Superior Plus Annual Report 2005

Plain-text annual report

Strength Through Diversity 2 0 0 5 A n n u a l R e p o r t Diversiﬁed Businesses Satisﬁed Customers Sustainable Growth Contents Performance Highlights Management’s Letter Corporate Governance Operations Review Selected Historical Information Management’s Discussion & Analysis 2 3 6 8 18 20 Superior Plus Income Fund Management’s Report Auditors’ Report Consolidated Financial Statements 45 45 46 Notes to Consolidated Financial Statements 49 Corporate Information Unitholder Information 68 69 Superior Propane 35% (1) Superior Propane has been in business since 1951 and is Canada’s largest distributor of propane, related products and services. It also provides natural gas liquids wholesale marketing services to small and medium sized propane retailers, mainly in the United States. ERCO Worldwide 35% (1) ERCO Worldwide has been in business since the 1940s and is a leading supplier of chemicals and technology to the pulp and paper industries, a regional Midwest supplier of chloralkali products and the third largest producer of potassium products in North America. JW Aluminum 17% (1) JWA has been in business since 1980. The company manufactures specialty ﬂat-rolled aluminum products, primarily serving the heating, ventilation and air conditioning; building and construction; ﬂexible packaging, and other end-use markets in the United States. Operations: 209 locations across Canada comprised of 43 larger market centres and 166 satellite and storage yards. Number of Employees: Approximately 1,650 Annual Sales Volume: Approximately 1.5 billion litres of propane. Type of Customers: Diversiﬁed geographically and across end-use applications. The largest customer contributed approximately 1% of gross proﬁt in 2005. Operations: 10 specialty chemicals plants strategically located; 7 in Canada, 2 in the United States, and 1 to commence operation mid-2006 in Chile. Number of Employees: Approximately 510 Annual Sales Volume: Total chemical sales of 787,000 tonnes. Type of Customers: More than 200 customers. The top 10 customers contribute approximately 47% of revenues. Operations: 3 aluminum fabrication facilities located in Mt. Holly, South Carolina, Russellville, Arkansas and St. Louis, Missouri. Number of Employees: Approximately 800 Annual Sales Volume: 333 million pounds of specialty, ﬂat-rolled aluminum products sold in 2005. Type of Customers: More than 300 customers in the United States. No single customer accounts for more than 7% of sales, with the top 10 customers accounting for approximately 42% of 2005 sales. Winroc 11% (1) Winroc has been in business since 1971 and is the largest distributor of specialty construction products to the walls and ceilings industry in Canada and seventh largest in North America. Operations: 38 branches with 30 locations in western Canada and Ontario; and 8 in Minnesota and parts of the southwestern United States. Number of Employees: Approximately 900 Annual Sales Volume: $487 million of revenues, with 52% derived from drywall and accessories. Type of Customers: Approximately 6,900 residential, commercial, new and remodelling customers, diversiﬁed geographically. The top 10 customers contributed approximately 14% of 2005 distribution sales. Superior Energy Management 2% (1) Superior Energy Management commenced operations in June of 2002, providing ﬁxed-price natural gas supply services to residential, commercial and industrial markets in Ontario and Quebec. Operations: Main focus area is Ontario, expanding into Quebec market. Number of Employees: Approximately 30 Annual Sales Volume: Approximately 100,000 GJ/d of natural gas. Type of Customers: Approximately 57,000 commercial, small industrial and residential customers. The largest customer contributed approximately 5% of gross proﬁt in 2005. Distributable cash ﬂow, operating distributable cash ﬂow, maintenance capital expenditures and growth capital, which are used throughout this document, are terms used in accordance with the deﬁnitions contained in Note 1 to the Consolidated Financial Statements. These measures do not have a standardized meaning prescribed by generally accepted accounting principles (“GAAP”) and may not be comparable to similar measures presented by other companies. Distributable cash ﬂow cannot be assured. (1) 2005 annual operating distributable cash ﬂow contribution, including JW Aluminum as if it had been acquired on January 1, 2005. Key Strengths: • Leading competitive position. • Geographic and end-use customer diversiﬁcation. • Utility-like operating risk proﬁle. Key Strengths: • Leading competitive position. • Geographic and customer diversiﬁcation. • Low cost structure. • Simple and safe manufacturing process. Key Strengths: • Leader in specialty aluminum markets. • Diversiﬁed products and customers. • In-house product development capability. • Flexible manufacturing model. • No direct exposure to changes in primary aluminum prices. Key Strengths: • Leading competitive position. • Geographic and end-use customer diversiﬁcation. • Track record of stable and growing ﬁnancial results and attractive growth potential. Operating Distributable Cash Flow and Net Maintenance Capital (millions of dollars) 99.9 108.7 106.0 112.7 94.2 4.1 3.0 3.5 5.6 2.8 2001 2002 2003 2004 2005 Operating Distributable Cash Flow and Maintenance Capital (2) (millions of dollars) 93.3 91.3 93.1 81.3 77.4 11.1 12.7 6.4 7.6 8.1 2001 2002 2003 2004 2005 Operating Distributable Cash Flow and Maintenance Capital (3) (millions of dollars) 52.8 27.1 27.9 33.4 20.1 2.6 9.0 8.1 5.1 3.6 2001 2002 2003 2004 2005 Operating Distributable Cash Flow and Net Maintenance Capital (4) (millions of dollars) 30.2 21.0 12.3 12.1 10.1 4.2 4.7 5.8 6.9 5.6 2001 2002 2003 2004 2005 Key Strengths: • Stable contract-based business. • Complementary to propane retailing. • Attractive growth opportunities. Operating Distributable Cash Flow (5) (millions of dollars) 7.7 4.5 5.3 (0.1) 2002 2003 2004 2005 (2) (3) ERCO Worldwide acquired December 19, 2002. Unaudited prior year results are provided for comparison purposes. JW Aluminum acquired October 19, 2005. Unaudited prior year results are provided for comparison purposes. (4) Winroc acquired June 11, 2004. Unaudited prior year results are provided for comparison purposes. (5) 2002 to 2004 restated to give retroactive effect to change in accounting for natural gas customer acquisition costs. Strength Through Diversiﬁed Businesses Superior Plus Income Fund was established in 1996 and has diversiﬁed over time into ﬁve strong business platforms, consisting of propane retailing, specialty chemicals, ﬂat-rolled aluminum products, specialty construction products distribution, and ﬁxed-price natural gas retailing. Underpinning the success of our diversiﬁcation strategy are strong business platforms with the following characteristics: • Mature businesses; • Low operating risk proﬁles; • Strong competitive positions; • Stable and sustainable cash ﬂows; • Experienced management capabilities; and • Visible value growth potential. Strategic direction, governance, access to capital and other services are provided by the corporate ofﬁce, enabling the businesses to focus on the execution of their business plans. Diversiﬁcation has reduced Superior’s overall business risk, while providing further value growth opportunities to generate stable distributions, growing over time. 1 2005 Annual Report Performance Highlights Superior Plus has outperformed the S&P/TSX Composite Total Return and the Scotia Capital Income Trust indices since inception of the Fund in 1996 to December 31, 2005. Over that period, unitholders earned an annualized total return of 19.4%, including cumulative distributions of $16.31 per trust unit. We remain committed to generating superior returns and long-term value. SPF.UN – TOTAL RETURN SINCE INCEPTION (Includes re-investment of distributions) October 7, 1996 to December 31, 2005 700 Superior Plus Income Fund Total Return (SPF.UN) Scotia Capital Income Trust Index S&P/TSX Composite Total Return Index Return Annualized 415.9% 19.4% Return Annualized 314.9% 16.7% Return Annualized 141.5% 10.0% 600 500 400 300 200 100 0 OCT 96 APR 97 OCT 97 APR 98 OCT 98 APR 99 OCT 99 APR 00 OCT 00 APR 01 OCT 01 APR 02 OCT 02 APR 03 OCT 03 APR 04 OCT 04 APR 05 OCT 05 DEC 05 Business Segment Contributions (1) Distributable Cash Flow ($ per trust unit) 35% Superior Propane 35% ERCO Worldwide 17% JW Aluminum 11% Winroc 2% Superior Energy Management $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 (1) (2) 2.47 (1) (2) 2.54 (2) 2.35 2.36 (2) 1.93 (2) 1.71 1.58 1.34 1.38 1.24 1.15 96E 97 98 99 00 01 02 03 04 05 One time Management internalization effect. Restated to give retroactive effect to change in accounting for natural gas customer acquisition costs. 2 (1) 2005 annual operating distributable cash ﬂow contribution, including JW Aluminum as if it had been acquired on January 1, 2005. Superior Plus Income Fund Management’s Letter 2005 Highlights • Soft results from Superior Propane and Superior Energy Management outpaced growth achieved by ERCO Worldwide and Winroc. • Made growth capital investments of over $500 million to acquire JW Aluminum and expand existing businesses; advanced platform for proﬁtable growth and diversiﬁcation. • Rapid rise and volatility of energy costs require repositioning of some of our businesses. • Expanded management capabilities to support long-term proﬁtability and growth. and challenges. We made substantial growth capital F or Superior Plus, 2005 was a year of achievements investments, expanded our business platforms and added management depth to position Superior Plus for long-term profitability and growth. At the same time, right-size the propane retailing business. As part of the review, John Gleason, who joined Superior Plus in April 2005 as Senior Vice-President, Corporate Development, took over the leadership of Superior Propane as President in January 2006. Under his leadership, the team continues to focus on the rapid rise in energy prices, warm weather, and the customer service to increase revenues while decreasing the strengthening of the Canadian dollar and resulting impacts cost structure to position the product and service offerings for on our customers have negatively affected the results of some future growth. of our businesses. In response to these new realities, we are adapting our strategies to improve the operating performance To achieve greater purchasing scale and improve its of these businesses. operational efﬁciency, Superior Propane acquired Superior Gas Liquids (SGL) in February, 2005 for $25.6 While distributable cash ﬂow grew modestly to $187.0 million million. SGL is a natural gas liquids wholesale marketer, compared to $184.4 million generated in 2004, distributable providing transportation, storage, risk management, cash ﬂow per trust unit decreased 7% to $2.35 compared supply and logistics services in Canada and the United to $2.54 generated in 2004. This reduction reﬂected weaker States. The acquisition of SGL is expected to further business performance from certain of our businesses and enhance Superior Propane’s supply and logistics dilution resulting from the conversion of debentures and competencies and increase other service revenues. warrants throughout the year. Although the propane business in Canada is mature, it 3 RESULTS FROM OPERATIONS continues to provide a solid foundation for stable returns. We Superior Propane contributed $94.2 million in operating are conﬁdent that under John’s leadership, we can proﬁtably distributable cash ﬂow in 2005, compared to $106.0 million in grow the propane retailing business going forward. 2004. The results were negatively impacted by the rapid rise and high volatility of crude oil, natural gas, and propane prices ERCO Worldwide, our specialty chemicals business, delivered over the last two years, coupled with warm weather across solid results in 2005, contributing $93.1 million in operating Canada. These conditions have continued into 2006. An distributable cash ﬂow, compared to $91.3 million in 2004. increased focus on customer service and retention programs This strong performance was fuelled by the beneﬁts of is expected to result in long-term beneﬁts, but caused the cost ERCO’s acquisition of the chloralkali/potassium facility in Port structure to increase in 2005. Due to these changing business Edwards, Wisconsin in June 2005 for $22.4 million. conditions, a business review commenced in late 2005 to 2005 Annual Report The combination of the rising Canadian dollar, and high Superior Energy Management (SEM), our ﬁxed-price natural energy and ﬁbre costs has resulted in several bleached gas retailing business, contributed $5.3 million of operating pulp plant closures and continues to have an impact on our distributable cash ﬂow, a decrease of $2.4 million from 2004. North American pulp customer base. In response, ERCO The rapid rise in natural gas prices prompted high-volume announced the shut-down of its high-cost plant in Thunder commercial customers to select lower margin ﬂoating index Bay, Ontario, resourcing production from its remaining prices. As a result, SEM has increased its focus on growing network of seven lower-cost sodium chlorate plants and the residential market and has built a solid foundation for continues to review opportunities to reposition its sodium future growth. During the 2005 third quarter, Greg McCamus chlorate operations in the face of further declines in became President of SEM. His focus is on the continued customer demand. proﬁtable growth of the business. ERCO Worldwide strengthened its leadership team A NEW PLATFORM FOR STABILITY AND GROWTH and advanced its diversiﬁcation strategy by expanding In October 2005, Superior Plus acquired JW Aluminum into potassium products and leveraging its Western (JWA), a manufacturer of specialty ﬂat-rolled aluminum Canadian chloralkali production and sales capabilities, products, headquartered in Mount Holly, South Carolina for which in the fourth quarter comprised 40% of its overall $405.4 million. The acquisition of JWA adds another strong cash ﬂow. Expansion of its sodium chlorate business business platform and management team to create long- internationally continues with the construction of ERCO’s term value growth for Superior Plus. Over its 25 years of 55,000 tonne capacity sodium chlorate facility in Chile, operations, JWA has developed a reputation as a premier scheduled to come on stream in mid-2006. ERCO is supplier, providing quality customer service, products, and well positioned to take advantage of opportunities in advanced in-house product development. JWA eliminates the growing Asian and South American markets. direct aluminum commodity price risk by charging customers Winroc, our walls and ceilings construction product distribution business, contributed record