Chemtrade Logistics Income Fund Annual Report

Transcription

1 Chemtrade Logistics Income Fund 2008 Annual Report

2 Corporate Profile Chemtrade operates a diversified business providing industrial chemicals and services to customers in North America and around the world. Chemtrade is one of North America s largest suppliers of sulphuric acid, liquid sulphur dioxide and sodium hydrosulphite, and a leading processor of spent acid. Chemtrade is also a leading regional supplier of sulphur, sodium chlorate, phosphorous pentasulphide, and zinc oxide. Visit our website Chemtrade s website is our primary medium for communicating with our unitholders. The site is regularly updated with news releases concerning distributions, financial results and other important developments, as well as presentations made to investor conferences and our annual meeting presentation. An electronic copy of this report is available on the website. We encourage our unitholders to visit the site regularly. Contents CHE.UN 1 Letter to Unitholders 3 Management s Discussion & Analysis 24 Management s Responsibility for Financial Reporting 25 Auditors Report 26 Consolidated Financial Statements 30 Notes to Consolidated Financial Statements IBC Unitholder Information

3 Letter to Unitholders Chemtrade concluded 2008 by achieving its most successful financial year ever. All of our businesses performed well as a result of important initiatives we have implemented in recent years. We have strengthened and improved our businesses, which allowed us to capitalize on the favourable market conditions that existed for much of the year. Our financial success would have been even greater had our Beaumont sulphuric acid plant not been offline for the last four months of the year. The Beaumont plant was shut down in August following an explosion in the plant s furnace. Two of our employees were injured in the incident and we re thankful that they are recovering. Extensive work was required to repair the plant. The repairs were completed in January when the plant was successfully restarted. Towards the end of the year, the deepening recession began to have an impact. We experienced a marked drop off in sales volume for most of our products in the fourth quarter, with almost half of the reduced demand occurring in December. In addition to the reduced sales volumes, the worsening economic conditions directly affected some of our customers, leading to an increase in our allowance for doubtful debts. Finally, our International group had an exceptional year benefiting from the very strong global market for sulphuric acid Financial Results 1 Distributable cash after maintenance capital expenditures was $2.50 per unit for the year, more than twice our $1.20 per unit distribution rate. Adjusted cash flow from operating activities in 2008 was $99.0 million (2007: $54.4 million) and Distributable Cash after Maintenance Capital Expenditures was $83.5 million (or $2.50 per unit) compared with $47.5 million (or $1.41 per unit) in Consolidated revenue for 2008 was $1.2 billion, more than double the $546.6 million generated in EBITDA was $118.9 million compared with $68.6 million, reflecting strong results from SPPC and International. Strengthened Balance Sheet In today s climate of economic and financial challenges, a strong balance sheet and financial flexibility are essential. The initiatives we executed in 2008 prepared us for these unprecedented times. In May we renegotiated our credit agreement and now have no debt due until August We also used the excess cash we generated during 2008 to significantly improve our debt position. As shown in our financial statements, our operating line of credit was fully paid off by the end of 2008, being a reduction of US$41 million. Our term debt was unchanged in While the amounts reported in the year-end financial statements show an increase in term debt, this is a result of U.S. dollar denominated debt being translated for financial reporting purposes, using a much weaker Canadian dollar than at the beginning of the year. This reduction of debt means that we enter 2009 in very good shape. At the end of 2008 our net debt to EBITDA ratio for bank purposes was approximately 1.5 times, less than half of the Credit Agreement covenant limit. We also have no debt outstanding on our operating credit line, which leaves us about US$65 million of room. All of this means that we created financial flexibility and strength in 2008, and are well positioned as we enter a n n u a l re p o r t 2008 «c h e m t r a d e lo g i s t i c s in c o m e fu n d 1

4 People It would be easy to assume that the exceptional financial results we achieved in 2008 were due solely to the buoyant international and North American market for our products. However, the ability to capitalize on these markets was based on our employees forging strong customer relationships, utilizing their market knowledge and delivering our products and services safely and reliably. In bringing the Beaumont plant successfully back on line, our dedicated people from across the organization demonstrated their commitment to improved operations and to our customers and are to be congratulated for their outstanding efforts working under difficult circumstances. My thanks again to the Board of Trustees whose guidance and experience are more valuable than ever as Chemtrade navigates economic times more difficult than most of us have ever experienced. Conclusion 2 Our unprecedented financial results in 2008 clearly demonstrate the beneficial results of our past years initiatives to improve our businesses. We will continue to invest in these improvements in 2009, confident that they will deliver further benefits in the years ahead. It is extremely difficult to forecast demand for our products given the current economic environment. We do not anticipate an appreciable increase in demand for our products as compared to the fourth quarter of 2008 until at least the second half of While our business model and some of our contracts mitigate the effects of certain commodity movements, a sustained decrease in demand will adversely affect Chemtrade. Despite a lack of demand specificity, we believe that we will generate Distributable cash after maintenance capital expenditures at least equal to our current distribution rate. Over the last few years, we have pursued initiatives to improve our business and to position ourselves for the long term, and we will continue this process in Since macro-economic factors are beyond our control, we believe that our best path forward is to continue our emphasis on strengthening our businesses. To this end, we will maintain our focus on generating cash, enhancing reliability through improvements to our capital assets and processes, and protecting our balance sheet to retain our financial flexibility. We also intend to closely monitor the demand for our products and will continue our practice of maintaining a healthy balance between short-term and long-term initiatives. Mark Davis President and Chief Executive Officer March 9, Further detailed discussion of the Fund s financial performance, including information on non-gaap measures and reconciliations with appropriate GAAP measures are contained in Management s Discussion & Analysis. 2 See cautionary statements contained in Forward-looking Statements in Management s Discussion & Analysis, which also apply to the Letter to Unitholders. 2 c h e m t r a d e lo g i s t i c s in c o m e fu n d» an n u a l re p o r t 2008

