Superior Plus Corp. (TSX:SPB)
Third Quarter Highlights
-- For the quarter ended September 30, 2013, Superior generated adjusted
operating cash flow (AOCF) per share of $0.19, consistent with the prior
year quarter of $0.19 per share, excluding the one-time impact of $0.11
or $12.5 million related to a settlement with TransCanada which was
included in the third quarter of 2012. Superior's results for the third
quarter were consistent with management's expectations. AOCF per share
compared to the prior year quarter was impacted by lower results from
Superior's Energy Services and Specialty Chemicals business segments
combined with a higher number of weighted average common shares, offset
by an improvement in Superior's Construction Products Distribution
business and lower interest costs.
-- Superior is confirming its 2013 financial outlook of AOCF per share of
$1.60 to $1.85. The 2013 financial outlook is provided before
restructuring charges. See "2013 Financial Outlook" for additional
details.
-- Superior is introducing its 2014 financial outlook of AOCF per share of
$1.65 to $1.95 before restructuring charges, an approximate 5% increase
over the anticipated 2013 financial results. Superior will provide
additional details on its 2014 financial outlook and the progress on its
Destination 2015 growth targets at its upcoming 2013 Annual Investor
Day. See "Superior Plus 2013 Annual Investor Day" for additional
details.
-- Superior is pleased to announce that it has entered into a strategic
supply agreement with Tronox LLC to purchase and market up to 130,000
metric tonnes of sodium chlorate on an annual basis from Tronox's
Hamilton, Mississippi facility. See "Tronox Strategic Supply Agreement"
for additional details.
-- Superior's expansion of its hydrochloric acid production capabilities at
its Port Edwards, Wisconsin facility is now anticipated to be in
commercial production in the fourth quarter of 2014, earlier than the
update provided on August 21, 2013, which anticipated commercial
production in the first quarter of 2015 as a result of the Port Edward's
acid burner being significantly damaged during the shipping process. The
Saskatoon facility expansion was not impacted by the accident and
remains on time and on budget with commercial production anticipated in
the fourth quarter of 2014.
-- Superior anticipates incurring $15.0 million to $20.0 million in one-
time restructuring costs associated with further operational
improvements at its Energy Services and Construction Products
Distribution. Restructuring charges are anticipated to be recognized
over the fourth quarter of 2013 and the first and second quarters of
2014. See "2013 and 2014 Financial Outlook" for further details. As
previously noted, Superior's 2013 and 2014 financial outlooks are
provided before one-time restructuring costs.
-- Energy Services results for the third quarter were impacted by a reduced
contribution from the fixed-price energy business due to the normal
course run off of the residential customer base as a result of exiting
this portion of the business in prior years due to difficult market
conditions. Superior anticipates that the resultant reduction in the
contribution from this business will continue for the remainder of 2013,
after which the contribution is anticipated to normalize on a
comparative basis. Additionally, results were impacted by modestly lower
contributions from the Canadian propane and U.S. refined fuels
businesses due to higher operating costs and reduced sales volumes.
-- Specialty Chemicals results for the third quarter were lower than the
prior year as a result of reduced chloralkali profits due to weaker
average sales prices on chlorine and hydrochloric acid, reduced sales
volumes due to plant downtime at the Port Edwards facility and higher
maintenance costs due to the timing of normal course maintenance. Sodium
chlorate gross profits were consistent with the prior year quarter as
higher sales volumes were fully offset by higher electricity prices.
-- The Construction Products Distribution business results for the third
quarter benefited from higher average selling prices, sales margins and
sales volumes.
-- Superior's forecasted December 31, 2013 total debt to EBITDA ratio is
unchanged at 3.3X to 3.7X, with a bias towards the high end of the range
due to recent commodity price increases for propane which negatively
impacts Superior's working capital requirements. Superior anticipates
that its total debt to EBITDA ratio as at December 31, 2014 will be in
the range of 3.3X to 3.7X. Superior continues to focus on reducing its
total debt; Superior's target total debt to EBITDA ratio remains
unchanged at 3.0X to 3.5X. See "2014 Financial Outlook" and "Debt
Management Update" for additional details.
-- On October 28, 2013 Superior redeemed all of its outstanding $150
million, 8.25% senior unsecured debentures due October 27, 2016. The
early redemption allows for Superior to benefit from lower average
interest costs.
Third Quarter Financial Summary
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Three months ended Nine months ended
September 30, September 30,
(millions of dollars except per
share amounts) 2013 2012 2013 2012
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Revenue 813.8 790.1 2,718.1 2,690.3
Gross profit 184.9 195.9 628.0 618.1
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EBITDA from operations (1) (2) 43.0 57.6 196.6 197.1
Interest (15.5) (18.3) (46.3) (55.1)
Cash income tax recovery (expense) 0.4 (0.3) (0.4) (0.8)
Corporate costs (3.7) (5.3) (13.5) (12.7)
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Adjusted operating cash flow (1) 24.2 33.7 136.4 128.5
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Adjusted operating cash flow per
share, basic and diluted (1)(3)(4) $0.19 $0.30 $1.12 $1.15
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Dividends paid per share $0.15 $0.15 $0.45 $0.45
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(1) 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 2013 Third Quarter Management's Discussion and Analysis
(MD&A).
(2) The prior year results have been restated for the impact of adopting
International Accounting Standard 19 - "Employee Benefits, amendments"
effective January 1, 2013. The impact to EBITDA from operations was a
decrease to Energy Services of $0.3 million and $0.9 million for the
three and nine months ended September 30, 2012 and a decrease to
Specialty Chemicals of $0.5 million and $1.5 million for the three and
nine months ended September 30, 2012. See Superior's 2013 Third Quarter
MD&A for additional details.
(3) The weighted average number of shares outstanding for the three months
ended September 30, 2013 is 126.2 million (2012 - 112.2 million) and for
the nine month ended is 122.0 million (2012-111.6 million).
(4) For the three and nine months ended September 30, 2012 and 2013, there
were no dilutive instruments.
Segmented Information
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Three months ended Nine months ended
September 30, September 30,
(millions of dollars) 2013 2012 2013 2012
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EBITDA from operations:
Energy Services 8.3 13.0 91.1 87.2
Specialty Chemicals 24.6 41.0 82.6 96.9
Construction Products Distribution 10.1 3.6 22.9 13.0
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43.0 57.6 196.6 197.1
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Energy Services
-- Energy Services EBITDA from operations for the third quarter was $8.3
million compared to $13.0 million in the prior year quarter. Results
were impacted by lower contributions from the fixed-price energy
services, the Canadian propane and the U.S. refined fuels businesses.
-- The Canadian propane business generated gross profit of $47.6 million in
the third quarter compared to $47.3 million in the prior year quarter as
modestly higher average sales margins were offset by reduced sales
volumes.
-- Canadian propane average sales margins were 20.5 cents per litre in the
third quarter compared to 19.7 cents per litre in the prior year
quarter. Average sales margins were higher than the prior year due to
the impact of a favourable sales mix as a result of a larger proportion
of higher margin residential and small commercial customers in the
current year quarter which more than offset the impact of a rise in the
wholesale cost of propane which negatively impacted sales margins.
-- Canadian propane distribution sales volumes were 8 million litres or 3%
lower than the prior year quarter due to a reduction in oil field
volumes as a result of reduced customer activity and the gasification of
certain customer sites. Residential, small commercial and industrial
volumes were consistent or modestly higher than the prior year quarter.
-- Average weather across Canada, as measured by degree days, for the third
quarter was 10% colder than the prior year and 2% warmer than the 5-year
average. Due to the nature of the Canadian propane business, weather
does not have a material impact on sales volumes in the third quarter.
-- During the third quarter, the Canadian propane business began the
initial roll out of of its ADD IT system starting with the Atlantic
region in September 2013. The remaining regions will implement the ADD
system throughout the remainder of 2013 and over the first half of 2014,
minimizing the impact on the business during the 2013/2014 heating
season. The ADD system will facilitate ongoing operational improvements.
-- The U.S. refined fuels business generated gross profits of $16.8 million
in the third quarter compared to $16.5 million in the prior year
quarter. The modest increase in gross profit was due to higher sales
margins as a result of improved sales mix offset in part by reduced
sales volumes.
-- U.S. refined fuels average sales margins were 5.1 cents per litre in the
quarter compared to 4.9 cents per litre in the prior year quarter. Sales
margins were positively impacted by an improved overall sales mix,
offset in part by the impact of higher wholesale propane costs which
negatively impacted sales margins.
-- Sales volumes within the U.S. refined fuels business were 9 million
litres or 3% lower than the prior year. Sales volumes were impacted by
reduced wholesale delivery volumes which were negatively impacted as a
result of competitive pricing pressures. Retail heating oil and propane
sales volume were consistent with the prior year.
-- Average weather for the U.S. refined fuel business, as measured by
degree days, was consistent with both the prior year quarter and the 5-
year average. Due to the nature of the U.S. refined fuels business,
weather does not have a material impact on sales volumes in the third
quarter.
-- The fixed-price energy services business generated gross profits of $4.8
million compared to $8.0 million in the prior year quarter due to
reduced natural gas profits. Lower natural gas gross profits were due to
a reduction in sales volumes as a result of a reduced contribution from
the residential segment which has been in decline due to a change in
strategy in prior years to exit that market and focus on small
commercial and industrial accounts. Gross profit related to the
electricity segment was lower than the prior year due to reduced
contributions from the Ontario market. Superior anticipates that the
reduction in the contribution from this business, due to exiting the
residential segment in prior years, will continue for the remainder of
2013, after which the contribution is anticipated to normalize on a
comparative basis.
-- The supply portfolio management business generated gross profits of $4.4
million in the third quarter compared to $3.9 million in the comparative
period as market based trading conditions were consistent with the prior
year quarter.
-- Operating expenses were $75.3 million in the third quarter compared to
$72.4 million in the prior year quarter. Operating expenses were higher
than the prior year due to costs associated with process re-engineering,
costs associated with the implementation of the ADD IT system,
regulatory and compliance costs and higher truck related maintenance
costs. Superior remains focused on reducing its cost structure in a
sustainable manner as part of its ongoing cost reduction initiatives.
-- Superior expects business conditions for the fourth quarter of 2013 for
its Energy Services business will be similar to the conditions
experienced throughout year-to-date 2013. Weather for the fourth quarter
of 2013 is anticipated to be consistent with the 5-year average. EBITDA
from operations for 2014 is anticipated to be higher than in 2013 due to
improved results at the Canadian propane and U.S. refined fuels
businesses. Improvement in EBITDA is anticipated as a result of modestly
higher sales volumes and improved average sales margins due to the
ongoing implementation of business initiatives. EBITDA from the fixed-
price energy services and wholesale supply business are anticipated to
be consistent with 2013. Operating expenses are anticipated to be
consistent with 2013 due to improvements in operational efficiencies
from business initiatives offset by costs associated with higher
volumes. Average weather, as measured by degree days, is anticipated to
be consistent with the 5-year average period for 2014. Operating
conditions for 2014 are anticipated to be similar to 2013.
Specialty Chemicals
-- EBITDA from operations for the third quarter was $24.6 million compared
to $41.0 million in the prior year quarter or $28.5 million in the prior
year excluding the one-time payment of $12.5 million related to a
settlement with TransCanada.
-- Sodium chlorate gross profits were modestly higher than the prior year
quarter due to higher sales volumes and modestly higher average selling
prices, which more than offset the impact of higher electricity input
costs.
-- Sodium chlorate sales volumes were 10% higher than the prior year
quarter due primarily to incremental export volume to CMPC in Chile.
Sales volumes to North American and other international customers were
modestly higher than the prior year.
-- Chloralkali gross profits were lower than the prior year quarter due to
a reduction in average sales prices and modestly lower sales volumes.
Sales volumes were impacted in part by downtime at the Port Edwards,
Wisconsin facility for normal course maintenance. The reduction in
average selling prices for chloralkali was due to a weak pricing
environment for chlorine and hydrochloric acid due to weak supply demand
fundamentals which was offset in part by modestly higher caustic soda
and potassium caustic pricing. Superior anticipates that the pricing
environment for both chlorine and hydrochloric acid will remain at
current levels in the short-term.
-- Operating expenses of $34.6 million were $2.8 million higher than the
prior year, due to unfavourable foreign currency revaluations on US-
denominated working capital, higher maintenance costs as a result of the
timing of normal course maintenance compared to the prior year quarter
and general inflationary increases.
-- As previously announced, Superior has approved an expansion of its
hydrochloric acid production capacity at its Port Edwards, Wisconsin and
Saskatoon, Saskatchewan facilities. Upon completion of both projects,
Superior will have doubled its total hydrochloric acid production
capacity to 360,000 wet metric tonnes. The expansion of the production
capacity will allow Superior to optimize overall returns at both
facilities by converting a larger portion of its chlorine into higher
value hydrochloric acid. The Port Edwards project is anticipated to cost
$18 million with commercial production now expected early in the fourth
quarter of 2014. As previously disclosed the Port Edwards project has
been delayed as a result of an accident involving the hydrochloric acid
burner while being prepared by the manufacturer for shipment to the Port
Edwards facility. The Saskatoon project is anticipated to cost $25
million with commercial production expected in the fourth quarter of
2014. To date, cumulative costs of $12.8 million have been incurred with
respect to both projects.
-- Superior expects business conditions for the fourth quarter of 2013 for
its Specialty Chemicals business to be similar to the conditions
experienced throughout year-to-date 2013. For 2014, EBITDA from
operations, is anticipated to be lower than in 2013 due to a reduced
contribution from sodium chlorate due to higher electricity prices and
lower average selling prices, offset in part by the contribution from
the strategic supply agreement with Tronox noted below. Contribution
from the chloralkali segment is anticipated to be modestly higher than
2013 due to the completion of the hydrochloric acid facility expansions
during 2014. Sales volumes of caustic, chlorine and hydrochloric acid
are anticipated to be modestly higher than 2013 which will be offset in
part by a modest reduction in average sales pricing on an electrical
chemical unit basis. Supply demand fundamentals in the chloralkali
markets in which Superior operates are anticipated to remain consistent
with the prior year.
Tronox Strategic Supply Agreement
-- Specialty Chemicals has entered into a supply agreement with Tronox LLC
("Tronox") to purchase up to 130,000 metric tonnes of sodium chlorate
per year from Tronox's Hamilton, Mississippi facility. The initial term
of the agreement extends to December 31, 2016 and may be automatically
extended in one year increments thereafter. Under the terms of the
agreement, Tronox will continue to own and operate the facility, and
Specialty Chemicals will purchase sodium chlorate to meet customer under
certain customer contracts being assumed. Specialty Chemicals will pay
an initial fee of $5.0 million and a quarterly fee of $0.8 million
during the initial term of the agreement, plus a cost for sodium
chlorate delivered. As part of the agreement, Specialty Chemicals will
acquire finished inventory, assume existing railcar leases and assume
existing customer contracts, as assigned. Additionally, the parties have
entered into a strategic long-term agreement for the supply of
chloralalkali product to service Tronox's requirements in North America.
-- The Tronox sodium chlorate facility is strategically located in the
Southeast United States which will allow ERCO to optimize the logistics
and transportation of product within its existing network of sodium
chlorate facilities.
Construction Products Distribution
-- EBITDA from operations for the third quarter was $10.1 million compared
to $3.6 million in the prior year quarter. Prior year results included
$2.7 million in one-time restructuring costs. Excluding the impact of
the restructuring costs noted above, results in the third quarter were
higher than the prior year quarter due to improved selling prices, sales
margins, volumes and cost reduction initiatives.
-- Gross profit was higher than the prior year quarter due to improved
average selling prices and sales margins, and higher sales volumes in
the U.S. Gypsum sales volumes were higher than the prior year quarter as
improved residential construction activity in the U.S. more than offset
reduced Canadian residential activity and the impact of a reduction in
branch locations as a result of restructuring activities completed
during 2012. Sales margins benefited from improved purchasing, the
implementation of pricing initiatives and the withdrawal from certain
Canadian markets that were less profitable.
-- Commercial and industrial insulation (C&I) sales volumes were higher
than the prior year quarter as sales and marketing initiatives to
increase sales have been successful despite a challenging commercial
market. C&I gross margins were modestly lower than the prior year
quarter due to a higher proportion of lower margin large projects.
-- Operating expenses for the third quarter were $41.3 million compared to
$43.1 million in the prior year quarter. Prior year operating costs
included $2.7 million in one-time restructuring costs. Excluding the
impact of prior year restructuring costs, operating costs were impacted
by cost associated with higher sales volumes in the U.S. operations and
inflationary increases of wages and other operating costs. Operating
expenses as a percentage of sales, excluding restructuring costs, were
modestly lower than the prior year quarter.
-- Superior expects business conditions for the fourth quarter of 2013 for
its Construction Products Distribution business to be similar to the
conditions experienced throughout year-to-date 2013. Superior
anticipates that EBITDA from operations in 2014 will be higher than in
2013 due to continued improvements in U.S. construction markets, in
particular, U.S. residential construction as well as benefits associated
with ongoing business initiatives. Superior anticipates that the U.S.
commercial market will be modestly improved in 2014 compared to 2013 and
that the Canadian residential and commercial markets will continue to be
challenging.
Corporate Related
-- Total interest expense for the third quarter was $15.5 million compared
to $18.3 million in the prior year quarter. Interest expense was lower
than the prior year quarter as a result of lower average debt levels due
to Superior's ongoing focus to reduce its total debt levels.
-- Corporate costs were $3.7 million in the third quarter a decrease of
$1.6 million compared to the prior year quarter. The decrease in
corporate costs is due to reduced costs associated with long-term
incentive plans as a result of a reduction in Superior's share price.
-- Superior's total debt (including convertible debentures) to Compliance
EBITDA improved to 3.6X as at September 30, 2013, compared to 4.4X as at
December 31, 2012 and 4.1X as at September 30, 2012. The reduction in
total leverage compared to December 31, 2012 is due to Superior using
the $137.8 million in net proceeds from its common share equity issue to
repay existing indebtedness. Superior continues to focus on reducing its
total leverage through ongoing debt reduction, including reducing
working capital requirements and improving business operations. See
"Debt Management Update" for details on Superior's anticipated December
31, 2013 and 2014 total debt to EBITDA ratios.
-- On October 28, 2013 Superior redeemed all of its outstanding $150.0
million, 8.25% senior unsecured debentures due October 27, 2016 at a
redemption price of $1,041.25 per $1,000 principal amount plus any
accrued and unpaid interest. The redemption price was as allowed for in
the underlying indenture. The early redemption allows for Superior to
benefit from lower average interest costs. See press release "Superior
Plus Announces Redemption of 8.25% Senior Unsecured Debentures Due
October 27, 2016" on September 19, 2013.
CRA Income Tax Update
As anticipated in Superior's previous disclosure, Superior received on April 2,
2013 from the CRA Notices of Reassessment for Superior's 2009 and 2010 taxation
years reflecting the CRA's intent to challenge the tax consequences of
Superior's corporate conversion transaction (Conversion) which occurred on
December 31, 2008. The CRA's position is based on the acquisition of control
rules, in addition to the general anti-avoidance rules in the Income Tax Act
(Canada). The table below summarizes Superior's estimated tax liabilities and
payment requirements associated with the received and anticipated Notices of
Reassessment.
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Taxes Payable 50% of the Taxes
Taxation Year (1)(2) Payable(1)(2) Payment Dates
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2009/2010 $13.0 $6.5 Paid in April 2013
2011 $10.0(3) $5.0 Q1 2014
2012 $10.0(3) $5.0 Q1 2014
2013 $10.0(3) $5.0 Q3 2014
2014 $20.0(3) $10.0 Q3 2015
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Total $63.0 $31.5
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(1) In millions of dollars.
(2) Includes estimated interest and penalties.
(3) Estimated based on Superior's previously filed tax returns and the
midpoint of Superior's 2013 and 2014 financial outlooks.
Superior filed a Notice of Objection with respect to the Notice of Reassessments
on May 8, 2013. The CRA did not respond or settle the Notice of Objection with
Superior in the 90 days after filing, as such Superior filed a Notice of Appeal
with the Tax Court of Canada on August 7, 2013. Superior anticipates that if the
application proceeds in the Tax Court of Canada a decision could be rendered by
the beginning of fiscal 2015. If a decision of the Tax Court of Canada were to
be appealed, the appeal process could reasonably be expected to take an
additional 2 years. If Superior receives a positive decision then any taxes,
interest and penalties paid to the CRA will be refunded plus interest and if
Superior is unsuccessful then any remaining taxes payable plus interest and
penalties will have to be remitted.
Superior remains confident in the appropriateness of its tax filing position and
the expected tax consequences of the Conversion and intends to vigorously defend
such position and intends to file its future tax returns on a basis consistent
with its view of the outcome of the Conversion.
Superior's 2013 and 2014 financial outlooks includes the impact of the
reassessments although the interim tax payments made by Superior will be
recorded to the balance sheet and will not impact either adjusted operating cash
flow or net earnings.
Based on the midpoint of Superior's current 2014 financial outlook of AOCF per
share of $1.80, if the tax pools from the Conversion were not available to
Superior, the impact would be an increase to cash income taxes of approximately
$0.15 per share for 2014. As previously stated, Superior intends to file its
future income tax returns on a basis consistent with its view of the outcome of
the Conversion.
2013 Financial Outlook
Superior expects 2013 AOCF per share of $1.60 to $1.85, consistent with the
financial outlook provided at the end of the second quarter of 2013. Superior's
2013 financial outlook excludes the impact of one-time restructuring costs
anticipated to be incurred in 2013.
2014 Financial Outlook
Superior expects 2014 AOCF per share of $1.65 to $1.95. The increase in the
mid-point of the 2014 financial outlook relative to the 2013 financial outlook
is due to ongoing improvements in the businesses as a result of Superior's
business initiative projects. Superior's 2014 financial outlook assumes there is
no material change to the outlook for the North American economy and that
average temperatures throughout 2014 are consistent with the 5-year average.
Superior's 2014 financial outlook excludes the impact of one-time restructuring
costs anticipated to be incurred in 2014.