operating distributable cash ﬂow of $30.2 million in 2005. This was the ﬁrst full-year contribution since its acquisition by Superior Plus in June 2004. Winroc established a leading market presence in Ontario with the acquisition of Interior Business Supplies in December 2004, followed by the the cost of primary aluminum plus a conversion fee. This has resulted in consistent growth in proﬁts. In November 2005, the Board approved a US$15 million Phase II expansion of JWA’s Russellville, Arkansas facility to support increased 2006 ﬁn stock and converter foil demand. The 42 million pound Russellville expansion will bring annual capacity to over 400 million pounds across JWA’s three manufacturing facilities. acquisition of Leon’s Insulation in April 2005 for $31.7 STRENGTH THROUGH DIVERSIFICATION million. In addition, Winroc expanded its product line and Our diversiﬁcation strategy continued to be successful in opened four new branches in fast-growing areas such as 2005 in reducing our overall business risk, as no single Fort McMurray, Alberta, and suburban Salt Lake City, Utah. business contributed more than 35% to distributable cash Winroc’s proﬁtability is expected to continue to increase ﬂow after giving full year effect to the acquisition of JWA. due to the growth of its existing distribution operations and Growth capital investments exceeding $500 million are 4 its expansion into Ontario. Residential construction rates expected to be accretive to unitholder distributions in 2006 are expected to moderate while commercial construction and beyond. demand is anticipated to increase and remodelling demand remains strong. Under strong management, Winroc is well positioned to become a leading competitor in the North American specialty building products market. STRONG FINANCIAL POSITION During 2005, Superior Plus ﬁnanced its growth by accessing public markets. In June, we issued $175 million of 5.75% convertible debentures. In October, we issued 6.2 million trust units priced at $25.75 and $75 million of 5.85% convertible Superior Plus Income Fund Management’s Letter debentures, raising a total of $410 million. Additionally, the conversion of $48 million of debentures and $17 million in proceeds received from the exercise of trust unit warrants, further strengthened our balance sheet. On March 3, 2006, we completed a $200 million, 10-year, 5.50% senior secured debt issue in the Canadian public bond market. Proceeds will be used to repay the US$145 million JWA acquisition credit facility and other revolving bank debt. MANAGEMENT CAPABILITIES During 2005, signiﬁcant effort was directed towards expanding and strengthening our management capabilities to provide the necessary leadership and experience to adjust our strategies to changes in our business environment and to provide for succession. Superior Propane added one ﬁnance and three operating ofﬁcers. Its management team now of $2.41 per trust unit paid in 2005 resulted in a payout ratio of 103%, due to soft performance from Superior Propane and ERCO Worldwide’s sodium chlorate business in the fourth quarter. Steps are being taken to reposition certain of our businesses in response to the changing business environment and are expected to improve distributable cash ﬂow per unit as these initiatives are implemented. However, in light of the negative impact that record warm temperatures experienced across Canada in January and February are having on Superior Propane’s 2006 results and continuing difﬁculties faced by North American pulp producers, we considered it prudent to reduce the monthly distribution rate to $0.185 consists of seven experienced ofﬁcers led by John Gleason. per trust unit or $2.22 on an annualized basis to ensure ERCO added three ofﬁcers to its skilled team, guided by our payout ratio is sustainable and our ﬁnancial strength Paul Timmons. Winroc, led by Paul Vanderberg, augmented maintained, pending the improvement of results over time. its team to support the growth of its business. SEM, under the leadership of Greg McCamus, is currently expanding its 2006 OUTLOOK management team. To support the growth and complexity This year will be a busy one at Superior Plus, as we harness of our businesses, we added three ofﬁcers at the corporate the beneﬁts of the diversiﬁcation and growth capital invested level. In addition, the Board of Directors has extended the in 2005 and continue to focus on customer service and employment agreement of the President and CEO to 2009 improving the operating performance of several of our and the Executive Chairman will move to the role of Chairman businesses. With more than 3,500 motivated employees, the of the Board. Equipped with strong management capabilities, commitment of our strengthened business and corporate we approach the future with conﬁdence. DISTRIBUTIONS leadership teams, the strong stewardship of our Board, and the continued support of our unitholders, we will continue to take advantage of growth opportunities within each business In November, the Fund increased its cash distribution by segment. Our strong values, entrepreneurial culture and 2.5% to $0.205 per month, or $2.46 on an annualized basis, ﬁnancial strength will allow us to consider other opportunities reﬂecting accretion from the acquisition of JWA. Distributions to create value over time. Grant D. Billing Executive Chairman 5 Geoffrey N. Mackey President and Chief Executive Ofﬁcer March 8, 2006 2005 Annual Report Corporate Governance 2005 Highlights • Reviewed governance structure and substantially strengthened practices and processes. • Adopted a written Board mandate, replacing existing Board guidelines. • Increased Board committees from two to three. • Introduced a written Code of Business Conduct and Ethics to supplement existing principles designed to promote honesty and integrity. underpinned by strong ethical and core values. Superior Plus has a performance-oriented culture are deeply entrenched within our business culture. Economic, environmental and social responsibilities In 2005, Superior Plus adopted a written Code of Business challenges of a global economy, the Board increased the number of committees from two to three. The standing committees are Audit; Governance and Nominating; and Compensation. Supported by its committees, the Board’s processes are designed to: achieve an appropriate degree Conduct and Ethics to supplement its existing principles of independence from management; oversee human and value statements that are designed to promote resources policies and procedures, including succession honesty and integrity across its five businesses. In addition, planning; consider, approve and monitor Superior Plus’ our communication and disclosure, insider trading, and strategic, operating, capital and ﬁnancial plans; and whistleblower policies were reviewed and improved. monitor its risk management framework, including the integrity of internal ﬁnancial and management systems. The Board is ultimately responsible for overseeing the business of Superior Plus and the affairs of the Fund, providing effective The Fund is listed on the Toronto Stock Exchange and abides guidance and stewardship. The Board seeks to insure that by applicable securities laws. On June 30, 2005, National Superior Plus and the Fund conduct their business with Policy 58-201 “Corporate Governance Guidelines” and honesty and integrity, with the objective of creating sustainable National Policy 58-101 “Disclosure of Corporate Governance and long-term value and proﬁtable growth. Practices” (Governance Guidelines) came into force. Through 6 Based on its commitment to strong, effective and responsible compliance with National Policy 52-109 “Certiﬁcation of corporate governance practices, Directors of Superior Plus Disclosure in Issuer’s Annual and Interim Filings” related to carefully considered and adapted the Boards’ structure, CEO/CFO certiﬁcation and ﬁnancial disclosure standards and membership and governance processes, policies and requirements. The Board of Superior Plus and management procedures as part of its annual strategy session in 2005. are focused on transparency and accountability of ﬁnancial the Audit Committee, the Board monitors management’s reporting and monitor developments in corporate governance, With the advances of Superior Plus’ diversiﬁcation strategy disclosure issues and best practices to be satisﬁed that and growth of its businesses, the Board considered it Superior Plus continues to carry out high standards of prudent to adapt and strengthen its governance framework. corporate governance. To remain focused on the strategic visions amid the increasing complexities of a larger organization and the Superior Plus Income Fund Board of Directors Peter A.W. Green Chairman, The Frog Hollow Group Inc. and Chairman of Patheon Inc. James S.A. MacDonald, Chairman and Managing Partner, Enterprise Capital Management Inc. Norman R. Gish President, Gish Consulting Group Peter Valentine, Senior Advisor to the CEO, Calgary Health Region and to the Dean of Medicine, University of Calgary Robert J. Engbloom, Q.C. Partner, Macleod Dixon LLP Geoffrey N. Mackey President and Chief Executive Ofﬁcer, Superior Plus Inc. Allan G. Lennox Principal, AG Lennox & Associates “We believe that a sound strategy, prudent corporate governance processes and a business culture based on honesty and integrity are integral to building long-term value for our unitholders.” David P. Smith, Managing Partner, Enterprise Capital Management Inc. Grant D. Billing Executive Chairman, Superior Plus Inc. Board Composition, Independence and Compliance The Superior Plus Board is composed of nine members with Superior Plus abides by applicable Canadian securities laws extensive business and board experience, high standards and regulations, including the Audit Committee rules and the of ethics and strong vision. Of the nine members, seven are Governance Guidelines. Superior’s statement of corporate independent. Grant Billing, Executive Chair and Geoff Mackey, governance practices and related disclosure, including the 7 President and CEO, are management directors. All indepen- determination and deﬁnitions of independence, Board and dent members currently participate in at least one standing committee meeting attendance records, and directorships committee. Since 2003, Peter Green has served as Lead of Board members in other public entities, are included in Director to strengthen the independence of the Board from the 2006 Information Circular. The Board and Committee management. He also serves as Chair of the Governance and mandates, position descriptions for the Executive Chair, the Nominating Committee. Based on the 2005 annual Board Lead Director, the President and CEO and the committee effectiveness and assessment evaluation it was determined chairs, together with the Code of Business Conduct and that the Board has the appropriate size and competencies to Ethics, the Communication and Disclosure, Insider Trading efﬁciently discharge its duties and responsibilities. and Whistleblower policies are posted on the Fund’s website. 2005 Annual Report Superior Propane 2005 Highlights • Increased focus on residential customer sales and retention. • Re-invested in ﬂeet, tanks, equipment and facilities to support the business. • Acquired Superior Gas Liquids to position the business for future growth. • Continued health, safety and environmental compliance yielding a reduction in lost work days and a corresponding overall increase in productivity. • Business review initiated to address challenging business environment. operating distributable cash flow, a decrease of $11.8 In 2005, Superior Propane contributed $94.2 million of largely due to a combination of three key factors: lower million or 11% from the previous year. This result was volumes as unusual weather reduced heating and crop drying Superior Propane to lead the business repositioning designed to achieve proﬁtable growth in the future. NEW GROWTH OPPORTUNITIES FOR 2006 In February 2005, Superior Propane acquired Superior Gas requirements and high and volatile propane commodity prices Liquids (SGL) for a purchase price of $25.6 million. SGL encouraged customer conservation; higher delivery costs due offers value-added, natural gas liquids wholesale marketing to increased fuel costs; and increased maintenance costs services to primarily small and medium-sized retailers in the incurred to renew tanks and equipment to ready the business United States. Superior Propane’s national scope enables for customer growth. BUSINESS REPOSITIONING SGL to achieve greater economies of scale in purchasing, enhancing its competitiveness while providing Superior Propane with enhanced supply and logistics capabilities, as One of the key initiatives in 2005 was our heightened focus well as exposure to the United States retail propane market. on customer service and retention. Tanks and equipment were renewed and an on-board truck computer program was SERVING OUR CUSTOMERS ACROSS CANADA initiated to increase operational efﬁciency and provide improved Superior Propane is Canada’s leading provider of propane, customer service. These programs increased Superior related products and services, with a market share of 8 Propane’s cost structure in the short term, but are expected to approximately 50%. In North America, Superior Propane ranks provide beneﬁts over time. Unseasonable warm weather, the number ﬁve by sales volumes among retail propane providers. continued structural decline of automotive volumes and high wholesale propane costs continue to impact sales. In response Propane is an environmentally friendly, clean burning, efﬁcient, to these changing business conditions, a review of Superior portable and economical fuel source. For 55 years, Superior Propane’s business has been initiated. The plan entails Propane has served the energy needs of Canadians in all aligning the cost structure to current sales volume levels, major end-use propane applications, including residential, while continuing to focus on customer service and retention to commercial, automotive, construction, oilﬁeld, and agricultural. increase sales. During 2005, Superior Propane’s leadership With operations in all provinces and territories, our geographic was signiﬁcantly strengthened to meet the challenges of the and end-use market diversity contributes to mitigating business. In January 2006, John Gleason became president of exposure to changes in weather and economic conditions. Superior Plus Income Fund Stable energy demand over time, combined with wholesale propane price changes that are generally passed on to the customer, provide for a “utility-like” operating risk proﬁle. Our customer care culture and a broad range of service offerings differentiate us from our competitors. We provide one-stop shopping, customizing our extensive service offerings including equipment sales John D. Gleason President Frank E. Burdzy Vice-President, Business Operations and rentals, installation, repair and maintenance services, pricing and Terrence N. Gill Vice-President, Human Resources Desmond E. Moult Vice-President, Finance Gregory D. Stewart Vice-President, Business Services payment options, to meet the needs of our customers. Superior Propane provides extensive service offerings and one-stop shopping to meet the needs of its customers. Andrew W. Carroll Vice-President, Business Development Carl F. Strub III Vice-President, Transportation and Operations Services We are able to leverage Superior Propane’s industry leading scale to gain efﬁciencies in procurement, supply and transportation infrastructure, business support services, and the development and implementation of value-added delivery and service programs. OUTLOOK The propane business continues to provide a solid foundation for stable returns. A renewed focus on customer care initiated during 2005 is designed to provide efﬁcient, consistent and responsive services in order to solidify customer retention. The repositioning of the business is expected to provide Superior Propane with an opportunity to achieve long-term proﬁtable growth. 