5 Management s Discussion and Analysis The information in this Management s Discussion and Analysis, or MD&A, is intended to assist the reader in the understanding and assessment of the trends and significant changes in the results of operations and financial condition of Chemtrade Logistics Income Fund. Throughout this MD&A, the term the Fund refers to Chemtrade Logistics Income Fund and its consolidated subsidiaries. The terms we, us or our similarly refers to the Fund. This MD&A should be read in conjunction with the audited consolidated financial statements of the Fund for the year ended December 31, The Fund s financial statements are prepared in accordance with accounting principles generally accepted in Canada, or Canadian GAAP. The Fund s reporting currency is the Canadian dollar. In this MD&A per unit amounts are calculated using the weighted average number of units outstanding for the applicable period unless otherwise indicated. Forward-looking Statements This MD&A contains certain statements which may constitute forward-looking statements within the meaning of certain securities laws, including the safe harbour provisions of the Securities Act (Ontario). The use of any of the words anticipate, continue, estimate, expect, may, will, project, should, believe and similar expressions are intended to identify forward-looking statements. This MD&A contains forward-looking statements about the objectives, strategies, financial condition, results of operations and businesses of the Fund. These statements are forward-looking as they are based on current expectations about our business and the markets we operate in, and on various estimates and assumptions. Forward-looking statements in this MD&A describe our expectations as of the date of this MD&A. Our actual results could be materially different from our expectations if known or unknown risks affect our business, or if our estimates or assumptions turn out to be inaccurate. As a result, we cannot guarantee that any forward-looking statement will materialize. Forward-looking statements do not take into account the effect that transactions or non-recurring items announced or occurring after the statements are made may have on our business. We disclaim any intention or obligation to update any forward-looking statement even if new information becomes available, as a result of future events or for any other reason. Risks that could cause our actual results to differ materially from our current expectations are discussed in the RISKS AND UNCERTAINTIES section of this MD&A. a n n u a l re p o r t 2008 «c h e m t r a d e lo g i s t i c s in c o m e fu n d 3

6 FINANCIAL HIGHLIGHTS Three Months Ended Year Ended December 31, December 31, December 31, December 31, December 31, ($ 000 except per unit amounts) Revenue $ 292,789 $ 144,580 $ 1,178,826 $ 546,636 $ 552,128 Net earnings (loss) (4) $ (2,460) $ 9,108 $ 40,331 $ 20,596 $ 3,820 Net earnings (loss) per unit - Basic $ (0.08) $ 0.27 $ 1.21 $ 0.61 $ Diluted $ (0.08) $ 0.27 $ 1.21 $ 0.61 $ 0.11 Total assets (4) $ 655,225 $ 510,575 $ 655,225 $ 510,575 $ 568,111 Long-term debt $ 185,023 $ 155,206 $ 185,023 $ 155,206 $ 173,932 EBITDA (3) $ 24,204 $ 23,042 $ 118,936 $ 68,644 $ 65,723 EBITDA per unit (1) $ 0.74 $ 0.69 $ 3.56 $ 2.04 $ 1.96 Cash flows from operating activities $ 94,183 $ 19,731 $ 147,905 $ 47,742 $ 41,950 Cash flows from operating activities per unit (1) $ 2.88 $ 0.59 $ 4.43 $ 1.42 $ 1.25 Adjusted cash flows from operating activities (3) $ 18,667 $ 18,843 $ 99,043 $ 54,351 $ 52,991 Adjusted cash flows from operating activities per unit (1)(3) $ 0.57 $ 0.56 $ 2.97 $ 1.62 $ 1.58 Distributable cash after maintenance capital expenditures (3) $ 11,490 $ 16,071 $ 83,488 $ 47,501 $ 46,383 Distributable cash after maintenance capital expenditures per unit (1)(3) $ 0.35 $ 0.48 $ 2.50 $ 1.41 $ 1.38 Distributions declared $ 9,691 $ 10,074 $ 39,906 $ 40,299 $ 48,133 Distributions declared per unit (2) $ $ $ $ $ Distributions paid $ 9,861 $ 10,075 $ 40,086 $ 40,971 $ 47,908 Distributions paid per unit (2) $ $ $ $ $ (1) Based on weighted average number of units outstanding for the period of: 32,738,881 33,582,936 33,370,769 33,582,848 33,582,040 (2) Based on actual number of units outstanding on record date. (3) See NON-GAAP MEASURES. (4) For the three months and year ended December 31, 2007, net earnings and total assets have been adjusted as a result of adopting CICA Handbook Section 3031, Inventories on a retrospective basis. The adjustment did not have a material impact on net earnings per unit (basic and diluted). 4 c h e m t r a d e lo g i s t i c s in c o m e fu n d» an n u a l re p o r t 2008

