39.5 17.2 176.3
----------------------------------------------------------------------------
Net earnings
(loss) before
income taxes 1.6 12.2 3.1 (17.2) (0.3)
Income tax
recovery - - - 1.4 1.4
----------------------------------------------------------------------------
Net earnings
(loss) 1.6 12.2 3.1 (15.8) 1.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three Construction
months ended Energy Specialty Products Total
June 30, 2010 Services Chemicals Distribution Corporate Consolidated
----------------------------------------------------------------------------
Revenues 493.3 118.3 179.6 - 791.2
Cost of sales
(includes
products &
services) (409.9) (77.3) (138.1) - (625.3)
----------------------------------------------------------------------------
Gross Profit 83.4 41.0 41.5 - 165.9
Expenses
Selling,
distribution
and
administrative
costs 95.8 30.5 38.5 3.6 168.4
Other expenses 0.5 - 0.2 - 0.7
Finance
expense 1.0 - 0.1 17.2 18.3
Unrealized
losses (gains)
on derivative
financial
instruments (23.8) (2.0) - 30.0 4.2
----------------------------------------------------------------------------
73.5 28.5 38.8 50.8 191.6
----------------------------------------------------------------------------
Net earnings
(loss) before
income taxes 9.9 12.5 2.7 (50.8) (25.7)
Income tax
recovery - - - 20.2 20.2
----------------------------------------------------------------------------
Net earnings
(Loss) 9.9 12.5 2.7 (30.6) (5.5)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six Construction
months ended Energy Specialty Products Total
June 30, 2011 Services Chemicals Distribution Corporate Consolidated
----------------------------------------------------------------------------
Revenues 1,435.9 256.9 344.4 - 2,037.2
Cost of sales
(includes
product &
services) (1,192.8) (167.9) (262.1) - (1,622.8)
----------------------------------------------------------------------------
Gross Profit 243.1 89.0 82.3 - 414.4
Expenses
Selling,
distribution
and
administrative
costs 197.3 64.1 76.8 7.1 345.3
Finance
expense 2.0 0.1 0.5 40.0 42.6
Unrealized
losses (gains)
on derivative
financial
instruments (23.0) 5.4 - (11.1) (28.7)
----------------------------------------------------------------------------
176.3 69.6 77.3 36.0 359.2
----------------------------------------------------------------------------
Net earnings
(loss) before
income taxes 66.8 19.4 5.0 (36.0) 55.2
Income tax
expense - - - (13.0) (13.0)
----------------------------------------------------------------------------
Net earnings
(loss) 66.8 19.4 5.0 (49.0) 42.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six Construction
months ended Energy Specialty Products Total
June 30, 2010 Services Chemicals Distribution Corporate Consolidated
----------------------------------------------------------------------------
Revenues 1,181.4 229.1 346.6 - 1,757.1
Cost of sales
(includes
products &
services) (959.6) (148.0) (266.0) - (1,373.6)
----------------------------------------------------------------------------
Gross Profit 221.8 81.1 80.6 - 383.5
Expenses
Selling,
distribution
and
administrative
costs 193.3 62.7 76.6 7.7 340.3
Other expenses 2.1 - 0.2 - 2.3
Finance
expense 2.0 0.1 0.2 34.6 36.9
Unrealized
losses on
derivative
financial
instruments 18.0 2.2 - 12.2 32.4
----------------------------------------------------------------------------
215.4 65.0 77.0 54.5 411.9
----------------------------------------------------------------------------
Net earnings
(loss) before
income taxes 6.4 16.1 3.6 (54.5) (28.4)
Income tax
recovery - - - 22.4 22.4
----------------------------------------------------------------------------
Net earnings
(Loss) 6.4 16.1 3.6 (32.1) (6.0)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net working capital, Total assets, Total liabilities, Acquisitions and
Purchase of property, plant and equipment
Construction
Energy Specialty Products Total
Services Chemicals Distribution Corporate Consolidated
----------------------------------------------------------------------------
As at June 30,
2011
Net working
capital (1) 249.8 31.5 109.1 (25.1) 365.3
Total assets 1,267.0 621.8 282.4 360.5 2,531.7
Total
liabilities 342.6 172.7 80.3 1,217.1 1,812.7
----------------------------------------------------------------------------
As at December
31, 2010
Net working
capital (1) 290.2 33.5 107.2 (31.1) 399.8
Total assets 1,406.7 653.1 280.8 385.4 2,726.0
Total
liabilities 447.2 177.3 76.4 1,271.9 1,972.8
----------------------------------------------------------------------------
For the three
months ended
June 30, 2011
Acquisitions 0.3 - - - 0.3
Purchase of
property, plant
and equipment 3.3 3.3 0.2 - 6.8
----------------------------------------------------------------------------
For the three
months ended
June 30, 2010
Acquisitions - - 17.7 - 17.7
Purchase of
property, plant
and equipment 3.5 4.9 1.7 1.0 11.1
----------------------------------------------------------------------------
For the six
months ended
June 30, 2011
Acquisitions 4.9 - - - 4.9
Purchase of
property, plant
and equipment 7.4 6.1 1.1 - 14.6
----------------------------------------------------------------------------
For the six
months ended
June 30, 2010
Acquisitions 142.6 - 18.1 - 160.7
Purchase of
property, plant
and equipment 7.1 8.1 1.9 1.0 18.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Net working capital reflects amounts as at the quarter end and is
comprised of trade and other receivables, prepaid expenses and
inventories, less trade and other payables, deferred revenue and
dividends and interest payable to shareholders and debenture holders.