9 2005 Annual Report ERCO Worldwide 2005 Highlights • Solid ﬁnancial performance, despite ongoing challenges faced by North American bleached pulp producers. • Acquisition of Port Edwards chloralkali/potassium facility expands product line. • Advanced the construction of 55,000 MT/year sodium chlorate plant in Chile. • Shutdown of Thunder Bay facility improves competitive position. • Strengthened organization positions ERCO to take advantage of further growth opportunities. distributable cash flow of $93.1 million in 2005, an E RCO Worldwide delivered solid operating increase of $1.8 million or 2% from the prior year, despite a challenging market environment. Significant market factors included the increasing value of the Canadian required as a feedstock in the production of chlorine dioxide, an environmentally preferred bleaching agent used in the production of high-quality paper products. We are also the leading global supplier of modern chlorine dioxide generators and related technology, used by pulp mills to convert sodium dollar, rising energy costs and a decrease in North American chlorate into chlorine dioxide. Our technology, blended with our sodium chlorate sales volumes due to soft bleached pulp experience and reputation, provide us with a unique competitive markets, offset by robust chloralkali market conditions. advantage, including early access to new market trends. DEVELOPMENT AND GROWTH In North America, the impact of the rising Canadian dollar During 2005, we substantially advanced our strategy of together with high electricity and ﬁber costs, continue to put expanding our product lines, increasing our operational pressure on the bleached pulp producers and has resulted efﬁciencies, and capitalizing on new opportunities in the in plant closures, reducing demand for sodium chlorate. In growing Asian and South American sodium chlorate markets. response to this changing environment and uncompetitive With the acquisition of the Port Edwards, Wisconsin, electricity costs in Ontario, we announced the shutdown of chloralkali/potassium facility in June 2005, ERCO became the 48,000 tonne capacity sodium chlorate plant in Thunder a leading producer of potassium products in North America. Bay, effective in the ﬁrst quarter of 2006. Electrical energy 10 The Port Edwards facility has a strong competitive position in represents 70-90% of a plant’s variable costs. Redirecting the regional midwest market. The acquisition has positioned the Thunder Bay production to our seven other lower cost ERCO to proﬁtably leverage its existing western Canadian plants that can achieve higher operating rates, enables us to chloralkali production and sales capability. More importantly, improve our competitive position. ERCO continues to review it diversiﬁed our product line into potassium products which opportunities to reposition its sodium chlorate operations are used in a diverse range of end-use products, such as because of further potential deterioration of the North agricultural and de-icing chemicals. This business provides a American sodium chlorate market. platform for further diversiﬁcation and growth. ERCO has maintained its leading market position as the approximately two-thirds complete and the improvements in largest North American producer of sodium chlorate, cell design, introduced during 2005, are increasing electrical Our ﬁve-year electrolytic cell replacement program is Superior Plus Income Fund ERCO Worldwide has further diversiﬁed its customer base and product lines into chloralkali and potassium markets. Paul S. Timmons President Edward J. Bechberger Vice-President, and General Manager, International Business John B. Kamler Vice-President, Business Development John H. Engelen Vice-President, Finance and Systems Sheila S. Burke Vice-President, Regulatory Affairs and External Relations efﬁciency by approximately 7%. During 2005, our plants in Vancouver, B.C. and Buckingham, Quebec achieved new production records and can sustain high utilization rates. OFFSHORE OPPORTUNITIES The construction of the 55,000 tonne annual capacity sodium Norman L. Christensen Vice-President, and General Manager, Chloralkali Operations Daniel J. Corbett Vice-President, Human Resources chlorate plant in Chile continues on time and on budget, bringing ERCO’s total capacity to 592,000 metric tonnes across eight facilities. The plant is scheduled to start-up in mid-2006 at a cost of $65 million and will provide CMPC Celulosa S.A. with a long-term sodium chlorate supply to its three pulp mills. Other offshore opportunities continue to emerge as large international mills increase production in lower cost areas and as developing regions of the world increase consumption of paper and related products. ORGANIZATIONAL STRENGTH During 2005, we reorganized into three separate segments, North American Chlorate, Chloralkali and International Operations to support our strategy of continuing to diversify the chemical business in North America and growing the sodium chlorate business offshore. We signiﬁcantly strengthened our management, human resources, customer services, logistical, legal and regulatory affairs capabilities to meet the ongoing business challenges and to position us for future growth. John N. Clarke Vice-President, and General Manager, North America Chlorate Business Port Edwards, Wisconsin Facility 11 2005 Annual Report JW Aluminum 2005 Highlights • Strong manufacturing performance and low cost structure added substantial value to 2005 results. • Annual capacity increased to 372 million pounds with the completion of Phase I expansion of Russellville, Arkansas facility. • Announced a 42 million pound Phase II expansion of the Russellville facility to support increased ﬁn stock and converter foil market demand. • Superior customer service and product quality continue to drive success. 19, 2005, adding operating distributable cash flow of JW Aluminum (JWA) joined Superior Plus on October year basis, operating distributable cash flow reached $8.6 million to Superior’s 2005 results. On a full $52.8 million, an increase of $19.4 million or 58% over the COMPETITIVE EDGE A diverse mix of products and end-use markets clearly differentiates JWA from its competitors and has been a key component of our success. A ﬂexible manufacturing model and a wide mix of products allow JWA to adjust its product previous year. JWA has steadily increased sales volumes and mix to meet changing customer demands and achieve profitability over the past 25 years. industry-leading utilization rates. JWA offers high quality products and customized solutions that facilitate customers’ FLAT-ROLLED SPECIALITY PRODUCTS processing requirements. Advanced in-house coating Headquartered in Mount Holly, South Carolina, with two capabilities and our ability to provide custom alloys to meet additional facilities in Russellville, Arkansas and St. Louis, speciﬁc needs, provide signiﬁcant additional beneﬁts. Missouri, JWA’s almost 800 employees fabricate specialty ﬂat-rolled aluminum products. These include bare and INDUSTRY-LEADING TECHNOLOGY coated “ﬁn stock” for the HVAC (heating, ventilation and air- JWA’s proprietary furnace design utilizes both scrap and conditioning) industry, light gauge converter foil for the ﬂexible prime metal, providing a cost advantage and lower emissions. 12 packaging industry, and heavier gauge sheet for the building State-of-the-art rolling, annealing, and slitting equipment and construction markets. In addition, we produce other is used to produce top quality products. A constant focus specialized rolled aluminum products used in a variety of other on environmental sustainability has resulted in signiﬁcant applications, including lithographic printing, automotive heat cost savings and recognition for outstanding environmental shields and telecommunication cable wrap. JWA continues to performance. be a leader in these specialty markets. STRONG DEMAND FUNDAMENTALS Fin stock represented 41% of 2005 sales and is expected to further grow in 2006. Fin stock demand has increased due to higher aluminum content required in air conditioning Superior Plus Income Fund units as a result of SEER 13 (Seasonal Energy Efﬁciency generate a metal proﬁt through the use of scrap. In addition, Ratio) regulations, implemented in the United States in JWA charges a conversion fee or “adder” to generate a January 2006. During 2005, JWA completed a 72 million traditional proﬁt after covering the cost of manufacturing and pound expansion of the Russellville facility. In November transportation. 2005, we announced a further 42 million pound, Phase II expansion of the Russellville facility to support additional ﬁn OUTLOOK stock demand. We believe these capacity expansions will Demand fundamentals are strong in JWA’s markets. With enable us to grow sales volumes proﬁtably while enhancing our recent capacity additions and our innovative and manufacturing ﬂexibility and customer service levels. entrepreneurial approach, we are conﬁdent of our ability to drive growth and proﬁtability in 2006 and beyond. Building sheet products represented 28% of 2005 sales and are used by our customers to manufacture end-use products such as trim coil, rooﬁng, doors and windows, sofﬁts, fascia and gutters. This market is driven primarily by residential repair, remodelling and new home and commercial construction. Over time, we expect to see strong demand in the southeastern United States, as reconstruction efforts get underway after the destruction left by hurricanes Katrina and Rita in 2005, and the 2004 hurricanes in Florida. Converter foil products represented 16% of 2005 sales and hold a key position in the ﬂexible packaging market due to aluminum’s strong barrier properties (i.e. UV protection/ impermeability) and the non-reactive, lightweight, non- absorbing nature of the metal. In addition, aluminum-based packaging is relatively inexpensive to produce and allows for innovative and creative design. Don E. Kassing President PASS-THROUGH COMMODITY PRICING Consistent with industry practice, JWA passes the cost of primary aluminum through to its customers, eliminating direct aluminum price risk and providing the opportunity to Barry G. Peake Vice-President, Finance Russell F. Penley Vice-President, Operations 13 A ﬂexible manufacturing model allows JWA to adjust its wide mix of products to meet changing customer demands and achieve industry-leading utilization rates. Blair H. Stewart Vice-President, Materials and IT 2005 Annual Report Winroc 2005 Highlights • Generated record operating distributable cash ﬂow. • Established leading market presence in Ontario. • Opened four new branches in fast growing markets. • Signiﬁcant potential to continue proﬁtable growth. W inroc generated record operating distributable cash flow in 2005 of $30.2 million, an increase of $9.2 million or 44% over the previous full year results. PRODUCTIVITY PARTNER TO BUILDERS AND REMODELLING CONTRACTORS Winroc provides “one-stop” walls and ceilings product lines and value-added job site services to builder and remodelling contractors. By delivering product to the right place and at the right time at the construction site, Winroc provides important productivity savings to its customers. STRONG BUSINESS FUNDAMENTALS 14 Winroc’s proﬁtability has increased consistently over the past 10 years, driven by a combination of organic growth and acquisitions. In April 2005, Winroc acquired Leon’s Insulation, Ontario’s largest distributor of drywall, insulation and associated products with locations in Burlington and Stouffville, Ontario. Together with the acquisition of IBS with locations in Windsor, London and Cambridge in late 2004, grew organically in 2005, opening new distribution operations in Fort McMurray and Medicine Hat, Alberta, Richmond, B.C. and suburban Salt Lake City, Utah. Winroc is estimated to be the largest specialty distributor in Canada and seventh largest in North America’s $20 billion per year walls and ceilings industry. The fragmented nature of the specialty buildings distribution industry continues to provide attractive consolidation opportunities over time. Winroc services the builder/contractor market, representing 50 – 60% of total industry revenues, with the remainder generated through big-box home centres and independent lumber yards that service the do-it-yourself market. Winroc’s multi-location distribution network, strong local market position and Allroc purchasing operation, provide purchasing scale and product line breadth to competitively service its markets. Overall industry demand has grown steadily over time. Approximately 50% of Winroc’s sales are estimated to be to commercial construction and remodelling and 50% to the residential construction and renovation markets. Commercial construction demand has historically lagged residential construction. Remodelling expenditures continue to steadily Winroc has developed a strong market presence in Ontario, increase. Canada’s largest regional market. In addition, Winroc also Superior Plus Income Fund GEOGRAPHIC AND PRODUCT DIVERSIFICATION In 2005, 63% of Winroc’s sales were derived from Canada and 37% from the southern and mid-western United States. Winroc employs approximately 900 people and operates from 38 branches. Its 6,900 customers are diversiﬁed, both geographically and by product category, with the 10 largest customers representing approximately 14% of sales. Winroc’s core business of drywall, steel-framing, insulation and ceiling products represent approximately 90% of sales. Other products include plaster products, tools, fasteners and exterior cladding products and coatings. GROWTH POTENTIAL