In conjunction with Superior's 2014 Financial Outlook, Superior is also
confirming its previously provided Destination 2015 growth rate in AOCF per
share of 5% to 7% for 2014 and 9% to 12% for 2015. Superior continues to see
positive momentum in its Energy Services and Construction Products Distribution
businesses due to a combination of traction on its business initiatives and
improved market conditions. The expected improvement in the Energy Services
business and the Construction Products Distribution business is being offset in
part by reduced results at the Specialty Chemicals business due to lower average
selling prices on sodium chlorate combined with higher electricity rates;
caustic, chlorine and hydrochloric acid pricing are anticipated to be consistent
with 2013.
Luc Desjardins, Superior's President and Chief Executive Officer stated "I am
pleased with the results for the third quarter and the fact we were able to
confirm our financial outlook for 2013 based on year-to-date results, the
current state of the North American economy and the assumption that average
temperatures for the last quarter of 2013 are consistent with the 5-year
average. I am also pleased to confirm that the initiatives that underpin
Superior's Destination 2015 continue to track to our expectations. As a result,
Superior's expected growth rates for 2014 and 2015 as noted above remain on
track.
We remain committed to transforming Superior into a best-in-class organization.
As I have reiterated in the past, a significant amount of work is required in
order for Superior to meet its long-term goals. In order to meet these goals, we
have determined that there are additional restructuring opportunities in our
Canadian propane and Construction Products Distribution businesses to improve
their operational and financial performance.
Efforts to improve all aspects of the Canadian propane business have been
underway throughout 2012 and 2013. Although we have realized tangible
improvements in many aspects of the business; such as, customer service,
customer retention, sales and intelligent pricing, we still have a significant
amount of work to do to become a best-in-class operator. The update to our IT
platform which will facilitate ongoing improvements in the efficiency of our
operations began in September 2013, beginning with the Atlantic region. To date
the implementation has gone well and we remain on track to roll out the ADD
system to our remaining regions throughout the remainder of 2013 and over the
first half of 2014. As we have communicated in the past, the ADD IT system will
facilitate improvements to our operations by providing the platform to improve
our forecasting and distribution efficiency. In order to ensure we continue to
transform the Canadian propane business to realize both the financial and
operational improvements in a timely manner, we will be undertaking some
additional restructuring activities which will accelerate the realization of
operational efficiencies by implementing a more disciplined and consistent
management operating system across the company designed to leverage the new
processes and information system investments. Restructuring activities, which
will begin in 2013, are anticipated to be completed by end of 2014. A project
team with assistance from an external consulting firm has been established to
implement the restructuring and business improvement initiatives.
In 2012 the CPD business underwent successful operational restructuring through
branch rationalization to reduce operating expenses. In 2013 and into 2014, the
CPD business will undergo further realignment to make the organization more
agile and increase our ability to capitalize on the U.S. residential and
commercial construction recovery. We are implementing common business processes
and systems across the business which was delayed over the past several years
due to challenging market conditions. In addition, we are reorganizing our
regional operational structure to align across all business segments. These
transformation initiatives will be implemented over the next two years and will
result in a completely integrated business with improved operating effectiveness
and an ability to react quickly to changing market conditions, providing the
necessary platform to operate at a best-in-class level."
Superior's 2013 and 2014 financial outlooks have been provided on the basis that
Superior will continue to prepare and file its future tax returns on a basis
consistent with its view of the outcome of the CRA's challenge of its corporate
conversion transaction.
For additional details on the assumptions underlying the 2013 and 2014 financial
outlooks, see Superior's 2013 Third Quarter Management's Discussion and
Analysis.
Debt Management Update
Superior remains committed to reducing its total debt and its total debt
leverage ratios. Superior anticipates its total debt to EBITDA ratio as at
December 31, 2013 will be in the range of 3.3X to 3.7X, consistent with the
update provided at the second quarter of 2013, but with a bias towards the high
end of the range due to recent commodity price increases for propane which
negatively impacts Superior's working capital requirements.
Superior's December 31, 2013 and 2014 forecasted total debt to EBITDA leverage
ratios are stated before restructuring costs due to uncertainty in the timing in
the recognition of these costs. Superior anticipates that restructuring costs
will be recognized over the fourth quarter of 2013 and the first and second
quarters of 2014.
Superior's anticipated debt repayment for 2014 and total debt to EBITDA leverage
ratio as at December 31, 2014, based on Superior's 2013 and 2014 financial
outlooks and Superior's 2013 year-to-date results, is detailed in the chart
below.
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(Dollar Per (Millions of
Share) Dollars)
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2014 financial outlook AOCF per share - mid-
point (1) $ 1.80 227.1
Maintenance capital expenditures, net (0.29) (36.5)
Capital lease obligation repayments (0.14) (18.2)
Payments to CRA in relation to tax
reassessment (2) (0.12) (15.0)
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Cash flow available for dividends and debt
repayment before growth capital $ 1.25 157.4
Expansion of Port Edward's and Saskatoon
facilities (0.19) (23.4)
Other growth capital expenditures (0.12) (15.1)
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Estimated 2014 free cash flow available for
dividends and debt repayment $ 0.94 118.9
Dividends (0.60) (75.7)
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Total estimated debt repayment $ 0.34 43.2
Estimated total debt to EBITDA as at December
31, 2014 3.3X - 3.7X 3.3X - 3.7X
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Dividends $ 0.60 75.7
Calculated payout ratio after all capital and
payment to CRA 64% 64%
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(1) See "Financial Outlook" in Superior's 2013 Third Quarter Management's
Discussion and Analysis for additional details including assumptions,
definitions and risk factors.
(2) See "CRA Income Tax Update" for additional details.
2013 Detailed Third Quarter Results
Superior's 2013 Third 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.
2013 Third Quarter and Annual Results Conference Call
Superior will be conducting a conference call and webcast for investors,
analysts, brokers and media representatives to discuss the 2013 Third Quarter
Results at 8:30 a.m. MDT on Friday November 1, 2013. To participate in the call,
dial: 1-866-226-1798. An archived recording of the call will be available for
replay until midnight, December 31, 2013. To access the recording, dial:
1-800-408-3053 and enter pass code 2815242 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.
Superior Plus 2013 Annual Investor Day
Superior is pleased to announce its upcoming Annual Investor Day on Friday,
November 29, 2013 at the King Edward Hotel in Toronto. A detailed update on
Superior's current operations, short and long-term growth opportunities and
financial position will be presented. The formal presentation will commence at
9:00AM EST, a light breakfast and lunch will be served. Members of the
professional investment community are invited to attend. To confirm your
participation, please rsvp by e-mailing your contact information to
rsvpinvestorday@superiorplus.com. Details of the event can also be found on
Superior's website at www.superiorplus.com.
Forward Looking Information
Certain information included herein is forward-looking information within the
meaning of applicable Canadian securities laws. Forward-looking information may
include statements regarding the objectives, business strategies to achieve
those objectives, expected financial results (including those in the area of
risk management), economic or market conditions, and the outlook of or involving
Superior, Superior LP and its businesses. Such forward looking information or
statements are typically identified by words such as "anticipate", "believe",
"continue", "could", "estimate", "expect", "plan", "intend", "forecast",
"future", "guidance", "may", "predict", "project", "should", "strategy",
"target", "will" or similar expressions suggesting future outcomes.
Forward-looking information in this document includes: future financial
position, consolidated and business segment outlooks, expected EBITDA from
operations, expected adjusted operating cash flow (AOCF) and adjusted operating
cash flow per share, expected leverage ratios and debt repayment, debt
management summary, expectations in terms of the cost of operations, capital
spend and maintenance and the variability of these costs, business strategy and
objectives, development plans and programs, business expansion and improvement
projects, expected timing of commercial production and the costs and benefits
associated therewith, market conditions in Canada and the U.S., expected tax
consequences of the Conversion, the expected challenge by the CRA of the tax
consequences of the Conversion (and the expected timing and impact of such
process including any payment of taxes and the quantum of such payments), future
income taxes, the impact of proposed changes to Canadian tax legislation or U.S.
tax legislation, future economic conditions, future exchange rates and exposure
to such rates, dividend strategy, payout ratio, expected weather, expectations
in respect to the global economic environment, our trading strategy and the risk
involved in these strategies, the impact of certain hedges on future reported
earnings and cash flows, commodity prices and costs, the impact of contracts for
commodities, demand for propane, heating oil and similar products, demand for
chemicals including sodium chlorate and chloralkali, effect of operational and
technological improvements, anticipated costs and benefits of restructuring
activities, business enterprise system upgrade plans, future working capital
levels, expected governmental regulatory regimes and legislation and their
expected impact on regulatory and legislative compliance costs, expectations for
the outcome of existing or potential legal and contractual claims, our ability
to obtain financing on acceptable terms, expected life of facilities and
statements regarding expenditure requirements of Superior or Superior Plus LP.
Forward-looking information is provided for the purpose of providing information
about management's expectations and plans about the future and may not be
appropriate for other purposes. Forward-looking information herein is based on
various assumptions and expectations that Superior believes are reasonable in
the circumstances. No assurance can be given that these assumptions and
expectations will prove to be correct. Those assumptions and expectations are
based on information currently available to Superior, including information
obtained from third party industry analysts and other third party sources, and
the historic performance of Superior's businesses. Such assumptions include
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, the assumptions set forth under the "Financial Outlook"
sections of our third quarter management's discussion and analysis ("MD&A") and
are subject to the risks and uncertainties set forth below.
By its very nature, forward-looking information involves numerous assumptions,
risks and uncertainties, both general and specific. Should one or more of these
risks and uncertainties materialize or should underlying assumptions prove
incorrect, as many important factors are beyond our control, Superior's or
Superior LP's actual performance and financial results may vary materially from
those estimates and intentions contemplated, expressed or implied in the
forward-looking information. These risks and uncertainties include incorrect
assessments of value when making acquisitions, increases in debt service
charges, the loss of key personnel, fluctuations in foreign currency and
exchange rates, inadequate insurance coverage, liability for cash taxes,
counterparty risk, compliance with environmental laws and regulations,
operational risks involving our facilities, force majeure, labour relations
matters, our ability to access external sources of debt and equity capital, and
the risks identified in (i) our MD&A under the heading "Risk Factors" and (ii)
Superior's most recent Annual Information Form. The preceding list of
assumptions, risks and uncertainties is not exhaustive.
When relying on our forward-looking information to make decisions with respect
to Superior, investors and others should carefully consider the preceding
factors, other uncertainties and potential events. Any forward-looking
information is provided as of the date of this document and, except as required
by law, neither Superior nor Superior LP undertakes to update or revise such
information to reflect new information, subsequent or otherwise. For the reasons
set forth above, investors should not place undue reliance on forward-looking
information.
For more information about Superior, visit our website at www.superiorplus.com.
Management's Discussion and Analysis of 2013 Third Quarter Results
October 31, 2013
The following Management Discussion & Analysis (MD&A) is a review of the
financial performance and position of Superior Plus Corp. (Superior) as at
September 30, 2013 and for the three and nine months ended September 30, 2013
and 2012. The information in this MD&A is current to October 31, 2013. 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 twelve months ended
December 31, 2012 and its December 31, 2012 MD&A. Additional information
regarding Superior, including the Annual Information Form, is available on SEDAR
at www.sedar.com, and on Superior's website, www.superiorplus.com.
The accompanying unaudited condensed consolidated financial statements of
Superior were prepared by and are the responsibility of Superior's management.
Superior's unaudited condensed consolidated financial statements were 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 99.9% 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 and Superior GP holds 0.1% of
Superior LP. 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 and Superior GP, 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.
Third Quarter Results
Summary of Adjusted Operating Cash Flow
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(millions of dollars except per
share amounts) 2013 2012(4) 2013 2012(4)
----------------------------------------------------------------------------
EBITDA from operations: (1)
Energy Services 8.3 13.0 91.1 87.2
Specialty Chemicals 24.6 41.0 82.6 96.9
Construction Products Distribution 10.1 3.6 22.9 13.0
----------------------------------------------------------------------------
43.0 57.6 196.6 197.1
Interest expense (15.5) (18.3) (46.3) (55.1)
Cash income tax recovery (expense) 0.4 (0.3) (0.4) (0.8)
Corporate costs (3.7) (5.3) (13.5) (12.7)
----------------------------------------------------------------------------
Adjusted operating cash flow (AOCF)
(1) 24.2 33.7 136.4 128.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
AOCF per share, basic and diluted
(2)(3) $0.19 $0.30 $1.12 $1.15
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Earnings before interest, taxes, depreciation and amortization (EBITDA)
and adjusted operating cash flow are not IFRS measures. See "Non-IFRS
Financial Measures".
(2) The weighted average number of shares outstanding for the three months
ended September 30, 2013 is 126.2 million (September 30, 2012 - 112.2
million) and for the nine months ended September 30, 2013, is 122.0
million (September 30, 2012 - 111.6 million).
(3) Superior did not provide its adjusted operating cash flow per share on a
fully diluted basis as Superior's share price is below the current
exercise price of Superior's Debentures as at September 30, 2013, it is
therefore unlikely that any material conversion will occur.
(4) The prior year quarter has been restated for the impact of adopting IAS
19 Employee Benefits on January 1, 2013. The impact to EBITDA from
operations was a decrease to Energy Services of $0.3 million and $0.9
million for the three and nine months ended September 30, 2012 and a
decrease to Specialty Chemicals of $0.5 million and $1.5 million for the
three and nine months ended September 30, 2012, see IAS 19 - Employee
Benefits, amendments for further details.
Adjusted Operating Cash Flow Reconciled to Net Cash Flow from Operating
Activities (1)
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(millions of dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Net cash flow from operating
activities 63.1 64.4 255.4 326.3
Add: Non cash interest expense 2.5 1.8 5.9 5.1
Less: Decrease in non-cash working
capital (23.8) (12.1) (72.3) (141.9)
Gain on debenture redemptions (0.3) (0.8) (0.7) (0.8)
Income tax recovery (expense) 0.4 (0.3) (0.4) (0.8)
Finance costs recognized in net
earnings (17.7) (19.3) (51.5) (59.4)
----------------------------------------------------------------------------
Adjusted operating cash flow 24.2 33.7 136.4 128.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See the unaudited condensed consolidated financial statements for net
cash flow from operating activities and changes in non-cash working
capital.
Third quarter adjusted operating cash flow was $24.2 million, a decrease of $9.5
million or 28% from the prior year quarter. The decrease in adjusted operating
cash flow was primarily due to lower operating results at Specialty Chemicals as
the prior year period included a one-time net benefit from the TransCanada
settlement of $12.5 million and lower Energy Services results offset in part by
higher Construction Products Distribution results and lower corporate and
interest costs. Adjusted operating cash flow was $3.0 million higher than the
prior year quarter, excluding the impact of the TransCanada settlement from the
prior year, due primarily to higher Construction Products Distribution results
and lower interest costs. Adjusted operating cash flow of $0.19 per share,
decreased by $0.11 per share as compared to the prior year quarter due to a 28%
decrease in adjusted operating cash flow as noted above and a 12% increase in
the weighted average number of shares outstanding. Excluding the TransCanada
settlement, adjusted operating cash flow per share of $0.19 was consistent with
the prior year quarter. The average number of shares outstanding increased in
2013 as a result of shares issued from Superior's Dividend Reinvestment Program
and Optional Share Purchase Plan (DRIP) and the completion of an equity offering
on March 27, 2013.
Adjusted operating cash flow for the nine months ended September 30, 2013 was
$136.4 million, an increase of $7.9 million or 6% from the prior year period.
The increase in adjusted operating cash flow was due to higher operating results
at Construction Products Distribution and lower interest costs offset in part by
lower operating results at Specialty Chemicals as the prior year period included
a one-time net benefit from the TransCanada settlement of $12.5 million and an
increase in shares outstanding. Excluding the TransCanada settlement, adjusted
operating cash flow per share was higher than the prior year period due to
higher Construction Products Distribution results and lower interest costs.
Adjusted operating cash flow was $1.12 per share for the nine months ended
September 30, 2013, a decrease of $0.03 per share as compared to the prior year
period as the 6% increase in adjusted operating cash flow as noted above was
more than offset by a 9% increase in the weighted average number of shares
outstanding. Excluding the TransCanada settlement, adjusted operating cash flow
per share of $1.12 was higher than the prior year period due to higher
contribution from Energy Services, Construction Products Distribution and lower
interest costs. The average number of shares outstanding increased in 2013 as a
result of shares issued from Superior's Dividend Reinvestment Program and
Optional Share Purchase Plan (DRIP) and the completion of an equity offering on
March 27, 2013.
Net earnings for the third quarter were $35.9 million and consistent with the
net earnings of $35.9 million in the prior year quarter. Net earnings were
primarily impacted by a decrease in gross profits fully offset by lower
operating expenses and income tax expense. Unrealized losses on financial
instruments were consistent with the prior year quarter as higher losses in the
current quarter on Superior's embedded debenture derivatives as a result of
fluctuations in Superior's share price were offset by lower losses on natural
gas derivatives due to fluctuations in the spot price of natural gas. Revenues
of $813.8 were $23.7 million higher than the prior year quarter due to increased
Specialty Chemicals revenue as a result of higher sales volumes and pricing for
some products and increased revenue at Construction Products Distribution as a
result of ongoing improvement in the U.S. residential construction market. Gross
profit of $184.9 million was $11.0 million lower than the prior year quarter
primarily due to the one-time net benefit from the TransCanada settlement of
$12.5 million at Specialty Chemicals in the prior year period offset in part by
higher Construction Products Distribution gross profits due to higher revenue
and gross margins. Operating expenses of $167.7 million in the third quarter
were $4.2 million lower than in the prior year quarter due to reduced
amortization expense, lower restructuring costs and lower corporate related
costs. Total income tax expense for the third quarter was $0.2 million compared
to income tax expense of $7.6 million in the prior year quarter. The decrease in
income tax expense was due to lower taxable earnings in the third quarter of
2013 as compared to the prior year quarter.
Net earnings for the nine months ended September 30, 2013 were $41.8 million,
compared to net earnings of $76.5 million in the prior year period. Net earnings
were primarily impacted by higher unrealized losses on financial instruments in
the current period offset in part by higher gross profits. The change in
unrealized losses on financial instruments was due principally to losses in the
current period on Superior's embedded debenture derivatives compared to the
prior year period as a result of fluctuations in Superior's share price and
losses on natural gas derivative due to fluctuations in the spot price of
natural gas. Revenues of $2,718.1 million were $27.8 million higher than the
prior year period due to increased revenue at Specialty Chemicals as a result of
increased sales volumes and pricing for some products and increased revenue at
Construction Products Distribution as a result of ongoing improvement in the
U.S. residential construction market. Gross profit of $628.0 million was $9.9
million higher than the prior year period primarily due to increased Energy
Services gross profits due to higher sales volumes and gross margins and higher
Construction Products Distribution gross profits on higher sales volumes and
margins offset in part by lower Specialty Chemical gross profits due to one-time
TransCanada settlement in the prior year period. Operating expenses of $517.1
million were $1.4 million lower than in the prior year period due to reduced
amortization expense and restructuring costs offset in part by higher operating
costs associated with increased sales volumes within the Energy Services
segment. Total income tax expense was $12.9 million compared to income tax
expense of $9.9 million in the prior year period. The increase in income tax
expense was due to changes in Superior's future tax rates offset in part by
lower taxable year-to-date earnings.
Energy Services
Energy Services' condensed operating results for 2013 and 2012:
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(millions of dollars) 2013 2012(2) 2013 2012(2)
----------------------------------------------------------------------------
Revenue(1) 459.0 453.8 1,690.0 1,699.4
Cost of sales(1) (375.4) (368.4) (1,358.9) (1,381.6)
----------------------------------------------------------------------------
Gross profit 83.6 85.4 331.1 317.8
Less: Cash operating and
administrative costs(1) (75.3) (72.4) (240.0) (230.6)
----------------------------------------------------------------------------
EBITDA from operations 8.3 13.0 91.1 87.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In order to better reflect the results of its operations, Superior has
reclassified certain amounts for purposes of this MD&A to present its
results as if it had accounted for various transactions as accounting
hedges. See "Reconciliation of Divisional Segmented Revenue, Cost of
Sales and Cash Operating and Administrative Costs Included in this MD&A"
for detailed amounts.
(2) The prior year has been restated for the impact of adopting IAS 19
Employee Benefits, amendments on January 1, 2013. Cash operating and
administrative costs were increased by $0.3 million for the three months
ended September 30, 2012 and $0.9 million for the nine months ended
September 30, 2012.
Revenues for the third quarter of 2013 were $459.0, an increase of $5.2 million
from revenues of $453.8 million in 2012. The increase in revenues was primarily
due to higher commodity prices offset in part by lower sales volumes as compared
to the prior year quarter. Total gross profit for the third quarter of 2013 was
$83.6 million, a decrease of $1.8 million or 2% as compared to the prior year
quarter. The decrease in gross profit was primarily due to lower fixed-price
energy services gross profits as a result of reduced customer renewals and
customer aggregation. A summary and detailed review of gross profit is provided
below.
Gross Profit Detail
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(millions of dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Canadian propane distribution 47.6 47.3 174.9 167.6
U.S. refined fuels distribution 16.8 16.5 94.2 85.8
Other services 10.0 9.7 30.1 28.2
Supply portfolio management 4.4 3.9 18.0 11.8
Fixed-price energy services 4.8 8.0 13.9 24.4
----------------------------------------------------------------------------
Total gross profit 83.6 85.4 331.1 317.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian Propane Distribution
Canadian propane distribution gross profit for the third quarter was $47.6
million, a slight increase of $0.3 million or 1% from 2012, due to higher gross
margins offset in part by lower sales volumes. Residential and commercial sales
volumes increased by 2 million litres or 4% from the prior year quarter due to
new residential sales and improved customer retention. Average weather across
Canada for the third quarter, as measured by degree days, was 10% colder than
the prior year and 2% warmer than with 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
Distribution operations. Industrial volumes declined by 11 million litres or 7%
due to reduced customer activity and the gasification of certain customer sites.
Automotive propane volumes increased by 1 million litres or 4%. This increase is
in contrast to the historical structural decline in this end-use market due to
the continued favourable price spread between propane and gasoline.