26. Geographic Information
United Total
Canada States Other Consolidated
----------------------------------------------------------------------------
Revenues for the three months ended
June 30, 2011 374.4 502.4 21.6 898.4
Revenues for the six months ended
June 30, 2011 890.4 1,103.4 43.4 2,037.2
Property, plant and equipment as at
June 30, 2011 492.5 331.5 47.8 871.8
Goodwill as at June 30, 2011 392.5 78.0 - 470.5
Total assets as at June 30, 2011 1,658.8 803.4 69.5 2,531.7
----------------------------------------------------------------------------
Revenues for the three months ended
June 30, 2010 377.8 394.4 19.0 791.2
Revenues for the six months ended
June 30, 2010 856.1 859.8 41.2 1,757.1
Property, plant and equipment as at
December 31, 2010 503.0 352.5 54.7 910.2
Goodwill as at December 31, 2010 391.9 79.8 - 471.7
Total assets as at December 31,
2010 1,932.0 737.3 56.7 2,726.0
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27. Comparative Figures
Certain reclassifications of prior year amounts have been made to conform to current period presentation. Specifically, $17.0 million, $11.1 million and $16.8 million have been reclassified to trade and other receivables from trade and other payables to provide comparative presentation of certain of Construction Products Distribution vendor and customer rebates as at January 1, 2010, June 30, 2010 and December 31, 2010, respectively.
28. Explanation of transition to IFRS
Superior's financial statements for the year ending December 31, 2011 will be the first annual financial statements that comply with IFRS and these financial statements were prepared as described in Note 2, including the application of IFRS 1. IFRS 1 requires an entity to adopt IFRS in its first annual financial statements prepared under IFRS by making an explicit and unreserved statement in those financial statements of compliance with IFRS. Superior will make this statement when it issues its 2011 annual financial statements.
IFRS also requires that comparative financial information be provided. As a result, the first date at which Superior has applied IFRS was January 1, 2010 (Transition Date). IFRS 1 requires first-time adopters to retrospectively apply all effective IFRS standards as of the reporting date, which for Superior will be December 31, 2011. However, it also provides for certain optional exemptions and certain mandatory exceptions for first time IFRS adopters.
First-time adoption of IFRS
Set forth below are the applicable IFRS 1 elective exemptions and mandatory exceptions applied in the conversion from GAAP to IFRS.
IFRS Elective Exemptions
Share-Based Payment Transactions
IFRS 2, Share-based Payments, encourages application of its provisions to equity instruments granted on or before November 7, 2002, but requires the application only to equity instruments granted after November 7, 2002 that had not vested by the Transition Date. Superior has elected to utilize this exemption to avoid applying IFRS 2 Share-Based Payments retrospectively and restate all share-based liabilities that were settled before the date of transition to IFRS. Accordingly, all unsettled liabilities arising from share-based payment transactions are in compliance with the principles of IFRS after the Transition Date.
Changes in the Decommissioning Liabilities Included in the Cost of Property, Plant and Equipment
Superior as elected to utilize this exemption to avoid retrospective restatement of all changes in decommissioning, restoration, and similar liabilities that are included in property, plant and equipment prior to the Transition Date.