Winroc’s experienced management team has substantial operations, purchasing, and business integration skills. During 2005, Winroc further strengthened its team and core competencies. Customer, supplier and employee support remains ﬁrmly entrenched in our core values. We have the people, the commitment and the skills to further tap our growth potential and become a leading specialty building products distributor in North America over time. Paul Vanderberg President James Empey Vice-President, Finance Wade Wilson Vice-President, Operations, Western Canada Peter Welly Vice-President, Operations U.S. and Acoustical Bob Hancock Vice-President, Allroc Sales and Marketing Colin Ramsden Regional Operations Manager, BC 15 By delivering product to the right place and at the right time at the construction site, Winroc provides important productivity savings to its customers. Jake Kooy Regional Operations Manager, Prairies Bob Jordan Regional Operations Manager, Ontario 2005 Annual Report Superior Energy Management 2005 Highlights • Record high natural gas prices created a challenging ﬁxed-price natural gas market environment, particularly in the commercial segment. • Strategic transition with increased focus on residential customers. • Expanded contracted customer base. • Strengthened leadership and support systems in anticipation of continued growth and proﬁtability. contributed operating distributable cash flow of $5.3 In 2005, Superior Energy Management (SEM) the prior year. Since its start-up in June 2002, SEM has million to Superior Plus, a decrease of $2.4 million from contributed $17.4 million of operating distributable cash flow In order to capture a ﬁxed selling margin for the term of the customer contract, a ﬁxed-price natural gas supply matching the volume and term of the customer obligation, is contracted with various producers and ﬁnancial counterparties. Currently, SEM sources ﬁxed-price natural gas obligations with minimal capital investment. Superior’s brand recognition, from 12 physical and ﬁnancial suppliers to achieve supplier established credit strength and supplier relationships are key diversiﬁcation and to effectively manage volume and components of SEM’s continued success. counterparty risk. The local distribution companies (LDCs) FIXED-PRICE NATURAL GAS BUSINESS are required to provide SEM with transportation, storage and Headquartered in Mississauga, Ontario, SEM provides natural distribution, as well as billing and collection services. As such, gas retailing services under ﬁxed-price term contracts to natural gas retailing is a stable, contract based, proﬁtable such as Union Energy, Enbridge Gas and Gaz Metropolitan, mid-sized commercial, industrial and residential customers business. in Ontario. In spring 2004, following initial deregulation of Quebec’s commercial and light industrial natural gas markets, STRATEGIC TRANSITION TO POSITION FOR GROWTH 16 SEM entered the market in the Gaz Metropolitain franchise 2005 was a year of strategic transition, as SEM increased region. Providing natural gas supply at a ﬁxed price for a the focus on growing its residential and small commercial term of one to ﬁve years, removes short-term price volatility customer base. A record high natural gas price environment for customers, protecting against long-term commodity price during 2005 compressed demand and proﬁtability from larger increases. SEM has developed an experienced sales network commercial/industrial accounts. Many of these consumers in the residential and commercial markets. Residential agents opted to meet their natural gas requirements on a short-term market door-to-door, while commercial sales agents and ﬂoating rate basis. Residential customers tend to prefer longer experienced in-house staff work with customers to develop an term, predominantly ﬁve-year agreements to manage their energy management plan that ﬁts their budget and business energy costs, particularly in a high and volatile natural gas objectives. pricing environment. In 2005, SEM added 28,000 residential Superior Plus Income Fund customers, doubling its total customer base to 57,000. Natural gas volumes increased by 32% to 37 million gigajoules in 2005. The increase in residential customers has expanded the average remaining term of SEM’s sales contracts at year-end from 32 months in 2005 to 45 months in 2006. The growth in residential sales fosters increased stability and proﬁtability going forward. During the third quarter of 2005, Greg McCamus became President of SEM and is focusing on enhancing SEM’s sales channels, customer service systems and processes. We are well positioned to continue to proﬁtably grow our ﬁxed-price natural gas business in Ontario and Quebec and to expand that service capability to other North American gas markets over time. SEM continues to evaluate the merits of entering the deregulated electricity market in Ontario. Providing natural gas supply at a ﬁxed price for a term of up to ﬁve years removes short-term volatility and protects our customers against commodity price increases. Greg L. McCamus President Gary F. Schein Controller Kris B. Plotzke Portfolio Manager, Natural Gas Shiraz H. Ladha Director, Business Operations & Systems 17 2005 Annual Report Selected Historical Information SUPERIOR PROPANE (millions of dollars except litres of propane and per litre amounts) Litres of propane sold (millions) Propane sales margin (cents per litre) Revenues Cost of products sold Gross proﬁt (1) Cash operating, administrative and tax costs Cash generated from operations before changes in net working capital Maintenance capital expenditures, net Operating distributable cash ﬂow (1) Includes gross proﬁt from other service revenues. ERCO WORLDWIDE (millions of dollars except thousands of metric tonnes (“MT”) and per MT amounts) Total chemical sales (MT) Average chemical selling price (dollars per MT) Revenues Cost of products sold Gross proﬁt Cash operating, administrative and tax costs Cash generated from operations before changes in net working capital Maintenance capital expenditures, net Operating distributable cash ﬂow 2005 1,468 15.8 856.2 571.8 284.4 187.4 97.0 2.8 94.2 2005 787 519 431.6 224.7 206.9 105.7 101.2 8.1 93.1 Year Ended December 31 2004 1,546 15.7 720.2 433.5 286.7 175.1 2003 1,625 15.5 727.1 436.5 290.6 178.4 111.6 112.2 5.6 3.5 106.0 108.7 2002 1,688 14.8 619.0 328.8 290.2 174.5 115.7 3.0 112.7 2001 1,733 15.0 787.5 486.8 300.7 196.7 104.0 4.1 99.9 Year Ended December 31 2004 2003 2002 (1) 2001 (1) 649 571 396.0 202.8 193.2 94.3 98.9 7.6 91.3 574 573 356.3 183.3 173.0 89.2 83.8 6.4 77.4 544 611 361.9 181.4 180.5 86.6 94.0 12.7 81.3 538 594 351.8 172.2 179.6 75.2 104.4 11.1 93.3 (1) ERCO Worldwide was acquired effective December 19, 2002. Prior year results are unaudited and provided for comparison purposes. JW ALUMINUM (millions of dollars except millions of pounds and per pound amounts) 2005 (1) 2004 (1) 2003 (1) 2002 (1) 2001 (1) Year Ended December 31 18 Sales volumes (millions of pounds) Gross proﬁt (cents per pound) Revenues Cost of products sold Gross proﬁt Cash operating, administrative and tax costs (2) Cash generated from operations before changes in net working capital Maintenance capital expenditures, net Operating distributable cash ﬂow 332.6 20.0 546.1 479.2 66.9 10.5 56.4 3.6 52.8 280.3 17.7 443.0 393.4 49.6 11.1 38.5 5.1 33.4 228.6 18.5 321.9 279.5 42.4 6.4 36.9 8.1 27.9 208.9 20.8 323.8 280.3 43.5 7.4 36.1 9.0 27.1 185.7 16.2 304.4 274.4 30.0 7.3 22.7 2.6 20.1 (1) (2) JW Aluminum was acquired effective October 19, 2005. Prior year results are unaudited and provided for comparison purposes. Only tax costs associated with the period from October 19, 2005 to December 31, 2005 have been included. Superior Plus Income Fund WINROC (millions of dollars) Revenues Cost of products sold Gross proﬁt Cash operating, administrative and tax costs Cash generated from operations before changes in net working capital Maintenance capital expenditures, net Operating distributable cash ﬂow 2005 486.6 368.8 117.8 82.0 35.8 5.6 30.2 Year Ended December 31 2004 (1) 2003 (1) 2002 (1) 2001 (1) 384.3 300.0 84.3 56.4 27.9 6.9 21.0 310.9 245.6 65.3 47.4 17.9 5.8 12.1 282.2 220.6 61.6 44.6 17.0 4.7 12.3 288.0 230.2 57.8 43.5 14.3 4.2 10.1 (1) Winroc was acquired effective June 11, 2004. Prior year results are unaudited and provided for comparison purposes. SUPERIOR ENERGY MANAGEMENT (millions of dollars except per gigajoule (“GJ”) and per GJ amounts) Natural gas sold (millions of GJs) Natural gas sales margin (cents per GJ) Revenues Cost of products sold Gross proﬁt Cash operating, administrative and selling costs Operating distributable cash ﬂow 2005 37 39.2 288.4 273.9 14.5 9.2 5.3 Year Ended December 31 2004 (2) 2003 (2) 2002 (1) (2) 28 47.7 211.3 197.9 13.4 5.7 7.7 21 38.8 152.2 144.1 8.1 3.6 4.5 2 22.5 11.4 10.9 0.5 0.6 (0.1) (1) (2) Superior Energy Management commenced business operations in June 2002. Restated to give retroactive effect to change in accounting for natural gas customer acquisition costs. CONSOLIDATED FINANCIALS (millions of dollars except average number of trust units and per trust unit amounts) Revenues Gross proﬁt Operating distributable cash ﬂow (1) Distributable cash ﬂow (1) Per trust unit (1) Year Ended December 31 2005 2,171.4 636.1 231.4 187.0 2004 2003 1,552.8 1,234.3 542.8 219.4 184.4 471.7 190.6 146.5 $ 2.35 $ 2.54 $ 2.47 $ 2002 640.9 295.8 115.7 90.7 1.93 46.9 579.4 Average number of trust units outstanding (millions) Growth capital Total assets (1) Current and long-term debt 79.7 525.3 2,327.8 624.8 72.7 126.3 59.4 129.8 1,552.1 1,445.1 1,392.8 446.2 317.8 443.4 (1) Restated to give retroactive effect to change in accounting for natural gas customer acquisition costs. 2001 787.5 300.7 99.9 78.3 $ 1.71 45.8 2.1 654.9 101.0 19 2005 Annual Report Superior Plus W. Mark Schweitzer Executive Vice-President and Chief Financial Ofﬁcer Derren J. Newell Vice-President, Business Process and Compliance Trevor G. Bell Vice-President, Tax Clint G. Warkentin Vice-President and Treasurer Theresia R. Reisch Vice-President, Investor Relations and Corporate Secretary Superior Plus is committed to maintaining a strong ﬁnancial position to support the execution of its business plans. Jay M. Bachman Manager, Corporate Reporting Management’s Discussion and Analysis As at March 8, 2006 Organization and Structure in common share equity (the “Common Shares”), and $1.469 billion of unsecured subordinated notes due October 1, T he Superior Plus Income Fund (the “Fund”) holds a 100% interest in Superior Plus Inc. (“Superior”) consisting of investments 2026 that bear interest at a weighted average interest rate of 12.4% (the “Shareholder Notes”). The distributable cash flow of the Fund is solely dependent on the results of Superior and is derived from dividends or returns of capital on the Common Shares and interest earned on the Shareholder Notes. Superior has five operating businesses: a propane retailing 20 business operating under the trade name “Superior Propane”; a specialty chemicals business operating under the trade name “ERCO Worldwide”; a manufacturer of specialty, flat-rolled aluminum products operating as “JW Aluminum”; a walls and ceilings construction product distribution business operating under the trade name “Winroc”; and a natural gas retailing business operating under the trade name “Superior Energy Management”. Superior Plus Income Fund Cash Distributions The Fund distributes to holders of trust units (“Unitholders”), interest earned on the Shareholder Notes and dividends or returns of capital declared on the Common Shares, after interest payments to holders of the convertible unsecured subordinated debentures (the “Debentures”) of the Fund (“Debentureholders”), and provision for administrative expenses and reserves of the Fund. The Fund targets to pay out substantially all of its ongoing sustainable distributable cash ﬂow through regular monthly distributions. The Fund increased its monthly distribution by 2.5% to $0.205 per trust unit effective with the November 2005 monthly distribution, based on expected sustainable distributable cash ﬂow including accretion from the acquisition of JW Aluminum (“JWA”). For 2005, distributions paid to Unitholders reached $2.41 per trust unit, an increase of 6% over 2004 distributions paid of $2.28 per trust unit, representing a payout ratio of 103% and 90% for 2005 and 2004 respectively. See “Distributions Paid to Unitholders” for further details. The payout ratio exceeded 100% in 2005 principally due to soft performance from Superior Propane and ERCO Worldwide’s sodium chlorate business in the fourth quarter. Steps are being taken to reposition certain of our businesses in response to the changing business environment and are expected to improve distributable cash ﬂow per unit as these initiatives are implemented. However, in light of the negative impact that record warm temperatures across Canada in January and February are having on Superior Propane’s 2006 results and continuing difﬁculties faced by North American pulp producers, it was considered prudent to reduce the monthly distribution rate to $0.185 per trust unit or $2.22 on an annualized basis to ensure our payout ratio is sustainable and our ﬁnancial strength maintained, pending the improvement of results over time. For income tax purposes, distributions paid in 2005 of $2.41 per trust unit are classiﬁed as other income of $1.676 per trust unit, a return of capital of $0.108 per trust unit and a dividend of $0.626 per trust unit. A summary of cash distributions since inception and related tax information is posted under the “Investor Information” section of Superior’s website at www.superiorplus.com. For 2006, approximately $1.87 per trust unit is expected to be distributed in the form of other income, $0.09 in the form of return of capital, with any remainder expected to be classiﬁed as a taxable dividend. Distributable Cash Flow Distributable cash ﬂow of the Fund available for distribution to Unitholders, is equal to cash generated from operations before natural gas customer acquisition costs and changes in net working capital, less amortization of natural gas customer acquisition costs and maintenance capital expenditures. Maintenance capital expenditures are equal to capital expenditures incurred to sustain the ongoing capacity of Superior’s operations and are deducted from the calculation of distributable cash ﬂow. Acquisitions and other capital expenditures incurred to expand the capacity of Superior’s operations or to increase its proﬁtability (“growth capital”), are excluded from the calculation of distributable cash ﬂow. See Note 1 to the Consolidated Financial Statements for the calculation of distributable cash ﬂow. Distributable cash ﬂow is the main performance measure used by management and investors to evaluate the performance of the Fund and its businesses. Readers are cautioned that distributable cash ﬂow, maintenance capital expenditures and growth capital are not deﬁned performance measures under Canadian generally accepted accounting principles (“GAAP”), and that distributable cash ﬂow cannot be assured. The Fund’s calculation of distributable cash ﬂow, maintenance capital expenditures and growth capital may differ from similar calculations used by comparable entities. Operating distributable cash ﬂow is distributable cash ﬂow before corporate and interest expenses. 