CALGARY, ALBERTA (TSX: FDG.UN) (NYSE: FDG) today announced its
second quarter 2008 results. Cash available for distribution
generated in the quarter was $420 million ($2.82 per unit) compared
with $135 million ($0.92 per unit) in the same period of 2007.
Distributions of $2.50 per unit were declared for the quarter
compared with $0.65 per unit. Net income was $373 million for the
quarter compared with $106 million.
"The Trust and Elk Valley Coal had an excellent second quarter,"
said Boyd Payne, President of the Trust. "The global steel industry
is currently in good shape, our operations worked well and we were
able to get our product to the ports and onto ships. Coal prices
are well up over last year and are starting to reflect higher 2008
coal year pricing, though a stronger Canadian dollar against the
U.S. dollar and some carry over of 2007 coal year sales tempered
average prices for the quarter. Looking forward, we will benefit
more fully from higher 2008 coal year prices over the next three
quarters. Also, while sales were strong for the quarter, we still
expect Elk Valley Coal to sell between 23 million and 25 million
tonnes of coal in 2008, which will be dependent on a number of
factors including rail service and mine performance."
"Costs continue to reflect inflationary pressures, however,"
added Payne. "Our cost of product sold is running at approximately
$45 per tonne, which is up considerably from last year. Our
production costs are trending to the higher end of our expectations
on rising input prices, notably diesel fuel. While transportation
costs are currently at the lower end of what we anticipate, they
are up sharply from last year largely due to price participation in
some of the port loading rates. Coal price increases have
outstripped the pressure on our costs and the improved operating
margins have contributed to the Trust being able to distribute a
record $2.50 per unit for the second quarter."
Payne continued: "In our current market place, global steel
market fundamentals are strong as is evidenced by high steel prices
and improved operating margins of steel producers. We are, however,
keeping an eye on the credit crisis and on the U.S. economy to get
a feel if they start to materially impact the global economy."
Coal Contracts
All of Elk Valley Coal's sales contracts have been settled for
the 2008 coal year at an average price of US$275 per tonne, which
reflects the average for all ranges of coal products, including
thermal and PCI coals, and the impact of certain multi-year
contracts.
Strategic Review Process
In December 2007, the Trust announced that independent
committees had been formed to explore and make recommendations
regarding strategic alternatives available to the Trust to maximize
value for its unitholders. The independent committees are
continuing their work and the Trust anticipates it will make no
further announcements regarding the strategic review until the
Trustees determine that disclosure of a material change is
required.
Conference Call and Webcast
A conference call to discuss these results will be held
Thursday, July 24, 2008 at 7:30 a.m. Mountain time, 9:30 a.m.
Eastern time. To participate in the conference call, please dial
1-866-898-9626 or 416-340-2216 approximately 10 minutes prior to
the call. A live and archived audio webcast and podcast of the
conference call will also be available on the Trust's website
www.fording.ca.
About Fording Canadian Coal Trust
Fording Canadian Coal Trust is an open-ended mutual fund trust
and one of the largest royalty trusts in Canada. The Trust makes
quarterly distributions to unitholders using royalties received
from its 60% interest in the metallurgical coal operations of the
Elk Valley Coal Partnership. Elk Valley Coal Partnership is the
world's second largest exporter of metallurgical coal, supplying
high-quality coal products to the international steel industry. The
Trust's units are traded on the Toronto Stock Exchange under the
symbol FDG.UN and on the New York Stock Exchange under the symbol
FDG.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This management's discussion and analysis, dated July 23, 2008,
should be read in conjunction with Fording Canadian Coal Trust's
(the Trust's) unaudited consolidated financial statements and the
notes thereto for the quarter ended June 30, 2008, its management's
discussion and analysis and consolidated financial statements for
the year ended December 31, 2007, and other public disclosure
documents of the Trust.
The Trust reports its financial information in Canadian dollars
and all monetary amounts set forth herein are expressed in Canadian
dollars unless otherwise stated.
Fording Canadian Coal Trust
The Trust is an open-ended mutual fund trust existing under the
laws of Alberta and governed by its Declaration of Trust. The Trust
does not carry on any active business. The Trust directly and
indirectly owns all of the interests of Fording LP, which holds a
60% interest in Elk Valley Coal Partnership (Elk Valley Coal).
Until June 2007, the Trust owned all of the interests of NYCO,
which is disclosed as a discontinued operation. The Trust uses the
cash it receives from its investments to make quarterly
distributions to its unitholders.
References to "we" and "our" in this management's discussion and
analysis are to the Trust and its subsidiaries.
Elk Valley Coal
Elk Valley Coal is a general partnership between Fording LP and
affiliates of Teck Cominco Limited (Teck Cominco). Teck Cominco is
the managing partner of Elk Valley Coal and is responsible for
managing its business and affairs, subject to certain matters that
require the agreement of the Trust and Teck Cominco. Our
consolidated financial statements reflect our proportionate
interest in Elk Valley Coal.
Elk Valley Coal is the second largest supplier of seaborne hard
coking coal in the world. Hard coking coal is a type of
metallurgical coal that is used primarily for making coke by
integrated steel mills, which account for substantially all global
production of primary (i.e. unrecycled) steel. The seaborne hard
coking coal market is characterized by the global nature of
international steel making, the relative concentration of quality,
export-capable metallurgical coal deposits in Australia, Canada and
the United States and the comparatively low cost of seaborne
transportation.
Elk Valley Coal has an interest in six active mining operations.
The Fording River, Coal Mountain, Line Creek and Cardinal River
operations are wholly owned. The Greenhills operation is a joint
venture in which Elk Valley Coal has an 80% interest and is
accounted for on a proportionate basis. The Elkview operation is a
limited partnership in which Elk Valley Coal owns, directly and
indirectly, a 95% general partnership interest. The Elkview
operation is consolidated into the accounts of Elk Valley Coal.
Non-GAAP Financial Measures
This management's discussion and analysis refers to certain
financial measures, such as distributable cash, cash available for
distribution, sustaining capital expenditures, and net income from
continuing operations before unusual items, future income taxes and
unrealized gains or losses on foreign exchange forward contracts,
that are not measures recognized under generally accepted
accounting principles (GAAP) in Canada or the United States and do
not have standardized meanings prescribed by GAAP. These measures
may differ from those made by other trusts or corporations. We
discuss these measures, which have been derived from our financial
statements and calculated on a consistent basis, because we believe
that they are of assistance in the understanding of the results of
our operations and financial position and are meant to provide
further information about the ability of the Trust to earn and
distribute cash to unitholders.
Cash available for distribution is the term used by us to
describe the cash generated from our investments during a fiscal
period that is available for distribution to unitholders. Actual
distributions of cash to unitholders are made in accordance with
our distribution policy.
Sustaining capital expenditures refers to expenditures in
respect of capital asset additions, replacements or improvements
required to maintain business operations at current production
levels. The determination of what constitutes sustaining capital
expenditures requires the judgment of management.
Net income from continuing operations before unusual items,
future income taxes and unrealized gains or losses on foreign
exchange forward contracts (in total and on a per unit basis) is a
non-GAAP measure of earnings. It adds back to net income from
continuing operations in accordance with GAAP the impact of
non-cash future taxes and unrealized gains or losses on foreign
exchange forward contracts, which are non-cash and subject to
significant change until realized, as well as unusual items that
are significant and not expected to be recurring.
Controls and Procedures
Management is responsible for establishing and maintaining
adequate disclosure controls and procedures as well as adequate
internal control over financial reporting. Disclosure controls and
procedures are designed to ensure that information required to be
disclosed in public filings is recorded, processed, summarized and
reported within appropriate time periods. Internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external
reporting purposes in accordance with GAAP. Internal control over
financial reporting may not prevent or detect fraud or
misstatements because of limitations inherent in any system of
internal control. There were no significant changes in the design
or effectiveness of the Trust's disclosure controls or internal
controls over financial reporting in the first half of 2008.