Leases
Superior has elected to apply the transitional provisions of IFRIC 4 Determining Whether an Arrangement Contains a Lease to determine only whether any existing contract or arrangements at the Transition Date contains a lease under IFRIC 4 and if so, to apply IAS 17 Leases from the inception of that arrangement. Furthermore, Superior has elected to utilize the leases exemption to avoid the reassessment of determining whether an arrangement contained a lease at the Transition Date for all arrangements assessed prior to the Transition Date which resulted in the same outcome under IFRS and previous GAAP.
Fair Value or Revaluation as Deemed Cost
Generally, for Energy Services, Specialty Chemicals and Construction Products Distribution property, plant, equipment, Superior has elected to use the fair value as deemed cost exemption. Deemed cost will be the cost under previous GAAP that was established by measuring items at fair value due to business combinations. For certain Energy Services property, plant and equipment, Superior has revalued assets at deemed cost and recorded accumulated depreciation and amortization of its property, plant and equipment in accordance with its IFRS policies.
Business Combinations
A first-time adopter may elect not to apply IFRS 3 Business Combinations, retrospectively to business combinations completed before the Transition Date. However, if a first-time adopter restates any business combinations to comply with IFRS 3, it shall restate all later business combinations and shall also apply IAS 27 from that same date. Superior has elected not to apply IFRS 3 to business combinations completed before the Transition Date. Superior has applied IFRS 3, Business Combinations, to all acquisitions completed during 2010 in accordance with IFRS. Superior has also tested all goodwill for impairment from acquisitions completed in 2010 and restated under IFRS 3. Superior also tested goodwill for impairment at the Transition Date to IFRS which resulted in no adjustments to goodwill.
Employee Benefits
IFRS 1 provides the option to retrospectively apply the corridor approach under IAS 19, Employee Benefits, for the recognition of actuarial gains and losses, or recognize all cumulative gains and losses deferred under GAAP in opening retained earnings at the Transition Date. Superior elected to recognize all cumulative actuarial gains and losses that existed at its Transition Date in opening deficit for all of its employee benefit plans.
Cumulative Translation Differences
Retrospective application of IFRS would require Superior to determine cumulative currency translation differences in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates, from the date a subsidiary or equity method investee was formed or acquired. IFRS 1 permits cumulative translation gains and losses to be reset to zero at the Transition Date. Superior elected to reset all cumulative translation gains and losses to zero in opening deficit at its Transition Date.
Borrowing Costs
IAS 23, Borrowing Costs, requires an entity to capitalize the borrowing costs related to all qualifying assets for which the commencement date for capitalization is on or after January 1, 2009 or date of transition whichever is later. Superior has applied the transitional provisions prescribed in IAS 23, which has constituted a change in accounting policy. All borrowing costs related to qualifying assets for which the commencement date for capitalization is on or after the Transition Date have been capitalized.
IFRS Mandatory Exceptions
Derecognition of financial assets and liabilities
A first-time adopter should apply the derecognition requirements in IAS 39 Financial Instruments: Recognition and Measurement, prospectively to transactions occurring on or after January 1, 2004. Superior has applied this mandatory exception which did not impact any of Superior's previously reported results.
Hedge Accounting
Hedge accounting can only be applied prospectively from the Transition Date to transactions that satisfy the hedge accounting criteria in IAS 39 at that date. Hedging relationships cannot be designated retrospectively and the supporting documentation cannot be created retrospectively. Superior has applied this mandatory exception which did not impact any of Superior's previously reported results.
Non-controlling Interests
A first-time adopter that applies IAS 27 Consolidated and Separate Financial Statements, should apply the standard retrospectively, with the exception of the following requirements which are applied prospectively from the Transition Date:
- The requirement that total comprehensive income is attributed to the owners of the parent and to the non-controlling interests have a deficit balance;
- The requirements on accounting for changes in the parent's ownership interest in a subsidiary that do not results in a loss of control; and
- The requirements on accounting for a loss of control over a subsidiary, and the related requirements of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
Estimates
An entity's estimates in accordance with IFRS at the date of transition to IFRS shall be consistent with estimates made for the same date in accordance with previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error.
Superior has applied these mandatory exceptions which did not impact any of Superior's previously reported results.
Reconciliations between GAAP and IFRS
IFRS 1 requires an entity to reconcile equity, net earnings (loss) and comprehensive income and cash flows for prior periods. The Company's first time adoption of IFRS did not have a material impact on the total operating, investing or financing cash flows. The following represents the reconciliations from GAAP to IFRS for the respective periods noted for equity, earnings and comprehensive income.
To view the tables regarding the Reconciliations between GAAP and IFRS, please visit the following link: http://media3.marketwire.com/docs/e804spb78.pdf.