21 It is also a non-GAAP measure and is used by management to assess the performance of its operating businesses. Distributable cash ﬂow increased modestly for the ninth consecutive year, reaching $187.0 million, an increase of $2.6 million (1%) over 2004 results. The full year contribution of record results from Winroc acquired in June 2004, and the initial inclusion of JWA results acquired on October 19, 2005, was substantially offset by softer performance from Superior Propane and higher borrowing costs due to higher interest rates and increased debt levels incurred to ﬁnance growth capital investments. Distributable cash ﬂow per trust unit was $2.35 in 2005, down $0.19 (7%) from 2004 as a 10% increase in the average number of trust units outstanding outpaced the increase in distributable cash ﬂow. The average number of trust units outstanding increased in 2005 as a result of trust units issued to partially ﬁnance the acquisition of JWA and the conversion of Debentures and warrants into trust units. 2005 Annual Report As outlined in the facing chart, the diversiﬁcation of the Fund’s earning base continued in 2005 with Superior Propane, ERCO Worldwide, JWA, Winroc and Superior Energy Management (“SEM”) contributing 41%, 40%, 4%, 13% and 2% of operating distributable cash ﬂow, respectively and is expected to diversify further in 2006 with a full year’s contribution from JWA. After giving effect to the acquisition of JWA as if it were owned by Superior for all of 2005, Superior Propane, ERCO Worldwide, JWA, Winroc and SEM would have contributed 35%, 35%, 17%, 11% and 2% of operating distributable cash ﬂow respectively. Net earnings for 2005 were $106.1 million, compared to $112.4 million in 2004. Distributable cash ﬂow increased relative to net earnings in 2005 compared to the prior year, due to increased non-cash amortization charges partially offset by higher non-cash Operating Distributable Cash Flow (millions of dollars) 219.4 231.4 115.7 99.9 190.6 4.5 77.7 108.7 3.1 112.6 7.7 14.4 91.3 106.0 5.3 30.2 8.6 93.1 94.2 2001 2002 2003 2004 2005 Superior Propane Erco Worldwide Winroc JW Aluminum Superior Energy Management 2002 to 2004 restated to give effect to change in accounting for natural gas acquisition costs. (See Note 3(b) to the Consolidated Financial Statements). recoveries of trust unit incentive plan compensation and future income taxes in Canada, and the commencement of payment of cash income taxes in the United States. The increase in amortization expense reﬂects ERCO Worldwide’s announcement in August 2005 to close its Thunder Bay sodium chlorate plant in the ﬁrst quarter of 2006, resulting in the accelerated amortization of the plant’s $40 million net book value over its remaining expected period of operation, combined with the excess of JWA’s amortization of capital equipment over cash maintenance capital expenses. The recovery of trust unit incentive plan compensation expense was driven by the decline in the Fund’s trust unit market value during the second half of 2005. Net earnings for 2005 were reduced by management retention bonuses paid in the second quarter of $1.3 million (2004 – $2.6 million), which were in turn used to repay a portion of trust unit purchase loans advanced as part of the management internalization transaction in 2003. These costs have been excluded from the calculation of distributable cash ﬂow, consistent with the previous accounting for management internalization costs. Fourth Quarter Results Fourth quarter distributable cash ﬂow reached $60.0 million, an increase of $4.2 million (8%) over the prior year quarter. Operating distributable cash ﬂow increased by $9.7 million (15%) as the initial contribution from JWA acquired on October 19, 2005 and improved results from Winroc were partially offset by softer performance from Superior Propane attributable to lower space heating demand and higher operating costs. Interest costs increased by $5.2 million due to increased debt levels incurred to ﬁnance growth capital investments made during 2005 as well as higher interest rates. Distributable cash ﬂow per trust unit was $0.70 in the fourth quarter, down $0.04 (5%) from the prior year period as the 8% increase in distributable cash ﬂow was more than offset by a 14% increase in the average number of trust units outstanding. Distributable cash ﬂow increased relative to net earnings in the fourth quarter of 2005 compared to the prior year period for similar reasons impacting the year-over-year comparison. Further discussion of the 2005 fourth quarter results is provided in the Fund’s Fourth Quarter and 2005 Earnings Release, dated March 8, 2006. 22 A more detailed discussion and analysis of the annual ﬁnancial and operating results of Superior’s businesses is provided on the following pages. Superior Propane Superior Propane generated operating distributable cash ﬂow of $94.2 million in 2005, representing 35% of the Fund’s total after giving effect to the ownership of JWA for all of 2005. Compared to 2004, Superior Propane’s operating distributable cash ﬂow decreased by $11.8 million (11%) due to lower propane sales volumes and increased operating costs, partially offset by increased other service gross proﬁt contributed from the Superior Gas Liquids (“SGL”) wholesale operations acquired in February 2005 and lower net maintenance capital expenditures. Condensed operating results for 2005 and 2004 are provided in the following table. See Note 17 to the Consolidated Financial Statements for detailed comparative business segment results and page 18 of this Annual Report for selected historical information for the last ﬁve years. Superior Plus Income Fund (millions of dollars except per litre amounts) Gross proﬁt Propane sales Other services Total gross proﬁt Less: Cash operating, administration and tax costs Cash generated from operations before changes in net working capital Maintenance capital expenditures, net Operating distributable cash ﬂow Propane retail volumes sold (millions of litres) 2005 2004 $ ¢/litre $ ¢/litre 231.7 52.7 284.4 15.8 3.6 19.4 243.2 43.5 286.7 15.7 2.8 18.5 (187.4) (12.8) (175.1) (11.3) 97.0 (2.8) 94.2 6.6 (0.2) 6.4 111.6 (5.6) 106.0 7.2 (0.4) 6.8 1,468 1,546 Propane sales gross proﬁt was $231.7 million, down $11.5 million (5%) from 2004 as sales volumes declined by 5% (78 million litres). Auto propane sales volumes declined by 30 million litres (15%) due to the continued structural decline in this end-use market, representing 40% of the overall decline in sales volumes. Residential and commercial sales volumes declined by 25 million litres (5%) as warmer weather, coupled with a 20% increase in average wholesale propane costs in 2005 compared to the prior year, encouraged customer conservation and reduced demand. Average temperatures in 2005 across Canada were 4% warmer than 2004 and the last ﬁve year average. As shown in the following chart, wholesale propane costs increases were driven by higher crude oil and natural gas prices experienced in the aftermath of the Gulf coast hurricanes in the third quarter of 2005. Industrial sales volumes increased by 4 million litres (1%) due to the addition of 16 million litres of reﬁned fuel sales volumes acquired over the last year in southwestern Ontario. Agricultural sales volumes declined by 27 million litres (21%) as lower crop drying demand in the prairies resulted from unusually wet weather experienced in the second quarter which signiﬁcantly reduced the size of the crop planted. Approximately 50% of Superior Propane’s sales volumes are due to heating related applications and 50% are related to economic activity levels. Propane sales margins averaged 15.8 cents per litre in 2005, and were comparable to 2004 levels despite the volatile and rising wholesale propane costs experienced in the second half of 2005 as sales margins typically decline during periods of rising propane commodity prices due to delays in passing on prices to customers. Conversely, sales margins typically increase when propane commodity prices decline. Relative Change in WTI Crude Oil and Natural Gas vs. Sarnia Wholesale Propane Prices 200 Sarnia Propane WTI Crude Oil Average Monthly Empress Natural Gas 23 ) e g n a h c % ( 150 100 50 JAN 04 FEB 04 MAR 04 APR 04 MAY 04 JUN 04 JUL 04 AUG 04 SEP 04 OCT 04 NOV 04 DEC 04 JAN 05 FEB 05 MAR 05 APR 05 MAY 05 JUN 05 JUL 05 AUG 05 SEP 05 OCT 05 NOV 05 DEC 05 2005 Annual Report Gross proﬁt from other services reached $52.7 million in 2005, an increase of $9.2 million (21%) over the prior year, due to contributions from SGL acquired in February 2005 and transportation surcharge fee income, partially offset by reduced proﬁtability of ﬁxed-price propane sales programs as hedging costs increased in the aftermath of the Gulf coast hurricanes in the third quarter. Despite the challenging business conditions experienced in 2005, total gross proﬁt was within 1% of 2004, reﬂecting Superior Propane’s leading market share and considerable operational and customer diversiﬁcation. Superior Propane’s operational risks are well distributed across its 43 market operations, with the largest ﬁve markets representing approximately 27% of cash generated from operations. Superior Propane’s customer base is well diversiﬁed geographically and across end-use applications as illustrated in the table below. Its largest customer contributed approximately 1% of gross proﬁts in 2005. Superior Propane Annual Sales Volumes and Gross Proﬁt By End-Use Application By Region Applications: Volume (1) GP (2) Volume (1) GP (2) Regions: Volume (1) GP (2) Volume (1) GP (2) 2005 2004 2005 2004 Residential Commercial Agricultural Industrial Automotive Other Services 183 315 100 696 174 – 59.9 60.9 11.5 78.8 20.6 52.7 192 331 127 692 204 – 61.6 63.3 14.2 80.1 24.0 43.5 Atlantic Quebec Ontario Sask./Man. AB/NWT/YK BC 110 257 342 202 334 223 32.3 49.9 80.1 27.2 54.5 40.4 115 283 350 226 345 227 32.6 52.4 78.4 28.6 55.2 39.5 1,468 284.4 1,546 286.7 1,468 284.4 1,546 286.7 Average margin (3) 15.8 15.7 Average margin (3) 15.8 15.7 (1) (2) (3) Volume: Volume of retail propane sold (millions of litres) GP: Gross proﬁt (millions of dollars) Average margin: Average propane retail sale margin (cents per litre) Cash operating, administration and tax costs were $187.4 million, an increase of $12.3 million (7%) from 2004. Fuel costs increased by $2.5 million as a result of higher fuel prices and were substantially mitigated through the implementation of transportation fee surcharges during the year. Tank and equipment maintenance costs increased by $3.7 million in an effort to ready the business to support growth and service initiatives focused on the residential and commercial end-use markets. The SGL business added $1.6 million of incremental costs in 2005. Cash operating costs were 12.8 cents per litre, an increase of 1.5 cents per litre (13%) over 2004 due to the 7% increase in costs coupled with the 5% decrease in sales volumes. Unseasonably warm weather and high wholesale propane cost trends have continued into the ﬁrst quarter of 2006 and are expected to dampen sales volume levels. In response to these changing business conditions, a review of Superior Propane’s cost structure has been initiated towards improving its operational efﬁciencies and to position its product and service offerings for future growth. In January 2006, Mr. John Gleason took over leadership of Superior Propane as President. Mr. Gleason joined Superior in April 2005 as Senior Vice President Corporate 24 Development and brings considerable experience in the areas of ﬁnance, business development and operations management gained over a 14-year period with MDS Inc., a global health and life science company. Net maintenance capital expenditures were $2.8 million in 2005, a decrease of $2.8 million from 2004 levels. Gross expenditures were $7.4 million in 2005 and 2004 and were directed largely towards the renewal of the delivery ﬂeet. Proceeds on disposals reached $4.6 million in 2005, an increase of $2.8 million over the prior year. Disposal proceeds realized in 2005 included the sale of Superior Propane’s primary transportation ﬂeet operations in eastern Canada to a national trucking company. In conjunction with the sale, a seven-year transportation service agreement was entered into with the purchaser which is anticipated to be cost neutral going forward. Superior Plus Income Fund Growth capital expenditures of $27.5 million (2004 – $4.2 million) included the $25.6 million acquisition of SGL in February 2005 and the acquisition of a southwestern Ontario reﬁned fuels distribution business during the third quarter. SGL is a Calgary-based, natural gas liquids wholesale marketing business, servicing over 80 small and medium-sized propane retailers based mainly in the United States. Wholesale sales volumes were approximately 470 million litres in 2005, resourced from approximately 50 suppliers. SGL has subsequent to its acquisition, taken on the management of Superior Propane’s supply and logistic requirements. OUTLOOK For 2006, Superior Propane’s operating distributable cash ﬂow is anticipated to be lower than 2005. Unseasonably warm weather and high wholesale propane cost trends have continued into the ﬁrst quarter of 2006 and are expected to dampen sales volume levels. These business challenges are anticipated to be addressed in 2006 by taking steps to improve Superior Propane’s operating efﬁciency while positioning its product and service offerings for future growth. The full year’s ownership of SGL, combined with the outsourcing of its primary transportation ﬂeet operations in eastern Canada, is expected to sharpen Superior Propane’s operating focus and proﬁtability. BUSINESS RISKS Competition. Propane retailing is a local, relationship-based business, in which propane competes for market share based on price and level of service. There are close to 200 propane retailers in Canada. Barriers to entry are relatively low. Propane is subject to vigorous competition from other sources of energy, including natural gas, fuel oil, electricity, wood, gasoline, diesel and other fuels. Propane prices are affected by crude oil and natural gas prices. Seasonality and Weather Conditions. Historically, overall propane demand from non-automotive end-use applications has been stable. However, weather and general economic conditions affect propane