Strategic Review Process
In December 2007, the Trust announced that independent
committees had been formed to explore and make recommendations
regarding strategic alternatives available to the Trust to maximize
value for its unitholders. The independent committees are
continuing their work and the Trust anticipates it will make no
further announcements regarding the strategic review until the
Trustees determine that disclosure of a material change is
required.
Overview
The table below summarizes our financial results from
operations:
Three months ended Six months ended
June 30 June 30
---------------------------------------
(millions of Canadian dollars,
except as noted) 2008 2007 2008 2007
----------------------------------------------------------------------------
Revenues $ 815.6 $ 418.3 $1,147.6 $ 768.8
Income from operations $ 459.0 $ 116.8 $ 478.7 $ 212.1
Net income from continuing operations $ 373.0 $ 106.4 $ 373.5 $ 183.2
Adjustments:
Changes in unrealized gains or
losses on foreign exchange forward
contracts $ 25.5 $ (58.0) $ 65.0 $ (65.1)
Future income tax expense $ 8.5 $ 80.0 $ 7.6 $ 80.9
---------------------------------------
Net income from continuing operations
before unusual items, future income
taxes and unrealized gains or losses
on foreign exchange forward
contracts $ 407.0 $ 128.4 $ 446.1 $ 199.0
---------------------------------------
---------------------------------------
Per unit amounts:
Net income from continuing
operations $ 2.51 $ 0.72 $ 2.51 $ 1.24
Net income from continuing
operations before unusual items,
future income taxes and unrealized
gains or losses on foreign exchange
forward contracts $ 2.73 $ 0.87 $ 3.00 $ 1.35
The increases in revenue and income from operations for the
second quarter and first half of 2008 primarily reflect higher U.S.
dollar coal prices for the 2008 coal year that commenced April 1,
2008 and higher sales volumes, partially offset by the negative
effects of the stronger Canadian dollar relative to the U.S.
dollar, increases in mining input costs and higher unit
transportation costs, which are variable, in part with selling
prices.
Net income included unrealized losses from the Trust's
outstanding foreign exchange forward contracts of $26 million for
the second quarter and $65 million for the first half of 2008
compared with unrealized gains of $58 million and $65 million,
respectively, in the comparative periods. Further, British Columbia
mineral taxes and Alberta Crown royalties increased as a result of
higher earnings for Elk Valley Coal.
Cash Available for Distribution
The cash available for distribution generated in the quarter was
$420 million ($2.82 per unit) compared with $135 million ($0.92 per
unit) in the second quarter of 2007. Cash available for
distribution for the first half of 2008 was $476 million ($3.20 per
unit) compared with $213 million ($1.44 per unit) in the
comparative period.
Distributions to unitholders were $2.50 per unit for the quarter
and $3.00 for the first half of 2008 compared with $0.65 per unit
and $1.30 per unit, respectively, in the comparative periods. As at
June 30, 2008, we are under-distributed by $0.24 per unit on a
cumulative basis since the inception of the Trust.
Financial Position
The significant increase in coal prices for the 2008 coal year
has increased working capital levels for Elk Valley Coal. Higher
working capital and increased capital spending levels in 2008 have
increased financing requirements, which are currently being met
through the combination of a US$100 million increase in Elk Valley
Coal's facility that allows it to sell up to US$200 million of its
U.S. dollar accounts receivable, proceeds from our distribution
reinvestment plan, and borrowings under lines of credit made
available to us and Elk Valley Coal.
Results of Operations
Three months ended Six months ended
June 30 June 30
---------------------------------------
(millions of Canadian dollars,
except as noted) 2008 2007 2008 2007
----------------------------------------------------------------------------
Statistics
Trust's share of coal production
(millions of tonnes) 3.9 3.7 7.4 6.8
Trust's share of coal sales
(millions of tonnes) 3.9 3.8 7.4 6.6
Average sales price (US$ per tonne) $ 204.30 $ 100.70 $ 153.90 $ 102.70
Operations (per tonne)
Average sales price $ 206.70 $ 110.90 $ 155.10 $ 116.30
Cost of product sold $ 44.40 $ 39.50 $ 45.20 $ 42.20
Transportation $ 38.90 $ 34.50 $ 38.10 $ 35.90
Income from operations
Revenues $ 815.6 $ 418.3 $1,147.6 $ 768.8
Cost of product sold 175.1 148.8 334.7 278.8
Transportation 153.5 130.2 282.1 237.6
Selling, general and administration 13.3 9.1 22.9 14.8
Depreciation and depletion 14.7 13.4 29.2 25.5
---------------------------------------
Income from operations $ 459.0 $ 116.8 $ 478.7 $ 212.1
---------------------------------------
---------------------------------------
Coal sales volumes for the quarter were up slightly from the
second quarter of 2007. On a year-to-date basis, coal sales volumes
increased by 12%, which primarily reflects the unusually low sales
volumes in the first quarter of 2007 caused by rail transportation
problems.
Average U.S. dollar coal prices doubled to US$204.30 per tonne
for the quarter and increased 50% to US$153.90 per tonne
year-to-date as a result of significantly higher contract prices
for the 2008 coal year, which commenced April 1, 2008.
Approximately one-third of the sales volume for the second quarter
of 2008 was carryover tonnage sold at 2007 coal year prices.
Average Canadian dollar prices increased 86% for the quarter and
33% for the year-to-date, which were less than the corresponding
increases in the average U.S. dollar prices because of the negative
impact of the stronger Canadian dollar compared to last year.
The unit cost of product sold for the quarter increased by $4.90
per tonne or 12% due primarily to inflation in mining input costs,
including a significant increase in the price of diesel fuel. The
7% increase in unit cost of product sold on a year-to-date basis
also reflects higher mining input costs. Unit costs experienced in
the first quarter of 2007 were unusually high as a result of
unplanned shutdowns and reduced production caused by
weather-related rail transportation problems.
Unit transportation costs for the quarter increased by $4.40 per
tonne or 13% due primarily to the coal price participation
provisions contained in certain of the port loading contracts with
Westshore Terminals as well as increases in contractual rail
rates.
Other Income and Expenses
Other Income and Expenses
Three months ended Six months ended
June 30 June 30
---------------------------------------
(millions of Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Interest expense $ (3.3) $ (4.7) $ (7.8) $ (9.7)
---------------------------------------
---------------------------------------
Net foreign exchange gains (losses) $ 4.2 $ 13.5 $ (3.6) $ 15.6
Realized gains on foreign exchange
forward contracts 2.5 15.0 37.3 5.3
Changes in unrealized gains or losses
on foreign exchange forward
contracts (25.5) 58.0 (65.0) 65.1
Other (3.6) 2.4 (2.7) 2.1
---------------------------------------
$ (22.4) $ 88.9 $ (34.0) $ 88.1
---------------------------------------
---------------------------------------
Interest expense for the quarter and year-to-date decreased due
primarily to lower interest rates.
Net foreign exchange gains (losses) consist primarily of net
foreign currency adjustments on our U.S. dollar-denominated
accounts receivable and long-term debt.
All of the foreign exchange forward contracts that were
outstanding at December 31, 2007, which had an average contracted
exchange rate of US$0.87, matured during the first quarter of 2008,
realizing gains of $34.8 million. In addition, a portion of the
foreign exchange forward contracts for the 2008 coal year matured
during the second quarter of 2008 resulting in additional realized
gains of $2.5 million. The remaining forward contracts for the 2008
coal year have mark-to-market losses and represent a liability of
$26 million as at June 30, 2008.
Income Taxes
Income tax expense for the quarter was $60 million compared with
$95 million in the second quarter of 2007. Income tax expense for
the second quarter of 2008 consisted primarily of British Columbia
mineral taxes and Alberta Crown royalties assessed on the cash
flows of Elk Valley Coal, which have increased significantly due
primarily to higher coal prices. Income tax expense for the second
quarter of 2007 consisted of a $79 million charge to record future
income taxes related to the change in income tax legislation that
will cause the Trust to become subject to Canadian corporate income
taxes commencing in 2011, as well as lower British Columbia mineral
taxes and Alberta Crown royalties on lower taxable cash flows for
Elk Valley Coal.