The following narratives explain the significant differences between the previous historical GAAP accounting policies and the current IFRS policies applied by Superior.
(a) Derecognition of Financial Assets
GAAP: Certain financial assets are derecognized under GAAP when entities do not retain access to all the economic benefits of the asset after a transfer of the receivable to a third party, including the accounts receivable securitization program.
IFRS: Under IFRS only certain financial assets can be derecognized when the related criteria are met. Based on a review of the IFRS criteria Superior's accounts receivable securitization program does not qualify for derecognition. As such the previously derecognized balances have been recognized under IFRS and included under trade and other receivables and borrowings.
(b) Property, Plant and Equipment
Componentization and Major inspection and repairs
GAAP: The cost of an item of property, plant and equipment made up of significant separable component parts should be allocated to the component parts when practicable. Costs meeting the criteria to be classified as a betterment are capitalized. GAAP specifies that the costs incurred in the maintenance of the service potential of an item of property, plant and equipment is a repair, not betterment.
IFRS: An entity is required to separately depreciate each part of property, plant and equipment that is significant in relation to the total cost of the property, plant and equipment item. Also, major inspections or overhauls required at regular intervals over the useful life of an item of property, plant and equipment which allows the continued use of the asset are required to be capitalized. As a result, Superior adjusted its depreciation of property, plant and equipment based on the each item's component parts and capitalized certain recertification, inspections and overhauls related to certain Energy Services assets.
Reversal of Prior Asset Impairment
GAAP: An impairment loss recognized in a prior period shall not be reversed if the fair value of the asset subsequently increases.
IFRS: An impairment loss recognized in a prior period for an asset other than goodwill may be reversed if, and only if, there has been a change in the estimates used to determine the recoverable amount of the asset since the last impairment loss was recognized. Under previous GAAP, Superior recognized an impairment loss on a Specialty Chemicals' facility. Upon transition to IFRS, Superior has reversed this impairment based on several market factor developments including the lower power rate trend in the facility's region, major cell upgrade investments made between the time the impairment was recognized and the Transition Date and improved North American pulp and paper fundamentals.
Capitalized assets related to finance leases
GAAP: To determine the appropriate classification of a lease as either capital or operating, an entity uses the following tests: the fair value versus the present value of the minimum lease payments, the lease term versus economic useful life, and the transfer or risks and rewards.
IFRS: To determine the appropriate classification of a lease as either finance or operating, an entity uses the same tests as under GAAP keeping in mind that IFRS adds an additional criterion noting that leased assets of a highly specialized nature might also be an indicator of a finance lease. Although the tests are consistent with GAAP and IFRS, the criteria in IAS 17 Leases is not framed in the same context as they do not provide a "bright line" and leaves more room for judgment when assessing when a lease transfers substantially all of the risks and rewards incidental to ownership. As a result, on transition to IFRS, Superior re-evaluated its leases and determined the appropriate classification between finance and operating leases. For those resulting finance leases, certain assets were capitalized and associated liabilities were recorded related to Energy Services and Construction Products Distribution.
(c) Accrued Pension Asset and Employee Future Benefits
As noted in the section discussing the IFRS applicable elective exemptions applied in the conversion from GAAP to IFRS, Superior has elected to recognize all cumulative actuarial gains and losses that existed at the Transition Date in opening retained earnings for all of its employee future benefit plans.
Actuarial Gains and Losses
GAAP: Actuarial gains and losses that arise in calculating the present value of the defined benefit obligation and the fair value of plan assets are recognized on a systematic and consistent basis, subject to a minimum required amortization based on a "corridor" approach. The corridor was 10% of the greater of the accrued benefit obligation at the beginning of the year and the fair value of plan assets at the beginning of the year. This excess is amortized as a component of pension expense into net earnings (loss) over the expected average remaining life of the active employees participating in the plans. Actuarial gains and losses below the 10% corridor are deferred.
IFRS: Superior has elected to recognize all actuarial gains and losses immediately in a separate statement of comprehensive income without recycling to the income statement in subsequent periods. As a result, actuarial gains and losses are not amortized to net earnings (loss) but rather are recorded directly to other comprehensive income at the end of each period. As a result, Superior adjusted its pension expense to remove the amortization of actuarial gains and losses. Also Superior reclassified any accrued pension asset related to actuarial gains (loss) to Deficit at the Transition Date.