Average propane sales margins for the third quarter increased to 20.5 cents per
litre from 19.7 cents per litre in the prior year quarter. The increase is
principally due to favourable movement in the sales mix as the current quarter
included a higher proportion of higher-margin sales volumes offset in part by a
rise in the wholesale cost of propane which negatively impacted margins.
Canadian Propane Distribution Sales Volumes
Volumes by End-Use Application Volumes by Region(1)
----------------------------------------------------------------------------
Three months ended Three months ended
September 30, September 30,
(millions of litres) 2013 2012 (millions of litres) 2013 2012
-------------------------------------- -------------------------------------
Residential 16 15 Western Canada 128 138
Commercial 37 36 Eastern Canada 85 83
Agricultural 7 7 Atlantic Canada 19 19
Industrial 148 159
Automotive 24 23
-------------------------------------- -------------------------------------
232 240 232 240
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Volumes by End-Use Application Volumes by Region(1)
----------------------------------------------------------------------------
Nine months ended Nine months ended
September 30, September 30,
(millions of litres) 2013 2012 (millions of litres) 2013 2012
-------------------------------------- -------------------------------------
Residential 88 79 Western Canada 532 524
Commercial 193 176 Eastern Canada 323 311
Agricultural 31 30 Atlantic Canada 71 74
Industrial 552 566
Automotive 62 58
-------------------------------------- -------------------------------------
926 909 926 909
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 region consists of
New Brunswick, Newfoundland & Labrador, Nova Scotia and Prince Edward
Island.
U.S. Refined Fuels Distribution
U.S. refined fuels distribution gross profit for the third quarter was $16.8
million, a slight increase of $0.3 million from the prior year quarter. The
increase in gross profit was due to higher gross margins offset in part by lower
sales volumes. Sales volumes of 326 million litres, decreased by 9 million
litres or 3% from the prior year quarter. The decrease was primarily due to
lower Marcellus Shale drilling activity, competitive pressures and a focus on
higher margin customers. Average weather as measured by heating degree days for
the third quarter was consistent with both the prior year and the 5-year
average. Average U.S. refined fuels sales margins of 5.1 cents per litre
increased slightly from 4.9 cents per litre in the prior year quarter. Sales
margins were positively impacted by a favourable sales mix due to a higher
proportion of higher-margin sales volumes offset in part by the impact of higher
wholesale propane costs which negatively impacted sales margins.
U.S. Refined Fuels Distribution Sales Volumes
Volumes by End-Use Application(1) Volumes by Region(2)
----------------------------------------------------------------------------
Three months ended Three months ended
September 30, September 30,
(millions of litres) 2013 2012 (millions of litres) 2013 2012
-------------------------------------- -------------------------------------
Northeast United
Residential 23 23 States 326 335
Commercial 169 164
Automotive 134 148
-------------------------------------- -------------------------------------
326 335 326 335
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Volumes by End-Use Application(1) Volumes by Region(2)
----------------------------------------------------------------------------
Nine months ended Nine months ended
September 30, September 30,
(millions of litres) 2013 2012 (millions of litres) 2013 2012
-------------------------------------- -------------------------------------
Northeast United
Residential 208 186 States 1,222 1,170
Commercial 585 564
Automotive 429 420
-------------------------------------- -------------------------------------
1,222 1,170 1,222 1,170
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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 $10.0 million in the third quarter, an increase
of $0.3 million from the prior year quarter due to higher service calls and
installation work.
Supply Portfolio Management
Supply portfolio management gross profits were $4.4 million in the third
quarter, an increase of $0.5 million from the prior year quarter due to
favourable market conditions, lower supply costs and optimization of arbitrage
opportunities through logistics management.
Fixed-Price Energy Services
Fixed-Price Energy Services Gross Profit
----------------------------------------------------------------------------
(millions of
dollars except
volume and per Three months ended Three months ended
unit amounts) September 30, 2013 September 30, 2012
Gross Gross
Profit Volume Per Unit Profit Volume Per Unit
----------------------------------------------------------------------------
72.3 126.1
Natural gas(1) 3.4 4.7 GJ cents/GJ 5.8 4.6 GJ cents/GJ
0.56 0.90
Electricity(2) 1.4 248.5 KWh cents/KWh 2.2 244.9 KWh cents/KWh
----------------------------------------------------------------------------
Total 4.8 8.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(millions of
dollars except
volume and per Nine months ended Nine months ended
unit amounts) September 30, 2013 September 30, 2012
Gross Gross
Profit Volume Per Unit Profit Volume Per Unit
----------------------------------------------------------------------------
64.8 125.7
Natural gas(1) 9.2 14.2 GJ cents/GJ 17.6 14.0 GJ cents/GJ
0.71 1.10
Electricity(2) 4.7 663.4 KWh cents/KWh 6.8 616.8 KWh cents/KWh
----------------------------------------------------------------------------
Total 13.9 24.4
----------------------------------------------------------------------------
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(1) Natural gas volumes are expressed in thousands of gigajoules (GJ).
(2) Electricity volumes are expressed in thousands of kilowatt hours (KWh).
Fixed-price energy services gross profit was $4.8 million in the third quarter,
a decrease of $3.2 million or 40% from $8.0 million in the prior year quarter.
Natural gas gross profit was $3.4 million, a decrease of $2.4 million from the
prior year quarter due to lower gross margins. Gross profit per unit was 72.3
cents per gigajoule (GJ), a decrease of 53.8 cents per GJ or 43% from the prior
year quarter due to sales mix as the existing customer base contains a lower
proportion of higher margin residential customers and overall decline in the
number of higher-margin residential customers. Sales volumes of natural gas were
4.7 million GJ, an increase of 0.1 million GJ or 2% than the prior year quarter
due to a higher customer demand. Electricity gross profit in the third quarter
of 2013 was $1.4 million, a decrease of $0.8 million or 36% from the prior year
quarter due to an increase in the supply cost of electricity and other charges
offset in part by higher customer demand.
Operating Costs
Cash operating and administrative costs were $75.3 million in the third quarter
of 2013, an increase of $2.9 million or 4% from the prior year quarter. The
increase in expenses was primarily due to the timing of truck maintenance,
system conversion costs, regulatory and compliance costs, process re-engineering
costs, and consulting costs associated with ongoing business initiatives offset
in part by the impact of cost reduction initiatives implemented in 2012 and
2013.
Financial Outlook
EBITDA from operations for Energy Services is anticipated to increase during the
remainder of 2013 as compared to 2012 due to improved gross margins and sale
volumes. Additionally, Superior expects to realize ongoing improvements in its
financial results as a result of its business initiative activities which will
more than offset a reduction in the contribution from the fixed-price energy
services business due to Superior exiting the Canadian residential market in
prior years. Weather for the fourth quarter of 2013 is anticipated to be
consistent with the 5-year average. EBITDA from operations for 2014 is
anticipated to be higher than in 2013 due to improved results at the Canadian
propane and U.S. refined fuels businesses. Improvement in EBITDA is anticipated
as a result of modestly higher sales volumes and improved average sales margins
due to the ongoing implementation of business initiatives. EBITDA from the
fixed-price energy services and wholesale supply business are anticipated to be
consistent with 2013. Operating expenses are anticipated to be consistent with
2013 due to improvements in operational efficiencies from business initiatives
offset by costs associated with higher volumes. Average weather, as measured by
degree days, is anticipated to be consistent with the 5-year average in 2014.
Operating conditions for 2014 are anticipated to be similar to 2013.
Initiatives to improve results in the Energy Services business continued during
the third quarter of 2013 in conjunction with Superior's goal for each of its
businesses to become best-in-class. Business improvement projects for 2013 and
2014 include: a) improving customer service, b) improving overall logistics and
procurement functions, c) enhancing the management of margins, d) working
capital management e) improving existing and implementing new technologies to
facilitate improvements to the business and f) completing a detailed
restructuring plan and commencing the related work.
The restructuring plan for Canadian Propane distribution business will
accelerate realization of operating efficiencies by implementing a more
disciplined and consistent management operating system across the company
designed to leverage the new processes and information system investments.
System Conversion
In 2013, Canadian propane distribution commenced the implementation of an order
to cash, billing and logistics IT system to replace the distribution and
invoicing functions of the present enterprise system. To mitigate the risk
associated with system changes, Canadian propane distribution will leverage the
learnings from the U.S Refined fuels organization that have been using this
system for several years. The total estimated cost of the implementation is
$17.2 million, approximately $13.8 million has been incurred to date and the
estimated completion is the summer of 2014. During the third quarter, the
initial roll out of the new system began with the Atlantic region and the
remaining regions will be transitioned throughout the remainder of 2013 and the
first half of 2014. The implementation has been done in phases in order to
minimize the impact on the business during the heating season.
In addition to the significant assumptions detailed above, refer to "Risk
Factors to Superior" for a detailed review of significant business risks
affecting the Energy Services' businesses.
Specialty Chemicals
Specialty Chemicals' condensed operating results for 2013 and 2012:
----------------------------------------------------------------------------
(millions of dollars
except per metric
tonne(MT) amounts)
Three months ended Nine months ended
September 30, September 30,
2013 2012(2) 2013 2012(2)
----------------------------------------------------------------------------
$ per MT $ per MT $ per MT $ per MT
Chemical revenue(1) 143.6 704 132.6 686 425.9 703 403.1 706
Chemical cost of sales
(1) (84.4)(414) (59.8) (309) (242.3)(400) (207.8) (364)
----------------------------------------------------------------------------
Chemical gross profit 59.2 290 72.8 377 183.6 303 195.3 342
Less: Cash operating
and administrative
costs(1) (34.6)(169) (31.8) (165) (101.0)(167) (98.4) (172)
----------------------------------------------------------------------------
EBITDA from operations 24.6 121 41.0 212 82.6 136 96.9 170
Chemical volumes sold
(thousands of MTs) 204 193 606 571
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In order to better reflect the results of its operations, Superior has
reclassified certain amounts for purposes of this MD&A related to
derivative financial instruments, non-cash amortization and foreign
currency translation losses or gains related to U.S.-denominated working
capital. See "Reconciliation of Divisional Segmented Revenue, Cost of
Sales and Cash Operating and Administrative Costs Included in this MD&A"
for detailed amounts.
(2) The prior year has been restated for the impact of adopting IAS 19
Employee Benefits, amendments on January 1, 2013. Cash operating and
administrative costs were increased by $0.5 million for the three months
ended September 30, 2012 and $1.5 million for the nine months ended
September 30, 2012.
Chemical revenue for the third quarter of $143.6 million was $11.0 million or 8%
higher than in the prior year quarter primarily due to higher sales volumes and
pricing for sodium chlorate. Third quarter gross profit of $59.2 million was
$1.1 million lower than in the prior year quarter excluding the one-time net
benefit of the TransCanada settlement of $12.5 million which was received in the
prior year quarter. Sodium chlorate gross profits increased due to higher sales
volumes offset in part by lower gross margins. Sodium chlorate gross margins
were lower due to higher electricity and transportation costs offset in part by
higher average selling prices. Sodium chlorate sales volumes increased by
approximately12,000 tonnes or 10% compared to the prior year quarter due to
higher demand from export markets and shipments from North America to Chile.
Chloralkali/potassium products gross profits were lower than the prior year
quarter due to slightly lower sales volumes and gross margins. Sales volumes
decreased by 2,000 tonnes or 3% due to downtime at the Port Edwards production
facility for normal course maintenance. Gross margins were lower due to a
reduction in average selling prices for chloralkali due to a weaker pricing
environment for chlorine and hydrochloric acid. This was partially offset by
higher caustic soda and potassium caustic pricing.
Cash operating and administrative costs of $34.6 million were $2.8 million or 9%
higher than in the prior year quarter due to unfavourable foreign currency
translation of U.S. denominated net working capital, timing of plant maintenance
and general inflationary increases.
Major Capital Projects
As announced in the first quarter of 2012, Superior has approved an $18.0
million expansion of hydrochloric acid production capacity at the Port Edwards,
Wisconsin chloralkali facility. The existing capacity of 110,000 wet metric
tonnes (WMT), or 36,000 dry metric tonnes, will be increased to approximately
220,000 WMT. The expansion project commenced in 2012, with commercial production
now expected in the fourth quarter of 2014, earlier than the update provided on
August 21, 2013, which anticipated commercial production in the first quarter of
2015 as a result of the acid burner being damaged during the shipping process.
As previously disclosed, the Port Edwards project has been delayed as a result
of an accident involving the hydrochloric acid burner while being prepared for
shipment to the Port Edwards facility.
As announced in the third quarter of 2012, Superior has approved a $25.0 million
expansion of the hydrochloric acid production capacity at the Saskatoon,
Saskatchewan chloralkali facility. The existing capacity of 70,000 WMT, or
22,000 dry metric tonnes, will be increased to approximately 140,000 WMT. The
expansion project commenced in 2012, with commercial production expected in the
fourth quarter of 2014.
As of September 30, 2013, a total of $12.8 million has been spent on the two
projects. Upon completion of both projects, Superior will have total
hydrochloric acid production capacity of approximately 360,000 WMT. The two
expansions will allow Superior to optimize overall returns at both facilities by
converting a larger portion of its chlorine into higher-value hydrochloric acid.
Strategic Supply Agreement
Specialty Chemicals has entered into a supply agreement with Tronox LLC
("Tronox") to purchase up to 130,000 metric tonnes of sodium chlorate per year
from Tronox's Hamilton, Mississippi facility. The initial term of the agreement
extends to December 31, 2016 and may be automatically extended in one year
increments thereafter. Under the terms of the agreement, Tronox will continue to
own and operate the facility, and Specialty Chemicals will purchase sodium
chlorate to meet customer under certain customer contracts being assumed.
Specialty Chemicals will pay an initial fee of $5.0 million and a quarterly fee
of $0.8 million during the initial term of the agreement, plus a cost for sodium
chlorate delivered. As part of the Agreement, Specialty Chemicals will acquire
finished inventory, assume existing railcar leases and assume existing customer
contracts, as assigned. Additionally, the parties have entered into a strategic
long-term agreement for the supply of chloralalkali product to service Tronox's
requirements in North America.
Financial Outlook
Superior expects business conditions for the remainder of 2013 for its Specialty
Chemicals business to be similar to the conditions experienced through
year-to-date 2013. EBITDA from operations for 2014 is expected to be lower than
2013 due to lower sodium chlorate contribution from higher average electricity
prices and lower average selling prices, offset in part by the contribution from
the Strategic Supply Agreement noted above. Contribution from the chloralkali
segment is anticipated to be modestly higher than 2013 due to the completion of
the hydrochloric acid facility expansions during 2014. Sales volumes of caustic,
chlorine and hydrochloric acid are anticipated to be modestly higher than 2013
which will be offset in part by a modest reduction in average sales pricing on
an electrical chemical unit basis. Supply demand fundamentals in the chloralkali
markets in which Superior operates are anticipated to remain consistent with the
prior year.
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 2013
and 2012:
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(millions of dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Revenue (2)
Gypsum Specialty Distribution
(GSD) revenue 137.4 135.5 399.6 387.8
Commercial and Industrial
Insulation (C&I) revenue 72.7 66.3 203.9 197.9
Cost of sales (2)
GSD cost of sales (104.0) (105.7) (306.6) (302.5)
C&I cost of sales (54.7) (49.4) (151.9) (146.9)
----------------------------------------------------------------------------
Gross profit 51.4 46.7 145.0 136.3
Less: Cash operating and
administrative costs (41.3) (43.1) (122.1) (123.3)
----------------------------------------------------------------------------
EBITDA from operations 10.1 3.6 22.9 13.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In order to better reflect the results of its operations, Superior has
reclassified certain amounts for purposes of this MD&A to present its
results as if it had accounted for various transactions as accounting
hedges. See "Reconciliation of Divisional Segmented Revenue, Cost of
Sales and Cash Operating and Administrative Costs Included in this MD&A"
for detailed amounts.
(2) The prior year revenue and cost of sales classifications between GSD and
C&I have been adjusted to align with the ongoing restructuring efforts.
GSD and C&I revenues of $210.1 million for the third quarter of 2013 were $8.3
million or 4% higher than in the prior year quarter. GSD revenue increased due
to higher sales volumes, as a result of ongoing improvement in U.S. new housing
starts offset in part by lower contribution from some Canadian regions due to
the impact of a slowdown in new housing starts in Canada and branch closures
completed during 2012. C&I revenues were higher than the prior year quarter as
investments in sales and marketing and other initiatives to increase sales have
been successful.
Gross profits of $51.4 million in the third quarter were $4.7 million or 10%
higher than in the prior year quarter primarily due to the higher revenues as
noted above and increased gross margins. The increase in GSD gross margins was
due to improved average selling prices, successful procurement initiatives and
the benefit of exiting less profitable markets. C&I gross margins were slightly
lower than the prior year quarter due to a larger proportion of lower margin
industrial projects.
Cash operating and administrative costs were $41.3 million in the third quarter,
a decrease of $1.8 million or 4% from the prior year quarter. The decrease was
primarily due to cost savings from restructuring activities completed during
2012 and the inclusion of $2.7 million of restructuring costs in the prior year
quarter offset in part by higher employee compensation costs.
Financial Outlook
Superior expects business conditions for the remainder of 2013 for its
Construction Products Distribution business to continue to improve as compared
to 2012 primarily in the U.S. residential construction market. EBITDA from
operations is anticipated to be higher due to the benefit from the ongoing
business initiative activities and the improved U.S. residential market.
Superior anticipates that EBITDA from operations in 2014 will be higher than in
2013 due to continued improvements in U.S. construction markets, in particular,
U.S. residential construction as well as benefits associated with completing
ongoing business initiatives. Superior anticipates that the U.S. commercial
market will be modestly improved in 2014 compared to 2013 and that the Canadian
residential and commercial markets will continue to be challenging.
Initiatives to improve results in the Construction Products Distribution
business continued during the third quarter. Ongoing business improvement
projects for 2013 and 2014 include: a) assessment of overall logistics and
existing branch network, b) review of supply chain management including
procurement and transportation, c) review of product pricing, d) working capital
management, e) sales growth in select focus products/markets and f) completing a
detailed restructuring plan and commencing the related work.
In 2012 the CPD business underwent successful operational restructuring through
branch rationalization to reduce operating expenses. In 2013 and into 2014, the
CPD business will undergo further realignment to make the organization more
agile and increase our ability to capitalize on the U.S. residential and
commercial construction recovery. Common business processes and systems will be
implemented across the business which was delayed over the past several years
due to challenging market conditions. Also, the regional operational structure
will be aligned across all the business segments.
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 Nine months ended
September 30, September 30,
(millions of dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Efficiency, process improvement and
growth-related 11.0 4.4 30.4 6.7
Other capital 12.3 4.1 21.8 15.0
----------------------------------------------------------------------------
23.3 8.5 52.2 21.7
Acquisitions - 5.5 - 5.5
Proceeds on disposition of capital (4.8) (0.4) (5.8) (4.1)
----------------------------------------------------------------------------
Total net capital expenditures 18.5 13.6 46.4 23.1
Investment in finance leases 1.3 1.5 2.7 5.3
----------------------------------------------------------------------------
Total expenditures 19.8 15.1 49.1 28.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Efficiency, process improvement and growth related expenditures were $11.0
million in the third quarter compared to $4.4 million in the prior year quarter.
These are primarily related to the expansion projects at Specialty Chemicals and
Energy Services' purchases of rental assets and truck related expenditures
although additional expenditures were made during the quarter on the Canadian
Propane distribution system conversion. Other capital expenditures were $12.3
million in the third quarter compared to $4.1 million in the prior year quarter,
consisting primarily of required maintenance and general capital across all of
Superior's segments although additional expenditures were made at Specialty
Chemicals. Proceeds on the disposal of capital were $4.8 million in the third
quarter and consisted of Superior's disposition of surplus tanks, cylinders and
property. During the third quarter Superior entered into new leases with capital
equivalent value of $1.3 million primarily related to delivery vehicles for the
Energy Services and Construction Products Distribution segments.
Corporate and Interest Costs
Corporate costs for the third quarter were $3.7 million, compared to $5.3
million in the prior year quarter. The decrease was primarily due to lower long
term incentive costs as a result of a decrease in Superior's share price during
the quarter offset in part by higher consulting and legal costs.
Interest expense on borrowing and finance lease obligations for the third
quarter was $7.3 million, compared to $9.5 million in the prior year quarter.
The decrease was due to lower average debt as a result of Superior's $143.9
million equity offering ($137.8 million net of issuance costs) which closed on
March 27, 2013, higher cash flows and the benefit of debt repayment efforts
during the past 12 months. 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 include all series of convertible unsecured subordinated
debentures) for the third quarter was $8.2 million compared to $8.8 million in
the prior year quarter. The decrease was due to the redemption of $49.9 million
of Superior's 5.75% convertible subordinated debentures due December 31, 2012 on
August 1, 2012, $50.0 million of Superior's 5.85% convertible subordinated
debentures due October 31, 2015 on January 3, 2013, $25.0 million of Superior's
5.85% convertible subordinated debentures due October 31, 2015 on April 9, 2013
and $68.9 million of Superior's 7.50% convertible subordinated debentures due
December 31, 2014 on September 3, 2013. The above noted decrease was offset in
part by the issuance of $97.0 million of 6.00% convertible subordinated
debentures on July 22, 2013 which mature on June 30, 2019.
Income Taxes
Total income tax expense for the third quarter was $0.2 million and consists of
$0.4 million in cash income tax recovery and $0.6 million in deferred income tax
expense, compared to a total income tax expense of $7.6 million in the prior
year quarter, which consisted of $0.3 million in cash income tax expense and a
$7.3 million deferred income tax expense.
Cash income tax recovery (expense) for the third quarter was $0.4 million and
consisted of income tax recovery in the U.S. of $0.4 million (2012 Q3 - ($0.3)
million of U.S. cash tax expense). Deferred income tax expense for the third
quarter was $0.6 million (2012 Q3 - $7.3 million deferred income tax expense),
resulting in a corresponding net deferred income tax asset of $281.7 million as
at September 30, 2013. The decrease in deferred income tax expense was due to
lower taxable earnings compared to the prior year quarter.