On a year-to-date basis, income tax expense was $63 million
compared with $107 million for the first half of 2007.
Cash Available for Distribution
Cash available for distribution is derived from cash flows from
the operations of the Trust's subsidiaries, including our
proportionate interest in Elk Valley Coal, before changes in
non-cash working capital, less sustaining capital expenditures to
the extent not funded by debt or equity, principal repayments on
debt obligations and any amount allocated to reserves. Sustaining
capital expenditures refers to our share of Elk Valley Coal's
expenditures in respect of capital asset additions, replacements or
improvements required to maintain business operations at current
production levels. The determination of what constitutes sustaining
capital expenditures requires the judgment of Elk Valley Coal's
management. Reserves, which are a discretionary decision of the
Trust and its subsidiaries, and of Elk Valley Coal, may be
established that would reduce cash available for distribution in
order to meet any short-term or long-term need for cash. Such
reserves established at the Elk Valley Coal level have the effect
of reducing amounts distributed by Elk Valley Coal to its partners;
however, such reserves must be authorized by special resolution of
the partners and Elk Valley Coal is required to make reasonable use
of its operating lines for working capital purposes.
The partnership agreement governing Elk Valley Coal requires the
partners to fund their proportionate share of Elk Valley Coal's
sustaining capital expenditures to the extent that the actual
expenditures exceed the depreciation deductions that are available
to the partners for tax purposes (referred to under Canadian tax
laws as "capital cost allowance") plus certain other tax
deductions. Elk Valley Coal's sustaining capital expenditures are
planned to be approximately $250 million in 2008 (Trust's share -
$150 million), which is up from our previous estimate of $200
million (Trust's share - $120 million), and the tax deductions that
are expected to be available in the year are approximately $90
million (Trust's share - $54 million).
The Trust's share of Elk Valley Coal's sustaining capital
expenditures was $31 million for the quarter compared with $14
million in the second quarter of 2007. On a year-to-date basis, the
Trust's share of Elk Valley Coal's sustaining capital expenditures
was $57 million compared with $17 million in the first half of
2007. Sustaining capital expenditures funded by the Trust using
proceeds from the distribution reinvestment plan or debt were $27
million for the quarter and $43 million for the year-to-date.
The cash available for distribution from our investments and the
distributions made by the Trust are set forth in the table
below.
Three months ended Six months ended
June 30 June 30
---------------------------------------
(millions of Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash from operating activities $ 240.9 $ 139.8 $ 284.1 $ 213.0
Add (deduct):
Increase (decrease) in non-cash
working capital 186.5 (18.2) 210.3 (10.2)
Sustaining capital expenditures (30.8) (13.7) (57.0) (17.4)
Sustaining capital expenditures
funded by distribution
reinvestment plan or debt 27.4 - 43.2 -
Proceeds from the sale of NYCO - 30.5 - 30.5
Other (3.9) (3.2) (4.3) (1.7)
---------------------------------------
Cash available for distribution
generated in the period 420.1 135.2 476.3 212.6
Distributable cash carried forward
from prior periods (12.3) 13.3 5.8 15.7
---------------------------------------
Distributable cash, including amounts
carried forward 407.8 148.5 482.1 228.3
Distributions declared during the
period 372.3 95.9 446.6 191.5
---------------------------------------
Under-distributed balance carried
forward to future periods $ 35.5 $ 52.6 $ 35.5 $ 36.8
---------------------------------------
---------------------------------------
Per unit amounts:
Cash available for distribution
generated in the period $ 2.82 $ 0.92 $ 3.20 $ 1.44
Distributions declared $ 2.50 $ 0.65 $ 3.00 $ 1.30
Under-distributed balance carried
forward to future periods $ 0.24 $ 0.25 $ 0.24 $ 0.25
Liquidity and Capital Resources
The significant increase in coal prices for the 2008 coal year
has increased working capital levels for Elk Valley Coal. Higher
working capital and the increased capital spending levels in 2008
have increased financing requirements. These financing requirements
are met by selling accounts receivable, lines of credit available
to Elk Valley Coal and contributions from the partners. During the
second quarter of 2008 Elk Valley Coal negotiated an increase in
the facility that allows it to sell certain of its U.S. dollar
accounts receivable. The maximum amount of accounts receivable that
may be sold and outstanding at any one time under the facility was
increased from US$100 million to US$200 million.
Borrowings under the bank credit facility increased by $33
million from $280 million at December 31, 2007 to $313 million as
of June 30, 2008. Other uses of bank facilities include letters of
credit or guarantees, of which our share was $35 million, leaving
our share of unused bank facilities at $172 million as of June 30,
2008. In addition to the bank credit facility, Elk Valley Coal has
a separate unsecured credit line for the purpose of issuing letters
of credit. At June 30, 2008, the Trust's share of letters of credit
issued and outstanding under this credit line was $11 million.
The Trust's financing requirements are met using available lines
of credit and proceeds from the distribution reinvestment plan. For
the second quarter 2008 distribution paid in July 2008, unitholders
representing approximately 25% of our outstanding units elected to
participate in the plan. Approximately 1.3 million Trust units were
issued in July 2008 in lieu of cash distributions of $93 million.
Through July 23, 2008, on a cumulative basis since the inception of
the distribution reinvestment plan, approximately 3 million units
have been issued in lieu of cash distributions of $160 million.
Cash and cash equivalents increased to $283 million at June 30,
2008 from $152 million at December 31, 2007 primarily because of
improved operating results. Distributions for any given quarter are
paid out following the quarter.
The Trust expects to make capital contributions to Elk Valley
Coal of approximately $100 million during 2008 to fund a portion of
Elk Valley Coal's sustaining capital expenditures, which is based
on actual capital contributions in the first half of 2008 of $43
million and anticipated capital contributions in the second half of
2008 of approximately $60 million. The Trust will fund its capital
contributions utilizing proceeds from the distribution reinvestment
plan or its available lines of credit.
To help manage exposure to currency fluctuations and their
effect on unitholder distributions, foreign exchange forward
contracts are used by us to fix the rate at which certain future
anticipated flows of U.S. dollars are exchanged into Canadian
dollars during the current coal year. As at June 30, 2008, the
Trust has outstanding US$2.5 billion of forward contracts that will
mature prior to April 2009. The average contracted exchange rate on
the outstanding forward contracts is US$0.99. As at June 30, 2008,
the U.S./Canadian dollar exchange rate was US$0.98.
Summary of Quarterly Results
Our quarterly results over the past two years reflect the
variability of Elk Valley Coal's business. Income levels are
influenced largely by coal prices, the U.S./Canadian dollar
exchange rate, coal sales volumes and unit cost of product sold and
coal transportation costs.