Measurement Date
GAAP: The measurement date of the defined benefit and plan assets can be a date up to three months prior to the date of the financial statements, provided the entity adopted this practice consistently from year to year. Superior used a measurement date of November 30th for the pension plans and December 31st for the other post-employment plans.
IFRS: An entity is required to determine the present value of the pension obligation and the fair value of plan assets with sufficient regularity such that the amounts recognized in the financial statements do not differ materially from the amounts that would be determined at the balance sheet date. As a result, on transition to IFRS, Superior re-measured its pension obligations and plan assets as of January 1, 2010, which impacted the calculation of the pension expense.
Fair Value of Expected Return on Plan Assets
GAAP: The expected return on plan assets is the product of the expected long-term rate of return on plan assets and a market-related fair value of plan assets. The market-related fair value recognized changes in the fair value of plan assets over a five year period.
IFRS: The expected return on plan assets is a product of the expected long-term rate of return on plan assets and the fair value of plan assets on the balance sheet date. As a result, Superior adjusted its pension expense to reflect an expected return on plan assets using the fair value of its plan assets at the end of each reporting period.
(d) Finance Leasing Obligations
GAAP: To determine the appropriate classification of a lease as either capital or operating, an entity uses the following tests: the fair value versus the present value of the minimum lease payments, the lease term versus economic useful life, and the transfer or risks and rewards.
IFRS: To determine the appropriate classification of a lease as either finance or operating, an entity uses the same tests as under GAAP keeping in mind that IFRS adds an additional criterion noting that leased assets of a highly specialized nature might also be an indicator of a finance lease. Although the tests are consistent with GAAP and IFRS, the criteria in IAS 17 Leases is not framed in the same context as they do not provide a "bright line" and leaves more room for judgment when assessing when a lease transfers substantially all of the risks and rewards incidental to ownership. As a result, on transition to IFRS, Superior re-evaluated its leases and determined the appropriate classification between finance and operating leases. Any finance lease obligations have been grouped with current and non current borrowings. For those resulting finance leases, certain assets were capitalized and associated liabilities were recorded related to Energy Services and Construction Products Distribution.
(e) Deferred Credit
GAAP: When, through a business combination or reorganization, an entity obtains tax basis that can be used to offset future income taxes payable, EIC-110 stipulates that these future tax benefits should be recorded as future tax assets on the balance sheet. Any excess of the amounts assigned to the acquired assets over the consideration paid should be allocated pro rata to reduce the values assigned to any non-monetary assets acquired. If the allocation reduces the non-monetary assets to zero, then the remainder should be classified as a deferred credit and amortized to net earnings (loss) over the life of the tax asset.
IFRS: When, through a business combination or reorganization, an entity obtains tax basis that can be used to offset future income taxes payable, IFRS stipulates that the difference between the recognized tax asset and the consideration paid to a third party to obtain those benefits is to be fully recognized in the income statement during the period in which the transaction occurred. As a result, on transition to IFRS, all deferred credits related to prior acquisitions were reclassified to opening deficit.
(f) Provisions
GAAP: An entity is required to recognize a liability for an asset retirement obligation in the period in which it is incurred when a reasonable estimate of the amount of the obligation can be made. If a reasonable estimate of the amount of the obligation cannot be made in the period the asset retirement obligation is incurred, the liability shall be recognized when a reasonable estimate of the amount of the obligation can be made. Additionally, only a legal obligation associated with the retirement of a tangible long-lived asset establishes a clear duty or responsibility to another party that justifies the recognition of the liability.
IFRS: An entity is required to recognize a provision for obligations arising from both legal and constructive obligations regardless of the uncertainty of the nature or timing of the provision. As a result, on transition to IFRS, a provision for decommissioning costs related to certain Specialty Chemicals facilities has been recorded.
Also restructuring provisions are only included as part of acquired liabilities when the acquiree has recognized an existing liability for restructuring in accordance with application IFRS standards. As a result, restructuring provisions recorded as part of the purchase price allocation under GAAP are charged to earnings under IFRS. Superior recognized various restructuring provisions related to business combinations completed in 2010 which could not be recognized under IFRS, as such the related amounts were adjusted through retained earnings.
(g) Deferred Income taxes
Superior has adjusted both deferred tax assets and liabilities due to recognizing deferred income taxes on the various adjustments made to Superior balance sheet due to the transition to IFRS.