Canada Revenue Agency (CRA) Income Tax Update
As anticipated in Superior's previous disclosures, Superior received on April 2,
2013 from the CRA, Notices of Reassessment for Superior's 2009 and 2010 taxation
years reflecting the CRA's intent to challenge the tax consequences of
Superior's corporate conversion transaction (Conversion) which occurred on
December 31, 2008. The CRA's position is based on the acquisition of control
rules, in addition to the general anti-avoidance rules in the Income Tax Act
(Canada). The table below summarizes Superior's estimated tax liabilities and
payment requirements associated with the received and anticipated Notices of
Reassessment. Upon receipt of the Notices of Reassessment, 50% of the taxes
payable pursuant to such Notices of Reassessment, must be remitted to the CRA.
----------------------------------------------------------------------------
Taxes Payable 50% of the Taxes
Taxation Year (1)(2) Payable(1)(2) Payment Dates
----------------------------------------------------------------------------
2009/2010 $13.0 $6.5 Paid in April 2013
2011 $10.0(3) $5.0 Q1 2014
2012 $10.0(3) $5.0 Q1 2014
2013 $10.0(3) $5.0 Q3 2014
2014 $20.0(3) $10.0 Q3 2015
----------------------------------------------------------------------------
Total $63.0 $31.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In millions of dollars.
(2) Includes estimated interest and penalties.
(3) Estimated based on Superior's previously filed tax returns and the
midpoint of Superior's 2013 outlook.
Superior filed a Notice of Objection with respect to the Notice of Reassessments
on May 8, 2013. The CRA did not respond or settle the Notice of Objection with
Superior in the 90 days after filing; as such Superior filed a Notice of Appeal
with the Tax Court of Canada on August 7, 2013. Superior anticipates that if the
application proceeds in the Tax Court of Canada a decision could be rendered by
the beginning of fiscal 2015. If a decision of the Tax Court of Canada were to
be appealed, the appeal process could reasonably be expected to take an
additional 2 years. If Superior receives a positive decision then any taxes,
interest and penalties paid to the CRA will be refunded plus interest and if
Superior is unsuccessful then any remaining taxes payable plus interest and
penalties will have to be remitted.
Superior remains confident in the appropriateness of its tax filing position and
the expected tax consequences of the Conversion and intends to vigorously defend
such position and intends to file its future tax returns on a basis consistent
with its view of the outcome of the Conversion.
Superior's 2013 and 2014 financial outlook as provided in this MD&A includes the
impact of the reassessments received to date although the interim tax payments
made by Superior will be recorded to the balance sheet and will not impact
either adjusted operating cash flow or net earnings. Please refer to the Debt
Management Summary on page 28 for the cash flow implications.
Based on the midpoint of Superior's current 2014 financial outlook of adjusted
operating cash flow per share of $1.80, if the tax pools from the Conversion
were not available to Superior, the impact would be an increase to cash income
taxes of approximately $0.15 per share for 2014. As previously stated, Superior
intends to file its future income tax returns on a basis consistent with its
view of the outcome of the Conversion.
Financial Outlook
Superior's outlook is for adjusted operating cash flow for 2013 to be between
$1.60 per share and $1.85 per share consistent with the outlook included in
Superior's second quarter MD&A. The 2013 financial outlook is provided before
restructuring charges. Superior is introducing its adjusted operating cash flow
2014 financial outlook of between $1.65 to $1.95, before restructuring charges,
an approximate increase of 5% over the anticipated 2013 financial results.
Achieving Superior's adjusted operating cash flow is dependent on the operating
results of its three operating segments.
In addition to the operating results of Superior's three operating segments,
significant assumptions underlying Superior's 2013 and 2014 outlooks are:
-- Economic growth in Canada and the U.S. is expected to be similar to or
modestly higher than in 2012 for the remainder of the year and increase
modestly in 2014;
-- Superior is expected to continue to attract capital and obtain financing
on acceptable terms;
-- Superior's estimated total debt to EBITDA ratio is based on maintenance
and growth related expenditures of $93.2 million in 2014 and working
capital funding requirements which do not contemplate any significant
commodity price changes;
-- The foreign currency exchange rate between the Canadian dollar and US
dollar is expected to average 1.03 in 2013 and 2014 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
remain consistent with 2012 levels for both 2013 and 2014; and
-- Canadian and U.S. based cash taxes are expected to be minimal for 2013
and 2014 based on existing statutory income tax rates and the ability to
use available losses.
Energy Services
-- Average temperatures across Canada and the Northeast U.S. are expected
to be consistent with the recent five-year average for the remainder of
2013 and 2014;
-- Total propane and U.S. refined fuels-related sales volumes for the
remainder of 2013 are expected to increase modestly from 2012, due to
assumptions that weather will be consistent with the five-year average
and that there will be an impact from customer win-back and retention
programs. Annual sales volumes for 2014 are expected to increase from
2013 due to customer growth initiatives and retention programs;
-- 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 results for the remainder of 2013 are
expected to increase as compared to 2012 due to supply chain management
efforts, improved supply cost contracts and higher sales volumes due to
a return to normal weather. Results for 2014 are expected to increase
modestly from 2013 due to growth in sales volumes and margins; and
-- Fixed-price energy services results for the remainder of 2013 are
expected to decrease as compared to 2012. The decrease will be primarily
related to lower transportation-related gross profits and lower
contribution from residential customer renewals and residential customer
count. Total new customer aggregation volumes are expected to decline
from 2012 as the system price for natural gas remains low. Growth in the
fixed-price electricity segment is expected to offset a portion of the
decline in natural gas gross profits. Results for 2014 are expected to
decrease from 2013 due to continued declines in the natural gas segment
as the system price of natural gas is expected to remain low offset in
part by continued growth in the electricity segment.
Specialty Chemicals
-- Sodium chlorate sales volumes are expected to increase during the
remainder of 2013 as compared to 2012 due to improved North American
demand. Sodium chlorate gross profits are expected to increase modestly
from 2012 due to higher sales volumes and slightly higher pricing offset
in part by higher electricity pricing and purchased product costs.
Current supply and demand conditions are expected to reduce gross
margins going forward. Sodium chlorate contribution in 2014 is expected
to decrease from 2013 due to lower gross margins associated with lower
pricing and higher electricity prices. Sales volumes in 2014 are
expected to increase as compared to 2013 due to the impact of the
strategic supply agreement;
-- Chloralkali sales volumes are expected to increase during the remainder
of 2013 as compared to 2012 due to higher demand for chlorine and
caustic products. Pricing is expected to improve modestly for chlorine
in 2013 as compared to 2012 although it will be consistent for other
products. Chloralkali contribution in 2014 is expected to be modestly
higher than 2013 due to higher sales volumes associated with the
completion of the Port Edwards and Saskatoon expansions offset in part
by higher electricity costs and a modest reduction in average sales
pricing on an electrical chemical unit basis;
-- Electrical costs are expected to increase slightly in 2013 as compared
to the prior year and increase in 2014 as compared to 2013; and
-- Average plant utilization will approximate greater than 90% in 2013 and
2014.
Construction Products Distribution
-- GSD sales revenue from Canada is expected to decline during the
remainder of 2013 due to the impact of branch closures in 2012 and lower
residential construction activity, offset in part by the successful
introduction of new products and price management. GSD sales revenue
from the United States is expected to increase during the remainder of
2013 due to emphasis on specific product opportunities, pricing
initiatives and residential market improvements in most regions. C&I
sales revenue is expected to increase during the remainder of 2013 due
to emphasis on specific product opportunities and pricing initiatives.
Revenues in 2014 are expected to increase as compared to 2013 due to
continued growth in U.S. based GSD sales as the U.S. residential market
continues to improve and higher C&I sales revenue due to some limited
recovery in the U.S. commercial construction segment;
-- Sales margins for GSD and C&I are expected to increase during the
remainder of 2013 due to price management initiatives, procurement
strategy and closure of low-margin branches. Sales margins in 2014 are
expected to increase modestly from 2013 due to continued focus on price
management and procurement; and
-- Operating costs as a percentage of revenue are expected to increase
slightly during the remainder of 2013 due to investment in supply chain
capability and inflationary increases of wages and other operating
costs, offset in part by savings from branch closures and restructuring
completed in 2012. Operating costs in 2014 are expected to decrease as a
percentage of revenue compared to 2013 due to anticipated savings from
restructuring efforts.
Restructuring Charges
-- Superior anticipates incurring $15.0 million to $20.0 million in one-
time restructuring costs associated with further operational
improvements at its Energy Services and Construction Products
Distribution. Restructuring charges are anticipated to be recognized
over the fourth quarter of 2013 and the first and second quarters of
2014. These costs are excluded from Superior's 2013 and 2014 financial
outlooks.
Debt Management Update
Superior anticipates its total debt to EBITDA ratio as at December 31, 2013 will
be in the range of 3.3X to 3.7X, consistent with the range provided in
Superior's third quarter MD&A, but with a bias towards the high end of the range
due to recent commodity price increases for propane which negatively impacts
Superior's working capital requirements.
Superior's December 31, 2013 and 2014 forecasted total debt to EBITDA leverage
ratios are stated before restructuring costs due to uncertainty in the timing in
the recognition of these costs. Superior anticipates that restructuring costs
will be recognized over the fourth quarter of 2013 and the first and second
quarters of 2014.
Superior's anticipated debt repayment for 2014 and total debt to EBITDA leverage
ratio as at December 31, 2014, based on Superior's 2013 and 2014 financial
outlooks and year-to-date results, are detailed in the chart below.
Millions of
Per Share dollars
----------------------------------------------------------------------------
2014 financial outlook AOCF per share - mid-
point (1) $ 1.80 227.1
Maintenance capital expenditures, net (0.29) (36.5)
Capital lease obligation repayments (0.14) (18.2)
Payment to CRA in relation to tax reassessment
(2) (0.12) (15.0)
----------------------------------------------------------------------------
Cash flow available for dividends and debt
repayment before growth capital $ 1.25 157.4
Expansion of Port Edward's and Saskatoon
facilities (0.19) (23.4)
Other growth capital expenditures (0.12) (15.1)
----------------------------------------------------------------------------
Estimated 2014 free cash flow available for
dividends and debt repayment $ 0.94 118.9
Dividends (0.60) (75.7)
----------------------------------------------------------------------------
Total estimated debt repayment $ 0.34 43.2
Estimated total debt to EBITDA ratio as at
December 31, 2014 3.3X - 3.7X 3.3X - 3.7X
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Dividends $ 0.60 75.7
Calculated payout ratio after all capital and
payment to CRA 64% 64%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See "Financial Outlook" for additional details including assumptions,
definitions and risk factors.
(2) See "Canada Revenue Agency Income Tax Update" for additional details.
In addition to Superior's significant assumptions detailed above, refer to "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 (collectively Borrowing) before deferred financing
fees totaled $456.3 million as at September 30, 2013, a decrease of $183.3
million from December 31, 2012. The decrease in Borrowing was primarily due to
the equity offering that Superior closed on March 27, 2013 for net proceeds of
$137.8 million, the proceeds from the issuance of $97.0 million of 6.00%
debentures on July 22, 2013 and the seasonal reduction of net working capital
offset in part by $143.9 million of debenture redemptions (see Redemptions
below) during 2013.
On September 19, 2013, Superior announced that on October 28, 2013, it would
redeem all of its outstanding $150.0 million, 8.25% senior unsecured debentures
due October 27, 2016. The early redemption allows for Superior to benefit from
lower average interest costs.
On June 10, 2013, Superior completed an extension of its $570 million Credit
Facility with eight lenders. The Credit Facility matures on June 27, 2016 and
can be expanded to $750 million. Financial covenant ratios were unchanged with
consolidated secured debt to consolidated EBITDA ratio and a consolidated debt
to consolidated EBITDA ratio of 3.0x and 5.0x, respectively. See "Summary of
Cash Flow" for details on Superior's sources and uses of cash.
As at September 30, 2013, Debentures (before deferred issue fees) issued by
Superior totaled $494.5 million which was $47.0 million lower than the balance
as at December 31, 2012 due to the redemption of the 5.85%, 5.75%, and 7.50%
convertible unsecured subordinated debentures during 2013, see Redemptions below
for further details, offset in part the issuance of $97.0 million of unsecured
subordinated debentures on July 22, 2013. See Note 11 to the unaudited condensed
consolidated financial statements for additional details on Superior's
Debentures.
Redemptions
On January 3, 2013, Superior completed the previously announced redemption of
$50.0 million principal amount of its previously issued 5.85% convertible
subordinated debentures (2015 Debentures) due October 31, 2015 and the remaining
$25.0 million principal amount on April 9, 2013. Superior used funds from its
Credit Facility to fund the redemption of the 2015 Debentures. The debentures
were redeemed, at the redemption price of $1,000 in cash per $1,000 principal
amount of 2015 Debentures plus accrued and unpaid interest up to but excluding
the redemption date.
On July 22, 2013, Superior redeemed the entire $68.9 million principal amount of
its 7.50% convertible unsecured subordinated debentures (7.50% Debentures) in
accordance with the indenture governing the 7.50% Debentures. The 7.50%
Debentures were redeemed at the redemption price which is equal to the
outstanding principal amount of the 7.50% Debentures to be redeemed, together
with all accrued and unpaid interest thereon up to the Redemption Date, being
$1,013.3562 per $1,000 principal amount of the 7.50% Debentures. The 7.50%
Debentures ceased to bear interest from and after the Redemption Date.
As at September 30, 2013, approximately $395.2 million was available under the
Credit Facility which Superior considers sufficient to meet its expected net
working capital, capital expenditure and refinancing requirements.
Consolidated net working capital was $202.0 million as at September 30, 2013, a
decrease of $77.2 million from net working capital of $279.2 million as at
December 31, 2012. The decrease was primarily due to a reduction in inventory
and accounts receivables within the Energy Services segment as a result of the
seasonality of the business. Superior's net working capital requirements are
financed from revolving term bank credit facilities.
Proceeds received from the DRIP were $nil million for the three months ended
September 30, 2013 (three months ended September 30, 2012 $3.6 million). On
March 7, 2013, Superior announced that it will stop the active operation of its
DRIP program effective after payment of the March dividend in April. Proceeds
received from the DRIP were $4.9 million for the nine months ended September 30,
2013 (nine months ended September 30, 2012 $10.6 million).
As at September 30, 2013, when calculated in accordance with the Credit
Facility, the consolidated secured debt to compliance EBITDA ratio was 1.2 to
1.0 (December 31, 2012 - 1.9 to 1.0) and the consolidated debt to compliance
EBITDA ratio was 1.7 to 1.0 (December 31, 2012 - 2.4 to 1.0). For both of these
covenants all outstanding Debentures are not included. These ratios are within
the requirements contained in Superior's debt covenants. 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
Debentures. Also, Superior is subject to several distribution tests and the most
restrictive stipulates that Distributions (including Debenture holders and
related payments) cannot exceed compliance EBITDA less cash income taxes, plus
$35.0 million on a trailing 12-month rolling basis. On a 12-month rolling basis
as at September 30, 2013, Superior's available distribution amount was $145.0
million under the above noted distribution test.
On March 28, 2013, Standard and Poor's confirmed both Superior and Superior LP's
long-term corporate credit rating as BB- and the secured debt rating as BB+. The
outlook rating for Superior remains stable. On July 2, 2013, DBRS confirmed
Superior LP's senior secured rating of BB (high) and Superior LP's senior
unsecured rating of BB (low). The trend for both ratings is stable.
As at September 30, 2013, Superior had an estimated defined benefit pension
solvency deficiency of approximately $21.4 million (December 31, 2012 - $36.7
million) and a going concern solvency surplus (deficiency) of approximately $1.6
million (December 31, 2012 - ($6.5) 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 common shares issued and outstanding during the
third quarter was 126.2 million shares, an increase of 14.0 million common
shares from the prior year quarter due to the issuance of 13,806,271 common
shares over the year and the resulting impact on weighted average number of
common shares outstanding. The following table provides details:
----------------------------------------------------------------------------
Issued Number
Average of Common
Closing Issuance Price Shares
Date per Share (Millions)
----------------------------------------------------------------------------
As at September 30, 2012 112.4
October 15,
Issuance of common shares 2012 through
under Superior's DRIP March 15, 2013 $10.09 0.8
Issuance of common shares March 27, 2013 $11.10 13.0
----------------------------------------------------------------------------
As at September 30, 2013 126.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at October 31, 2013, September 30, 2013 and December 31, 2012, the following
common shares and securities convertible into common shares were issued and
outstanding:
----------------------------------------------------------------------------
October 31, 2013 September 30, 2013 December 31, 2012
Convertible Convertible Convertible
(millions) Securities Shares Securities Shares Securities Shares
----------------------------------------------------------------------------
Common shares
outstanding 126.2 126.2 112.8
5.85% Debentures (1) - - - - $75.0 2.4
7.50% Debentures (2) - - - - $69.0 5.3
5.75% Debentures (3) $172.5 9.1 $172.5 9.1 $172.5 9.1
6.00% Debentures (4) $150.0 9.9 $150.0 9.9 $150.0 9.9
7.50% Debentures (5) $75.0 6.6 $75.0 6.6 $75.0 6.6
6.00% Debentures (6) $97.0 5.8 $97.0 5.8 - -
----------------------------------------------------------------------------
Shares outstanding and
issuable upon
conversion of
Debentures 157.6 157.6 146.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Convertible at $31.25 per share.
(2) Convertible at $13.10 per share.
(3) Convertible at $19.00 per share.
(4) Convertible at $15.10 per share.
(5) Convertible at $11.35 per share.
(6) Convertible at $16.75 per share.
Dividends Paid to Shareholders
Dividends paid to Superior's shareholders depend on its cash flow from operating
activities with consideration for Superior's changes in working capital
requirements, investing activities and financing activities. See "Summary of
Adjusted Operating Cash Flow" and "Summary of Cash Flow" for additional details.
Dividends paid to shareholders in the third quarter were $18.9 million or $0.15
per share, an increase of $2.1 million due to the issuance of shares under
Superior DRIP during the past 12 months and the equity offering completed on
March 27, 2013. Superior's monthly dividend is $0.05 per share or $0.60 per
share on an annualized basis. See "Debt Management Update" for further details.
Dividends to shareholders are declared at the discretion of Superior's Board of
Directors.
Superior's primary sources and uses of cash are detailed below:
Summary of Cash Flow (1)
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(millions of dollars) 2013 2012 2013 2012
----------------------------------------------------------------------------
Cash flow from operating activities 47.6 43.8 213.0 281.4
Investing activities(2):
Purchase of property, plant and
equipment (23.3) (8.5) (52.1) (21.7)
Proceeds from disposal of
property, plant and equipment 4.8 0.4 5.8 4.1
Acquisitions - (5.5) - (5.5)
----------------------------------------------------------------------------
Cash flow used in investing
activities (18.5) (13.6) (46.3) (23.1)
----------------------------------------------------------------------------
Financing activities:
Net proceeds (repayment) of
revolving term bank credits and
other debts (26.8) 33.3 (183.1) (153.3)
Repayment of finance lease
obligation (4.4) (4.7) (12.1) (12.3)
Redemption of 5.75% convertible
debentures - (49.9) - (49.9)
Redemption of 5.85% convertible
debentures - - (75.0) -
Redemption of 7.50% convertible
debentures (68.9) - (68.9) -
Proceeds from the issuance of
6.00% convertible debentures 97.0 - 97.0 -
Issue costs on issuance of 6.00%
convertible debentures (3.8) - (3.8) -
Proceeds from issuance of common
shares - - 143.9 -
Issue costs on issuance of common
shares - - (6.3) -
Proceeds from the dividend
reinvestment plan - 3.6 4.9 10.6
Dividends paid to shareholders (18.9) (16.8) (54.8) (50.2)
----------------------------------------------------------------------------
Cash flow used in financing
activities (25.8) (34.5) (158.2) (255.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 3.3 (4.3) 8.5 3.2
Cash and cash equivalents, beginning
of period 12.9 12.5 7.6 5.2
Effect of translation of foreign
currency-denominated cash and cash
equivalents (0.1) (0.5) - (0.7)
----------------------------------------------------------------------------
Cash and cash equivalents, end of
period 16.1 7.7 16.1 7.7
----------------------------------------------------------------------------
(1) See the consolidated statement of cash flow 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,
share-based compensation 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. Refer to
Superior's 2012 Annual MD&A for further details on financial instrument risk
management.
As at September 30, 2013, Superior has hedged approximately 70% of its estimated
US dollar exposure for 2013 and approximately 83% in 2014. The estimated
sensitivity of 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 2013 is $0.2 million
and for 2014 is $0.4 million after giving effect to United States forward
contracts for 2013 and 2014, as shown in the table below. Superior's
sensitivities and guidance are based on an anticipated average Canadian to US
dollar foreign currency exchange rate for 2013 and 2014 of 1.03.
----------------------------------------------------------------------------
(US$ millions except 2018 and
exchange rates) 2013 2014 2015 2016 2017 Thereafter Total
----------------------------------------------------------------------------
Energy Services - US$
forward sales 12.4 26.0 26.0 - - - 64.4
Construction Products
Distribution - US$ forward
sales 6.0 12.0 12.0 12.0 - - 42.0
Specialty Chemicals - US$
forward sales 43.5 181.0 148.0 101.4 51.0 - 524.9
Corporate - US$ forward
purchases (35.5) (27.0) - - - - (62.5)
----------------------------------------------------------------------------
Net US $ forward sales 26.4 192.0 186.0 113.4 51.0 - 568.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Energy Services - Average
US$ forward sales rate 1.05 1.01 1.01 - - - 1.02
Construction Products
Distribution - Average US$
forward sales rate 1.07 1.00 1.00 1.03 - - 1.02
Specialty Chemicals -
Average US$ forward sales
rate 1.04 1.03 1.02 1.04 1.04 - 1.03
Corporate - US$ forward
purchases rate 1.01 1.01 - - - - 1.01
----------------------------------------------------------------------------
Net average external
US$/CDN$ exchange rate 1.04 1.01 1.01 1.03 1.04 - 1.02
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For additional details on Superior's financial instruments, including the amount
and classification of gains and losses recorded in Superior's third quarter
condensed 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 12
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 September 30, 2013.