2008 2007
-------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------
Coal statistics (Trust's
60% share)
---------------------------
Sales (millions of tonnes) 3.9 3.5 3.6 3.4 3.8 2.8
Average CDN$ prices
(per tonne ) $206.70 96.10 $91.50 $97.30 $110.90 $123.50
Cost of product sold
(per tonne ) 44.40 46.20 40.00 41.00 39.50 45.80
Transportation (per tonne) 38.90 37.20 33.00 35.80 34.50 37.80
(millions of Canadian
dollars, except per
unit amounts)
---------------------------
Revenues $ 815.6 332.0 $327.5 $331.0 $ 418.3 $ 350.5
Income from operations 459.0 19.5 42.8 53.4 116.8 95.3
Net income from continuing
operations 373.0 0.5 48.8 90.5 106.4 76.8
Net income 373.0 0.5 48.8 90.5 117.0 77.0
Net income from continuing
operations before unusual
items, future income taxes
and unrealized gains or
losses on foreign exchange
forward contracts 407.0 39.0 74.9 82.9 128.4 70.6
Cash available for
distribution generated
in the period 420.1 56.2 74.8 61.4 135.2 77.4
Distributions declared 372.3 74.3 78.6 88.7 95.9 95.6
Distributions declared per
unit 2.50 0.50 0.53 0.60 0.65 0.65
2006
----------------
Q4 Q3
----------------
Coal statistics (Trust's 60% share)
------------------------------------
Sales (millions of tonnes) 3.5 3.5
Average CDN$ prices (per tonne ) $ 122.60 $ 124.40
Cost of product sold (per tonne ) 36.40 42.60
Transportation (per tonne ) 36.80 35.60
(millions of Canadian dollars, except
per unit amounts)
-------------------------------------
Revenues $ 424.9 $ 440.3
Income from operations 149.8 143.7
Net income from continuing operations 114.6 123.3
Net income 68.6 123.8
Net income from continuing operations
before unusual items, future income
taxes and unrealized gains or losses
on foreign exchange forward contracts 116.3 120.0
Cash available for distribution
generated in the period 146.5 122.5
Distributions declared 139.7 117.6
Distributions declared per unit 0.95 0.80
Demand for coal is dependent on the requirements of integrated
steel mill customers. These customers largely determine the
shipping schedule and, therefore, the timing of coal sales. Coal
prices are typically negotiated for each coal year commencing April
1. Realized prices depend on U.S. dollar price settlements, whether
coal sales volumes from one coal year are carried over into the
following year, and the U.S./Canadian dollar exchange rate. The
cost of product sold has been trending up largely because of
significant inflation in mining input costs. Net income for the
fourth quarter of 2006 includes a $53 million write-down of NYCO's
assets in anticipation of its sale. Net income from continuing
operations for the second quarter of 2007 includes a $79 million
charge to future income tax expense resulting from a change in tax
legislation. Net income from continuing operations for the second
quarter of 2007 through the second quarter of 2008 includes the
significant impact of changes in unrealized gains and losses on our
foreign exchange forward contracts. Unit cost of product sold for
the first quarter of 2007 was unusually high and sales volumes were
unusually low due to rail transportation problems, which caused
unplanned shutdowns and interruptions of production. Transportation
costs are primarily rail haulage charges and port loading fees,
which are, in part, dependant on coal prices.
Outlook
Demand for Elk Valley Coal's products is currently strong, as is
the demand for steel products. We continue to monitor changing
global economic conditions for any potential impacts on demand for
steel.
Guidance for 2008 calendar year sales volume remains at 23 to 25
million tonnes for Elk Valley Coal. Results over the balance of
2008 are expected to reflect normal variability for planned
shutdowns and maintenance activities.
Guidance for average coal prices is US$195 to US$205 per tonne
for the 2008 calendar year compared with US$154 per tonne realized
during the first half of the 2008 calendar year. First half 2008
average prices include sales under lower-priced 2007 coal year
contracts, and sales for the balance of 2008 will largely be at
higher 2008 coal year contract prices.
High diesel fuel prices are moving unit cost of product sold to
the high end of our guidance range of $45 to $47 per tonne for the
2008 calendar year. Diesel fuel is a major input cost for Elk
Valley Coal and there has been significant inflation in diesel
prices during 2008. Each $0.01 per litre increase in the average
price of diesel fuel increases the cost of coal produced by
approximately $0.09 per tonne.
Our guidance range for cost of product sold includes the
estimated impact of the new carbon tax regime that became effective
in British Columbia on July 1, 2008. The carbon taxes will increase
Elk Valley Coal's costs for diesel fuel and natural gas. The tax
will also apply to coal that is consumed in the coal processing
dryers. The impact of the carbon taxes is estimated to be
approximately $0.50 per tonne of coal produced in the second half
of 2008. The carbon tax rate will double on July 31, 2009 and then
increase by a further 50% on July 1, 2010.
Guidance for transportation costs remains at $42 to $44 per
tonne for the 2008 calendar year. Price participation provisions in
certain of Elk Valley Coal's port loading contracts with Westshore
Terminals will result in higher unit transportation costs in the
third and fourth quarters as 2008 coal year prices take fuller
effect and average realized selling prices increase.
Capital spending at Elk Valley Coal in 2008 is planned to be
approximately $250 million (Trust's share -$150 million), which is
up from our previous estimate of $200 million (Trust's share - $120
million). The increase is primarily the result of an acceleration
of certain projects and progress payments made for certain capital
acquisitions. All of the planned expenditures are sustaining in
nature. Demand for mining equipment and contractor services is
currently very strong, which makes equipment delivery times and
project completion dates difficult to estimate in some cases.
Elk Valley Coal has commenced a feasibility study of its
inactive Quintette property located in northeast British
Columbia.
Number of Units Outstanding
There were approximately 149 million trust units outstanding as
at June 30 and 150 million outstanding as at July 23, 2008.
Approximately 19,000 options were outstanding under the exchange
option plan on the respective dates.
Transactions with Related Parties
Elk Valley Coal has entered into agreements with Teck Cominco,
its managing partner, for the provision of certain management
services in the ordinary course of operations. Elk Valley Coal also
sells coal to Teck Cominco at market prices. The Trust's share of
related party revenues for the first half of 2008 were $2 million
(2007 - $2 million). Expenses paid to Teck Cominco for management
services were recorded at the exchange amounts, the Trust's share
of which was $0.3 million in the first half of 2008 (2007 - $0.3
million).
Teck Cominco arranges insurance coverage on behalf of Elk Valley
Coal with arm's length insurance providers. During 2008, Elk Valley
Coal began paying premiums at market rates for certain types of
insurance coverage to an affiliate of Teck Cominco, our share of
which totaled $3 million for the first half of 2008.
As at June 30, 2008, related party accounts receivable with Teck
Cominco were $0.3 million (December 31, 2007 - $0.4 million) and
related party accounts payable were $0.8 million (December 31, 2007
- $0.1 million).
In the normal course of operations Elk Valley Coal makes
shipments of coal on a cost of service basis through Neptune
Terminals, a co-operative entity in which Elk Valley Coal holds a
46% equity interest. The Trust's share of these costs are included
in transportation costs and totaled $7 million during the first
half of 2008 (2007 - $6 million).
Changes in Accounting Policies
Inventories
We adopted CICA Handbook Section 3031, Inventories, effective
January 1, 2008. Section 3031 provides new guidelines for
accounting for inventories. The adoption of Section 3031 did not
have a material impact on our consolidated financial
statements.
Financial instruments
We adopted CICA Handbook Sections 3862, Financial Instruments -
Disclosures, and 3863, Financial Instruments - Presentation,
effective January 1, 2008. Additional quantitative and qualitative
information regarding our financial instruments and the associated
risks is provided in note 9 to the accompanying consolidated
financial statements.
Capital disclosures
We adopted CICA Handbook Section 1535, Capital Disclosures,
effective January 1, 2008. This section requires us to disclose our
objectives and requirements for managing our capital. This new
disclosure is provided in note 10 to the accompanying consolidated
financial statements.
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and
Intangible Assets, which replaces Section 3062, Goodwill and Other
Intangible Assets. This new standard provides guidance on the
recognition, measurement, presentation and disclosure of goodwill
and intangible assets and is effective for us beginning January 1,
2009. Concurrent with the adoption of this standard, Emerging
Issues Committee Abstract EIC-27, Revenues and Expenditures in the
Pre-operating Period, will be withdrawn. This will result in a
change to our accounting for the start up of mining operations, as
pre-commercial production costs will no longer be capitalized as an
asset. As the change must be applied retroactively, we are
currently assessing the impact of this new standard on our
consolidated financial statements.
International Financial Reporting Standards (IFRS)
The use of IFRS for financial reporting in Canada will become
applicable for us for the year beginning January 1, 2011. We are
currently in the process of developing an implementation strategy
to establish timelines and identify significant differences between
Canadian GAAP and IFRS. The impacts on our consolidated financial
statements of converting to IFRS are unknown at this time.