(h) Accumulated Other Comprehensive Income (Loss)
As noted in the section discussing the IFRS applicable elective exemptions applied in the conversion from GAAP to IFRS, Superior has applied the one-time exemption to set the unrealized foreign currency gains (losses) on translation of self-sustaining foreign operations ("currency cumulative translation adjustment" or "CTA") to zero as of January 1, 2010. The cumulative translation adjustment balance as of January 1, 2010 of $22.1 million was recognized as an adjustment to opening deficit. The application of the exemption had no impact on net equity.
(i) Goodwill
Business Combinations
As stated in the section entitled "IFRS Exemption Options", Superior did not early adopt IFRS 3 for business combinations completed during 2010. Consequently, business combinations completed prior to January 1, 2010 have not been restated and the carrying amount of goodwill under IFRS as of January 1, 2010 is equal to the carrying amount under GAAP as of that date. The IFRS adjustments below relate to acquisitions completed on or after January 1, 2010.
Measurement of Purchase Price
GAAP: Share issued as consideration to complete a business combination are measured at their market price a few days before and after the date the parties reached an agreement on the purchase price and the proposed transaction is announced.
IFRS: Shares issued as consideration to complete a business combination are measured at their market value at the acquisition closing date. As a result, goodwill and shareholders' capital were reduced relative to the re-measurement of the shares issued as consideration for the Burnaby Assets acquisition.
Acquisition related costs
GAAP: If certain conditions are met, the costs of restructuring an acquisition can be included in the purchase price and the allocation of the acquisition costs. Also direct costs incurred to complete an acquisition can be included in the allocation of acquisition costs to the assets acquired.
IFRS: Restructuring provisions are only included as part of the acquired liabilities when the acquiree has recognized an existing liability for restructuring in accordance with application IFRS standards. As a result, restructuring provisions recorded as part of the purchase price allocation under GAAP are charged to earnings under IFRS. Superior recognized various restructuring provisions which could not be recognized under IFRS, as such the related amounts were adjusted through goodwill and other payables.
Under IFRS all direct acquisition costs incurred to complete a business combination are charged to earnings. As such, Superior has adjusted goodwill and earnings due to previously capitalizing acquisition costs under GAAP.
Correction of historical GAAP differences
The net impact of correcting the historical GAAP differences was a decrease of $3.2 million in total assets, a $2.0 million increase in total liabilities and a $5.2 million decrease in total equity, as at January 1, 2010. The net impact on June 30, 2010 and December 31, 2010 was consistent with the above noted amounts. See below for further details on the corrected items.
(j) Superior has reduced accounts receivables within the Specialty Chemicals segment due to previous revenue recognition differences with GAAP. Also Superior has reduced accounts receivables within the Specialty Chemicals segment due to previous revenue recognition differences with GAAP.
(k) Superior has reduced inventories in order adjust for previous reconciliation issues associated with inventory balances within the Energy Services segment. Also inventories have been reduced due to a reclassification of parts related inventory within Specialty Chemicals into property, plant and equipment and retained earnings.
(l) Superior has increased the value of its intangible assets in order to correct a previous revaluation issue under GAAP.
(m) Superior has reclassified a portion of the Sunoco purchase equation under GAAP into property, plant and equipment as certain amounts were previously incorrectly grouped with goodwill.
(n) Superior has increased trade and other payables as certain liabilities under GAAP were not properly recognized.
(o) Superior has adjusted the outstanding convertible debentures in order to comply with the effective interest rate method under GAAP.
Presentation Reclassifications
1) Prepaid expenses
All prepaid expenses are presented separately on the face of the balance sheet.
2) Investment property
Under GAAP investment properties can be grouped with property, plant and equipment and under IFRS any amounts associated with investment property should be reclassified. Superior has grouped all investment property with intangible assets and investment property.
3) Deferred taxes and Investment tax credits
Superior has reclassified all current deferred tax amounts and investment tax credits with non-current deferred taxes on the face of the balance sheet.
4) Contributed Surplus
Superior has reclassified all contributed surplus with share capital on the face of the balance sheet.
To view the tables regarding the Reconciliations between GAAP and IFRS, please visit the following link: http://media3.marketwire.com/docs/e804spb86.pdf.
The following narratives explain the significant differences between the previous historical GAAP accounting policies and the current IFRS policies applied by Superior.
(a) Cost of products sold
GAAP: Under GAAP, all manufacturing costs are absorbed into the carrying cost of manufactured inventory and flow through the income statement only once the related inventory has been sold. These manufacturing costs (deprecation and amortization included) will then become part of the entity's cost of products sold.