market volumes. Weather inﬂuences the demand for propane primarily for space heating uses and also for agricultural applications, such as crop drying. Approximately three-quarters of Superior Propane’s annual cash ﬂow is typically generated in the October-March winter heating season. Superior Propane accumulates propane inventory during the summer months for delivery to customers during the winter heating season. The cost of inventory may be higher or lower than market prices for propane at the time of sale and can impact proﬁtability. Propane Demand, Supply and Pricing. Propane represents less than 2% of the overall Canadian energy market and is used in a wide range of applications, including residential, commercial, industrial, agricultural and automotive uses. Demand for traditional propane end-use applications is increasing marginally with general economic growth. Increases in the cost of propane encourage customers to conserve fuel consumption and to invest in more energy efﬁcient equipment, reducing demand. Automotive propane demand is presently declining at a rate of approximately 15 to 20% per year due to the development of more fuel-efﬁcient and complicated engines which increase the cost of converting engines to propane and reduce the savings per kilometre driven. Reversal of this market trend will require increased support of governments and original equipment vehicle manufacturers. Based on the most recently available industry data, it is estimated that on an annual basis, approximately 11.8 billion litres of propane are produced in Canada of which about 3.6 billion litres are consumed domestically. The remainder is exported to the United States. Superior Propane’s supply is currently purchased from 20 propane producers in Canada. Superior Propane leases underground 25 propane storage capacity in Marysville, Michigan and at Fort Saskatchewan, Alberta and accumulates propane storage positions during the summer months to provide it with further supply security and distribution capacity in periods of supply disruption and high demand in the winter season. Propane is mainly purchased under annual contracts, with pricing arrangements based on industry posted prices at the time of delivery. The retail propane business is a “margin-based” business where the level of proﬁtability is largely dependent on the difference between retail sales prices and wholesale product costs. Changes in propane supply costs are normally passed through to customers, but timing lags may result in both positive and negative gross margin ﬂuctuations. Fixed-Price Offerings. Superior Propane offers its customers various ﬁxed-price propane programs. In order to mitigate the price risk from offering these services, Superior Propane 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. Gains and losses from the 2005 Annual Report customers’ contract and the mitigating supply transaction are recorded simultaneously into income at the time of settlement. See Note 15(ii) to the Consolidated Financial Statements for ﬁxed-price propane purchase and sale commitment amounts. Employee and Labour Relations. As of December 31, 2005, Superior Propane had 1,463 regular and 192 part-time employees. Approximately 411 or 28% of its employees are unionized through six provincial or regional certiﬁcations in British Columbia/Yukon, Manitoba, Ontario and Quebec with expiry dates ranging from December 2005 to April 2008. Collective bargaining agreements are renegotiated in the normal course of business and are not expected to materially affect Superior Propane’s business. Environmental, Health and Safety Risk. Slight quantities of propane may be released during transfer operations. The storage and transfer of propane has limited impact on soil or water given that a release of propane will disperse into the atmosphere. To mitigate risks, Superior Propane has established a comprehensive program directed at environmental, health and safety protection. This program consists of an environmental policy, codes of practice, periodic self-audits, employee training, quarterly and annual reporting and emergency prevention and response. ERCO Worldwide ERCO Worldwide generated operating distributable cash ﬂow of $93.1 million in 2005, representing 35% of the Fund’s total after giving effect to the ownership of JWA for all of 2005. Compared to 2004, operating distributable cash ﬂow increased by $1.8 million (2%), as the Port Edwards chloralkali/potassium facility acquired in June 2005 contributed operating distributable cash ﬂow of $14.9 million, outpacing lower contributions from sodium chlorate and technology operations. Condensed operating results for 2005 and 2004 are provided in the following table. See Note 17 to the Consolidated Financial Statements for detailed comparative business segment results and page 18 of this Annual Report for selected historical information for the last ﬁve years. (millions of dollars except per metric tonne (“MT”) amounts) Revenue Chemicals Technology Cost of sales Chemicals Technology Gross proﬁt Less: cash operating, administration and tax costs Cash generated from operations before changes in net working capital Maintenance capital expenditures, net Operating distributable cash ﬂow Chemical volumes sold (thousands of MT) 26 2005 $/MT 2004 408.2 23.4 (213.2) (11.5) 206.9 (105.7) 101.2 (8.1) 93.1 519 30 (271) (15) 263 (134) 129 (10) 119 370.3 25.7 (191.2) (11.6) 193.2 (94.3) 98.9 (7.6) 91.3 787 649 $/MT 571 40 (295) (18) 298 (145) 153 (12) 141 Gross proﬁt of $206.9 million, increased by $13.7 million (7%) over 2004 as increased chemical gross proﬁts were partially offset by a $2.2 million reduction in technology gross proﬁts due to normal course royalty license expirations. Chemical gross proﬁts increased by $15.9 million (9%) as the addition of the Port Edwards business, coupled with a robust chloralkali pricing environment in the second half of 2005, more than offset an $8.1 million (10%) decline in gross proﬁts from sodium chlorate operations. Sodium chlorate gross proﬁt was impacted by a 1% (6,000 tonnes) decline in sales volumes reﬂecting softening bleached pulp market conditions in North America, a 1% decline in average selling prices due to the impact of the appreciation of the Canadian dollar on sales priced in United States dollars, and a 1% increase in production costs due to increased electricity costs. ERCO Worldwide’s Superior Plus Income Fund foreign exchange hedging program in 2005 generated realized gains of $15.3 million and substantially mitigated the impact of the 7% year over year average appreciation of the Canadian dollar against the United States dollar denominated sales. (See “Business Risks – Foreign Currency Rate Risk” for discussion of hedge positions). Total chemical sales reached 787,000 metric tonnes in 2005, an increase of 138,000 tonnes (21%) over 2004 of which 144,000 tonnes was generated by the Port Edwards facility. Sodium chlorate and chloralkali/potassium production capacity utilization averaged 96% (2004 – 96%) and 92% (2004 – 97%) respectively. Average chemical revenue and cost of sales per tonne statistics declined in 2005 from 2004 levels as a result of the addition of chloralkali/potassium product sales from Port Edwards which have lower average selling and production costs than ERCO Worldwide’s existing product mix. Cash operating, administration and tax costs were $105.7 million in 2005, an increase of $11.4 million over the prior year. Increased expenses in 2005 included the addition of Port Edwards operating costs of $11.4 million, $1.5 million of United States cash income taxes, and $1.1 million of severance and related costs with respect to the planned closure in the ﬁrst quarter of 2006 of the 48,000 tonne capacity Thunder Bay sodium chlorate plant. This was partially offset by $2.1 million of non-recurring costs associated with exiting the calcium hypochlorite business in 2004. Chloralkali/potassium sales contributed 29% of operating cash ﬂow from chemical operations before maintenance capital expenditures, up from 12% in 2004, reﬂecting the increased diversiﬁcation of ERCO Worldwide’s product line. Sodium chlorate sales represent 71% of ERCO Worldwide’s operating cash ﬂow from chemical operations before maintenance capital expenditures and are principally sold to bleached pulp manufacturers. Sodium chlorate is required to generate chlorine dioxide that bleaches the pulp and represents approximately 5% of the variable cost to manufacture bleached pulp. As a result, sodium chlorate sales volumes and prices tend to be very stable over time despite the volatility of bleached pulp prices (see the following chart). ERCO Worldwide’s top 10 customers comprised approximately 47% of its revenues in 2005, with its largest customer representing 7% of its revenues. Pulp Prices Compared to Sodium Chlorate Prices and Sales Volumes Sodium Chlorate (Source Market Wire) NBSK (Source Paper Loop) Sodium Chlorate Sales Volumes (ERCO Worldwide) ) e n n o t / $ S U ( 750 700 650 600 550 500 450 400 350 300 250 ) s e n n o T c i r t e M 0 0 0 ( 600 550 500 450 400 350 300 250 27 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Maintenance capital costs of $8.1 million in 2005, increased by $0.5 million over 2004 due principally to the addition of the Port Edwards plant. For 2006, maintenance capital expenditures are expected to rise to the $8 million to $10 million range, reﬂecting a full year of ownership of the Port Edwards plant. Growth capital expenditures aggregated $58.6 million in 2005, compared to $5.7 million in 2004 and were directed towards opportunities in the growing South American sodium chlorate market, increasing operational efﬁciencies, and expanding product 2005 Annual Report lines. Construction of the 55,000 tonne sodium chlorate plant in Chile continues on time and on budget. The plant is scheduled to start up in mid-2006 with full production expected by the end of the third quarter, at a cost of $65 million and will provide CMPC Celulosa S.A. with a long-term contracted sodium chlorate supply to its three pulp mills. Expenditures of $27.5 million were incurred during 2005 ($28.9 million cumulatively). Remaining construction costs are anticipated to be funded from existing revolving term bank credit facilities. Work on the ﬁve-year sodium chlorate cell replacement program continued with $7.9 million spent in 2005 ($19.5 million cumulatively). The project is approximately two-thirds complete with expenditures of $11.5 million anticipated over the next three years. Improvements in cell design are yielding an approximate 7% increase in electrical efﬁciency, generating estimated annual energy savings of $1.5 million. The cell replacement program is considered to be growth capital in nature as the project will improve the production efﬁciency of the business. On June 5, 2005, the Port Edwards, Wisconsin chloralkali/potassium facility was acquired for $22.4 million on a debt-free basis, providing ERCO Worldwide with the opportunity to proﬁtably leverage its existing chloralkali production and sales capability and diversifying its product line into potassium products. OUTLOOK ERCO Worldwide’s results in 2006 are expected to moderate from 2005 levels. Ownership of the Port Edwards chloralkali/ potassium plant for a full year in 2006, the start-up of the new sodium chlorate plant in Chile in mid-2006, and increased international sodium chlorate sales are expected to generate incremental proﬁtability. This is expected to be outweighed by the impacts of softening sodium chlorate demand from North American bleached pulp producers, the appreciation of the strengthening Canadian dollar on U.S. dollar denominated sales, and increased electrical costs. The planned closure of the 48,000 tonne sodium chlorate plant in Thunder Bay during the ﬁrst quarter of 2006 is expected to enable ERCO Worldwide to shift production to its remaining lower cost seven North American chlorate plants. BUSINESS RISKS Competition. ERCO Worldwide, one of four global sodium chlorate companies, competes with Eka Chemicals, the Kemira Group (“Kemira”) and the Canexus Income Fund (“Canexus”) on a worldwide basis. The business also competes with a number of smaller regional producers. Key competitive factors include price, product quality, logistics capability, reliability of supply, and technical capability and service. Of the global producers, Kemira and Canexus do not provide chlorine dioxide generators or related technology. The business also competes with chloralkali producers, such as Dow Chemicals, and potassium producers such as Occidental Chemicals, Olin Corporation and Ashta Chemicals and PPG Industries. In addition, the end-use markets for ERCO Worldwide’s products are correlated to the general economic environment and the competitiveness of its customers which is outside of its control. North American bleached pulp producers are experiencing global competitive pressure as a result of increased ﬁber and energy costs and the impact of exchange rates which may result in reduced demand for sodium chlorate in North America. Foreign Currency Rate Risk. Approximately 50% of ERCO Worldwide’s production is manufactured in Canada and sold to customers in the United States and offshore and are denominated in US dollars. ERCO Worldwide manages its exposure to 28 ﬂuctuations between the US and Canadian dollar by entering into hedge contracts with external third parties and internally with other Superior Plus divisions. Approximately 93%, 55% and 10% of ERCO Worldwide’s estimated US dollar revenue stream for 2006, 2007 and 2008, respectively, have been hedged. (See “Foreign Currency Hedging” and Note 15(iv) to the Consolidated Financial Statements). Supply Arrangements. ERCO Worldwide uses four primary raw materials to produce its chemical products: electricity, salt, potash and water. Electricity comprises 70% to 90% of variable production costs. The business has long-term contracts or contracts that renew automatically with power producers in each of the jurisdictions in which its plants are located. These contracts generally provide ERCO Worldwide with some portion of ﬁrm power supply and a portion that may be interrupted by the producer based on the terms of the various agreements. The business can reduce its power consumption quickly and at minimal cost, which allows it, in some jurisdictions, to reduce its overall power costs by selling ancillary services back to the power producer or to the power Superior Plus Income Fund grid. In jurisdictions where electrical costs are deregulated, ﬁxed-price term supply contracts are entered into in order to manage production costs. Approximately 36% of ERCO Worldwide’s annual power requirements are located in deregulated electricity jurisdictions, of which approximately 45% of their annual requirements have been sourced through ﬁxed-cost electrical