Risk Factors
Unitholders should refer to the 'Key Risk and Uncertainties'
section in the Trust's 2007 Management's Discussion and Analysis,
and the 'Risk Factors' section in the most recent Annual
Information Form for other factors that could potentially impact
the Trust's financial performance and its ability to meet its
targets.
Caution Regarding Forward-Looking Statements
This management's discussion and analysis contains
forward-looking information within the meaning of the United States
Private Securities Litigation Reform Act of 1995 relating, but not
limited to, the Trust's expectations, intentions, plans and
beliefs. Forward-looking information can often be identified by
forward-looking words such as "anticipate", "believe", "expect",
"goal", "plan", "intend", "estimate", "optimize", "may", and "will"
or similar words suggesting future outcomes, or other expectations,
beliefs, plans, objectives, assumptions, intentions or statements
about future events or performance. This management's discussion
and analysis contains forward-looking information, included in, but
not limited to, the sections titled 'Overview', 'Results of
Operations', 'Liquidity and Capital Resources', 'Outlook, and
'Changes in Accounting Policies'.
Unitholders and prospective investors are cautioned not to place
undue reliance on forward-looking information. By its nature,
forward-looking information involves numerous assumptions, known
and unknown risks and uncertainties, of both a general and specific
nature, that could cause actual results to differ materially from
those suggested by the forward-looking information or contribute to
the possibility that predictions, forecasts, or projections will
prove to be materially inaccurate.
The forward-looking statements contained in this management's
discussion and analysis are based, in part, upon certain
assumptions made by the Trust, including, but not limited to, the
following: no material disruption in production; no material
variation in anticipated coal sales volumes, coal prices or cost of
product sold; no material variation in the forecasted yields, strip
ratios, haul distances and productivity for each mine in which the
Trust has an interest; no material increases in the global supply
of hard coking coal other than what is currently projected by
management; significant quantities of weaker coking coals will not
be substituted for hard coking coal; continued strength in global
steel markets; no material disruption in construction or operations
at minesites; no variation in availability or allocation of haul
truck tires to Elk Valley Coal in 2008; an absence of labour
disputes in the forecast period; no further material increase in
the cost of labour; no material variations in markets and pricing
of metallurgical coal other than anticipated variations; no
material variation in anticipated mining, energy or transportation
costs; continued availability of and no further material disruption
in rail service and port facilities; no material delays in the
current timing for completion of ongoing projects; financing will
be available on terms favourable to the Trust and Elk Valley Coal;
no material variation in the operations of Elk Valley Coal
customers which could impact coal purchases; no material variation
in historical coal purchasing practices of customers; coal sales
contracts will be entered into with new customers; existing
inventories will not result in decreased sales volumes; parties
execute and deliver contracts currently under negotiation; and, no
material variations in the current taxation environment other than
those changes that have already been announced.
The Trust cautions that the list of factors and assumptions set
forth above is not exhaustive. Some of the risks, uncertainties and
other factors which negatively affect the reliability of
forward-looking information are discussed in the Trust's public
filings with the Canadian and United States securities regulatory
authorities, including its most recent management information
circular, annual information form, quarterly reports, management's
discussion and analysis, material change reports and news releases.
Copies of the Trust's Canadian public filings are available on
SEDAR at www.sedar.com. The Trust's U.S. public filings, including
the Trust's most recent annual report on form 40-F as supplemented
by its filings on form 6-K, are available at www.sec.gov. The Trust
further cautions that information contained on, or accessible
through, these websites is current only as of the date of such
information and may by superseded by subsequent events or filings.
The Trust undertakes no obligation to update publicly or otherwise
revise any information, including any forward-looking information,
whether as a result of new information, future events or other such
factors that affect this information except as required by law.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three months ended Six months ended
(millions of Canadian June 30 June 30
dollars, except per --------------------------------------------------
unit amounts) 2008 2007 2008 2007
----------------------------------------------------------------------------
Revenues $ 815.6 $ 418.3 $ 1,147.6 $ 768.8
Expenses
Cost of product sold 175.1 148.8 334.7 278.8
Transportation 153.5 130.2 282.1 237.6
Selling, general and
administration 13.3 9.1 22.9 14.8
Depreciation and
depletion 14.7 13.4 29.2 25.5
--------------------------------------------------
356.6 301.5 668.9 556.7
--------------------------------------------------
Income from operations 459.0 116.8 478.7 212.1
Other income (expense)
Interest expense (3.3) (4.7) (7.8) (9.7)
Other items, net (note 4) (22.4) 88.9 (34.0) 88.1
--------------------------------------------------
Income before taxes 433.3 201.0 436.9 290.5
Income tax expense (note 5) 60.3 94.6 63.4 107.3
--------------------------------------------------
Net income from continuing
operations 373.0 106.4 373.5 183.2
Income from discontinued
operation - NYCO (note 13) - 10.6 - 10.8
--------------------------------------------------
Net income $ 373.0 $ 117.0 $ 373.5 $ 194.0
--------------------------------------------------
--------------------------------------------------
Other comprehensive
loss (note 12) - (8.3) - (4.5)
--------------------------------------------------
Comprehensive income $ 373.0 $ 108.7 $ 373.5 $ 189.5
--------------------------------------------------
--------------------------------------------------
Weighted average number
of units outstanding
(millions) (note 11)
Basic 148.9 147.4 148.8 147.2
Diluted 148.9 147.4 148.8 147.3
Basic and diluted amounts
per unit
Net income from
continuing operations $ 2.51 $ 0.72 $ 2.51 $ 1.24
Net income from
discontinued
operation - NYCO $ - $ 0.07 $ - $ 0.07
--------------------------------------------------
Net income $ 2.51 $ 0.79 $ 2.51 $ 1.31
--------------------------------------------------
--------------------------------------------------
CONSOLIDATED STATEMENTS OF ACCUMULATED EARNINGS
(unaudited)
Three months ended Six months ended
June 30 June 30
(millions of Canadian --------------------------------------------------
dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Balance - beginning
of period $ 2,006.4 $ 1,749.6 $ 2,005.9 $ 1,672.6
Net income 373.0 117.0 373.5 194.0
--------------------------------------------------
Balance - end of period $ 2,379.4 $ 1,866.6 $ 2,379.4 $ 1,866.6
--------------------------------------------------
--------------------------------------------------
The accompanying notes to the unaudited consolidated financial statements
are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended Six months ended
June 30 June 30
(millions of Canadian --------------------------------------------------
dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Operating activities
Net income from
continuing operations $ 373.0 $ 106.4 $ 373.5 $ 183.2
Items not using
(providing) cash:
Depreciation and
depletion 14.7 13.4 29.2 25.5
Loss (gain) on disposal
of capital assets (0.1) (2.4) (0.1) (2.3)
Provision for asset
retirement obligations,
net 1.2 0.2 1.7 1.1
Increase (decrease) in
unrealized losses on
foreign exchange forward
contracts 25.5 (58.0) 65.0 (65.1)
Unrealized foreign
exchange loss (gain) on
long-term debt (2.6) (22.8) 8.6 (25.9)
Future income tax expense 8.5 80.0 7.6 80.9
Other items, net 1.6 3.3 3.4 3.7
Non-controlling interest 5.6 1.0 5.5 2.0
Operating cash flow from
discontinued operation
- NYCO - 0.5 - (0.3)
--------------------------------------------------
427.4 121.6 494.4 202.8
Decrease (increase) in
non-cash working capital (186.5) 18.2 (210.3) 10.2
--------------------------------------------------
Cash from operating
activities 240.9 139.8 284.1 213.0
--------------------------------------------------
Investing activities
Additions to capital
assets (30.8) (13.7) (57.0) (19.9)
Proceeds on disposal of
capital assets 0.4 3.0 0.4 3.5
Other investing activities,
net (1.1) 0.2 (1.1) 0.1
Investing cash flow from
discontinued operation
- NYCO - 33.8 - 33.7
--------------------------------------------------
Cash from (used in)
investing activities (31.5) 23.3 (57.7) 17.4
--------------------------------------------------
Financing activities
Distributions paid (74.3) (84.6) (152.9) (224.3)
Proceeds from distribution
reinvestment plan (note 11) 13.9 - 27.4 -
Increase in long-term debt 25.0 0.2 25.0 0.2
Other financing activities,
net (3.9) (2.3) (4.7) (3.6)
--------------------------------------------------
Cash used in financing
activities (39.3) (86.7) (105.2) (227.7)
--------------------------------------------------
Increase in cash and cash
equivalents 170.1 76.4 121.2 2.7
Cash and cash equivalents -
beginning of period 102.6 70.9 151.5 144.6
--------------------------------------------------
Cash and cash equivalents -
end of period $ 272.7 $ 147.3 $ 272.7 $ 147.3
--------------------------------------------------
--------------------------------------------------
The accompanying notes to the unaudited consolidated financial statements
are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30 December 31
(millions of Canadian dollars) 2008 2007
----------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 272.7 $ 151.5
Accounts receivable 294.7 72.4
Fair value of foreign exchange forward contracts - 38.7
Inventory 152.9 134.0
Prepaid expenses 6.6 4.9
--------------------------
726.9 401.5
Capital assets 686.4 652.8
Goodwill 12.9 12.9
Other assets 19.9 19.6
--------------------------
$ 1,446.1 $ 1,086.8
--------------------------
--------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 149.7 $ 111.5
Fair value of foreign exchange forward contracts 26.3 -
Income taxes payable 16.8 18.3
Distributions payable 372.3 78.6
Current portion of long-term debt (note 6) 1.5 1.6
--------------------------
566.6 210.0
Long-term debt (note 6) 313.8 280.9
Other long-term liabilities (note 7) 165.2 157.2
Future income taxes (note 5) 134.4 126.9
--------------------------
1,180.0 775.0
--------------------------
Commitments and contingencies (note 8)
Unitholders' equity (note 11)
Trust units 426.7 399.3
Accumulated earnings 2,379.4 2,005.9
Accumulated cash distributions (2,540.0) (2,093.4)
Accumulated other comprehensive income (note 12) - -
--------------------------
266.1 311.8
--------------------------
$ 1,446.1 $ 1,086.8
--------------------------
--------------------------
The accompanying notes to the unaudited consolidated financial statements
are an integral part of these statements.