The Canadian propane business system roll out (see System Conversion) commenced
during the third quarter of 2013 and management has concluded that the change
materially affected Superior's internal controls over financial reporting.
Superior's management team has participated at all levels of planning and
execution of the IT system and has concluded that no material deficiency has
resulted from this change to internal controls over financial reporting .The
planning and execution of the system transition will continue to be overseen by
senior management with involvement by the President and VP Finance of the
business and the certifying officers.
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 September 30, 2013. 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
provision retirement obligations.
Recent Accounting Pronouncements
Certain new standards, interpretations, amendments or improvements to existing
standards were issued by the IASB or the International Financial Reporting
Interpretations Committee (IFRIC) that are mandatory for accounting periods
beginning on January 1, 2013 or later. The affected standards that apply to
Superior are as follows:
IFRS 9 - Financial Instruments: Classification and Measurement
IFRS 9, Financial Instruments, was issued in November 2009 and is intended to
replace International Accounting Standard (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, 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, 2015, with earlier adoption permitted.
Superior is assessing the effect of IFRS 9 on its financial results and
financial position; changes, if any, are not expected to be material.
Superior adopted the following on January 1, 2013:
IFRS 10 - Consolidated Financial Statements
IFRS 10 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 was effective for
Superior on January 1, 2013. Superior adopted the amendments on January 1, 2013,
with no impact to Superior.
IFRS 11 - Joint Arrangements
IFRS 11 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 became applicable on January 1, 2013. Superior adopted the amendments
on January 1, 2013, with no impact to Superior.
IFRS 12 - Disclosure of Interests in Other Entities
IFRS 12 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 disclosure 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 became effective for Superior on January 1, 2013. Superior adopted
the amendments on January 1, 2013, with no impact to Superior.
IFRS 13 - Fair Value Measurement
IFRS 13 defines fair value, sets out a single IFRS framework for measuring fair
value and requires disclosure about fair value measurements. IFRS 13 applies to
accounting standards that require or permit fair value measurements or
disclosure about fair value measurements (and measurements, such as fair value
less costs to sell, based on fair value or disclosure about those measurements),
except in specified circumstances. IFRS 13 became applicable on January 1, 2013.
Superior adopted the amendments on January 1, 2013, with no impact to Superior.
IAS 1 - Presentation of Other Comprehensive Income
The amendments to IAS 1, Presentation of Financial Statements, issued in June
2011, require entities to group items presented in other comprehensive income on
the basis of whether they might be reclassified to the consolidated statement of
income in subsequent periods and items that will not be reclassified to the
consolidated statement of income. The amendments did not address which items are
presented in other comprehensive income and did not change the option to present
items net of tax. The amendments to IAS 1 became effective for annual periods
beginning on or after July 1, 2012, which was January 1, 2013 for Superior, and
are to be applied retrospectively. Superior adopted the amendments on January 1,
2013, with no impact to Superior.
IAS 19 - Employee Benefits, amendments
IAS 19 amendments were issued in June 2011, and changed the accounting and
disclosure for defined benefit plans and termination benefits. The 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 obligations 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 applies for accounting
periods beginning on or after January 1, 2013. Superior adopted IAS 19 on
January 1, 2013 and the financial impact is an increase of $3.1 million to
pension expenses and a corresponding decrease to accumulated other comprehensive
loss for the year ended December 31, 2012. The impact on Superior's balance
sheet as at January 1, 2012 is a $4.0 million increase to retained deficit, a
$0.1 million decrease in employee benefit obligations and a corresponding
decrease to accumulated other comprehensive loss of $4.1 million. The impact on
the three and nine months ended September 30, 2012 was an increase in selling,
distribution and administrative costs of $0.8 million and $2.4 million,
respectively. See below for the quarterly impact to AOCF in 2012.
Reconciliation of the retrospective impact of IAS 19
----------------------------------------------------------------------------
(millions of
dollars) (per share)
----------------------------------------------------------------------------
AOCF as reported under IFRS in 2012 193.5 $1.73
IAS 19 Quarterly impact:
Q1 decrease in AOCF (0.8) ($0.01)
Q2 decrease in AOCF (0.8) ($0.01)
Q3 decrease in AOCF (0.8) ($0.01)
Q4 decrease in AOCF (0.7) -
----------------------------------------------------------------------------
AOCF as revised for 2012 190.4 $1.70
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarterly Financial and Operating Information
----------------------------------------------------------------------------
(millions of
dollars
except per
share
amounts) 2013 Quarters 2012 Quarters (2)(3) 2011 Quarters
Third Second First Fourth Third Second First Fourth Third
----------------------------------------------------------------------------
Canadian
propane
sales
volumes
(millions
of litres) 232 265 429 383 240 255 413 368 239
U.S. refined
fuels sales
volumes
(millions
of litres) 326 383 512 428 335 363 473 440 344
Natural gas
sales
volumes
(millions
of GJs) 5 5 5 5 5 5 5 5 5
Electricity
sales
volumes
(millions
of KwH) 249 205 205 200 245 187 185 167 176
Chemical
sales
volumes
(thousands
of metric
tonnes) 204 199 203 200 193 190 188 187 197
Revenues 813.8 854.4 1,049.9 934.0 790.1 834.3 1,065.9 1,043.4 845.0
Gross profit 184.9 190.0 253.1 228.2 195.9 184.1 238.1 234.6 178.5
Net earnings
(loss) 35.9 (25.5) 31.4 13.5 35.9 12.7 27.9 (231.4)(113.4)
Per share,
basic $0.28($0.20) $0.28 $0.12 $0.32 $0.11 $0.25 ($2.10)($1.04)
Per share,
diluted $0.12($0.20) $0.27 $0.12 $0.29 $0.11 $0.24 ($2.10)($1.04)
Adjusted
operating
cash flow 24.2 30.2 82.0 61.9 33.7 28.2 66.6 63.8 23.5
Per share,
basic $0.19 $0.24 $0.72 $0.55 $0.30 $0.25 $0.60 $0.58 $0.21
Per share,
diluted $0.19 $0.24 $0.69 $0.55 $0.30 $0.25 $0.60 $0.58 $0.21
Net working
capital (1)
(millions
of dollars) 202.0 242.3 280.5 279.2 218.3 234.4 325.3 377.3 295.0
----------------------------------------------------------------------------
(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) Superior's 2012 quarterly results have been restated for the adoption of
IAS 19 Employee Benefits, amendments.
(3) December 31, 2012 has been restated for the impact of a prior period
adjustment. Refer to Note 8 in the financial statements.
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, other
expenses, non-cash interest expense, current income taxes and finance costs.
Superior may deduct or include additional items in 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 Superior's performance.
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 expenses, which
can differ significantly from quarter to quarter. Adjustments are also made to
reclassify the cash flow related to natural gas and electricity customer
contract-related costs in a manner consistent with the income statement's
recognition of these costs. Adjusted operating cash flow is reconciled to net
cash flow from operating activities on Page 13.
EBITDA
EBITDA represents earnings before taxes, depreciation, amortization, finance
expense and certain 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. The EBITDA of
Superior's operating segments may be referred to as EBITDA from operations. Net
earnings before income taxes are reconciled to EBITDA from operations on page
38.
Compliance EBITDA
Compliance EBITDA represents earnings before interest, taxes, depreciation,
amortization and certain 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 14 to the unaudited condensed consolidated
financial statements for a reconciliation of net earnings to compliance EBITDA.
Payout Ratio
Payout ratio represents dividends as a percentage of adjusted operating cash
flow less other capital expenditures, and is used by Superior to assess its
financial results and leverage. Payout ratio is not a defined performance
measure under IFRS. Superior's calculation of payout ratio may differ from
similar calculations used by comparable entities.
Reconciliation of Net Earnings before income taxes to EBITDA from Operations (1) (2)
--------------------------------------------------------------------------
Construction
For the three months ended September Energy Specialty Products
30, 2013 Services Chemicals Distribution
--------------------------------------------------------------------------
Net Earnings before income taxes 1.9 15.6 8.5
Add: Amortization of property, plant
and equipment and intangible assets 13.1 - 1.5
Amortization included in cost of
sales - 10.4 -
Gains on disposal of assets (3.5) - -
Amortization of customer contract-
related costs 0.7 - -
Customer contract-related costs (0.3) - -
Finance costs 0.4 0.1 0.1
Unrealized gains on derivative
financial instruments (4.0) (1.5) -
--------------------------------------------------------------------------
EBITDA from operations 8.3 24.6 10.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Construction
For the three months ended September Energy Specialty Products
30, 2012 Services Chemicals Distribution
--------------------------------------------------------------------------
Net Earnings before income taxes 25.5 28.3 1.7
Add: Amortization of property, plant
and equipment and intangible assets 13.1 1.7 1.7
Amortization included in cost of
sales - 10.9 -
Losses on disposal of assets 0.3 - -
Amortization of customer contract-
related costs 0.9 - -
Customer contract-related costs (0.3) - -
Finance costs 1.3 0.1 0.2
Unrealized gains on derivative
financial instruments (27.8) - -
--------------------------------------------------------------------------
EBITDA from operations 13.0 41.0 3.6
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Construction
For the nine months ended September Energy Specialty Products
30, 2013 Services Chemicals Distribution
--------------------------------------------------------------------------
Net Earnings before income taxes 73.6 54.6 17.9
Add: Amortization of property,
plant and equipment and intangible
assets 38.6 - 4.5
Amortization included in cost of
sales - 30.4 -
(Gains) Losses on disposal of
assets (3.3) - 0.1
Amortization of customer contract-
related costs 2.1 -
Customer contract-related costs (0.6) -
Finance costs 1.9 0.2 0.4
Unrealized gains on derivative
financial instruments (21.2) (2.6) -
--------------------------------------------------------------------------
EBITDA from operations 91.1 82.6 22.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Construction
For the nine months ended September Energy Specialty Products
30, 2012 Services Chemicals Distribution
--------------------------------------------------------------------------
Net Earnings before income taxes 84.4 58.3 7.7
Add: Amortization of property, plant
and equipment and intangible assets 40.7 5.0 4.7
Amortization included in cost of
sales - 33.4 -
(Gains) Losses on disposal of
assets (0.8) - 0.1
Amortization of customer contract-
related costs 2.6 - -
Customer contract-related costs (0.9) - -
Finance costs 3.3 0.2 0.5
Unrealized gains on derivative
financial instruments (42.1) - -
--------------------------------------------------------------------------
EBITDA from operations 87.2 96.9 13.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) See the unaudited condensed consolidated financial statements for net
earnings before income taxes, depreciation included in selling,
distribution and administrative costs, amortization of intangible assets
and accretion of convertible debenture issue costs, amortization
included in cost of sales, depreciation of customer contract-related
costs, customer contract-related costs and unrealized (gains) losses on
derivative financial instruments.
(2) See "Non-IFRS Financial Measures" for additional details.
Reconciliation of Segmented Revenue, Cost of Sales and Cash Operating and
Administrative Costs
----------------------------------------------------------------------------
For the three months ended
September 30, 2013
Construction
Specialty Products
Energy Services Chemicals Distribution
----------------------------------------------------------------------------
Revenue per financial
statements 459.0 144.7 210.1
Foreign currency gains (losses)
related to working capital - (1.1) -
----------------------------------------------------------------------------
Revenue per the MD&A 459.0 143.6 210.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cost of products sold per
financial statements (375.4) (94.8) (158.7)
Non-cash amortization - 10.4 -
----------------------------------------------------------------------------
Cost of products sold per the
MD&A (375.4) (84.4) (158.7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross profit 83.6 59.2 51.4
Cash operating and
administrative costs per
financial statements (85.3) (35.7) (42.8)
Depreciation costs 9.2 - 1.5
Amortization costs 3.9 - -
(Gains) Losses on disposal of
assets (3.5) - -
Amortization of customer
contract-related costs 0.7 - -
Customer contract-related
costs (0.3) - -
Reclassification of foreign
currency (gains) and losses
related to working capital - 1.1 -
----------------------------------------------------------------------------
Cash operating and
administrative costs per the
MD&A (75.3) (34.6) (41.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended
September 30, 2012
Construction
Specialty Products
Energy Services Chemicals Distribution
----------------------------------------------------------------------------
Revenue per financial
statements 453.8 134.5 201.8
Foreign currency gains (losses)
related to working capital - (1.9) -
----------------------------------------------------------------------------
Revenue per the MD&A 453.8 132.6 201.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cost of products sold per
financial statements (368.4) (70.7) (155.1)
Non-cash amortization - 10.9 -
----------------------------------------------------------------------------
Cost of products sold per the
MD&A (368.4) (59.8) (155.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross profit 85.4 72.8 46.7
Cash operating and
administrative costs per
financial statements (86.4) (35.4) (44.8)
Depreciation costs 8.9 - 1.6
Amortization costs 4.2 1.7 0.1
(Gains) Losses on disposal of
assets 0.3 - -
Amortization of customer
contract-related costs 0.9 - -
Customer contract-related
costs (0.3) - -
Reclassification of foreign
currency (gains) and losses
related to working capital - 1.9 -
----------------------------------------------------------------------------
Cash operating and
administrative costs per the
MD&A (72.4) (31.8) (43.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine months ended
September 30, 2013
Construction
Specialty Products
Energy Services Chemicals Distribution
----------------------------------------------------------------------------
Revenue per financial
statements 1,690.0 424.6 603.5
Foreign currency gains (losses)
related to working capital - 1.3 -
----------------------------------------------------------------------------
Revenue per the MD&A 1,690.0 425.9 603.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cost of products sold per
financial statements (1,358.9) (272.7) (458.5)
Non-cash amortization - 30.4 -
----------------------------------------------------------------------------
Cost of products sold per the
MD&A (1,358.9) (242.3) (458.5)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross profit 331.1 183.6 145.0
Cash operating and
administrative costs per
financial statements (276.8) (99.7) (126.7)
Depreciation costs 26.9 - 4.4
Amortization costs 11.7 - 0.1
(Gains) Losses on disposal of
assets (3.3) - 0.1
Amortization of customer
contract-related costs 2.1 -
Customer contract-related
costs (0.6) -
Reclassification of foreign
currency (gains) and losses
related to working capital - (1.3) -
----------------------------------------------------------------------------
Cash operating and
administrative costs per the
MD&A (240.0) (101.0) (122.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine months ended
September 30, 2012
Construction
Specialty Products
Energy Services Chemicals Distribution
----------------------------------------------------------------------------
Revenue per financial
statements 1,699.4 405.2 585.7
Foreign currency gains (losses)
related to working capital - (2.1) -
----------------------------------------------------------------------------
Revenue per the MD&A 1,699.4 403.1 585.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cost of products sold per
financial statements (1,381.6) (241.2) (449.4)
Non-cash amortization - 33.4 -
----------------------------------------------------------------------------
Cost of products sold per the
MD&A (1,381.6) (207.8) (449.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross profit 317.8 195.3 136.3
Cash operating and
administrative costs per
financial statements (272.2) (105.5) (128.1)
Depreciation costs 27.2 - 4.5
Amortization costs 13.5 5.0 0.2
(Gains) Losses on disposal of
assets (0.8) - 0.1
Amortization of customer
contract-related costs 2.6 - -
Customer contract-related
costs (0.9) - -
Reclassification of foreign
currency (gains) and losses
related to working capital - 2.1 -
----------------------------------------------------------------------------
Cash operating and
administrative costs per the
MD&A (230.6) (98.4) (123.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Risk Factors to Superior
The risk factors and uncertainties detailed below are a summary of Superior's
assessment of its material risk factors as detailed in Superior's 2012 Annual
Information Form under "Risk Factors" which is filed on the Canadian Securities
Administrators' website, www.sedar.com, and on Superior's website,
www.superiorplus.com.
Risks to Superior
Superior depends entirely on the operations and assets of Superior LP.
Superior's ability to make dividend payments to its shareholders depends on the
ability of Superior LP to make distributions on its outstanding limited
partnership units, as well as on the operations and business of Superior LP.
There is no assurance regarding the amount of cash to be distributed by Superior
LP or generated by Superior LP and, therefore, there is no assurance regarding
funds available for dividends to shareholders. The 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., the general partner of
Superior LP, 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.
Since the beginning of 2010, the CRA has requested and reviewed information from
Superior relating to the plan of arrangement involving Superior Plus Income Fund
and Ballard Power Systems Inc. and the Conversion. On February 11, 2013,
Superior received the proposal letter from the CRA. The proposal letter proposes
to deny the availability of capital losses of approximately $623.0 million and
other tax basis of approximately $1,000.0 million. On April 2, 2013, Superior
received from the CRA, Notices of Reassessment for Superior's 2009 and 2010
taxation years. Superior filed a Notice of Objection with respect to the Notice
of Reassessments on May 8, 2013. The CRA did not respond or settle the Notice of
Objection with Superior in the 90 days after filing, as such Superior filed a
Notice of Appeal with the Tax Court of Canada on August 7, 2013. Superior
remains confident in the appropriateness of its tax filing position and the
expected tax consequences of the Arrangement and the Conversion and intends to
vigorously defend such position. Superior also strongly believes that the
acquisition of control or the general anti-avoidance rule do not apply to the
Arrangement and the Conversion and intends to file its future tax returns on a
basis consistent with its view of the outcome of the Arrangement and the
Conversion.
The credit facilities and U.S. Notes 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 and debenture redemptions
under its term credit facilities may be impaired.
Superior maintains a substantial floating interest rate exposure through a
combination of floating interest rate borrowing 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 demand
from Superior's customers, thereby increasing Superior's sales and its 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. Increased interest rates, however, will
affect Superior's borrowing costs, which may have an adverse effect on Superior.
A portion of Superior's net cash flow is denominated in US dollars. Accordingly,
fluctuations in the Canadian/US dollar exchange rate can affect 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 assurance 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 CRA (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.
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. While propane is usually more cost-effective than
electricity, electricity is a major competitor in most areas. Fuel oil is also
used as a residential, commercial and industrial source of heat. Except for
certain industrial and commercial applications, propane is generally not
competitive with natural gas in areas where natural gas service exists. Other
alternative energy sources such as compressed natural gas, methanol and ethanol
are available or could be further developed and could have an impact on the
propane industry in general and Canadian propane distribution in particular, in
the future. The trend towards increased conservation measures and technological
advances in energy efficiency may have a detrimental effect on propane demand
and Canadian propane distribution's sales. Demand for traditional propane
end-use applications is increasing marginally with general economic growth.
However, increases in the cost of propane encourage customers to reduce fuel
consumption and to invest in more energy efficient equipment, reducing demand.
Automotive propane demand is presently stabilizing after several years of
decline but this trend could return depending upon propane pricing and the
market acceptance of propane conversion options and the availability of
infrastructure.
Competition in the U.S. refined fuels' business markets generally occurs on a
local basis between large, full-service, multi-state marketers and smaller,
independent local marketers. Marketers primarily compete based on price and
service and tend to operate in close proximity to customers, typically within a
35-mile marketing radius from a central depot, in order to minimize delivery
costs and provide prompt service.
Weather and general economic conditions affect distillates market volumes.
Weather influences the immediate demand for distillates, primarily for heating,
while longer-term demand declines due to economic conditions as customers trend
towards conservation and supplement heating with alternative sources such as
wood pellets.
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 (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 environmental, health and safety protection program. It 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
pose the potential for spills which impact the soil 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 compliance 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.
In 2013, Canadian propane distribution commenced the implementation of an order
to cash, billing and logistics IT system to replace the distribution and
invoicing functions of the present enterprise system. To mitigate the risk
associated with system changes, Canadian propane distribution will leverage the
learnings from the U.S refined fuels organization that have been using this new
system and implementation will be rolled out one region at a time.
Approximately 19% of Superior's Canadian propane distribution business employees
are unionized and 5% of U.S. refined fuels distribution business 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 renegotiation process that could have an adverse impact
on Superior.
Fixed-price energy services business
There may be new market entrants in the energy retailing business that compete
directly for the customer base that Superior targets, slowing or reducing its
market share.
Superior Energy Management (SEM) purchases natural gas to meet its estimated
commitments to its customers based on their historical consumption of gas.
Depending on a number of factors, including weather, customer attrition and poor
economic conditions affecting commercial customers' production levels, customer
natural gas consumption may vary from the volume purchased. This variance must
be reconciled and settled at least annually and may require SEM to purchase or
sell natural gas at market prices which may have an adverse impact on the
results of this business. To mitigate potential balancing risk, SEM closely
monitors its balancing position and takes measures such as adjusting gas
deliveries and transferring gas between pools of customers, minimizing
imbalances. The reserve is reviewed on a monthly basis to ensure that it is
sufficient to absorb any losses that might arise from balancing.
SEM matches its customers' estimated electricity requirements by entering into
electricity swaps as customers are acquired within pre-determined risk
tolerances. Depending on several factors, including weather, customers' energy
consumption may vary from the volumes purchased by SEM. SEM 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 SEM is
responsible when customer aggregation forecasts are not realized.
Fixed-price energy services manages 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 eight
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. The financial condition of each counterparty is, however, 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 laws 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. Fixed-price
energy services also markets electricity in Pennsylvania and New York State and
natural gas in New York State only. The regulatory environment in Pennsylvania
is favourable to retail choice. The Pennsylvania Utility Commission's Retail
Market Investigation focused on solutions to increase retail market share and
included orders for utilities to investigate retail opt-in auctions to entice
customers to consider retail choice, reduce enrollment timelines, implement
retail referral programs and design seamless moves that would reduce churn as a
customer moves or changes accounts.
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
the segment's 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
remain 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.
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 US dollar 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. There is potential 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 segment's
facilities unsafe, they may order that such facilities be shut down.
Specialty Chemicals' operations and activities in various jurisdictions require
regulatory approval for the handling, production, transportation and disposal of
chemical products and waste substances. The failure to obtain or comply fully
with such applicable regulatory approval may materially adversely affect
Specialty Chemicals.
Specialty Chemicals' production facilities maintain complex process and
electrical equipment. The facilities have existed for many years and undergone
upgrades and improvements. Routine maintenance is regularly completed to ensure
equipment is operated within appropriate engineering and technical requirements.