7 NON-GAAP MEASURES EBITDA Throughout this MD&A, the term EBITDA is used to describe earnings before any deduction for net interest and accretion expense, taxes, depreciation and amortization and other non-cash charges such as minority interest. EBITDA is a metric used by many investors and analysts to compare organizations on the basis of ability to generate cash from operations. Management considers EBITDA (as defined) to be an indirect measure of operating cash flow, which is a significant indicator of the success of any business. It is not intended to be representative of cash flow from operations or results of operations determined in accordance with Canadian generally accepted accounting principles ( GAAP ) or cash available for distribution. EBITDA is not a recognized measure under Canadian GAAP. The Fund s method of calculating EBITDA may differ from methods used by other income funds or companies, and accordingly may not be comparable to similar measures presented by other organizations. A reconciliation of EBITDA to net earnings follows: Three Months Ended Year Ended December 31, December 31, December 31, December 31, December 31, ($ 000) Net earnings (loss) $ (2,460) $ 9,108 $ 40,331 $ 20,596 $ 3,820 Add: Unrealized foreign exchange loss (gain) 12, ,712 (776) 366 Depreciation and amortization 11,240 9,051 41,123 38,713 44,367 Impairment of property, plant and equipment ,276 Gain on disposal of property - - (250) - - Net interest and accretion expense 4,070 3,050 13,535 12,633 11,438 Net taxes (841) 1,552 7,485 (2,480) (6,544) Minority interest - (15) - (22) - EBITDA (1) $ 24,204 $ 23,042 $ 118,936 $ 68,664 $ 65,723 (1) EBITDA for the three months and year ended December 31, 2008 includes recoveries of $nil and $1,238 respectively (2007 charges of $nil and $1,971 respectively) for restructuring. EBITDA for the year ended December 31, 2006 included charges of $2,706 for restructuring. Cash Flow The following table is derived from, and should be read in conjunction with, the consolidated statement of cash flows. Management believes this supplementary disclosure provides useful additional information related to the cash flows of the Fund including the amount of cash available for distribution to Unitholders, repayment of debt and other investing activities. Certain sub-totals presented within the cash flows table below, such as Adjusted cash flows from operating activities, Distributable cash after maintenance capital expenditure and Distributable cash after all capital expenditure, are not defined terms under Canadian GAAP. These sub-totals are used by management as measures of internal performance and as a supplement to the consolidated statement of cash flows. Investors are cautioned that these measures should not be construed as an alternative to using net income as a measure of profitability or as an alternative to the GAAP consolidated statement of cash flows. Further, the Fund s method of calculating each measure may not be comparable to calculations used by other income trusts bearing the same description. a n n u a l re p o r t 2008 «c h e m t r a d e lo g i s t i c s in c o m e fu n d 5

8 Three Months Ended Year Ended December 31, December 31, December 31, December 31, December 31, ($ 000) Cash flows from operating activities $ 94,183 $ 19,731 $ 147,905 $ 47,742 $ 41,950 Add (deduct): Changes in non-cash working capital and other items (75,516) (888) (48,862) 6,609 11,041 Adjusted cash flows from operating activities 18,667 18,843 99,043 54,351 52,991 Less: Maintenance capital expenditure 7,177 2,772 15,555 6,850 6,608 Distributable cash after maintenance capital expenditure 11,490 16,071 83,488 47,501 46,383 Less: Non-maintenance capital expenditure (1) 1,061 1,939 4,273 2, Distributable cash after all capital expenditure 10,429 14,132 79,215 45,285 45,446 (1) Non-maintenance capital expenditures are either pre-funded, usually as part of a significant acquisition and related financing or are considered to expand the capacity of the Fund s operations. CONSOLIDATED OPERATING RESULTS Consolidated revenue for the fourth quarter of 2008 was $292.8 million, which was more than double the consolidated revenue of $144.6 million recorded in the fourth quarter of Consolidated revenues for the year ended December 31, 2008 of $1.2 billion was also more than double the revenue of $546.6 million recorded for the year ended December 31, The main reason for the increase in quarterly and annual revenues was the extremely high prices for acid and sulphur, both in North America and in markets served by the International segment. The Fund s net loss and EBITDA for the fourth quarter of 2008 were $2.5 million and $24.2 million respectively compared to net earnings and EBITDA for the fourth quarter of 2007 of $9.1 million and $23.0 million respectively. Net earnings and EBITDA for 2008 were $40.3 million and $118.9 million respectively. Comparable net earnings and EBITDA for 2007 were $20.6 million and $68.7 million respectively. The main reason for the improvement in EBITDA in 2008 was stronger results from the SPPC and International segments. Also, 2008 included a recovery of $1.2 million relating to restructuring activities, whereas 2007 results included costs of $2.0 million with respect to such activities (as described in the RESTRUCTURING section below) s fourth quarter and annual earnings were negatively impacted by the inclusion of unrealized foreign exchange losses of $12.2 million and $16.7 million respectively. These losses were a result of the sharp decline in the Canadian dollar relative to the U.S. dollar towards the end of Conversely, the Fund recorded unrealized gains on the translation of its U.S. dollar denominated assets in foreign operations, but those are included in Other Comprehensive Income and not Consolidated Statements of Earnings. 6 c h e m t r a d e lo g i s t i c s in c o m e fu n d» an n u a l re p o r t 2008