Notes to Consolidated Financial Statements
(unaudited)
1. STRUCTURE OF FORDING CANADIAN COAL TRUST AND NATURE OF
OPERATIONS
Fording Canadian Coal Trust (the Trust) is an open-ended mutual
fund trust existing under the laws of Alberta and governed by its
Declaration of Trust. The Trust does not carry on any active
business. The Trust directly and indirectly owns all of the
interests of Fording LP, which holds a 60% interest in Elk Valley
Coal. Elk Valley Coal owns and operates six metallurgical coal
mines in British Columbia and Alberta. The Trust previously held a
100% interest in NYCO, which was sold in June 2007 and is accounted
for as a discontinued operation in the consolidated financial
statements. The Trust uses the cash it receives from its
investments to make quarterly distributions to its unitholders.
Elk Valley Coal is a general partnership between Fording LP and
affiliates of Teck Cominco Limited (Teck Cominco). Teck Cominco is
the managing partner of Elk Valley Coal and is responsible for
managing its business and affairs, subject to certain matters that
require the agreement of the Trust and Teck Cominco. The
consolidated financial statements of the Trust reflect its
proportionate interest in Elk Valley Coal.
These consolidated financial statements should be read in
conjunction with the Trust's 2007 annual consolidated financial
statements and notes thereto and other public disclosure documents
of the Trust.
The preparation of these consolidated financial statements
requires management to make certain estimates and assumptions that
affect amounts reported and disclosed in the consolidated financial
statements and related notes. Actual amounts could differ from
those estimates. A discussion of the accounting estimates that are
significant in determining the Trust's financial results is
contained in the Management's Discussion and Analysis for 2007.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles
and follow the same accounting principles and methods of
application as described in the Trust's annual financial statements
for 2007, except as discussed in note 3. Certain of the comparative
figures have been reclassified to conform to the current year
presentation.
3. CHANGES IN ACCOUNTING POLICIES
Inventories
The Trust adopted CICA Handbook Section 3031, Inventories,
effective January 1, 2008. Section 3031 provides new guidelines for
accounting for inventories. The adoption of Section 3031 did not
have a material impact on the consolidated financial statements of
the Trust.
Financial instruments
The Trust adopted CICA Handbook Sections 3862, Financial
Instruments - Disclosures, and 3863, Financial Instruments -
Presentation, effective January 1, 2008. Additional quantitative
and qualitative information regarding the Trust's financial
instruments and the associated risks is provided in note 9.
Capital disclosures
The Trust adopted CICA Handbook Section 1535, Capital
Disclosures, effective January 1, 2008. This section requires the
Trust to disclose its objectives and requirements for managing its
capital. This new disclosure is provided in note 10.
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and
Intangible Assets, which replaces Section 3062, Goodwill and Other
Intangible Assets. This new standard provides guidance on the
recognition, measurement, presentation and disclosure of goodwill
and intangible assets and is effective for the Trust beginning
January 1, 2009. Concurrent with the adoption of this standard,
Emerging Issues Committee Abstract EIC-27, Revenues and
Expenditures in the Pre-operating Period, will be withdrawn. This
will result in a change to the Trust's accounting for the start up
of mining operations, as pre-commercial production costs will no
longer be capitalized as an asset. As the change must be applied
retroactively, the Trust is currently assessing the impact of this
new standard on the consolidated financial statements.
International Financial Reporting Standards (IFRS)
The use of IFRS for financial reporting in Canada will become
applicable to the Trust for the year beginning January 1, 2011. The
Trust is currently in the process of developing an implementation
strategy to establish timelines and identify significant
differences between Canadian GAAP and IFRS. The impacts on the
consolidated financial statements of converting to IFRS are unknown
at this time.
4. OTHER ITEMS, NET
Three months ended Six months ended
June 30 June 30
----------------------------------------
(millions of Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Interest and investment income $ 2.1 $ 1.4 $ 3.3 $ 2.6
Foreign exchange gains (losses) from
financial instruments:
Foreign exchange gain (loss) on
revaluation of U.S.
dollar-denominated accounts
receivable 1.4 (9.3) 5.0 (10.3)
Unrealized foreign exchange gain (loss)
on revaluation of U.S.
dollar-denominated long-term debt 2.6 22.8 (8.6) 25.9
Realized gain on foreign exchange
forward contracts 2.5 15.0 37.3 5.3
Changes in unrealized gains or
losses on foreign exchange
forward contracts (25.5) 58.0 (65.0) 65.1
Other (5.5) 1.0 (6.0) (1.5)
----------------------------------------
$ (22.4) $ 88.9 $ (34.0) $ 88.1
----------------------------------------
----------------------------------------
5. INCOME TAXES
Income tax expense is comprised of the following components:
Three months ended Six months ended
June 30 June 30
----------------------------------------
(millions of Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Current income tax expense:
Canadian corporate income taxes $ - $ - $ 0.7 $ 0.2
Provincial mineral taxes and Crown
royalties 51.8 14.6 55.1 26.2
----------------------------------------
51.8 14.6 55.8 26.4
Future income tax expense (reversal):
Canadian corporate income taxes 0.1 79.3 (2.4) 79.3
Provincial mineral taxes and Crown
royalties 8.4 0.7 10.0 1.6
----------------------------------------
8.5 80.0 7.6 80.9
----------------------------------------
Total income tax expense $ 60.3 $ 94.6 $ 63.4 $ 107.3
----------------------------------------
----------------------------------------
The following table reconciles the income tax expense calculated using
statutory tax rates to the actual income tax expense.