contracts, for remaining terms up to twelve years with three investment grade counter-parties (See Note 15(iii) to the Consolidated Financial Statements). The ten-year power agreement at ERCO Worldwide’s Valdosta facility expires in December 2006 at which time power costs are expected to increase. ERCO Worldwide purchases salt from third-party suppliers at each of its plants with the exception of the Bruderheim, Hargrave and Saskatoon facilities, which are self-supplied through long-term salt reserves that are solution-mined on site. Salt purchase contracts are typically ﬁxed-price contracts with terms of one year or greater, often with automatic renewals. Salt costs typically comprise about 10% of variable production costs of sodium chlorate. Environmental Risk. ERCO Worldwide’s 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. ERCO Worldwide is a founding member of Responsible Care®, an initiative of the Canadian Chemical Producers Association, an association that promotes the safe and environmentally sound management of chemicals. ERCO Worldwide manages its environmental and safety risk in a manner consistent with Responsible Care® protocols and strives to achieve an environmental and safety record that compares favourably with other businesses in the chemical industry. The business has not had a material environmental or safety incident for over 12 years and has steadily reduced the number of safety and environmental incidents at all of its facilities. Employee and Labour Relations. As at December 31, 2005, ERCO Worldwide had 509 employees of which approximately 126 (25%) are unionized. The three plants in Vancouver, Saskatoon and Buckingham are subject to collective bargaining agreements which expire from 2007 to 2009. JW Aluminum Superior acquired JWA on October 19, 2005 on a debt-free basis for cash consideration of $405.4 million. JWA is a manufacturer of specialty, ﬂat-rolled aluminum products primarily serving the heating ventilation and air conditioning, building and construction and ﬂexible packaging end-use markets in the United States. The acquisition of JWA provides Superior with further business diversiﬁcation and an additional platform for value growth. JWA’s strong competitive position, history of stable and growing proﬁtability and experienced management team are consistent with Superior’s acquisition criteria and objectives. The accounting for the acquisition is more fully described in Note 4 to the Consolidated Financial Statements. JWA contributed $8.6 million of operating distributable cash ﬂow to Superior’s 2005 results during the 74-day period since its acquisition, consistent with expectations. Had JWA been owned by Superior for the full year in 2005, it would have represented approximately 17% of the Fund’s total operating distributable cash ﬂow. Condensed unaudited operating results for JWA for the years ended December 31, 2005 and 2004 are provided below for comparison purposes: 29 (millions of dollars except per pound amounts) 2005 2005 2004 October 19 – December 31 Years Ended December 31 Gross proﬁt Less: Cash operating, administration and tax costs Cash generated from operations before changes in net working capital Maintenance capital expenditures, net Operating distributable cash ﬂow Aluminum sold (millions of pounds) 12.5 (3.4) 9.1 (0.5) 8.6 ¢/lb 17.6 (4.8) 12.8 (0.7) 12.1 66.9 (10.5) 56.4 (3.6) 52.8 ¢/lb 20.0 (3.1) 16.9 (1.1) 15.8 49.6 (11.1) 38.5 (5.1) 33.4 ¢//lb 17.7 (4.0) 13.7 (1.8) 11.9 71 333 280 2005 Annual Report Sales volumes by product Fin stock Building sheet Convertor foil Other products Total October 19 – December 31 Years Ended December 31 2005 43% 26% 13% 18% 100% 2005 41% 25% 16% 18% 100% 2004 35% 29% 16% 20% 100% Operating distributable cash ﬂow for 2005 reached $52.8 million, an increase of $19.4 million (58%) over the prior year due to improved sales volumes and conversion margins. Gross proﬁt increased by 35% over 2004 to $66.9 million in 2005 as a result of a 19% increase in sales volumes and an 11% increase in conversion margins. Increased sales volumes in 2005 were supported by the completion of the Russellville 72 million pound annual capacity Phase 1 expansion during the third quarter. Increased sales volumes were directed principally to the growing ﬁn stock market. Conversion margins were higher in all product categories compared to the prior year and more than offset the increase in energy costs experienced in 2005. Cash operating and administrative costs of $10.5 million in 2005 included cash income taxes of $1.3 million incurred during Superior’s 74-day ownership period in 2005. Cash operating and administrative costs in 2004 included costs associated with the integration of the Russellville and St. Louis plants that were acquired in April 2004. Growth capital expenditures of $1.9 million were incurred since JWA was acquired by Superior and were related to the completion of the Russellville Phase 1 expansion and initial expenditures on the US$15 million, 42 million pound Phase 2 expansion at Russellville that was announced in Superior’s third quarter earnings news release. OUTLOOK For 2006, Superior’s operating distributable cash ﬂow is expected to beneﬁt from a full year’s ownership of JWA as well as from a full year’s contribution from the Russellville Phase I expansion that was completed during the third quarter of 2005, and the initial contribution from the US$15 million Phase II expansion at Russellville which is expected to be completed by the end of the third quarter 2006. The Phase II expansion is expected to provide an 11% increase in JWA’s annual capacity and will further increase manufacturing ﬂexibility. Increased capacity will be directed principally towards the ﬁn stock market which is growing due to increased aluminum content now required in the manufacture of air-conditioning equipment as a result of recent energy efﬁciency legislation implemented in the United States. Demand and conversion margins for JWA’s other products are expected to be comparable to 2005 levels. JWA expects to be subject to cash income taxes in 2006, at a rate of 15% to 20% of cash generated from operations before changes in net working capital. Maintenance capital expenditures are expected to be in the $6 million to $7 million range. BUSINESS RISKS 30 Competition. The market in which JWA operates is highly competitive. JWA competes primarily on the basis of price, product quality, ability to meet customer demands, product selection, efﬁciency, customer service and technical support. Some of JWA’s competitors have greater capital resources, more efﬁcient technologies, or may have lower raw material and energy costs and may be able to sustain longer periods of price competition. In addition, the end-use markets for certain ﬂat-rolled aluminum products are highly competitive. Aluminum may be substituted with other materials, such as steel, plastic, composite material and glass, for various applications, including in the automotive end-use markets. In the past, customers have demonstrated a willingness to substitute other materials for aluminum. The willingness of customers to accept substitutes for aluminum products could have a material adverse effect on JWA’s ﬁnancial results. Superior Plus Income Fund Demand. Certain end-use markets for aluminum rolled products, such as the construction and industrial and transportation markets, experience demand cycles that are correlated to the general economic environment which is outside of JWA’s control. A recession or a slowing of the economy in any of the geographic segments in which JWA operates or a decrease in manufacturing activity in industries such as HVAC, automotive, construction and packaging and consumer goods, could have a material adverse effect on JWA’s ﬁnancial results. JWA cannot predict the timing, extent and duration of the economic cycles in the markets in which its customers operate. Environmental. JWA is subject to a broad range of environmental, health and safety laws and regulations. Such laws and regulations impose increasingly stringent environmental, health and safety protection standards and permitting requirements regarding, among other things, air emissions, wastewater storage, treatment and discharges, the use and handling of hazardous or toxic materials, waste disposal practices and the remediation of environmental contamination and working conditions for JWA’s employees. The costs of complying with these laws and regulations, including participation in assessments and remediation of sites and installation of pollution control facilities, can be signiﬁcant. Changes in these laws and regulations could result in additional compliance costs which could be signiﬁcant. In addition, these laws and regulations may also result in substantial environmental liabilities, including liabilities associated with past activities. JWA establishes reserves for potential environmental liabilities where it is appropriate to do so; however, predicting the existence or cost of potential environmental liabilities or remediation costs is difﬁcult, and, as a result, any reserves established could ultimately be inadequate. Availability of Raw Materials. Prices for the raw materials required by JWA are subject to continuous volatility and may increase from time to time. JWA’s sales are made on the basis of a “margin over metal price” and JWA is therefore not directly exposed to ﬂuctuations in primary aluminum prices. However, if primary aluminum prices increase signiﬁcantly, JWA’s working capital requirements would increase and demand for JWA’s products could decline as some of JWA’s customers could decide to substitute other materials for its products. Changes in availability and pricing of scrap aluminum relative to primary aluminum pricing could have an adverse impact on ﬁnancial results. In addition, if costs of raw materials other than aluminum increase, JWA may not be able to pass on the entire cost of the increases to its customers or offset fully the effects of these higher raw material costs through productivity improvements. Any one of these factors could have an adverse effect on JWA’s ﬁnancial results. Energy Supplies. JWA consumes substantial amounts of energy in its production processes. A number of factors could materially adversely affect its energy position including: increases in costs of natural gas; signiﬁcant increases in costs of supplied electricity or fuel related to transportation; interruptions in energy supply due to equipment failure or other causes; and the inability to extend energy supply contracts upon expiration on economical terms. If energy costs were to rise, or if energy supplies or supply arrangements were disrupted, it could have an adverse effect on JWA’s ﬁnancial results. Customer Concentration. JWA’s ten largest customers accounted for approximately 42% of JWA’s total sales and operating revenues in 2005, with the top customer representing approximately 7% of JWA’s total sales and operating revenues in 2005. A signiﬁcant downturn in the business or ﬁnancial condition of JWA’s signiﬁcant customers could materially affect JWA’s results of operations. In addition, if JWA’s existing relationships with signiﬁcant customers materially deteriorate or are terminated in the future and JWA is not 31 successful in replacing business lost from such customers, its results of operations could be adversely affected. The contracts under which JWA supplies its customers are subject to renewal, renegotiation or re-pricing at periodic intervals. A failure to successfully renew, renegotiate or re-price such agreements could result in a reduction or loss in customer purchase volume or revenue, and if JWA is not successful in replacing business lost from such customers, its results of operations could be adversely affected. 2005 Annual Report Winroc Winroc generated operating distributable cash ﬂow of $30.2 million in 2005, representing 11% of the Fund’s total after giving effect to the ownership of JW Aluminum for all of 2005. This performance represented an increase of $15.8 million (110%) from the $14.4 million of operating distributable cash ﬂow generated in 2004 subsequent to Superior acquiring Winroc on June 11, 2004 for cash consideration of $104.2 million on a debt-free basis. Compared to full prior year period which are presented for comparative purposes, Winroc’s operating distributable cash ﬂow increased by 44% ($9.2 million), driven by the expansion of its distribution network into the Ontario market. Condensed operating results for the years 2005 and 2004 (unaudited) are provided in the following table. See Note 17 to the Consolidated Financial Statements for detailed comparative business segment results and page 19 of this Annual Report for selected historical information for the last ﬁve years. (millions of dollars) Distribution sales gross proﬁt Direct sales gross proﬁt Gross proﬁt Less: Cash operating, administration and tax costs Cash generated from operations before changes in net working capital Maintenance capital expenditures, net Operating distributable cash ﬂow Years Ended December 31 June 11 – December 31 2005 113.4 4.4 117.8 (82.0) 35.8 (5.6) 30.2 2004 79.9 4.4 84.3 (56.4) 27.9 (6.9) 21.0 2004 46.9 2.6 49.5 (32.5) 17.0 (2.6) 14.4 Distribution sales gross proﬁt reached $113.4 million in 2005, an increase of 42% ($33.5 million) over 2004. Higher sales volumes contributed to improved gross proﬁt as drywall sales, which are an indicator of overall sales volumes, increased by 27%. More than three-quarters of the increase in sales volumes was generated by the expansion into Ontario through the acquisitions of Leon’s Insulation Inc. (“Leon’s”) in April 2005 and Interior Building Supplies (“IBS”) in December 2004 with the remaining growth generated by Winroc’s operations in the United States and from four new greenﬁeld operations that were opened during the year. Gross margins improved with higher product prices, particularly from operations in the United States and improved purchasing performance from operations acquired in Ontario. Direct sales gross proﬁt generated by Allroc, Winroc’s wholesale business, was $4.4 million in 2005 and was comparable to 2004 performance. Cash operating, administration and tax costs were $82.0 million in 2005, an increase of 45% ($25.6 million) over 2004 due principally to the year over year increase in the number of distribution branches from 32 to 38, increased sales volumes, and higher corporate costs incurred to support growth in the business. Cash income taxes incurred in the United States were $2.6 million in 2005, an increase of $2.1 million over 2004 due to increased proﬁtability and a full year of ownership in 2005. Maintenance capital expenditures of $5.6 million in 2005 were moderately lower than 2004 levels as higher expenditures were incurred in early 2004 to support anticipated distribution volume growth. Maintenance capital expenditures in 2006 are anticipated to be in the $6 to $7 million range. 