9 RESULTS OF OPERATIONS BY BUSINESS SEGMENT SPPC Three Months Ended Year Ended December 31, December 31, December 31, December 31, ($ 000) (1) (1) Revenue $ 148,438 $ 73,848 $ 538,930 $ 309,416 Earnings before the under-noted (EBITDA) 16,495 12,931 86,477 52,040 Depreciation and amortization 8,551 6,395 30,350 27,581 Gain on disposal of property - - (250) - Net interest and accretion expense 3,626 2,613 11,235 10,762 Income tax (recovery) expense (757) 315 3,497 (4,079) Net earnings $ 5,075 $ 3,608 $ 41,645 $ 17,776 (1) Depreciation and amortization and net earnings have been adjusted as a result of adopting CICA Handbook Section 3031, Inventories on a retrospective basis. SPPC manufactures and distributes sulphuric acid and other sulphur based products to an extensive customer base in Canada and the U.S., and provides acid regeneration services to the petroleum industry, primarily in the U.S. Gulf Coast area. SPPC also supplies liquid and powder sodium hydrosulphite, which is sold to the pulp and paper industry and to a lesser extent, to the textile industry. For the fourth quarter of 2008, SPPC generated revenue of $148.4 million, which was more than double the revenue of $73.8 million recorded during the fourth quarter of The increase in 2008 revenue is primarily the result of higher prices for acid and the effect of the weaker Canadian dollar relative to the U.S. dollar on U.S. dollar denominated revenues. The strength in acid prices more than offset the impact of lower volumes resulting from the Beaumont plant being off-line for the entire fourth quarter (as described in the BEAUMONT INCIDENT section). During the fourth quarter of 2008, SPPC s EBITDA was $3.6 million higher than the level achieved in 2007, mainly due to higher pricing realized for acid. This was partially offset by a few negative items experienced during the quarter: a) lower volume of acid due to the Beaumont plant being off-line; b) period costs incurred at Beaumont, which should be recoverable under the Fund s business interruption insurance; c) costs of certain maintenance activities undertaken at Beaumont while the plant was off-line; d) higher costs for replacement SO 2 purchased to offset the reduced supply from Xstrata s Kidd Creek plant while they were undergoing a labour disruption; and e) the impact of lower volumes and higher costs for SHS which were only partially offset by higher selling prices for SHS. The improvement in net earnings during the fourth quarter of 2008, relative to the fourth quarter of 2007 was lower than the EBITDA improvement, due to increased depreciation and amortization and higher net interest expenses. Depreciation and amortization for the fourth quarter of 2008 were higher than the fourth quarter of 2007 due to capital additions and amortization being recorded on intangible assets related to the Vale Inco contracts. Net interest expenses were higher in the fourth quarter of 2008 due mainly to the impact of the weaker Canadian dollar relative to the U.S. dollar on U.S. dollar denominated interest expense. For the year ended December 31, 2008, SPPC generated revenues of $538.9 million, an increase of approximately 74% over the level achieved during The increase in 2008 revenue is principally the result of higher prices for acid and sulphur, although higher prices were achieved for all products. The effect of higher prices was moderated by lower volume of acid, due to the Beaumont plant being off-line for the last four months of the year. During 2008, SPPC s EBITDA increased by $34.4 million. Strong results from acid more than offset the impact of the Beaumont incident and volume and cost pressures on SHS. The improvement in 2008 net earnings was not as much as the EBITDA improvement, mainly due to higher depreciation and amortization expenses and income taxes. Depreciation and amortization was higher in 2008 than 2007 due to reasons already described above. Income tax expense was higher for 2008 due mainly to increased earnings. Restructuring costs also had a modest, positive impact on 2008 EBITDA and net earnings relative to 2007 (as described in the RESTRUCTURING section below). a n n u a l re p o r t 2008 «c h e m t r a d e lo g i s t i c s in c o m e fu n d 7

10 Pulp Chemicals Three Months Ended Year Ended December 31, December 31, December 31, December 31, ($ 000) (1) (1) Revenue $ 10,153 $ 14,635 $ 53,354 $ 58,093 Earnings before the under-noted (EBITDA) 3,358 5,326 18,635 19,546 Depreciation and amortization 2,182 2,303 9,156 9,321 Net interest and accretion expense ,700 2,094 Net earnings $ 629 $ 2,495 $ 6,779 $ 8,131 (1) Depreciation and amortization and net earnings have been adjusted as a result of adopting CICA Handbook Section 3031, Inventories on a retrospective basis. Pulp Chemicals produces sodium chlorate and crude tall oil ( CTO ), both of which are chemicals used in the pulp and paper industry. Sodium chlorate is used to bleach pulp and CTO is used as a less expensive alternative energy source to natural gas. Fourth quarter 2008 Pulp Chemicals revenue was $4.4 million lower than the level achieved during the fourth quarter of The main reason for the decline was due to reduced customer demand towards the end of the fourth quarter including the decision by a large customer to take downtime at the end of December. This volume decline also negatively impacted full year revenues and consequently, 2008 revenues were $4.7 million lower than Net earnings and EBITDA for the fourth quarter were lower than the levels achieved during the comparable period in 2007, also mainly due to the lower sales volume as described above. Higher sales prices achieved during 2008 were not enough to offset the effect of the lower sales volume in the fourth quarter and consequently net earnings and EBITDA were lower than the levels achieved during net earnings were negatively impacted by higher interest expenses in 2008 due to the unwinding of interest rate swaps in conjunction with the conversion of Canadian dollar denominated debt into U.S. dollars in September International Three Months Ended Year Ended December 31, December 31, December 31, December 31, ($ 000) Revenue $ 134,198 $ 56,097 $ 586,542 $ 179,127 Earnings before the under-noted (EBITDA) 10,450 9,409 34,884 14,942 Depreciation and amortization ,617 1,811 Net interest income (103) (91) (400) (392) Income tax expense (84) 1,237 3,988 1,599 Minority interest - (15) - (22) Net earnings $ 10,130 $ 7,926 $ 29,679 $ 11,946 8 c h e m t r a d e lo g i s t i c s in c o m e fu n d» an n u a l re p o r t 2008