Three months ended Six months ended
June 30 June 30
----------------------------------------
(millions of Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Expected income tax expense at
Canadian statutory tax rate
of 39% (2007 - 39%) $ 169.0 $ 83.3 $ 170.4 $ 118.2
Increase (decrease) in taxes
resulting from:
Allocation of net income to
unitholders (169.0) (83.3) (170.4) (118.0)
Provincial mineral taxes and Crown
royalties 60.2 15.3 65.1 27.8
Future Canadian corporate income
taxes recognized as a result
of the taxation change 0.1 79.3 (2.4) 79.3
Other - - 0.7 -
----------------------------------------
Income tax expense $ 60.3 $ 94.6 $ 63.4 $ 107.3
----------------------------------------
----------------------------------------
The temporary differences comprising the future income tax assets and
liabilities are as follows:
June 30 December 31
(millions of Canadian dollars) 2008 2007
----------------------------------------------------------------------------
Future income tax assets:
Asset retirement obligations $ 49.6 $ 48.2
Other 9.3 12.6
----------------------------------------
58.9 60.8
Future income tax liabilities:
Capital assets carrying value in excess of tax
basis 193.3 187.7
----------------------------------------
Net future income tax liabilities $ 134.4 $ 126.9
6. LONG-TERM DEBT AND BANKING FACILITIES
June 30 December 31
(millions of Canadian dollars) 2008 2007
----------------------------------------------------------------------------
Long-term debt
Five-year bank credit facilities:
US$283.0 million in LIBOR rate loans with an
average interest rate of 3.2% (2007 - 5.5%) $ 288.3 $ 279.6
Revolving banker's acceptances bearing an average
interest rate of 3.8% 25.0 -
Other debt 2.0 2.9
-------------------------
315.3 282.5
Less current portion (1.5) (1.6)
-------------------------
$ 313.8 $ 280.9
-------------------------
The Trust and Elk Valley Coal together have a five-year
revolving bank credit facility with a syndicate of banks that will
mature on February 11, 2012. The banks have committed up to $400.0
million to the Trust and up to $200.0 million to Elk Valley Coal,
of which the Trust's share is $120.0 million.
At June 30, 2008, the Trust's share of other uses of the bank
credit facility in the form of issued and outstanding letters of
credit and guarantees was $35.1 million. The Trust's share of
unused bank facilities at June 30, 2008 was $171.6 million.
In addition to the bank credit facility, Elk Valley Coal has a
separate unsecured credit line for the purpose of issuing letters
of credit. At June 30, 2008, the Trust's share of letters of credit
issued and outstanding under this credit line was $11 million.
7. OTHER LONG-TERM LIABILITIES
June 30 December 31
(millions of Canadian dollars) 2008 2007
----------------------------------------------------------------------------
Asset retirement obligations $ 123.5 $ 119.9
Pension and other post-retirement benefits 31.6 29.0
Non-controlling interest 8.2 6.4
Other, net 1.9 1.9
-------------------------
$ 165.2 $ 157.2
-------------------------
-------------------------
Pension and other post-retirement benefits
Substantially all employees participate in either a defined
benefit or defined contribution plan. The pension expense for the
three and six month periods ended June 30, 2008 was $4.6 million
and $9.5 million, respectively (2007 - $5.4 million and $10.5
million, respectively).
8. COMMITMENTS AND CONTINGENCIES
Neptune Terminals guarantee
By virtue of its 46% ownership interest in Neptune Bulk Terminal
(Canada) Ltd. (Neptune Terminals), Elk Valley Coal is contingently
obligated for its share of the bank indebtedness and asset
retirement obligations of Neptune Terminals. The Trust's share of
these contingent obligations was $16.3 million as at June 30,
2008.
Foreign exchange forward contracts
At June 30, 2008, the Trust had outstanding foreign exchange
forward contracts totalling US$2,502 million at an average
contracted exchange rate of US$0.99. All of the contracts mature
prior to March 31, 2009. As of June 30, 2008, the fair value of the
outstanding contracts was an unrealized loss of $26.3 million,
which is recorded as a current liability in the consolidated
balance sheet. As at June 30, 2008, the U.S./Canadian dollar
exchange rate was US$0.98.
9. ACCOUNTING FOR FINANCIAL INSTRUMENTS
The Trust's financial instruments include cash and cash
equivalents, accounts receivable and payable, derivative financial
instruments, distributions payable, and long-term debt. The
carrying amounts for cash and cash equivalents, accounts
receivable, accounts payable, and distributions payable recorded on
the consolidated balance sheet are reasonable estimates of their
fair values due to the relatively short periods to maturity and the
commercial terms of these instruments. The carrying amount of the
Trust's long-term debt approximates fair value due to the floating
interest rate on the debt.
Cash and cash equivalents are classified as held-to-maturity and
are recorded at amortized cost on the consolidated balance sheet.
Accounts receivable are classified as loans and receivables and are
also recorded at amortized cost.
Derivative financial instruments, which consist of foreign
exchange forward contracts, are classified as held-for-trading and
are recorded at fair value on the consolidated balance sheet. Fair
value is measured using the quoted market rate for forward
contracts of a similar maturity date.
Accounts payable, distributions payable, and long-term debt are
classified as other financial liabilities and are recorded at
amortized cost. The Trust's principal financial liability is its
long-term debt and substantially all of the interest expense
reported in the consolidated statements of income and comprehensive
income is associated with this long-term debt.
Gains or losses and fees associated with all financial
instruments are included in Other items, net in the consolidated
statements of income and comprehensive income.
Financial instruments risk exposure and management
The Trust is exposed to various risks associated with its
financial instruments. These risks are categorized as credit risk,
liquidity risk and market risk.
Credit risk
The Trust is exposed to credit losses in the event of
non-payment of accounts receivable by Elk Valley Coal's customers.
However, Elk Valley Coal normally sells to large, well established
customers of high credit quality. In addition, Elk Valley Coal
obtains, to the extent practical, either export or domestic trade
credit insurance or confirmed irrevocable letters of credit as
security for all accounts receivable. The export trade credit
insurance is provided by a Canadian Crown corporation and the
domestic trade credit insurance is provided by one of the largest
private trade credit insurance providers in the world. The
likelihood of default by these insurance providers is considered by
Elk Valley Coal to be remote. For confirmed irrevocable letters of
credit, Elk Valley Coal requires that they be issued by a major
international bank of high credit quality. The maximum credit risk
that the Trust is exposed to by way of its accounts receivable is
equal to the carrying amount of $294.7 million at June 30, 2008.
The Trust believes that it has no significant concentrations of
credit risk related to its accounts receivable.
The Trust is also exposed to credit risk associated with the
performance of counterparties to its foreign exchange forward
contracts. This risk is mitigated by entering into contracts with
several different financial institutions that are of high credit
quality. The Trust believes that it has no significant
concentrations of credit risk related to its foreign exchange
forward contracts.
As of June 30, 2008 there are no financial assets that the Trust
deems to be impaired or that are past due according to their terms
and conditions.
Liquidity risk
Liquidity risk is the risk that the Trust will encounter
difficulty in meeting obligations associated with its financial
liabilities. The table below summarizes the future undiscounted
cash flow requirements for financial liabilities at June 30,
2008:
less than less than less than
(millions of Canadian dollars) 1 month 1 year 5 years Total
----------------------------------------------------------------------------
Accounts payable and accrued
liabilities $ 149.7 $ - $ - $ 149.7
Distributions payable 372.3 - - 372.3
Long-term debt - 1.5 313.8 315.3
----------------------------------------
$ 522.0 $ 1.5 $ 313.8 $ 837.3
----------------------------------------
----------------------------------------
For a description of how the Trust manages its liquidity to
ensure it can meet its short and long-term obligations, please
refer to the Liquidity and Capital Resources section of the Trust's
2007 Management's Discussion and Analysis dated March 14, 2008 and
the Management's Discussion and Analysis for the second quarter of
2008 included in this earnings report.