IFRS: Under IFRS, inventory is accounted for in the same manner as under GAAP, with manufacturing costs being absorbed into the inventory's carrying value and expensed through the income statement as a cost of product sold. The depreciation and amortization component of inventory is larger under IFRS than GAAP, due to the componentization of Superior's property, plant & equipment described and the impairment reversal detailed above in note (b).
(b) Operating and administrative costs & selling, distribution and administrative costs
Leases
GAAP: To determine the appropriate classification of a lease as either capital or operating, an entity uses the following tests: the fair value versus the present value of the minimum lease payments, the lease term versus economic useful life, and the transfer or risks and rewards.
IFRS: To determine the appropriate classification of a lease as either finance or operating, an entity uses the same tests as under GAAP keeping in mind that IFRS adds an additional criterion noting that leased assets of a highly specialized nature might also be an indicator of a finance lease. Although the tests are consistent with GAAP and IFRS, the criteria in IAS 17 Leases is not framed in the same context as they do not provide a "bright line" and leaves more room for judgment when assessing when a lease transfers substantially all of the risks and rewards incidental to ownership. As a result, on transition to IFRS, Superior re-evaluated its leases and determined the appropriate classification between finance and operating leases, any finance lease obligations have been grouped with current and non current borrowings. The classification of a number of leases as finance type has resulted in decrease in operating costs as lease payments are now broken into principal repayments and interest costs.
Componentization and Major inspection and repairs
GAAP: The cost of an item of property, plant and equipment made up of significant separable component parts should be allocated to the component parts when practicable. Costs meeting the criteria to be classified as a betterment are capitalized. GAAP specifies that the costs incurred in the maintenance of the service potential of an item of property, plant and equipment is a repair, not a betterment.
IFRS: An entity is required to separately depreciate each part of property, plant and equipment that is significant in relation to the total cost of the property, plant and equipment item. Also, major inspections or overhauls required at regular intervals over the useful life of an item of property, plant and equipment which allows the continued use of the asset are required to be capitalized. As a result operating costs were reduced due to the capitalization of various expenditures for major inspections and overhauls.
Employee benefit expense
Fair Value of Expected Return on Plan Assets
GAAP: The expected return on plan assets is the product of the expected long-term rate of return on plan assets and a market-related fair value of plan assets. The market-related fair value recognized changes in the fair value of plan assets over a five year period.
IFRS: The expected return on plan assets is a product of the expected long-term rate of return on plan assets and the fair value of plan assets on the balance sheet date. As a result, Superior adjusted its pension expense to reflect an expected return on plan assets using the fair value of its plan assets at the end of each reporting period. This adjustment has resulted in a reduction of the annual employee benefits expense during the period.
(c) Other expenses
Acquisition related costs
GAAP: If certain conditions are met, the costs of restructuring an acquisition can be included in the purchase price and the allocation of the acquisition costs. Also direct costs incurred to complete an acquisition can be included in the allocation of acquisition costs to the assets acquired.
IFRS: Under IFRS all direct acquisition costs incurred to complete a business combination are charged to earnings. As such, Superior has increased other expenses due to the recognition in earnings of previously capitalizing acquisition costs under GAAP.
(d) Depreciation of property, plant and equipment
GAAP: When an entity owns complex assets that are comprised of numerous parts, each of the asset's major components must be separated and depreciated over its particular useful life. A component should be separately tracked if its individual cost is significant in relation to the total cost of the asset. Although this concept was theoretically included in Canadian GAAP, it was only required to be applied when practical to do so.
IFRS: In contrast to GAAP's treatment of limiting the application of componentization to situations where such application is practical, IFRS requires that an entity will apply componentization to all of its assets.
Reversal of impairment of property, plant and equipment
GAAP: Reversal of impairment losses in not permitted.
IFRS: Reversal of impairment losses is required for assets other than goodwill if certain criteria are met. As a result, Superior reversed the impairment on Specialty Chemicals Valdosta, Georgia sodium chlorate facility due changes in the North American chlorate market. The reversal of the impairment has increased the amount of depreciation of property, plant and equipment.
Capitalized assets related to finance leases
GAAP: To determine the appropriate classification of a lease as either capital or operating, an entity uses the following tests: the fair value versus the present value of the minimum lease payments, the lease term versus economic useful life, and the transfer or risks and rewards.