Notwithstanding Specialty Chemicals' operating standards and history of limited
downtime, breakdown of an electrical transformer or rectifier equipment and
certain other equipment would temporarily reduce production at the affected
facility. Although the segment has insurance coverage to mitigate substantial
loss due to equipment outage, Specialty Chemicals' reputation and its ability to
meet customer requirements could be negatively affected by a major electrical
equipment failure.
Approximately 24% 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
negotiation process that could have an adverse impact on Superior.
Construction Products Distribution
Activity in the Construction Products Distribution segment is subject to changes
in general economic activity and, in particular, residential and non-residential
construction. New residential construction is subject to such factors as
household income, employment levels, customer confidence, population changes and
the local supply of residential units. Residential renovation is not as
sensitive to these factors and can provide some balance in the demand for
residential construction product distribution. Non-residential activity can be
subdivided into commercial, industrial and institutional. New construction 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 Superior's insulation
businesses. As a result, changes to general economic activity or other factors
mentioned above that affect the amount of construction or renovation in
residential and non-residential markets can have an adverse effect on the
segment's 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 the segment's ability to provide reliable service at competitive
prices.
The 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 affect existing housing sales, new home
construction, new non-residential construction, and office/commercial space
turnover, all of which are significant factors in determining demand for
products and services.
The C&I market is driven largely by C&I construction spending and economic
growth. Demand is influenced by commercial construction and renovation, the
construction, maintenance and expansion of industrial process facilities (such
as oil refineries, petrochemical plants and power generation facilities) and
institutional facilities in the government, healthcare and education sectors.
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. These hazards can
result in personal injury including fatalities, damage to and destruction of
property and equipment and environmental damage. There can be no assurance that
as a result of past or future operations, there will not be claims of injury by
employees or members of the public due to exposure, or alleged exposure, to
these materials. There can be no assurance as to the actual amount of these
liabilities or the timing of them, if any. 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 negotiation process that could have an adverse impact
on the segment and Superior.
SUPERIOR PLUS CORP.
Condensed Consolidated Balance Sheets
----------------------------------------------------------------------------
September 30, December 31,
(unaudited, millions of Canadian dollars) Notes 2013 2012(1)(2)
----------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents 16.1 7.6
Trade and other receivables 4&12 349.3 389.0
Prepaid expenses 28.8 20.5
Inventories 183.8 213.7
Unrealized gains on derivative financial
instruments 12 10.3 16.6
----------------------------------------------------------------------------
Total Current Assets 588.3 647.4
----------------------------------------------------------------------------
Non-Current Assets
Property, plant and equipment 6 825.8 829.9
Intangible assets 32.9 39.6
Goodwill 189.1 189.1
Notes and finance lease receivables 9.9 10.1
Deferred tax 13 284.8 303.1
Unrealized gains on derivative financial
instruments 12 8.6 12.9
----------------------------------------------------------------------------
Total Non-Current Assets 1,351.1 1,384.7
----------------------------------------------------------------------------
Total Assets 1,939.4 2,032.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Current Liabilities
Trade and other payables 8 317.9 318.5
Deferred revenue 9 27.4 18.2
Borrowing 10 58.1 59.7
Convertible unsecured subordinated
debentures 11&21 - 50.0
Dividends and interest payable 14.6 7.3
Unrealized losses on derivative financial
instruments 12 25.0 36.5
----------------------------------------------------------------------------
Total Current Liabilities 443.0 490.2
----------------------------------------------------------------------------
Non-Current Liabilities
Borrowing 10 393.9 574.7
Convertible unsecured subordinated
debentures 11 468.2 475.1
Other liabilities 9 0.1 1.0
Provisions 7 15.3 17.6
Employee future benefits 26.9 54.0
Deferred tax 13 3.1 2.5
Unrealized losses on derivative financial
instruments 12 55.9 42.6
----------------------------------------------------------------------------
Total Non-Current Liabilities 963.4 1,167.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Liabilities 1,406.4 1,657.7
----------------------------------------------------------------------------
Equity
Capital 1,787.9 1,646.5
Deficit (1,231.8) (1,218.2)
Accumulated other comprehensive loss (23.1) (53.9)
----------------------------------------------------------------------------
Total Equity 14 533.0 374.4
----------------------------------------------------------------------------
Total Liabilities and Equity 1,939.4 2,032.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) December 31, 2012 has been restated for the impact of adopting IAS 19
Employee Benefits, amendments on January 1, 2013. Refer to Note 2.
(2) December 31, 2012 has been restated for the impact of a prior period
adjustment. Refer to Note 8.
See accompanying Notes to the Condensed Consolidated Financial Statements.
SUPERIOR PLUS CORP.
Condensed Consolidated Statement of Changes in Equity
----------------------------------------------------------------------------
Accumulated
(unaudited, other
millions of Share Contributed Total comprehensive
Canadian dollars) Capital Surplus(1) Capital Deficit loss Total
----------------------------------------------------------------------------
January 1, 2012 1,629.8 3.3 1,633.1 (1,228.2) (55.3) 349.6
Impact of
adopting IAS
19, Employee
Benefits,
amendments(2) - - - (4.0) 4.1 0.1
Impact of prior
period
adjustment (3) - - - (8.8) - (8.8)
----------------------------------------------------------------------------
Restated as at
January 1, 2012 1,629.8 3.3 1,633.1 (1,241.0) (51.2) 340.9
Net earnings - - - 76.5 - 76.5
Option value
associated with
redemption of
convertible
debentures - (0.8) (0.8) - - (0.8)
Shares issued
under dividend
reinvestment
plan 10.6 - 10.6 - - 10.6
Dividends
declared to
shareholders - - - (50.3) - (50.3)
Unrealized
foreign
currency losses
on translation
of foreign
operation - - - - (13.5) (13.5)
Actuarial
defined benefit
losses - - - - (7.7) (7.7)
Income tax
expense on
other
comprehensive
income - - - - 2.7 2.7
----------------------------------------------------------------------------
September 30, 2012 1,640.4 2.5 1,642.9 (1,214.8) (69.7) 358.4
----------------------------------------------------------------------------
Net earnings - - - 13.5 - 13.5
Shares issued
under dividend
reinvestment
plan 3.6 - 3.6 - - 3.6
Dividends
declared to
shareholders - - - (16.9) - (16.9)
Unrealized
foreign
currency gains
on translation
of foreign
operation - - - - 4.7 4.7
Actuarial
defined benefit
gains - - - - 14.9 14.9
Income tax
expense on
other
comprehensive
loss - - - - (3.8) (3.8)
----------------------------------------------------------------------------
December 31, 2012 1,644.0 2.5 1,646.5 (1,218.2) (53.9) 374.4
----------------------------------------------------------------------------
Net earnings - - - 41.8 - 41.8
Option value
associated with
redemption of
convertible
debentures - (1.1) (1.1) - - (1.1)
Shares issued
under dividend
reinvestment
plan 4.9 - 4.9 - - 4.9
Issuance of
common shares 137.6 - 137.6 - - 137.6
Dividends
declared to
shareholders - - - (55.4) - (55.4)
Unrealized
foreign
currency gains
on translation
of foreign
operation - - - - 12.9 12.9
Actuarial
defined benefit
gains - - - - 24.3 24.3
Income tax
expense on
other
comprehensive
loss - - - - (6.4) (6.4)
----------------------------------------------------------------------------
September 30, 2013 1,786.5 1.4 1,787.9 (1,231.8) (23.1) 533.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Contributed surplus represents Superior's equity reserve for the option
value associated with the issuance of convertible unsecured subordinate
debentures and warrants.
(2) December 31, 2012 has been restated for the impact of adopting IAS 19
Employee Benefits, amendments on January 1, 2013. Refer to Note 2.
(3) Superior restated the January 1, 2012 deficit by $8.8 million due to a
prior period adjustment. Refer to Note 8.
See accompanying Notes to the Condensed Consolidated Financial Statements.
SUPERIOR PLUS CORP.
Condensed Consolidated Statement of Net Earnings and Total Comprehensive
Income
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(unaudited, millions of
Canadian dollars except per
share amounts) Notes 2013 2012(1) 2013 2012(1)
----------------------------------------------------------------------------
Revenues 17 813.8 790.1 2,718.1 2,690.3
Cost of sales (includes
products & services) 17 (628.9) (594.2) (2,090.1) (2,072.2)
----------------------------------------------------------------------------
Gross profit 184.9 195.9 628.0 618.1
----------------------------------------------------------------------------
Expenses
Selling, distribution and
administrative costs 17 (167.7) (171.9) (517.1) (518.5)
Finance expense 17 (17.7) (19.3) (51.5) (59.4)
Unrealized gains (losses) on
derivative financial
instruments 12 36.6 38.8 (4.7) 46.2
----------------------------------------------------------------------------
(148.8) (152.4) (573.3) (531.7)
----------------------------------------------------------------------------
Net earnings before income
taxes 36.1 43.5 54.7 86.4
Income tax expense 13 (0.2) (7.6) (12.9) (9.9)
----------------------------------------------------------------------------
Net earnings 35.9 35.9 41.8 76.5
----------------------------------------------------------------------------
Net earnings 35.9 35.9 41.8 76.5
Other comprehensive income:
Unrealized foreign currency
(losses) gains on
translation of foreign
operations (10.2) (15.1) 12.9 (13.5)
Actuarial defined benefit
gains (losses) 12.4 (4.1) 24.3 (7.7)
Income tax (expense)
recovery on other
comprehensive income (loss) (1.8) 1.3 (6.4) 2.7
----------------------------------------------------------------------------
Other comprehensive income
(loss) 0.4 (17.9) 30.8 (18.5)
----------------------------------------------------------------------------
Total Comprehensive income
for the period 36.3 18.0 72.6 58.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings per share
Basic 15 $0.28 $0.32 $0.34 $0.69
Diluted 15 $0.12 $0.31 $0.33 $0.68
----------------------------------------------------------------------------
(1) Three and nine months ended September 30, 2012 has been restated for the
impact of adopting IAS 19 Employee Benefits,amendments on January 1,
2013. Refer to Note 2.
See accompanying Notes to the Condensed Consolidated Financial Statements.
SUPERIOR PLUS CORP.
Condensed Consolidated Statement of Cash Flows
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
(unaudited, millions of
Canadian dollars) Notes 2013 2012(1) 2013 2012(1)
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings for the period 35.9 35.9 41.8 76.5
Adjustments for:
Depreciation included in
selling, distribution and
administrative costs 6 10.7 10.5 31.3 31.7
Amortization of intangible
assets 4.1 6.0 12.2 18.7
Depreciation included in cost
of sales 6 10.4 10.9 30.4 33.4
Amortization of customer
contract-related costs 0.7 0.9 2.1 2.6
(Gains) Losses on disposal of
assets (3.5) 0.3 (3.2) (0.7)
Unrealized (gains) losses on
derivative financial
instruments 12 (36.6) (38.8) 4.7 (46.2)
Customer contract-related
costs (0.3) (0.3) (0.6) (0.9)
Finance expense recognized in
net earnings 17.7 19.3 51.5 59.4
Income tax expense recognized
in net earnings 0.2 7.6 12.9 9.9
Decrease in non-cash
operating working capital 16 23.8 12.1 72.3 141.9
----------------------------------------------------------------------------
Net cash flows from operating
activities 63.1 64.4 255.4 326.3
Income taxes (paid) received (0.2) - (6.5) 0.4
Interest paid (15.3) (20.6) (35.9) (45.3)
----------------------------------------------------------------------------
Cash flows from operating
activities 47.6 43.8 213.0 281.4
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant
and equipment 19 (23.3) (8.5) (52.1) (21.7)
Proceeds from disposal of
property, plant and equipment 4.8 0.4 5.8 4.1
Acquisitions 19 - (5.5) - (5.5)
----------------------------------------------------------------------------
Cash flows used in investing
activities (18.5) (13.6) (46.3) (23.1)
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (repayment) proceeds of
revolving term bank credits
and other debt (26.8) 33.3 (183.1) (153.3)
Repayment of finance lease
obligations (4.4) (4.7) (12.1) (12.3)
Redemption of 5.75%
convertible debentures - (49.9) - (49.9)
Redemption of 5.85%
convertible debentures 11 - - (75.0) -
Redemption of 7.50%
convertible debentures 11 (68.9) - (68.9) -
Proceeds from issuance of
6.00% convertible debentures 11 97.0 - 97.0 -
Issue costs on issuance of
6.00% convertible debentures (3.8) - (3.8) -
Proceeds from issuance of
common shares - - 143.9 -
Issue costs on issuance of
common shares - - (6.3) -
Proceeds from the dividend
reinvestment plan - 3.6 4.9 10.6
Dividends paid to shareholders (18.9) (16.8) (54.8) (50.2)
----------------------------------------------------------------------------
Cash flows used in financing
activities (25.8) (34.5) (158.2) (255.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 3.3 (4.3) 8.5 3.2
Cash and cash equivalents,
beginning of period 12.9 12.5 7.6 5.2
Effect of translation of
foreign currency-denominated
cash and cash equivalents (0.1) (0.5) - (0.7)
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period 16.1 7.7 16.1 7.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Three and nine months ended September 30, 2012 has been restated for the
impact of adopting IAS 19 Employee Benefits, amendments on January 1,
2013. Refer to Note 2.
See accompanying Notes to the Condensed Consolidated Financial Statements.
Notes to the Unaudited Condensed Consolidated Financial Statements
(unaudited, Tabular amounts in millions of Canadian dollars, except per
share amounts)
1. Organization
Superior Plus Corp. (Superior) is a diversified business corporation,
incorporated under the Canada Business Corporations Act. The registered office
is at suite 1400, 840 - 7th Avenue S.W., 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 interest of Superior General Partner Inc. Superior
does not conduct active business operations but rather distributes to
shareholders a portion of 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.
Superior is a publicly traded company with its common shares trading on the
Toronto Stock Exchange ("TSX") under the exchange symbol SPB.
The accompanying unaudited condensed consolidated financial statements
(consolidated financial statements) of Superior as at September 30, 2013 and the
three and nine months ended September 30, 2013 and 2012 were authorized for
issuance by the Board of Directors on October 31, 2013.
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. Specialty Chemicals is a leading supplier of sodium chlorate and
technology to the pulp and paper industries and a regional supplier of potassium
and chloralkali products in the U.S. Midwest. Construction Products Distribution
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 19).
2. Basis of Presentation
The accompanying consolidated financial statements were prepared in accordance
and comply with International Accounting Standard 34 Interim Financial Reporting
(IAS 34) as issued by the International Accounting Standards Board (IASB) using
the accounting policies Superior adopted in its annual consolidated financial
statements as at and for the year ended December 31, 2012 other than the
standards adopted as at January 1, 2013. The accounting policies are based on
the International Financial Reporting Standards (IFRS) and International
Financial Reporting Interpretations Committee (IFRIC) interpretations that were
applicable at that time. These accounting policies have been applied
consistently to all periods presented in these consolidated financial
statements, and have been applied consistently throughout the consolidated
entities.
The consolidated financial statements are presented in Canadian dollars, which
is Superior's functional currency. All financial information presented in
Canadian dollars has been rounded to the nearest hundred-thousand. These
consolidated financial statements should be read in conjunction with Superior's
2012 annual consolidated financial statements.
The consolidated financial statements were prepared on the historical cost basis
except for certain financial instruments that are measured at fair value as
explained in Superior's 2012 annual consolidated financial statements 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 statement of net earnings from date of acquisition or, in the case of
disposals, up to the effective date of disposal. All transactions and balances
between Superior and Superior's subsidiaries are eliminated on consolidation.
Superior's subsidiaries are all wholly owned directly or indirectly by Superior
Plus Corp.
Significant Accounting Policies
(a) 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 and related
disclosure. The estimates and associated assumptions are based on historical
experience and various other factors deemed 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 where assumptions and estimates are
significant to the financial statements are consistent with those disclosed in
Superior's 2012 annual consolidated financial statements.
(b) 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, 2013 or later periods. The affected standards are
consistent with those disclosed in Superior's 2012 annual consolidated financial
statements.
Superior adopted the following standards on January 1, 2013:
IFRS 10 - Consolidated Financial Statements
IFRS 10 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 previous 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 was effective for
Superior on January 1, 2013. Superior adopted the amendments on January 1, 2013,
with no impact to Superior.
IFRS 11 - Joint Arrangements
IFRS 11 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 became applicable on January 1, 2013. Superior adopted the amendments
on January 1, 2013, with no impact to Superior.
IFRS 12 - Disclosure of Interests in Other Entities
IFRS 12 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 disclosure 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 became effective for Superior on January 1, 2013. Superior adopted
the amendments on January 1, 2013, with no impact to Superior.
IFRS 13 - Fair Value Measurement
IFRS 13 defines fair value, sets out a single IFRS framework for measuring fair
value and requires disclosure about fair value measurements. IFRS 13 applies to
accounting standards that require or permit fair value measurements or
disclosure about fair value measurements (and measurements, such as fair value
less costs to sell, based on fair value or disclosure about those measurements),
except in specified circumstances. IFRS 13 became applicable on January 1, 2013.
Superior adopted the amendments on January 1, 2013, with no impact to Superior.
IAS 1 - Presentation of Other Comprehensive Income
The amendments to IAS 1, Presentation of Financial Statements, issued in June
2011, require entities to group items presented in other comprehensive income on
the basis of whether they might be reclassified to the consolidated statement of
income in subsequent periods and items that will not be reclassified to the
consolidated statement of income. The amendments did not address which items are
presented in other comprehensive income and did not change the option to present
items net of tax. The amendments to IAS 1 became effective for annual periods
beginning on or after July 1, 2012, which was January 1, 2013 for Superior, and
are to be applied retrospectively. Superior adopted the amendments on January 1,
2013, with no impact to Superior.
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, 2015, with
earlier adoption permitted. Superior adopted the amendments on January 1, 2013,
with no impact to Superior.
IAS 19 - Employee Benefits, amendments
IAS 19 amendments were issued in June 2011 that changed the accounting and
disclosure 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 obligations 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 must be applied for
accounting periods beginning on or after January 1, 2013. Superior adopted IAS
19 on January 1, 2012 and the financial impact is an increase of $3.1 million to
pension expense and a corresponding decrease to accumulated other comprehensive
loss for the year ended December 31, 2012. The impact on Superior's balance
sheet as at January 1, 2012 is a $4.0 million increase to deficit, a $0.1
million decrease in employee benefit obligations and a corresponding decrease to
accumulated other comprehensive loss of $4.1 million. The impact on the three
and nine months ended September 30, 2012 was an increase in selling,
distribution and administrative costs of $0.8 million and $2.4 million,
respectively.
3. Seasonality of Operations
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 is typically at seasonally high
levels during the first and fourth quarters, and normally declines to seasonal
low in the second and third quarters. Net working capital is also significantly
influenced by wholesale propane prices and other refined fuels.
Construction Products Distribution
Sales typically peak during the second and third quarters with the seasonal
increase in building and renovation activities. They then decline through the
fourth quarters and into the subsequent first quarter. Similarly, net working
capital is typically at seasonally highs levels during the second and third
quarters, and normally decline to seasonal lows in the fourth and first
quarters.
4. Trade and Other Receivables
A summary of trade and other receivables is as follows:
September 30, December 31,
Note 2013 2012
----------------------------------------------------------------------------
Trade receivables, net of allowances 12 320.9 355.9
Accounts receivable - other 27.5 32.3
Finance lease receivable 0.9 0.8
----------------------------------------------------------------------------
Trade and other receivables 349.3 389.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Inventories
The cost of inventories recognized as an expense during the three and nine
months ended September 30, 2013 was $560.7 million (September 30, 2012 - $541.7
million) and $1,903.6 million (September 30, 2012 - $1,879.9 million). Superior
recorded an inventory write down during the three and nine months ended
September 30, 2013 of $nil million (September 30, 2012 - $nil million) and $nil
million (September 30, 2012 - $3.6 million), respectively. Superior recorded no
reversals of inventory write downs during the three and nine months ended
September 30, 2013 and 2012.
6. Property, Plant and Equipment
----------------------------------------------------------------------------
Specialty Energy
Chemicals Services
Plant & Retailing
Land Buildings Equipment Equipment
----------------------------------------------------------------------------
Cost
----------------------------------------------------------------------------
Balance at December 31,
2012 29.7 148.6 738.3 589.8
----------------------------------------------------------------------------
Balance at September 30,
2013 29.2 148.8 771.5 607.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Depreciation
----------------------------------------------------------------------------
Balance at December 31,
2012 - 43.4 346.3 306.0
----------------------------------------------------------------------------
Balance at September 30,
2013 - 48.0 375.7 326.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Carrying Amount
----------------------------------------------------------------------------
Balance at December 31,
2012 29.7 105.2 392.0 283.8
----------------------------------------------------------------------------
Balance at September 30,
2013 29.2 100.8 395.8 280.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Construction
Products
Distribution Leasehold
Equipment Improvements Total
----------------------------------------------------------------------------
Cost
----------------------------------------------------------------------------
Balance at December 31,
2012 43.3 9.7 1,559.4
----------------------------------------------------------------------------
Balance at September 30,
2013 45.1 11.4 1,613.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated Depreciation
----------------------------------------------------------------------------
Balance at December 31,
2012 25.6 8.2 729.5
----------------------------------------------------------------------------
Balance at September 30,
2013 29.1 8.1 787.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Carrying Amount
----------------------------------------------------------------------------
Balance at December 31,
2012 17.7 1.5 829.9
----------------------------------------------------------------------------
Balance at September 30,
2013 16.0 3.3 825.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depreciation per cost category:
----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
Cost of sales 10.4 10.9 30.4 33.4
Selling, distribution and
administrative costs 10.7 10.5 31.3 31.7
----------------------------------------------------------------------------
Total 21.1 21.4 61.7 65.1
----------------------------------------------------------------------------
The carrying amount of Superior's property, plant, and equipment includes $63.6
million of leased assets as at September 30, 2013 (December 31, 2012 - $67.8
million).