11 International operations provide removal and marketing services for elemental sulphur and sulphuric acid. These products are marketed to customers globally. During the fourth quarter of 2008, International s revenue was $134.2 million compared with $56.1 million for the same period of For 2008, International s revenue increased by $407.4 million from the level of $179.1 achieved during The increase in revenues is primarily due to significantly higher prices for acid and sulphur. International net earnings and EBITDA during the fourth quarter and year ended December 31, 2008 were considerably higher than the comparable periods in Although towards the end of 2008, global demand and prices for sulphur and acid started to decline, a relatively low volume of product that was not committed to specific customers resulted in extremely high margins and was a key driver of the improved EBITDA and earnings. Further, during the volatile market conditions prevalent in 2008, this segment was able to leverage its market knowledge and infrastructure to significantly add value to suppliers and customers and thereby earn incremental margin. Corporate Three Months Ended Year Ended December 31, December 31, December 31, December 31, ($ 000) Cost of services $ 6,098 $ 4,624 $ 21,060 $ 17,864 Loss before the under-noted (EBITDA) (6,098) (4,624) (21,060) (17,864) Unrealized foreign exchange loss (gain) 12, ,712 (776) Net interest and accretion expense Net earnings $ (18,293) $ (4,920) $ (37,772) $ (17,257) The Corporate segment includes the administrative costs of corporate activities which are not directly allocable to an operating segment, such as information technology, finance and human resources. For the fourth quarter and year ended December 31, 2008 corporate costs, excluding unrealized foreign exchange losses were $6.1 million and $21.1 million respectively compared with $4.6 million and $17.9 million respectively for the fourth quarter and year ended December 31, Corporate costs in the fourth quarter of 2008 were negatively impacted by an increase of $3.4 million in the allowance for doubtful accounts. The increase was mainly due to a provision for losses expected as a result of two customers filing for Chapter 11 reorganization in January This was partially offset by higher realized foreign exchange gains of $0.8 million recognized during the fourth quarter of 2008, relative to the fourth quarter of Finally, incentive compensation recorded during the fourth quarter of 2008 was $1.2 million lower than the fourth quarter of This decrease was mainly due to lower accruals for the Total Return Long-Term Incentive Plan ( TR LTIP ). The increase in corporate costs during 2008 was mainly due to the increase of $3.4 million in the allowance for doubtful accounts as explained above corporate costs also included legal and consulting costs relating to the Beaumont incident (as described in the BEAUMONT INCIDENT section) and legal and other costs relating to the EPA settlement (as described in the U.S. ENVIRONMENTAL PROTECTION AGENCY ( EPA ) SETTLEMENT section). These increases were partially offset by lower incentive compensation costs of $0.6 million and higher realized foreign exchange gains of $0.9 million recognized in 2008, relative to The decrease in incentive compensation was mainly due to lower TR LTIP accruals corporate costs benefited from the inclusion of US$0.8 million related to the Hurricane Rita insurance claim recovery. a n n u a l re p o r t 2008 «c h e m t r a d e lo g i s t i c s in c o m e fu n d 9

12 The TR LTIP accruals relate to the 2006, 2007 and 2008 TR LTIP. The 2006, 2007 and 2008 TR LTIP s are payable at the beginning of 2009, 2010 and 2011 respectively. Although an accrual with respect to these plans has been recorded, the payouts will be based upon Total Return, as described in the Fund s Management Information Circular, achieved over the three-year performance periods of each plan. The nature of this calculation makes it difficult to forecast the amount of TR LTIP expenses that will be recordable in any period as it is based upon future distributions and changes in unit value. The Corporate segment includes large unrealized foreign exchange losses on the translation of U.S. dollar denominated debt, which were a result of the sharp decline in the Canadian dollar relative to the U.S. dollar towards the end of This exchange rate fluctuation also resulted in large unrealized foreign exchange gains on the translation of U.S. dollar denominated assets. However, as per accounting rules, those gains are required to be shown in Other Comprehensive Income rather than in the Consolidated Statements of Income. There was no net interest and accretion expense recorded in 2008 and the expense recorded in 2007 was relating to convertible debentures prior to their redemption in the first quarter of RESTRUCTURING During the fourth quarter of 2006, the Fund decided to discontinue production of powder SHS and costs of $2.7 million related to that decision were recorded in that quarter. The Fund recorded an additional $2.0 million of costs related to this decision during These costs included a provision for a penalty on a long-term supply agreement. During 2008, the penalty was waived. As a result, the Fund reversed the penalty provision previously recorded of $1.2 million. BEAUMONT INCIDENT During the third quarter of 2008, an explosion occurred at the Fund s Beaumont, Texas facility. Currently, it is not possible to estimate the amount of income the Fund has lost or the expected amount of recovery the Fund will receive under its business interruption insurance policies and therefore as at December 31, 2008, no insurance recovery has been recorded. An insurance recovery will be recorded when the amount of the recovery is determined. The Beaumont plant commenced operations in January During the fourth quarter of 2008, the Fund incurred legal and consulting costs relating to this incident. During the fourth quarter of 2008, the Fund incurred capital expenditures relating to the repair of damaged property at the Beaumont facility. These costs are recoverable under the Fund s property insurance policy and to the extent payment had not been received prior to December 31, 2008, an amount has been included in Accounts receivable. U.S. ENVIRONMENTAL PROTECTION AGENCY ( EPA ) SETTLEMENT In January 2009, the Fund reached a settlement with the EPA and certain States, whereby new emission limitations will be established at each of its five sulphuric acid manufacturing facilities. The agreement with Chemtrade arose from a broader EPA initiative regarding the domestic sulphuric acid manufacturing industry. Chemtrade s plants will meet these stricter limits by various agreed dates ranging from December 2009 to December Chemtrade anticipates that these compliance actions will cost it approximately US$6.0 million in respect of four facilities, most of which will be spent to bring its Riverton, Wyoming facility into compliance with the new limits by December Because of Chemtrade s existing overall levels of control, the civil penalty to be paid by Chemtrade is not material and it was recorded in Certain additional funds and penalties will be expended in respect of Chemtrade s Cairo facility, but those costs will be paid for by Marsulex Inc., pursuant to an indemnity agreement between the two companies. FOREIGN EXCHANGE The Fund has operating subsidiaries that are based in the U.S. BCT, the Fund s international subsidiary, uses the U.S. dollar as its reporting currency. As the Fund reports in Canadian dollars, its reported earnings are exposed to fluctuations in the Canadian/U.S. dollar exchange rate. The Fund currently estimates that on an unhedged basis, a $0.01 increase in the Canadian/U.S. dollar exchange rate reduces Distributable cash after maintenance capital expenditures by less than $0.1 million on an annual basis and vice-versa. 10 c h e m t r a d e lo g i s t i c s in c o m e fu n d» an n u a l re p o r t 2008