IFRS: To determine the appropriate classification of a lease as either finance or operating, an entity uses the same tests as under GAAP keeping in mind that IFRS adds an additional criterion noting that leased assets of a highly specialized nature might also be an indicator of a finance lease. Although the tests are consistent with GAAP and IFRS, the criteria in IAS 17 Leases is not framed in the same context as they do not provide a "bright line" and leaves more room for judgment when assessing when a lease transfers substantially all of the risks and rewards incidental to ownership. As a result, on transition to IFRS, Superior re-evaluated its leases and determined the appropriate classification between finance and operating leases. For those resulting finance leases, certain assets were capitalized and associated liabilities were recorded related to Energy Services and Construction Products Distribution. Depreciation of property, plant and equipment has increased due to the capitalization of various finance type leases as part of the transition to IFRS.
(e) Finance expense
GAAP: Consistent with note (d) to the above reconciliation of comprehensive income (loss), the criteria for capitalization of leases are narrower and less judgmental than under IFRS. Consequently, fewer leases were capitalized under GAAP as compared to IFRS, resulting in a smaller interest expense on Superior's leasing obligations.
IFRS: Consistent with note (d) to the above reconciliations of financial position, the criteria for capitalization of leases are broader and more judgmental under IFRS than GAAP. Consequently, upon transition to IFRS, Superior has capitalized numerous Energy Services and Construction Products Distribution leases under IFRS that were classified as operating leases under GAAP. The increased interest expense is reflective of the interest incurred on these additional leasing obligations.
(f) Income tax recovery (expense)
Superior has adjusted income tax recovery (expense) due to the impact of the various adjustments made to Superior balance sheet as a result of the transition to IFRS. Specifically, the changes to income taxes are primarily related to the impact of reversing any amounts associated with previously recognized deferred credits and adjustments to property, plant and equipment.
(g) Unrealized foreign currency gains (losses) on translation of foreign operations
The change in unrealized foreign currency gains (losses) on translation of foreign operations is due to the revaluation of IFRS related adjustments recognized in Superior's foreign operations.
(h) Amortization of actuarial defined benefit gains (losses)
Canadian GAAP: Actuarial gains and losses that arise in calculating the present value of the defined benefit obligation and the fair value of plan assets are recognized on a systematic and consistent basis, subject to a minimum required amortization based on a "corridor" approach. The corridor was 10% of the greater of the accrued benefit obligation at the beginning of the year and the fair value of plan assets at the beginning of the year, with the excess being amortized into the income statement over the expected average remaining life of the active employees participating in the plans.
IFRS: An entity may adopt any systematic method that results in faster recognition of actuarial gains and losses than the 10% corridor method, provided that the same basis is applied to both gains and losses and is applied consistently from period to period. Superior has elected to recognize the entirety of actuarial gains and losses during the period in which they occur. If an entity adopts a policy of recognizing actuarial gains and losses in the period in which they occur, it may recognize them in other comprehensive income, provided that it does so for all of its defined benefit plans and for all of its actuarial gains and losses. Consistent with this, Superior's actuarial gains and losses are now included in its accumulated other comprehensive income.
Correction of historical GAAP related items
The net impact of correcting the historical GAAP differences was a $3.0 million increase in amortization of intangible assets and a $0.2 million decrease in accretion of convertible debentures, for the twelve months ended December 31, 2010. The pro rata net impact on the three months ended June 30, 2010 was consistent with the above noted amounts. See below for further details on the corrected items.
(i) Revenues and cost of products sold
The increase in revenue and cost of products sold was due to adjusting Specialty Chemical's revenue recognition policy in accordance with GAAP.
(j) Amortization of intangible assets
The increase in amortization of intangible assets is due to an increase in Specialty Chemicals' amortization of patents due to the correction of a prior period revaluation issue under GAAP.
(k) Accretion of convertible debentures
A portion of the decrease in accretion of convertible debentures, borrowings and decommissioning liabilities is due the impact of adoption the GAAP interest rate method.
Presentation Reclassification
Reclassification of realized gains (losses) on derivative financial instruments
Superior has chosen to present expenses in the statement of comprehensive income on the nature of the expense. As such any realized gains (losses) have been allocated between revenue and cost of sales based on their nature.
Reclassification of depreciation of property, plant and equipment and amortization of intangible assets
Superior has chosen to present expenses in the statement of comprehensive income on the nature of the expense. As such any depreciation and amortization amounts have been allocated to selling, distribution and administrative costs based on their nature.
Reclassification of interest on revolving term bank credits, interest on convertible debentures and accretion of debenture issues costs
Superior has chosen to present expenses in the statement of comprehensive income on the nature of the expense. As such any interest and accretion amounts associated with obligations have been allocated to interest expense based on their nature.
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