7. Provisions
----------------------------------------------------------------------------
Decommissioning Environmental
Costs Expenditures Total
----------------------------------------------------------------------------
Balance at the beginning of the
period 16.2 1.4 17.6
Additions 0.1 0.2 0.3
Utilization - (0.5) (0.5)
Unwinding of discount 0.2 - 0.2
Impact of change in discount rate (2.7) - (2.7)
Net foreign currency exchange
difference 0.4 - 0.4
----------------------------------------------------------------------------
Balance at the end of the period 14.2 1.1 15.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Decommissioning costs
Specialty Chemicals
Superior makes full provision for the future cost of decommissioning Specialty
Chemicals' chemical facilities. The provision is on a discounted basis and is
based on existing technologies at current prices or long-term price assumptions,
depending on the activity's expected timing. As at September 30, 2013, the
discount rate used in Superior's calculation was 3.08% (December 31, 2012 -
2.4%). Superior estimates the total undiscounted amount of expenditures required
to settle its decommissioning liabilities is approximately $20.4 million
(December 31, 2012 - $20.1 million) which will be paid over the next nineteen to
twenty-seven 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, the amount and timing of these costs is uncertain.
Energy Services
Superior makes full provision for the future costs of decommissioning certain
assets associated with the Energy Services segment. Superior estimates the total
undiscounted expenditures required to settle its decommissioning liabilities to
be approximately $9.1 million at September 30, 2013 (December 31, 2012 - $8.8
million) which will be paid out over the next nineteen years. The risk-free rate
of 3.08% at September 30, 2013 (December 31, 2012 - 2.4%) 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 or, if earlier, on divestment or
closure of inactive sites. Superior estimates the total undiscounted
expenditures required to settle its environmental expenditures to be
approximately $1.1 million at September 30, 2013 (December 31, 2012 - $1.4
million) which will be paid out over the next two years. The provision for
environmental expenditures has been estimated using existing technology, at
current prices and discounted using a risk-free discount rate of 3.08% at
September 30, 2013 (December 31, 2012 - 2.4%). 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 Superior's share of the liability.
8. Trade and Other Payables
A summary of trade and other payables is as follows:
September 30, December 31,
2013 2012(1)
----------------------------------------------------------------------------
Trade payables 233.5 241.6
Net benefit obligation 3.7 3.6
Other payables 58.2 62.1
Amounts due to customers under construction
contracts 1.1 1.3
Share-based payments 21.4 9.9
----------------------------------------------------------------------------
Trade and other payables 317.9 318.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In the third quarter of 2013, Superior discovered an understatement of
trade and other payables and an overstatement of prepaid expenses, which
relates to fiscal 2010 and 2009. Superior has corrected the prior period
error in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors which states that an entity shall
correct material prior period errors retrospectively in the first set of
financial statements authorized for issue after their discovery by
restating the comparative amounts for the prior period presented in
which the error occurred or if the error occurred before the earliest
prior period presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented.
Consequently, as at January 1, 2012, to correct the error, Superior
increased the deficit by $8.8 million (refer to the condensed
consolidated statement of changes in equity) and increased trade and
other payables by $4.4 million, reduced prepaid expenses by $4.2
million, and decreased accumulated other comprehensive loss by $0.2
million.
9. Deferred Revenue
September 30, December 31,
2013 2012
----------------------------------------------------------------------------
Balance at the beginning of the period 19.2 14.2
Deferred during the period 29.4 29.1
Released to net earnings (loss) (21.3) (23.9)
Foreign exchange impact 0.2 (0.2)
----------------------------------------------------------------------------
Balance at the end of the period 27.5 19.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 30, December 31,
2013 2012
----------------------------------------------------------------------------
Current 27.4 18.2
Non-current 0.1 1.0
----------------------------------------------------------------------------
27.5 19.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The deferred revenue relates to Energy Services' unearned service revenue and
Specialty Chemicals' unearned product-related revenues.
10. Borrowing
September December
Year of Effective Interest 30, 31,
Maturity Rate 2013 2012
----------------------------------------------------------------------------
Revolving Term Bank
Credits(1)
Floating BA rate
Bankers Acceptances plus applicable
(BA) 2016 credit spread 83.9 148.6
Canadian Prime Rate Prime rate plus
Loan 2016 credit spread 11.0 13.0
Floating LIBOR rate
plus applicable
LIBOR Loans 2016 credit spread 53.4 137.3
(US$52.0 million;
2012 US $138.0
million)
US Prime rate plus
US Base Rate Loan 2016 credit spread - 34.5
(US$ nil million;
2012- US$34.6
million)
----------------------------------------------------------------------------
148.3 333.4
----------------------------------------------------------------------------
Other Debt
Accounts receivable
factoring program(2) - Floating BA Plus 8.3 -
Deferred
consideration 2013-2016 Non-interest-bearing 2.3 2.7
----------------------------------------------------------------------------
10.6 2.7
----------------------------------------------------------------------------
Senior Secured
Notes(3)
----------------------------------------------------------------------------
Senior secured notes
subject to fixed
interest rates
(US$92.0 million;
2012 - US$92.0
million) 2013-2015 7.65% 94.6 91.5
----------------------------------------------------------------------------
Senior Unsecured
Debentures
----------------------------------------------------------------------------
Senior unsecured
debentures 2016 8.25% 150.0 150.0
----------------------------------------------------------------------------
Finance Lease
Obligations
----------------------------------------------------------------------------
Finance lease
obligations 52.8 62.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total borrowing
before deferred
financing fees 456.3 639.6
Deferred financing
fees (4.3) (5.2)
----------------------------------------------------------------------------
Borrowing 452.0 634.4
Current Maturities (58.1) (59.7)
----------------------------------------------------------------------------
Borrowing 393.9 574.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) On June 10, 2013, Superior and its wholly-owned subsidiaries, Superior
Plus Financing Inc. and Commercial E Industrial (Chile) Limitada,
extended its $570.0 million credit facility which can be expanded up to
$750.0 million. The credit facility matures on June 27, 2016 and is
secured by a general charge over the assets of Superior and certain of
its subsidiaries. As at September 30, 2013, Superior had $26.3 million
of outstanding letters of credit (December 31, 2012 - $31.1 million) and
approximately $113.2 million of outstanding financial guarantees
(December 31, 2012 - $121.9 million). The fair value of Superior's
revolving term bank credits, other debt, letters of credit, and
financial guarantees approximates their carrying value as a result of
the market based-interest rates, the short-term nature of the underlying
debt instruments and other related factors.
(2) Superior has entered into a Master Receivables Purchase Agreement (MRPA)
with a financial institution where it may purchase from time to time, on
an uncommitted revolving basis, a 100% interest in receivables from
Superior. The maximum aggregate amount of purchased receivables
purchased by the financial institution under this agreement and
outstanding at any time is limited to $15.0 million. As at September 30,
2013, the accounts receivable factoring program totalled CDN $8.3
million (CDN $nil million at December 31, 2012).
(3) Senior secured notes (the Notes) totalling US $92.0 million and US $92.0
million (respectively, CDN $94.6 million at September 30, 2013 and CDN
$91.5 million at December 31, 2012) 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 as at September 30, 2013 was CDN
$105.9 million (December 31, 2012 - CDN $94.4 million).
Repayment requirements of Borrowing before deferred financing fees are as
follows:
Current maturities 58.1
Due in 2014 48.7
Due in 2015 46.5
Due in 2016 301.3
Due in 2017 1.1
Due in 2018 0.6
Subsequent to 2018 -
----------------------------------------------------------------------------
Total 456.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Convertible Unsecured Subordinated Debentures
Superior's debentures are as follows:
----------------------------------------------------------------------------
October December June June October June
Maturity 2015(1)(2) 2014(3) 2017 2018 2016 2019(4) Total
Interest rate 5.85% 7.50% 5.75% 6.00% 7.50% 6.00% Carrying
Conversion
price per
share $31.25 $13.10 $19.00 $15.10 $11.35 $16.75 Value
----------------------------------------------------------------------------
Debentures
outstanding as
at September
30, 2013 - - 168.3 144.7 72.5 82.7 468.2
Debentures
outstanding as
at December
31, 2012 74.1 67.4 167.6 144.0 72.0 - 525.1
----------------------------------------------------------------------------
Quoted market
value as at
September 30,
2013 - - 173.8 151.5 84.0 96.7 506.0
Quoted market
value as at
December 31,
2012 75.2 71.4 169.2 148.0 84.2 - 548.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Superior redeemed $50.0 million of the outstanding amount of the 5.85%
October 2015 convertible unsecured subordinated debentures, on January
3, 2013.
(2) Superior made a final redemption of $25.0 million being the total
outstanding amount on the 5.85% October 2015 convertible unsecured
subordinated debentures, on April 9, 2013.
(3) Superior made a redemption of $68.9 million being the total outstanding
amount on the 7.50% December 2014 convertible unsecured subordinated
debentures, on September 3, 2013.
(4) Superior issued the 6.00% unsecured subordinated debentures due June
2019 on July 22, 2013.
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. Superior also 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 October 2016, June 2018 and June 2019
convertible debentures. The cash conversion put option has been classified as an
embedded derivative and measured at fair value through net earnings (FVTNE) (see
Note 12 for further details).
12. 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 input 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 consideration 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 (Level 1). 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 (Level 2). Superior uses internally developed methodologies
and unobservable inputs to determine the fair value of some financial
instruments when required (Level 3).
Fair values determined using valuation models require 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 forecast commodity price curves,
interest rate yield curves, currency rates, and price and rate volatilities as
applicable.
During August 2012, Specialty Chemicals received a payment of $15.8 million from
TransCanada Energy Ltd., a subsidiary of TransCanada Corporation, in connection
with the arbitration ruling related to the Sundance Power Purchase Agreement
(PPA) between TransAlta Corporation and TransCanada Corporation. The payment
resulted from the Electrical Sales Agreement (ESA) between TransCanada
Corporation and Superior whereby TransCanada Corporation supplies Superior with
fixed-priced energy from the PPA. A one-time gain of $12.5 million, representing
the payment, net of certain settlement costs, was recorded in cost of goods
sold. This settlement relates to Specialty Chemicals' fixed-price electricity
purchase agreement which expires in 2017. Specialty Chemicals has begun to
receive electricity production from the PPA as the Sundance units have partially
started and therefore, are participating in accordance with the terms of the
Electricity Sales Agreement (ESA).
With respect to the valuation of Specialty Chemicals' fixed-price electricity
agreement, the valuation of this agreement requires Superior to make assumptions
about the long-term price of electricity in electricity markets for which active
market information is not available. The impact of the assumption for the
long-term forward price curve of electricity has a material impact on the fair
value of this agreement. A $1/MWh change in the forecast price of electricity
would result in a change in the fair value of this agreement of $0.8 million,
with a corresponding impact to net earnings before income taxes.
No changes in valuation techniques were made by Superior during the period ended
September 30, 2013 and no financial instruments have been reclassified between
the different fair value input levels.
----------------------------------------------------------------------------
Asset (Liability)
----------------------------------------------------------------------------
Fair
Value
Effective Input September December
Description Notional(1) Term Rate Level 30, 2013 31, 2012
----------------------------------------------------------------------------
Natural gas
financial 21.83 GJ(2) 2013-2018 CDN $4.45 Level 1 (23.3) (42.2)
swaps-AECO /GJ
Foreign
currency
forward US$642.4(3) 2013-2017 1.03 (11.5) 10.7
contracts, Level 1
net sale
Foreign
currency
forward
contracts, US$59.0(3) 2013-2014 1.01 Level 1 1.7 0.2
balance
sheet-
related
Six-month
Interest rate BA rate
swaps - CDN$ $150.0(3) 2013-2017 plus Level 2 6.8 9.4
2.65%
Equity
derivative $12.6 (3) 2013-2015 $10.26 Level 2 0.6 0.5
contracts /share
Debenture-
embedded $255.0(3) 2013-2018 - Level 3 (32.8) (19.8)
derivative
Energy
Services
Butane
wholesale $1.65
purchase and 2.91 USG (4) 2013-2014 /USG Level 2 (0.1) (0.2)
sale
contracts,
net sale
Energy
Services
Diesel
wholesale $3.96
purchase and 2.65 USG (4) 2013-2014 /USG Level 2 0.1 -
sale
contracts,
net sale
Energy
Services
Propane
wholesale $1.10
purchase and 5.49 USG(4) 2013-2014 /USG Level 2 0.3 0.7
sale
contracts,
net sale
Energy
Services $38.71
electricity 0.95MWh (5) 2013-2017 /MWh Level 2 (7.9) (10.3)
swaps
Energy
Services
heating oil 1.47 $2.89 US
purchase and Gallons(4) 2013 /Gallon Level 2 (0.1) (0.2)
sale
contracts
Specialty
Chemicals
fixed-price $37-$59
electricity 12-45 MW(6) 2013-2017 /MWh Level 3 4.2 1.6
purchase
agreements
----------------------------------------------------------------------------
(1) Notional values as at September 30, 2013. (2) Millions of gigajoules
(GJ) purchased. (3) Millions of dollars.(4) Millions of United States
gallons purchased. (5) Millions of mega watt hours (MWh). (6) Megawatts
(MW) on a 24/7 continual basis per year purchased.
----------------------------------------------------------------------------
All financial and non-financial derivatives are designated as fair value
through net earnings upon their initial recognition.
----------------------------------------------------------------------------
Current Long-term Current Long-term
Description Assets Assets Liabilities Liabilities
----------------------------------------------------------------------------
Natural gas financial swaps
-AECO - - 15.2 8.0
Energy Services electricity
swaps - - 4.3 3.6
Foreign currency forward
contracts, net sale 2.9 0.8 3.7 11.5
Foreign currency forward
contracts, balance sheet-
related 0.8 0.9 - -
Interest rate swaps 2.6 4.3 0.1 -
Equity derivative contracts 0.6 - - -
Debenture-embedded
derivative - - - 32.8
Energy Services propane
wholesale purchase and sale
contracts 1.3 - 1.0 -
Energy Services propane
purchase and sale contracts - - 0.1 -
Energy Services butane
wholesale purchase and sale
contracts 0.2 - 0.3 -
Energy Services heating oil
purchase and sale contracts 0.2 - 0.3 -
Energy Services diesel
purchase and sale contracts 0.1 - - -
Specialty Chemicals fixed-
price electricity purchase
agreements 1.6 2.6 - -
----------------------------------------------------------------------------
As at September 30, 2013 10.3 8.6 25.0 55.9
As at December 31, 2012 16.6 12.9 36.5 42.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended For the three months ended
September 30, 2013 September 30, 2012
Realized Unrealized Realized Unrealized
Description gain (loss) gain (loss) gain (loss) gain (loss)
----------------------------------------------------------------------------
Natural gas financial
swaps - AECO (7.7) 3.8 (13.9) 20.0
Energy Services
electricity swaps (1.9) 0.2 (2.2) 5.7
Foreign currency
forward contracts, net
sale 0.2 15.1 4.1 19.9
Foreign currency
forward contracts,
balance sheet-related - (1.4) - (2.4)
Interest rate swaps 0.1 0.5 - 1.6
Equity derivative
contracts 0.1 (0.1) - -
Energy Services propane
wholesale purchase and
sale contracts 0.1 0.5 - (0.5)
Energy Services propane
purchase and sale
contracts - 0.1 - -
Energy Services butane
wholesale purchase and
sale contracts - (0.1) - 0.9
Energy Services heating
oil purchase and sale
contracts (1.1) (0.3) (6.1) 1.6
Energy Services diesel
purchase and sale
contracts - (0.1) - 0.1
Specialty Chemicals
fixed-price
electricity purchase
agreements 0.3 1.6 (0.4) -
----------------------------------------------------------------------------
Total (losses) gains on
financial and non-
financial derivatives (9.9) 19.8 (18.5) 46.9
----------------------------------------------------------------------------
Foreign currency
translation of senior
secured notes - 2.1 - 4.4
Change in fair value of
debenture embedded
derivative - 14.7 - (12.5)
----------------------------------------------------------------------------
Total realized and
unrealized (losses)
gains (9.9) 36.6 (18.5) 38.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine months ended For the nine months ended
September 30, 2013 September 30, 2012
Realized Unrealized Realized Unrealized
Description gain (loss) gain (loss) gain (loss) gain (loss)
----------------------------------------------------------------------------
Natural gas financial
swaps - AECO (21.3) 18.9 (44.3) 35.4
Energy Services
electricity swaps (5.2) 2.5 (9.3) 4.3
Foreign currency forward
contracts, net sale 4.3 (22.2) 6.7 14.0
Foreign currency forward
contracts, balance
sheet-related - 1.7 - (1.3)
Interest rate swaps 1.3 (2.5) 1.2 0.1
Equity derivative
contracts 0.5 - - -
Energy Services propane
wholesale purchase and
sale contracts 0.1 (0.7) - 1.1
Energy Services propane
purchase and sale
contracts - 0.3 - 0.5
Energy Services butane
wholesale purchase and
sale contracts - 0.1 - -
Energy Services heating
oil purchase and sale
contracts 0.7 0.1 (5.6) 0.7
Energy Services diesel
purchase and sale
contracts - - - 0.1
Specialty Chemicals
fixed-price electricity
purchase agreements 0.3 2.6 (1.8) -
----------------------------------------------------------------------------
Total (losses) gains on
financial and non-
financial derivatives (19.3) 0.8 (53.1) 54.9
----------------------------------------------------------------------------
Foreign currency
translation of senior
secured notes - (3.1) - 4.1
Change in fair value of
debenture embedded
derivative - (2.4) - (12.8)
----------------------------------------------------------------------------
Total realized and
unrealized (losses)
gains (19.3) (4.7) (53.1) 46.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Realized (losses) gains on financial and non-financial derivatives and foreign
currency translation (losses) gains on the revaluation of Canadian domiciled
US-denominated working capital have been classified on the statement of net
earnings 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
Derivative assets FVTNE Fair Value
Notes and finance lease receivables Loans and receivables Amortized cost
Financial liabilities
Trade and other payables Other liabilities Amortized cost
Dividends and interest payable Other liabilities Amortized cost
Borrowing Other liabilities Amortized cost
Convertible unsecured subordinated
debentures(1) Other liabilities Amortized cost
Derivative liabilities FVTNE Fair Value
----------------------------------------------------------------------------
(1) Except for derivatives embedded in the related financial instruments
that are classified as FVTNE and measured at fair value.
Non-Derivative Financial Instruments
The fair value of Superior's cash and cash equivalents, trade and other
receivables, notes and finance lease receivables, trade and other payables, and
dividends and interest payable approximates their carrying value due to the
short-term nature of these amounts. The carrying value and the fair value of
Superior's borrowing and debentures is provided in Notes 10 and 11.
Financial Instruments - Risk Management
Market Risk
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 and, 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 net
earnings. Details on Superior's market risk policies are consistent with those
disclosed in Superior's 2012 annual consolidated financial statements.
Credit Risk
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 debt risk for
residential customers. Energy Services actively monitors the credit-worthiness
of its commercial customers. Overall, Superior's credit quality is enhanced by
its portfolio of customers which is diversified across geographical (primarily
Canada and the United States) and end-use (primarily commercial, residential and
industrial) markets.
Allowances for doubtful accounts receivables are reviewed by Superior at each
balance sheet date. Superior updates its estimate of the allowance for doubtful
accounts based on the evaluation of the recoverability of trade receivables with
each customer, taking into account historical collection trends of past due
accounts and current economic conditions. Trade receivables are written-off once
it is determined they are not collectible.
Pursuant to their respective terms, trade receivables, before deducting an
allowance for doubtful accounts, are aged as follows:
September 30, December 31,
2013 2012
----------------------------------------------------------------------------
Current 234.5 243.1
Past due less than 90 days 80.0 108.2
Past due over 90 days 12.1 11.8
----------------------------------------------------------------------------
Trade receivables 326.6 363.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The current portion of Superior's trade receivables is neither impaired nor past
due and there are no indications as of the reporting date that the debtors will
not make payment.
Superior's trade receivables are stated after deducting a provision of $5.7
million as at September 30, 2013 (December 31, 2012 - $7.2 million). The
movement in the provision for doubtful accounts was as follows:
September 30, December 31,
2013 2012
----------------------------------------------------------------------------
Allowance for doubtful accounts, at the
beginning of the period (7.2) (20.8)
Impairment losses recognized on receivables (2.1) (3.9)
Amounts written off during the period as
uncollectible 3.0 17.5
Amounts recovered 0.6 -
----------------------------------------------------------------------------
Allowance for doubtful accounts at the end of
the period (5.7) (7.2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liquidity Risk
Liquidity risk is the risk that Superior cannot meet a demand for cash or fund
an obligation as it comes due. Liquidity risk also includes the risk of not
being able to liquidate assets in a timely manner at a reasonable price.
To ensure it is able to react to contingencies and investment opportunities
quickly, Superior maintains sources of liquidity at the corporate and subsidiary
levels. The main sources of liquidity are cash and other financial assets, the
undrawn committed revolving-term bank credit facility, equity markets and
debenture markets.
Superior is subject to the risks associated with debt financing, including the
ability to refinance indebtedness at maturity. Superior believes these risks are
mitigated through the use of long-term debt secured by high-quality assets,
maintaining debt levels that in management's opinion are appropriate, and by
diversifying maturities over an extended time. Superior also seeks to include in
its agreements terms that protect it from liquidity issues of counterparties
that might otherwise impact liquidity.
Superior's contractual obligations associated with its financial liabilities are
as follows:
2018 and
2013 2014 2015 2016 2017 Thereafter Total
----------------------------------------------------------------------------
Borrowing 58.1 48.7 46.5 301.3 1.1 0.6 456.3
Convertible unsecured
subordinated debentures - - - 72.5 168.3 227.4 468.2
US$ foreign currency
forward sales contracts 61.3 224.4 188.4 117.4 52.9 - 644.4
US$ foreign currency
forward purchases
contracts (32.2) (27.2) - - - - (59.4)
CDN$ natural gas purchases 5.8 4.5 0.7 0.3 0.2 - 11.5
CDN$ butane purchases 0.1 0.1 - - - - 0.2
CDN$ propane purchases 0.5 0.6 - - - - 1.1
US$ propane purchases 0.1 0.1 - - - - 0.2
US$ heating oil purchases 0.1 - - - - - 0.1
Fixed-price electricity
purchase commitments 2.2 8.9 8.9 8.9 8.9 - 37.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Superior's contractual obligations are considered 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 as at September 30, 2013 are
consistent with those disclosed in Superior's 2012 annual consolidated financial
statements.