13 To manage the volatility of foreign exchange rates, the Fund has entered into a series of foreign exchange contracts with its principal bankers. All foreign exchange contracts are under International Swap and Derivatives Association ( ISDA ) agreements. As of December 31, 2008, approximately all planned transfers for 2009 have been effectively hedged at $ Contracts in place at December 31, 2008 include future contracts to sell US$6,000, US$12,033, CHF 3,000 and SEK 3,000 at weighted average exchange rates of C$1.1805, 0.748, US$0.84 and US$0.13 respectively, for periods through to December There are unrealized losses of $0.2 million and unrealized gains of $1.0 million from these contracts at December 31, The purpose of these contracts is to hedge the value of the funds which are used to pay dividends and interest by subsidiary companies to the Fund and to meet other commitments. The amount of the related derivative is recorded at fair market value at the period end and included with Prepaid expenses and other assets or Accrued and other liabilities on the balance sheet. The resultant non-cash charge or gain is reported as unrealized foreign exchange loss (gain). The impact of this non-cash charge or gain is excluded from the computation of Distributable cash after maintenance capital expenditures. See NON-GAAP MEASURES Cash Flow. The Fund s International and U.S. based operations are considered to be self-sustaining, as they are financially independent. As a result, gains or losses arising from the translation of the assets and liabilities of self-sustaining operations are recorded in other comprehensive income. The changes recorded in the accumulated other comprehensive income account since December 31, 2007 were a result of changes in the Canadian/U.S. dollar exchange rate between December 31, 2007 and December 31, The rate of exchange used to translate U.S. denominated balances has changed from a rate of US$1.00 = $0.99 at December 31, 2007 to US$1.00 = $1.22 at December 31, See RISKS AND UNCERTAINTIES for additional comments on foreign exchange. NET INTEREST AND ACCRETION EXPENSE Net interest and accretion expense was $4.1 million in the fourth quarter of 2008 compared with $3.1 million in the fourth quarter of Net interest and accretion expense was $13.5 million for 2008 compared with $12.6 million for Interest on the Canadian dollar denominated debt amounted to $nil and $4.1 million in the fourth quarter and 2008 respectively and $1.2 million and $4.6 million in the fourth quarter and 2007 respectively. Interest expense during 2008 was lower than interest expense for 2007 due to the conversion of the Canadian dollar denominated long-term debt into U.S. dollar denominated long-term debt. This was partially offset by the recognition of the $0.9 million loss resulting from the unwinding of interest rate swaps. The interest on the U.S. dollar denominated debt was $1.8 million and $6.8 million for the fourth quarter and 2008 respectively, compared with $1.6 million and $7.0 million for the fourth quarter and 2007 respectively. Interest expense was higher during the fourth quarter of 2008 due to the conversion of Canadian dollar denominated long-term debt into U.S. dollar denominated long-tem debt. Interest expense for 2008 was lower than 2007 primarily because of lower usage of operating lines of credit and lower effective annual interest rates, partially offset by interest on the converted long-term debt. The effective annual interest rate at December 31, 2008 was 5.48% on the pre-existing debt ( %) and 4.64% on the converted debt ( %). See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities - Financial Instruments for information concerning swap arrangements. Interest on the outstanding 10% convertible debentures was $nil for both the fourth quarter and 2008, compared to $nil for the fourth quarter of 2007 and $0.2 million in The expense was lower in 2008 than 2007 due to the redemption of all of the outstanding convertible debentures in the first quarter of During the fourth quarter and 2008, the Fund recorded accretion expense of $0.1 million and $0.7 million respectively compared with $0.2 million and $0.8 million for the fourth quarter and 2007 respectively. This accretion is due to the amortization of transaction costs related to the Fund s borrowings. During the fourth quarter and 2008, the Fund recorded interest expense of $1.1 million and $1.2 million respectively due to the recognition of the fair value losses of its US$34.5 million interest rate swaps which were previously included in other comprehensive income. These hedges were de-recognized during 2008 as the operating lines of credit were repaid. a n n u a l re p o r t 2008 «c h e m t r a d e lo g i s t i c s in c o m e fu n d 11