Market risk
The significant market risk exposures affecting the financial
instruments held by the Trust are those related to foreign currency
exchange rates and interest rates which are explained as
follows:
Foreign currency exchange rates
The Trust's U.S. dollar-denominated accounts receivable, foreign
exchange forward contracts and long-term debt are exposed to
foreign currency exchange rate risk because the value of these
financial instruments will fluctuate with changes in the
U.S./Canadian dollar exchange rate. For each US$0.01 decrease in
the U.S./Canadian dollar exchange rate (i.e. the U.S. dollar
strengthening against the Canadian dollar), the net value of the
Trust's financial instruments outstanding as of June 30, 2008 would
decrease by approximately $28.8 million, which would be charged to
net income.
Interest rates
The Trust is exposed to interest rate risk on its long-term debt
and, to a minor extent, on its interest bearing investments in cash
and cash equivalents. The Trust's long-term debt bears a floating
interest rate that is derived from the London Interbank Offered
Rate (LIBOR). A 1% (i.e. 100 basis point) increase in LIBOR would
have caused interest expense for the three month period ended June
30, 2008 to increase by approximately $0.7 million.
10. CAPITAL DISCLOSURES
The capital structure of the Trust consists of long-term debt
and unitholders' equity, which is comprised of issued units and
accumulated earnings, less accumulated cash distributions.
Due to the nature of the Trust and its formation, including the
requirement under the Declaration of Trust to pay annual
distributions in an amount sufficient to ensure the Trust is not
liable under currently applicable income tax legislation for
corporate income taxes, the amount of unitholders' equity tends to
be relatively low. In addition, the Trust's investment in a
cyclical resource business results in volatility in its net income
and cash flows. As a result of these factors, the Trust's borrowing
capacity is determined based on its earnings and cash flows as
opposed to debt-to-equity ratios. The Trust's objective is to
maintain debt levels relative to its earnings and cash flows such
that the debt could be considered equivalent to
investment-grade.
A distribution reinvestment plan was implemented during 2007
that has the effect of increasing units outstanding over time as
additional units are issued each quarter in lieu of cash
distributions. For the second quarter 2008 distribution to be paid
in July 2008, unitholders representing approximately 25% of the
Trust's outstanding units elected to participate in the
distribution reinvestment plan.
Under the syndicated bank credit facility, the Trust is required
to comply with certain ratios of debt to earnings before interest,
taxes, depreciation, depletion and amortization (EBITDA) and EBIDTA
to interest expense. To date, the Trust has complied with these
externally imposed capital requirements.
The Trust will become subject to Canadian corporate income taxes
beginning in 2011 based on changes to Canadian income tax
legislation that will become applicable to the Trust at that time.
This may result in changes to the capital structure of the Trust or
the nature of the Trust itself.
11. UNITHOLDERS' EQUITY
Units issued and outstanding
Three months ended Six months ended
June 30, 2008 June 30, 2008
(in millions of units and Canadian ----------------------------------------
dollars) Units Amount Units Amount
----------------------------------------------------------------------------
Balance, beginning of period 148.7 $ 412.8 148.3 $ 399.3
Units issued under distribution
reinvestment plan 0.2 13.9 0.6 27.4
----------------------------------------
Balance, end of period 148.9 $ 426.7 148.9 $ 426.7
----------------------------------------
----------------------------------------
At June 30, 2008, there were approximately 18,600 options
outstanding to purchase units, all of which are fully vested. The
options have a weighted average exercise price of $3.94 per unit
and the remaining weighted average contractual life is 2.0
years.
Accumulated distributions to unitholders
Three months ended Six months ended
June 30 June 30
----------------------------------------
(millions of Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Opening accumulated cash
distributions $ 2,167.7 $ 1,830.2 $ 2,093.4 $ 1,734.6
Distributions declared and payable 372.3 95.9 446.6 191.5
----------------------------------------
Closing accumulated cash
distributions $ 2,540.0 $ 1,926.1 $ 2,540.0 $ 1,926.1
----------------------------------------
----------------------------------------
Earnings per unit
For the periods presented, in calculating diluted earnings per
unit, net income remains unchanged from the basic earnings per unit
calculation and the number of units outstanding is increased for
the dilutive effect of outstanding unit options. The treasury stock
method is used to determine the dilutive effect of unit options and
other dilutive instruments.
Distribution reinvestment plan
Approximately 241,000 units were issued under the distribution
reinvestment plan during the quarter ended June 30, 2008 in lieu of
cash distributions of $13.9 million. In addition, approximately 1.3
million units were issued in July 2008 in lieu of cash
distributions of $93.0 million.
In 2007, distribution payments were reflected in the
consolidated statements of cash flows net of reinvestments under
the distribution reinvestment plan. Effective January 1, 2008, the
proceeds from the distribution reinvestment plan are shown as a
separate cash inflow in the consolidated statements of cash
flows.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income is made up of the following
components:
Three months ended Six months ended
June 30 June 30
----------------------------------------
(millions of Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Accumulated other comprehensive
income, beginning of period:
Foreign currency translation account
balance $ - $ 8.3 $ - $ 4.5
Other comprehensive income (loss):
Settlement of foreign exchange
forward contracts outstanding
on January 1, 2007 - - - 4.5
Release of foreign currency
translation account balance on
the sale of NYCO - (6.8) - (6.8)
Foreign currency translation
adjustments related to NYCO - (1.5) - (2.2)
----------------------------------------
Accumulated other comprehensive
income, end of period $ - $ - $ - $ -
----------------------------------------
----------------------------------------
13. DISCONTINUED OPERATION - NYCO
The sale of NYCO was completed in June 2007. For accounting
purposes, NYCO is classified as a discontinued operation.
Income from discontinued operation for the three and six month
periods ended June 30, 2007 was as follows:
June 30, 2007
----------------------------
Three months Six months
(millions of Canadian dollars) ended ended
----------------------------------------------------------------------------
Revenues $ 7.8 $ 19.4
Cost of product sold (5.4) (13.6)
Transportation (1.6) (3.7)
Selling, general and administration (1.0) (0.7)
Depreciation and depletion (0.5) (1.5)
----------------------------
Loss from operations (0.7) (0.1)
Gain on sale of NYCO 4.0 4.0
Release of foreign currency translation account
balance on sale of NYCO 6.8 6.8
Income tax recovery 0.5 0.1
----------------------------
Income from discontinued operation $ 10.6 $ 10.8
----------------------------
----------------------------
14. RELATED PARTY TRANSACTIONS
Elk Valley Coal has entered into agreements with Teck Cominco,
its managing partner, for the provision of certain management
services in the ordinary course of operations. Elk Valley Coal also
sells coal to Teck Cominco at market prices. The Trust's share of
related party revenues for the first half of 2008 were $1.5 million
(2007 - $2.1 million). Expenses paid to Teck Cominco for management
services were recorded at the exchange amounts, the Trust's share
of which was $0.3 million in the first half of 2008 (2007 - $0.3
million).
Teck Cominco arranges insurance coverage on behalf of Elk Valley
Coal with arm's length insurance providers. During 2008, Elk Valley
Coal began paying premiums for certain types of insurance coverage
at market rates to an affiliate of Teck Cominco, the Trust's share
of which totaled $2.8 million for the first half of 2008.
As at June 30, 2008, related party accounts receivable with Teck
Cominco were $0.3 million (December 31, 2007 - $0.4 million) and
related party accounts payable were $0.8 million (December 31, 2007
- $0.1 million).
In the normal course of operations Elk Valley Coal makes
shipments of coal on a cost of service basis through Neptune
Terminals, a co-operative entity in which Elk Valley Coal holds a
46% equity interest. The Trust's share of these costs are included
in transportation costs and totaled $6.8 million during the first
half of 2008 (2007 - $6.2 million).
Contacts: Fording Canadian Coal Trust Colin Petryk Director,
Investor Relations (403) 260-9823 Fording Canadian Coal Trust Najda
Dupanovic Coordinator, Investor Relations (403) 260-9892 Email:
investors@fording.ca Website: www.fording.ca
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