13. 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 expense, comprised of current taxes and deferred taxes for the
three and nine months ended September 30, 2013 was $0.2 million and $12.9
million respectively, compared to $7.6 million and $9.9 million in the
comparative period. For the three and nine months ended September 30, 2013,
deferred income tax expense from operations in Canada, the United States and
Chile was $0.6 million and $12.5 million, respectively, which resulted in a
corresponding total net deferred income tax asset of $281.7 million at September
30, 2013.
On April 2, 2013, Superior received from the CRA, Notices of Reassessment for
Superior's 2009 and 2010 taxation years reflecting the CRA's intent to challenge
the tax consequences of Superior's corporate conversion transaction (Conversion)
which occurred on December 31, 2008. The CRA's position is based on the
acquisition of control rules, in addition to the general anti-avoidance rules in
the Income Tax Act (Canada). The table below summarizes Superior's estimated tax
liabilities and payment requirements associated with the received and
anticipated Notices of Reassessment. Upon receipt of the Notices of
Reassessment, 50% of the taxes payable pursuant to such Notices of Reassessment,
must be remitted to the CRA.
----------------------------------------------------------------------------
50% of the Taxes
Taxation Year Taxes Payable (1)(2) Payable(1)(2) Payment Dates
----------------------------------------------------------------------------
2009/2010 $13.0 $6.5 Paid in April 2013
2011 $10.0(3) $5.0 Q1 2014
2012 $10.0(3) $5.0 Q1 2014
2013 $10.0(3) $5.0 Q3 2014
2014 $20.0(3) $10.0 Q3 2015
----------------------------------------------------------------------------
Total $63.0 $31.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In millions of dollars.
(2) Includes estimated interest and penalties.
(3) Estimated based on Superior's previously filed tax returns and the
midpoint of Superior's 2013 and 2014 financial outlooks.
Superior filed a Notice of Objection with respect to the Notice of Reassessments
on May 8, 2013. The CRA did not respond or settle the Notice of Objection with
Superior in the 90 days after filing; as such Superior filed a Notice of Appeal
with the Tax Court of Canada on August 7, 2013. Superior anticipates that if the
application proceeds in the Tax Court of Canada a decision could be rendered by
the beginning of fiscal 2015. If a decision of the Tax Court of Canada were to
be appealed, the appeal process could reasonably be expected to take an
additional 2 years. If Superior receives a positive decision then any taxes,
interest and penalties paid to the CRA will be refunded plus interest and if
Superior is unsuccessful then any remaining taxes payable plus interest and
penalties will have to be remitted.
Superior remains confident in the appropriateness of its tax filing position and
the expected tax consequences of the Conversion and intends to vigorously defend
such position and intends to file its future tax returns on a basis consistent
with its view of the outcome of the Conversion.
14. Total 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 ratably
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. Superior does
not have any preferred shares outstanding.
Issued Number of
Common Shares Total
(Millions) Equity
----------------------------------------------------------------------------
Total Equity, December 31, 2012 112.8 374.4
Net earnings - 41.8
Other comprehensive income - 30.8
Option value associated with redemption of
convertible debentures - (1.1)
Shares issued under dividend reinvestment plan 0.4 4.9
Issuance of common shares 13.0 137.6
Dividends declared to shareholders (1) - (55.4)
----------------------------------------------------------------------------
Total Equity, September 30, 2013 126.2 533.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Dividends to shareholders are declared at the discretion of Superior.
During the nine months ended September 30, 2013, Superior paid dividends
of $54.8 million or $0.45 per share (September 30, 2012 - $50.2 million
or $0.45 per share).
September 30, December 31,
2013 2012
----------------------------------------------------------------------------
Accumulated other comprehensive loss before
reclassification
Currency translation adjustment
Balance at the beginning of the period (22.6) (13.8)
Unrealized foreign currency gains and
(losses) on translation of foreign
operations 12.9 (8.8)
----------------------------------------------------------------------------
Balance at the end of the period (9.7) (22.6)
----------------------------------------------------------------------------
Actuarial defined benefits
Balance at the beginning of the period (25.3) (31.4)
Actuarial defined benefit gains 24.3 7.2
Income tax expense on other comprehensive
loss (6.4) (1.1)
----------------------------------------------------------------------------
Balance at the end of the period (7.4) (25.3)
----------------------------------------------------------------------------
Total accumulated other comprehensive loss
before reclassification (17.1) (47.9)
----------------------------------------------------------------------------
Amounts reclassified from accumulated other
comprehensive loss
Accumulated derivative losses
Balance at the beginning of the period (6.0) (6.0)
Reclassification of derivative gains (losses)
previously deferred(1) - -
----------------------------------------------------------------------------
Balance at the end of the period (6.0) (6.0)
----------------------------------------------------------------------------
Total amounts reclassified from accumulated
other comprehensive loss (6.0) (6.0)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated other comprehensive loss at the
end of the period (23.1) (53.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The reclassification of derivative gains (losses) previously deferred
are included in unrealized losses (gains) on derivative financial
instruments on the statement of net earnings.
Other Capital Disclosures
Additional Capital Disclosure
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 its
assets while maximizing the growth of its businesses and returns to its
shareholders.
In the management of capital, Superior includes shareholders' equity (excluding
accumulated other comprehensive loss) current and long-term borrowing,
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, or issue new debt or convertible debentures with different
characteristics.
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 its other public reports.
Superior is subject to various financial covenants in its credit facility
agreements, including senior debt, total debt to EBITDA ratio and restricted
payments test which are measured on a quarterly basis. As at September 30, 2013
and December 31, 2012 Superior was in compliance with all of its financial
covenants.
Superior's financial objectives and strategy related to managing its capital as
described above 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.
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:
September 30, December 31,
As at 2013 2012 (1)
----------------------------------------------------------------------------
Total shareholders' equity 533.0 374.4
Exclude accumulated other comprehensive loss 23.1 53.9
----------------------------------------------------------------------------
Shareholders' equity excluding accumulated
other comprehensive loss 556.1 428.3
Current borrowing (2) 58.1 59.7
Borrowing (2) 398.2 579.9
Less: Senior unsecured debentures (150.0) (150.0)
----------------------------------------------------------------------------
Consolidated secured debt 306.3 489.6
Add: Senior unsecured debentures 150.0 150.0
----------------------------------------------------------------------------
Consolidated debt 456.3 639.6
Current portion of convertible unsecured
subordinated debentures (2) - 50.0
Convertible unsecured subordinated debentures
(2) 483.9 491.5
----------------------------------------------------------------------------
Total debt 940.2 1,181.1
----------------------------------------------------------------------------
Total capital 1,496.3 1,609.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) December 31, 2012 has been restated for the impact of a prior period
adjustment. Refer to Note 8.
(2) Borrowing and convertible unsecured subordinated debentures are before
deferred issuance costs and option value.
----------------------------------------------------------------------------
September 30, December 31,
Twelve months ended 2013 2012
----------------------------------------------------------------------------
Net earnings 55.3 90.0
Adjusted for:
Finance expense 69.7 77.6
Realized gains on derivative financial
instruments included in finance expense 2.4 2.2
Depreciation included in selling,
distribution and administrative costs 42.0 42.4
Depreciation included in cost of sales 41.9 44.9
(Gains) Losses on disposal of assets (1.5) 1.0
Amortization of intangible assets 17.0 23.5
Impairment of property, plant and equipment 4.7 4.7
Income tax expense 12.0 9.0
Unrealized losses (gains) on derivative
financial instruments 18.8 (32.1)
Pro-forma impact of acquisitions - 0.6
----------------------------------------------------------------------------
Compliance EBITDA (1)(2) 262.3 263.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) 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.
(2) The twelve months ended December 31, 2012 has been restated for the
impact of adopting IAS 19 Employee Benefits, amendments on January 1,
2013. Refer to Note 2.
September 30, December 31,
2013 2012(1)
----------------------------------------------------------------------------
Consolidated secured debt to Compliance EBITDA 1.2:1 1.9:1
Consolidated debt to Compliance EBITDA 1.7:1 2.4:1
Total debt to Compliance EBITDA 3.6:1 4.5:1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The compliance ratios have been restated for the impact of adopting IAS
19 Employee Benefits,amendments on January 1, 2013. Refer to Note 2.
15. Net Earnings per Share
Three months ended Nine months ended
September 30, September 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
Net earnings per share computation,
basic
Net earnings for the period 35.9 35.9 41.8 76.5
Weighted average shares outstanding
(millions) 126.2 112.2 122.0 111.6
----------------------------------------------------------------------------
Net earnings per share, basic $0.28 $0.32 $0.34 $0.69
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2013(1) 2012(2) 2013(3) 2012(4)
----------------------------------------------------------------------------
Net earnings per share computation,
diluted
Net earnings for the period 17.2 39.1 41.7 86.1
Weighted average shares outstanding
(millions) 148.5 126.5 127.8 126.0
----------------------------------------------------------------------------
Net earnings per share, diluted $0.12 $0.31 $0.33 $0.68
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The following outstanding convertible debentures have been excluded from
the calculation for the three months ended September 30, 2013 as they
were anti-dilutive: 5.75% convertible debentures due June 2017.
(2) The following outstanding convertible debentures have been excluded from
the calculation for the three months ended September 30, 2012 as they
were anti-dilutive: 7.50% convertible debentures due October 2016 and
6.00% convertible debentures due June 2018.
(3) The following outstanding convertible debentures have been excluded from
the calculation for the nine months ended September 30, 2013 as they
were anti-dilutive: 5.75% convertible debentures due June 2017, 7.50%
convertible debentures due October 2016 and 6.00% convertible debentures
due June 2018.
(4) The following outstanding convertible debentures have been excluded from
the calculation for the nine months ended September 30, 2012 as they
were anti-dilutive: 5.75% convertible debentures due December 2012,
5.85% convertible debentures due October 2015, 7.50% convertible
debentures due October 2016 and 6.00% convertible debentures due June
2018.
16. Supplemental Disclosure of Non-Cash Operating Working Capital Changes
Three months ended Nine months ended
September 30, September 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
Changes in non-cash working capital
Trade receivables and other 5.2 (3.7) 31.6 131.0
Inventories (5.2) (32.0) 29.9 9.8
Trade and other payables 31.6 55.0 2.8 7.6
Purchased working capital - 1.1 - 1.1
Other (7.8) (8.3) 8.0 (7.6)
----------------------------------------------------------------------------
23.8 12.1 72.3 141.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
17. Supplemental Disclosure of Condensed Consolidated Statement of Comprehensive
Income
Three months ended Nine months ended
September 30, September 30,
2013 2012 2013 2012
----------------------------------------------------------------------------
Revenues
Revenue from products 790.4 767.2 2,652.2 2,620.3
Revenue from the rendering of
services 15.1 13.4 43.8 40.9
Rental revenue 7.4 7.1 19.2 18.4
Construction contract revenue 0.5 0.1 0.1 5.4
Realized gains on derivative
financial instruments 0.4 2.3 2.8 5.3
----------------------------------------------------------------------------
813.8 790.1 2,718.1 2,690.3
----------------------------------------------------------------------------
Cost of sales (includes products &
services)
Cost of products and services (608.1) (562.5) (2,035.7) (1,979.3)
Depreciation included in cost of
sales (10.4) (10.9) (30.4) (33.4)
Realized losses on derivative
financial instruments (10.4) (20.8) (24.0) (59.5)
----------------------------------------------------------------------------
(628.9) (594.2) (2,090.1) (2,072.2)
----------------------------------------------------------------------------
Selling, distribution and
administrative costs
Other selling, distribution and
administrative costs (66.4) (85.3) (201.2) (252.8)
Employee costs (87.4) (66.4) (272.2) (209.5)
Depreciation included in selling,
distribution and administrative
costs (10.7) (10.5) (31.3) (31.7)
Amortization of intangible assets (4.1) (6.0) (12.2) (18.7)
Gains (Losses) on disposal of
assets 3.5 (0.3) 3.2 0.7
Employee future benefit expense (1.5) (1.6) (4.7) (4.6)
Realized (losses) gains on the
translation of U.S. denominated
net working capital (1.1) (1.8) 1.3 (1.9)
----------------------------------------------------------------------------
(167.7) (171.9) (517.1) (518.5)
----------------------------------------------------------------------------
Finance expense
Interest on borrowing (6.8) (8.0) (21.9) (25.2)
Interest on convertible unsecured
subordinated debentures (8.2) (8.8) (23.5) (27.3)
Interest on obligations under
finance leases (0.5) (1.5) (2.2) (3.7)
Gain on debenture redemption 0.2 0.8 0.6 0.8
Unwinding of discount on
debentures, borrowing and
decommissioning liabilities (2.4) (1.8) (5.8) (5.1)
Realized gains on derivative
financial instruments - - 1.3 1.1
----------------------------------------------------------------------------
(17.7) (19.3) (51.5) (59.4)
----------------------------------------------------------------------------
18. 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 nine months ended September 30, 2013, Superior incurred $0.7
million (September 30, 2012- $0.2 million) and $0.9 million (September 30, 2012
- $0.6 million) in legal fees respectively, with Norton Rose Canada LLP, a
related party with Superior as a member of Superior's Board of Directors is a
Partner at the law firm.
19. 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 months Construction
ended September 30, Energy Specialty Products Total
2013 Services Chemicals Distribution Corporate Consolidated
----------------------------------------------------------------------------
Revenues 459.0 144.7 210.1 - 813.8
Cost of sales
(includes products &
services) (375.4) (94.8) (158.7) - (628.9)
----------------------------------------------------------------------------
Gross Profit 83.6 49.9 51.4 - 184.9
Expenses
Selling,
distribution and
administrative
costs (85.3) (35.7) (42.8) (3.9) (167.7)
Finance expense (0.4) (0.1) (0.1) (17.1) (17.7)
Unrealized gains on
derivative
financial
instruments 4.0 1.5 - 31.1 36.6
----------------------------------------------------------------------------
(81.7) (34.3) (42.9) 10.1 (148.8)
----------------------------------------------------------------------------
Net earnings before
income taxes 1.9 15.6 8.5 10.1 36.1
Income tax expense - - - (0.2) (0.2)
----------------------------------------------------------------------------
Net Earnings 1.9 15.6 8.5 9.9 35.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months Construction
ended September 30, Energy Specialty Products Total
2012 Services Chemicals Distribution Corporate Consolidated
----------------------------------------------------------------------------
Revenues 453.8 134.5 201.8 - 790.1
Cost of sales
(includes products &
services) (368.4) (70.7) (155.1) - (594.2)
----------------------------------------------------------------------------
Gross Profit 85.4 63.8 46.7 - 195.9
Expenses
Selling,
distribution and
administrative
costs (86.4) (35.4) (44.8) (5.3) (171.9)
Finance expense (1.3) (0.1) (0.2) (17.7) (19.3)
Unrealized gains on
derivative
financial
instruments 27.8 - - 11.0 38.8
----------------------------------------------------------------------------
(59.9) (35.5) (45.0) (12.0) (152.4)
----------------------------------------------------------------------------
Net earnings (loss)
before income taxes 25.5 28.3 1.7 (12.0) 43.5
Income tax expense - - - (7.6) (7.6)
----------------------------------------------------------------------------
Net Earnings (Loss) 25.5 28.3 1.7 (19.6) 35.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine months Construction
ended September 30, Energy Specialty Products Total
2013 Services Chemicals Distribution Corporate Consolidated
----------------------------------------------------------------------------
Revenues 1,690.0 424.6 603.5 - 2,718.1
Cost of sales
(includes products &
services) (1,358.9) (272.7) (458.5) - (2,090.1)
----------------------------------------------------------------------------
Gross Profit 331.1 151.9 145.0 - 628.0
Expenses
Selling,
distribution and
administrative
costs (276.8) (99.7) (126.7) (13.9) (517.1)
Finance expense (1.9) (0.2) (0.4) (49.0) (51.5)
Unrealized gains
(losses) on
derivative
financial
instruments 21.2 2.6 - (28.5) (4.7)
----------------------------------------------------------------------------
(257.5) (97.3) (127.1) (91.4) (573.3)
----------------------------------------------------------------------------
Net earnings (loss)
before income taxes 73.6 54.6 17.9 (91.4) 54.7
Income tax expense - - - (12.9) (12.9)
----------------------------------------------------------------------------
Net Earnings (Loss) 73.6 54.6 17.9 (104.3) 41.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine months Construction
ended September 30, Energy Specialty Products Total
2012 Services Chemicals Distribution Corporate Consolidated
----------------------------------------------------------------------------
Revenues 1,699.4 405.2 585.7 - 2,690.3
Cost of sales
(includes products &
services) (1,381.6) (241.2) (449.4) - (2,072.2)
----------------------------------------------------------------------------
Gross Profit 317.8 164.0 136.3 - 618.1
Expenses
Selling,
distribution and
administrative
costs (272.2) (105.5) (128.1) (12.7) (518.5)
Finance expense (3.3) (0.2) (0.5) (55.4) (59.4)
Unrealized gains on
derivative
financial
instruments 42.1 - - 4.1 46.2
----------------------------------------------------------------------------
(233.4) (105.7) (128.6) (64.0) (531.7)
----------------------------------------------------------------------------
Net earnings (loss)
before income taxes 84.4 58.3 7.7 (64.0) 86.4
Income tax expense - - - (9.9) (9.9)
----------------------------------------------------------------------------
Net Earnings (Loss) 84.4 58.3 7.7 (73.9) 76.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net working capital, Total assets, Total liabilities, and Purchase of property,
plant and equipment
----------------------------------------------------------------------------
Construction
Energy Specialty Products Total
Services Chemicals Distribution Corporate Consolidated
----------------------------------------------------------------------------
As at September
30, 2013
Net working
capital (1) 116.5 13.5 104.4 (32.4) 202.0
Total assets 630.8 593.7 213.6 501.3 1,939.4
Total
liabilities 246.0 195.2 90.0 875.2 1,406.4
----------------------------------------------------------------------------
As at December
31, 2012
Net working
capital (1)(2) 179.5 16.3 105.5 (22.1) 279.2
Total assets 725.4 585.6 199.6 521.5 2,032.1
Total
liabilities 303.1 171.7 84.2 1,098.7 1,657.7
----------------------------------------------------------------------------
For the three
months ended
September 30,
2013
Purchase of
property,
plant and
equipment 10.9 12.0 0.4 - 23.3
----------------------------------------------------------------------------
For the three
months ended
September 30,
2012
Acquisitions 5.5 - - - 5.5
Purchase of
property,
plant and
equipment 4.5 3.5 0.5 - 8.5
----------------------------------------------------------------------------
For the nine
months ended
September 30,
2013
Purchase of
property,
plant and
equipment 26.3 24.6 1.2 - 52.1
----------------------------------------------------------------------------
For the nine
months ended
September 30,
2012
Acquisitions 5.5 - - - 5.5
Purchase of
property,
plant and
equipment 9.8 10.7 1.2 - 21.7
----------------------------------------------------------------------------
(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.
(2) December 31, 2012 has been restated for the impact of a prior period
adjustment. Refer to Note 8.
20. Geographical Information
United Total
Canada States Other Consolidated
----------------------------------------------------------------------------
Revenues for the three months ended
September 30, 2013 289.2 497.6 27.0 813.8
Revenues for the nine months ended
September 30, 2013 980.8 1,665.2 72.1 2,718.1
Property, plant and equipment as at
September 30, 2013 450.1 332.1 43.6 825.8
Intangible assets as at September
30, 2013 16.0 16.9 - 32.9
Goodwill as at September 30, 2013 188.3 0.8 - 189.1
Total assets as at September 30,
2013 1,266.7 611.4 61.3 1,939.4
----------------------------------------------------------------------------
Revenues for the three months ended
September 30, 2012 292.3 476.2 21.6 790.1
Revenues for the nine months ended
September 30, 2012 1,060.1 1,552.3 77.9 2,690.3
Property, plant and equipment as at
December 31, 2012 460.6 324.4 44.9 829.9
Intangible assets as at December 31,
2012 15.8 23.8 - 39.6
Goodwill as at December 31, 2012 188.3 0.8 - 189.1
Total assets as at December 31, 2012 1,320.6 645.4 66.1 2,032.1
----------------------------------------------------------------------------
21. Subsequent Events
On October 23, 2013, Superior's Specialty Chemicals business, entered into an
agreement with Tronox LLC ("Tronox") to purchase up to 130,000 metric tonnes of
sodium chlorate per year from Tronox's Hamilton, Mississippi facility. The
initial term of the agreement extends to December 31, 2016 and may be
automatically extended in one year increments thereafter. The transaction has
been accounted for as an addition to property, plant and equipment based on the
undiscounted value of the corresponding finance lease obligation and
consideration totaling approximately $23.0 million. As part of the agreement,
Specialty Chemicals will acquired finished inventory, assume existing railcar
leases and assume existing customer contracts, as assigned. The property, plant
and equipment will be amortized over the initial term of the agreement.
Additionally, the parties have entered into a strategic long-term agreement for
the supply of chloralalkali product to service Tronox's requirements in North
America.
On October 28, 2013, Superior early redeemed the entire $150.0 million principal
amount of its previously issued 8.25% senior unsecured debentures which mature
on October 27, 2016. The early redemption allows Superior to benefit from lower
average interest rates in addition to actively managing its balance sheet
maturities. Superior used funds from its credit facility to fund the redemption.
FOR FURTHER INFORMATION PLEASE CONTACT:
Superior Plus Corp.
Wayne Bingham
Executive Vice-President and Chief Financial Officer
(403) 218-2951
(403) 218-2973 (FAX)
wbingham@superiorplus.com
Superior Plus Corp.
Jay Bachman
Vice-President, Investor Relations and Treasurer
(403) 218-2957 or Toll Free: 1-866-490-PLUS (7587)
(403) 218-2973 (FAX)
jbachman@superiorplus.com
www.superiorplus.com
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