14 INCOME TAXES Current income tax expense was $2.2 million for the fourth quarter of 2008 and $7.6 million for 2008, compared to $1.3 million and $2.2 million for the fourth quarter and for 2007, respectively. The effective tax rate for 2008 was 15.6% compared to the statutory corporate tax rate of 32.5%. This difference is primarily the result of lower tax rates in certain international business operations and distribution of trust income to the Unitholders, offset by the increase in the valuation allowance. The increase in future tax asset of $3.0 million at December 31, 2008 relative to December 31, 2007 is the result of increased tax loss carry forwards, net of valuation allowances, and other deductible temporary differences available in certain Canadian and foreign corporate subsidiaries. The increase in future tax liability of $4.9 million at December 31, 2008 relative to December 31, 2007 is the result of the increase in the taxable temporary differences between the accounting carrying amount and the tax basis of assets associated with certain Canadian and foreign corporate subsidiaries. At December 31, 2008, the Fund has $7.0 million of deductible temporary differences related to certain flow-through subsidiaries compared with $0.4 million for The Fund has not provided for future taxes on this amount as it is expected that these deductible temporary differences will substantially all reverse prior to the Fund being subject to SIFT tax in EXCESS CASH FLOWS AND NET INCOME OVER DISTRIBUTIONS PAID The following table presents excess cash flows from operating activities and net income over distributions paid for the three month period ended December 31, 2008 and for the years ended December 31, 2008, 2007 and Three Months Ended Year Ended December 31, December 31, December 31, December 31, ($ 000) (1) 2006 Cash flows from operating activities $ 94,183 $ 147,905 $ 47,742 $ 41,950 Net earnings (2,460) 40,331 20,596 3,820 Distributions paid during period 9,861 40,086 40,971 47,908 Excess (shortfall) of cash flows from operating activities over cash distributions paid 84, ,819 6,771 (5,958) Excess (shortfall) of net income over cash distributions paid $ (12,321) $ 245 $ (20,375) $ (44,088) (1) For the year ended December 31, 2007 net earnings has been adjusted as a result of adopting CICA Handbook Section 3031, Inventories on a retrospective basis. The Fund considers the amount of cash generated by the business in determining the amount of distributions payable to its Unitholders. In general, the Fund does not take into account quarterly working capital fluctuations as these tend to be temporary in nature. The Fund does not generally consider net income in setting the level of distributions as this is a non-cash metric and is not reflective of the level of cash flow that the Fund can generate. This divergence is particularly relevant for the Fund as it has a relatively high level of depreciation and amortization expenses and foreign exchange gains and losses. For the year ended December 31, 2006 distributions to Unitholders exceeded cash flows from operating activities mainly due to an increase in working capital. The additional distribution was funded by an increase in bank debt. 12 c h e m t r a d e lo g i s t i c s in c o m e fu n d» an n u a l re p o r t 2008

15 Distributions On January 4, 2007, the Fund announced a change in the monthly distribution rate to $0.10 per unit, effective with the January 2007 declaration. Distributions to Unitholders for the three months and year ended December 31, 2008 were declared as follows: Record Date Payment Date Distribution Per Unit Total ($ 000) Three months ended December 31: October 31, 2008 November 28, 2008 $ 0.10 $ 3,277 November 30, 2008 December 31, ,236 December 31, 2008 January 30, ,178 Sub-Total $ 0.30 $ 9,691 Nine months ended September 30 $ 0.90 $ 30,215 Total for the year ended December 31 $ 1.20 $ 39,906 Distributions declared in the three months and year ended December 31, 2007 were as follows: Record Date Payment Date Distribution Per Unit Total ($ 000) Three months ended December 31: October 31, 2007 November 30, 2007 $ 0.10 $ 3,358 November 30, 2007 December 31, ,358 December 31, 2007 January 31, ,358 Sub-Total $ 0.30 $ 10,074 Nine months ended September 30 $ 0.90 $ 30,225 Total for the year ended December 31 $ 1.20 $ 40,299 Treatment of the Fund s distributions for Canadian Income Tax purposes for 2007 and 2008 is as follows: Other Income Foreign Non-Business Income Total % 23.0% 100.0% 2008 (1) 75.0% 25.0% 100.0% (1) Represents anticipated tax characterization of planned distributions. The actual tax treatment of 2008 distributions will be determined by February 28, a n n u a l re p o r t 2008 «c h e m t r a d e lo g i s t i c s in c o m e fu n d 13

16 LIQUIDITY AND CAPITAL RESOURCES The Fund s distributions to Unitholders are sourced entirely from its investments in operating subsidiary companies. The Fund s investments are financed by trust units held by Unitholders, long-term debt and operating lines of credit. The cash flow of the Fund is required to fund distributions to Unitholders, capital expenditures and payment of interest on long-term debt as well as the repurchase of units under the Normal Course Issuer Bid as discussed below. The Fund intends to renew its long-term debt at maturity. Cash Flow from Operating Activities Cash flow from operating activities for the fourth quarter of 2008 was $94.2 million, an increase of $74.5 million from the level generated during the fourth quarter of The increase in cash flow is primarily due to a drastic reduction in working capital, particularly in the International segment. The reduction was due to significantly lower prices for sulphur and acid towards the end of Working capital in North America was also lower, but this was mainly due to the timing of certain payments and is expected to partially reverse in the first quarter of For 2008, cash flow from operating activities was $147.9 million, an increase of approximately $100.2 million from the level achieved in The increase in cash flow is due to a reduction in working capital of $48.8 million in 2008 whereas in 2007, working capital increased by $6.5 million. The remainder of the increase is due to the stronger earnings generated during 2008 by the SPPC and International segments as described above. Financing Activities Distributions to Unitholders during the fourth quarter and 2008 were $0.2 million and $0.9 million lower respectively than the same periods in These decreased distributions were due to the lower distribution rates in 2008 and due to lower units outstanding as a result of the buy back and cancellation of units by the Fund pursuant to a normal course issuer bid commenced in September 2008 (as explained in the Normal Course Issuer Bid below). During the third quarter of 2008, under provisions allowed by its credit agreement, the Fund converted its Canadian dollar denominated term debt into U.S. dollar term debt and $25.2 million of its outstanding Canadian dollar lines of credit into U.S. dollar lines of credit. As at December 31, 2008, the Fund has term debt of US$153.1 million and has no amounts outstanding on its operating lines of credit. Also in the third quarter of 2008, the Fund collapsed its swap arrangements on its Canadian dollar denominated term debt and recognized a loss of $0.9 million which has been included in net interest and accretion expense. The Fund also entered into new swap arrangements with its principal banker in order to fix interest rates until These swap arrangements covered the entire amount of its converted U.S. dollar term debt (US$52.9 million) and a portion of its converted operating lines of credit (US$23.3 million). During the second quarter of 2008, the Fund extended the term of its senior credit facilities with its principal bankers to August 2, 2011 on substantially unchanged terms and conditions. This was a two year extension to the then existing term, on substantially the same terms as the existing agreement. The Fund incurred transaction costs of $0.6 million related to this extension. As the Fund is treating this extension as a modification of the debt, rather than an extinguishment, these transaction costs have been added to the remaining unamortized transaction costs from the pre-existing agreements. These transaction costs will be recorded as net interest and accretion expense using the effective interest method over the life of the extended debt. During the first quarter of 2007, the Fund increased the aggregate amount that can be borrowed under the Fund s senior credit facilities with its principal bankers by $50.0 million. The Fund then used part of this increased credit facility to redeem the 16,378 convertible debentures outstanding for the principal amount plus accrued unpaid interest. Normal Course Issuer Bid On September 19, 2008, the Fund announced that it intends to purchase up to 3,330,094 of its units by way of a normal course issuer bid (the Bid ) through the facilities of the Toronto Stock Exchange ( TSX ), representing 10% of the public float on the day thereof. The purchases commenced on September 23, 2008 and will terminate by September 22, The purchases will be made in accordance with the policies and rules of the TSX and units will be purchased for cancellation. The prices that Chemtrade will pay for any units will be the market price of such units at the time of acquisition. 14 c h e m t r a d e lo g i s t i c s in c o m e fu n d» an n u a l re p o r t 2008

17 During 2008, the Fund purchased 1,872,526 units at an average per unit price of $9.48 for an aggregate purchase amount of $17.8 million. This resulted in $23.0 million being recorded as a reduction to units and $5.3 million being recorded as contributed surplus. For additional information on cash distributions, see NON-GAAP MEASURES Cash Flow and EXCESS CASH FLOWS AND NET INCOME OVER DISTRIBUTIONS PAID. Financial Instruments The Fund has entered into swap agreements with its principal bankers in order to fix the interest rates on its long-term debt. In the second quarter of 2008, the Fund entered into new swap arrangements with its principal banker, which will fix interest rates on all of its U.S. dollar long-term debt and Canadian dollar denominated long-term debt from August 2009, the previous maturity date of the Fund s credit facility, until August In the third quarter of 2008, the Fund converted its Canadian dollar long-term debt into U.S. dollar long-term debt, and consequently collapsed its swap arrangements on the Canadian long-term debt. The Fund also entered into new swap arrangements with its principal banker which fixes interest rates on all of its converted U.S. dollar long-term debt and a portion of its converted U.S. dollar operating lines of credit. In the fourth quarter of 2007, the Fund entered into a new swap arrangement to fix the interest rate on US$10 million of its operating lines of credit. The effective interest rate under the pre-existing swap arrangements is 5.48% and on the outstanding converted U.S. dollar long-term debt and operating lines of credit swap arrangements is 4.64%. At December 31, 2008, the fair values of the above noted agreements were liabilities of $9.1 million (US$7.5 million). See comments under NET INTEREST AND ACCRETION EXPENSE for comments on these rates. Subsequent to December 31, 2008, the Fund amended its existing interest rate swap arrangements related to its long-term debt, to extend the term to August The average effective interest under the new swap arrangements is 4.83%. The Fund also collapsed the US$34.5 million of interest rate swap arrangements on its operating lines of credit. See RESULTS OF OPERATIONS BY BUSINESS SEGMENT - Foreign Exchange for additional comments on hedging. To manage its exposure to changes in the price of natural gas, the Fund has entered into natural gas forward contracts. The Fund buys and sells specific quantities of natural gas at pre-determined dates on indices which are matched with the anticipated operational cash flows. At December 31, 2008, the fair value of these agreements is $1.2 million in favour of the Fund. These contracts are accounted for as derivatives with gains or losses recorded in selling, general, administrative and other costs. Investing Activities Investment in capital expenditures was $8.2 million in the fourth quarter of 2008, compared with $4.7 million in the fourth quarter of These amounts include $7.2 million in the fourth quarter of 2008 and $2.8 million in the fourth quarter of 2007 for maintenance capital requirements. Investment in capital expenditures for 2008 was $19.8 million compared with $9.1 million for The maintenance capital expenditure components were $15.6 million for 2008 and $6.9 million for As previously disclosed, the Fund intends to continue upgrading its manufacturing assets and consequently maintenance capital expenditures for 2009 are expected to be higher than 2008 and similar to total 2008 expenditures. Investment in non-maintenance capital expenditures were $1.1 million and $4.3 million during the fourth quarter and 2008 respectively compared with $1.9 million and $2.2 million during the fourth quarter and 2007 respectively. Most of the non-maintenance capital expenses during 2007 and 2008 were related to the expansion of the Rotterdam terminal, in the International segment, which was completed during Non-maintenance capital expenditures are either pre-funded, usually as part of a significant acquisition and related financing or are considered to expand or improve the capacity of the Fund s operations. During the third quarter of 2008, the Fund sold excess vacant land at its site in Leeds, South Carolina for gross proceeds of US$2.9 million. As a result of the sale, the Fund has recognized a gain on disposal of $0.3 million (US$0.2 million). During the second quarter, the Fund invested US$2.5 million in Meranol S.A.C.I. ( Meranol ). Meranol is based in Buenos Aires, Argentina and is a leading Argentine producer of sulphuric acid and other sulphur products. The investment was made in the form of convertible notes, convertible into 10% of the equity of Meranol. The notes bear an interest rate of 10% per annum. The Fund also has options over a specified period of time, to increase its investment to up to 45% of Meranol s common stock at a pre-determined price. a n n u a l re p o r t 2008 «c h e m t r a d e lo g i s t i c s in c o m e fu n d 15