32 Growth capital expenditures in 2005 were $31.9 million and were comprised principally of the Leon’s acquisition. Pursuant to the Leon’s acquisition agreement, Winroc may also be obligated to pay up to $5.0 million of additional consideration over the next ﬁve years based on Leon’s proﬁtability. Any additional consideration paid will be considered growth capital in the period in which the payment is made. Growth capital expenditures of $12.2 million were incurred in December 2004 to acquire IBS. These two acquisitions provide Winroc with ﬁve distribution branches and a leading market presence in Ontario, which is the largest regional market in Canada. Winroc enjoys considerable geographic and customer diversiﬁcation servicing over 6,900 customers across 38 distribution branches. (See “Distribution Revenues by Region” pie chart). Winroc’s 10 largest customers represent approximately 14% of its annual distribution sales. Winroc enjoys a strong position in the distribution markets where it operates, supported by its complete walls and ceilings product line and procurement capabilities. (See “Distribution Revenues by Product” pie chart). Superior Plus Income Fund Distribution Revenues by Region – 2005 Distribution Revenues by Product – 2005 26% Western US 26% Ontario (IBS & Leon’s) 22% Prairies 15% BC 11% Midwest US 52% Drywall & Components 13% Insulation 12% Steel Framing 11% Ceilings 7% Stucco & Plaster 5% Tools & Fasteners Sales to commercial builders and contractors are comprised of Winroc’s full product line whereas sales to residential builders and contractors are principally comprised of gypsum board and accessories, insulation and plaster products. Demand for walls and ceiling construction products is inﬂuenced by overall economic conditions with approximately 50% of sales from servicing residential new construction and remodelling activity and 50% of sales from servicing commercial new construction and remodelling activity. Overall demand has grown steadily over time as new commercial construction demand trends have historically lagged new residential construction, while remodelling expenditures have increased steadily. (See “End-Use Construction Demand Proﬁle” chart). End-Use Construction Demand Profile US Non-Residential Construction Footage Put In Place (Millions Sq. Ft.) US Residential Additions and Alterations (Billions of dollars) US Housing Starts (Millions) ) e g n a h c % ( 200 175 150 125 100 75 50 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 OUTLOOK For 2006, Winroc’s operating distributable cash ﬂow performance is anticipated to increase modestly as a result of the full year ownership of Leon’s and new distribution branches opened during 2005. New residential construction demand is expected to moderate and be offset by increased new commercial construction activity and consistent remodelling demand. Winroc continues to explore opportunities to proﬁtably expand its distribution operations through a combination of opening new greenﬁeld locations 33 and acquisitions. BUSINESS RISKS Competition. The North American walls and ceilings construction product business generates estimated annual sales revenues of more than $20 billion. Specialty distributors such as Winroc service the builder/contractor market representing 50% to 60% of total industry revenues with the remainder sold through big-box home centres and independent lumber yards that service the “do- 2005 Annual Report it-yourself” market as well as direct sales to modular home manufacturers. The specialty walls and ceilings distribution business is a local, relationship-based business in which distributors compete on a basis of price and service. Barriers to entry are relatively low. Winroc positions itself as a productivity partner with the installing contractor, providing value-added “stock and scatter” job site service. Winroc’s multi-location distribution network, strong market position and Allroc purchasing operation, provide it with purchasing scale, product line breadth and knowledge that assists its customers, providing it with a competitive advantage over smaller competitors. The specialty distribution sector is highly fragmented with the top seven competitors representing an estimated 35% of overall North American industry revenues. Demand, Supply and Pricing. Demand for walls and ceilings building materials is affected by changes in general and local economic factors including demographic trends, employment levels, interest rates, consumer conﬁdence and overall economic growth. These factors in turn impact the level of existing housing sales, new home construction, new non-residential construction, and ofﬁce/ commercial space turnover. Housing starts reﬂect the level of new residential construction activity. The level of new commercial construction activity has historically lagged new residential activity as commercial infrastructure is put in place to service residential development. Renovation activity trends have historically followed existing home resales and turnover of occupants in commercial building space. Winroc’s sales are moderately seasonal, consistent with new construction and renovation market activity, with approximately 53% of annual revenues generated during the second and third quarters. Winroc carries a comprehensive product line comprised of approximately 30,000 stock-keeping units. Its six principal product lines (See “Distribution Revenues by Product” pie chart), are sourced from over 100 suppliers. Winroc is not reliant on any one supplier to source product within its principal product lines. Winroc leverages its purchasing capability through its Allroc purchasing division, which provides third-party purchasing services to 12 independent distributors and retailers. Winroc purchases its products pursuant to various purchasing programs and does not enter into long-term purchase contracts. The walls and ceilings specialty distribution business is a “margin-based” business where the level of proﬁtability is dependent on the difference earned between selling prices and wholesale product cost, management of operating expenses and working capital. Changes in product costs are normally passed through to customers, but timing lags may result in both positive and negative ﬂuctuations of gross margins. Employee and Labour Relations. As at December 31, 2005, Winroc had 892 employees of which approximately 67 (8%) are unionized at three locations. Collective bargaining agreements expire between 2007 and 2008, and are renegotiated in the normal course of business. Health, Safety and Environment. Distribution of walls and ceilings construction products is a physically challenging job. Winroc maintains safe working practices through proper procedures and direction and utilization of equipment such as forklift trucks, 34 cranes and carts. Winroc handles and stores a variety of construction materials and maintains appropriate materials handling compliance programs. Superior Energy Management (“SEM”) SEM generated operating distributable cash ﬂow of $5.3 million in 2005, representing 2% of the Fund’s total after giving effect to the ownership of JWA for all of 2005. Compared to 2004, SEM’s operating distributable cash ﬂow decreased by $2.4 million (31%) as the impact of lower margins and higher operating costs were only partially offset by increased natural gas sales volumes. Effective January 1, 2005, SEM began to capitalize customer acquisition costs and amortize capitalized costs on a straight line basis over the term of customer contract. Previously, customer acquisition costs were expensed at the time natural gas deliveries commenced under new contracts. This change in accounting policy results in improved matching of up-front contract acquisition costs with the economic beneﬁts derived from gas sales over the term of the customer contract and has been retroactively applied. Superior Plus Income Fund Capitalized costs are treated as “growth capital” and the amortization of capitalized costs are deducted from distributable cash ﬂow. This change in accounting increased SEM’s operating distributable cash ﬂow for the years ended December 31, 2005 and 2004 by $4.6 million and $1.9 million respectively as detailed below. (See also Note 3(b) to the Consolidated Financial Statements). Operating distributable cash ﬂow, previous accounting policy Capitalized customer acquisition costs Amortization of capitalized costs Operating distributable cash ﬂow, new accounting policy Years Ended December 31 2005 $ 0.7 7.0 (2.4) $ 5.3 2004 $ 5.8 3.1 (1.2) $ 7.7 Condensed operating results are provided in the following table. See Note 17 to the Consolidated Financial Statements for detailed comparative business segment results and page 19 of this Annual Report for selected historical information for the last four years since its inception. (millions of dollars except per gigajoule(“GJ”) amounts) 2005 2004 Gross proﬁt Less: Cash operating, administration and selling costs Operating distributable cash ﬂow Natural gas sold (millions of GJs) 14.5 (9.2) 5.3 ¢/GJ 39.2 (24.9) 14.3 13.4 (5.7) 7.7 ¢/GJ 47.9 (20.4) 27.5 37 28 SEM provides ﬁxed price, term natural gas sales to commercial and light industrial consumers in Ontario and Quebec and to residential customers in Ontario. Gross proﬁt reached $14.5 million, an increase of 8% from 2004. Sales volumes increased by 32% to 37 million GJs in 2005 as SEM’s focus on growing its residential customer base resulted in the doubling of its customer base from 29,000 at the end of 2004 to 57,000 at the end of 2005. Sales margins decreased 18% to 39.2 cents/GJ in 2005. High natural gas prices, experienced since the fall of 2004, encouraged large volume, commercial/industrial ﬁxed-price customers to purchase their gas on a lower margin, ﬂoating-rate basis. This effect, coupled with increased pipeline transportation costs, was only partially offset by increased margins received from the growth in higher margin residential customers. Cash operating, administration and selling costs were $9.2 million in 2005, an increase of $3.5 million (61%) over 2004. Increased customer administration costs and amortization of customer acquisition costs accounted for half of the increase in costs, and were driven by the year over year increase in customers serviced by SEM. The remainder of the expense increase related to costs incurred to strengthen SEM’s management team and increased overhead to support SEM’s expanded activity level. SEM invested $7.0 million during 2005 (2004 – $3.1 million) to grow its customer base, resulting in a net increase of 28,500 customers (2004 – 18,000). SEM sells ﬁxed-price natural gas for terms up to ﬁve years. At December 31, 2005, the average remaining term of SEM’s contracts was 45 months, an increase of 41% over the prior year-end as the majority of SEM’s customer contracts entered into during 2005 were for a ﬁve year term. SEM’s largest customer represented 5% of 2005 gross proﬁts (2004 – 6%). At December 31, 2004, SEM’s largest ﬁxed-price natural gas supplier represented 29% (2004 – 44%) of its supply 35 portfolio. At December 31, 2005, approximately 15% SEM’s sales volumes were to residential customers (2004 – 8%). OUTLOOK SEM plans to continue to grow its ﬁxed-price natural gas business in 2006, with emphasis on growing its residential business in Ontario and commercial business in Quebec. This, combined with the growth in SEM’s contracted customer base during 2005, is expected to result in increased operating distributable cash ﬂow in 2006. 2005 Annual Report BUSINESS RISKS Fixed Price Offerings. SEM resources its ﬁxed-price term natural gas sales commitments by entering into various forward ﬁnancial and physical natural gas and US dollar foreign exchange purchase contracts for similar terms and volumes to create an effective Canadian dollar ﬁxed-price cost. SEM transacts with 12 ﬁnancial and physical natural gas counterparties. The ﬁnancial condition of each counterparty is evaluated and credit limits established to reduce SEM’s exposure to credit risk of non-performance. See “Foreign Currency Hedging” and Note 15(ii) and 15(iv) to the Consolidated Financial Statements for ﬁxed-price natural gas and foreign exchange purchase commitment amounts. A marginally long ﬁxed-price natural gas position is maintained in order that SEM’s sales force can market ﬁxed-price offerings to potential customers with a known cost of gas. Unmatched forward natural gas and foreign exchange positions are monitored daily in compliance with SEM’s risk management policy. Balancing. SEM purchases natural gas to meet its estimated commitments to its customers based upon their historical consumption of gas as determined by the local natural gas distribution utility (“LDC”) that services a particular customer. Depending on several factors including weather and customer attrition, customer natural gas consumption may vary from the volume purchased by SEM. Consumption variances must be reconciled and settled at least annually and may require SEM to purchase or sell natural gas at market prices which could adversely impact SEM’s proﬁtability. To mitigate potential balancing risk, SEM accrues estimated balancing costs on an ongoing basis and actively monitors and manages its balancing positions. Regulatory Environment. SEM operates in the highly regulated natural gas industry in the provinces of Ontario and Quebec. Changes to existing legislation could impact SEM’s operations. As part of the ABC services (Agent, Billing & Collection services), LDCs are mandated to perform certain services on behalf of SEM including invoicing, collection and assuming speciﬁc bad debt risks associated with SEM’s customers under these types of customer arrangements. In addition, the LDCs perform regulated services that include storage and distribution of the natural gas. If the rules mandating LDCs to provide ABC services were withdrawn, there is no assurance the LDCs would continue to provide these services. This could require SEM to resource these services directly, potentially adversely impacting its proﬁtability and business risk. Corporate Cash corporate administrative costs were $8.7 million in 2005, an increase of $2.8 million over 2004. Approximately one-third of the increase was due to increased costs incurred to expand and strengthen our management capacities at the corporate ofﬁce. The remainder of the increase was related to inter-divisional allocations of United States income taxes, and increased public company costs. Cash income taxes of $5.8 million were incurred with respect to operations in the United States (2004 – nil) and have been charged to the business from which the taxable income was derived. In Canada, cash taxes were limited to federal and provincial capital taxes of $3.4 million (2004 – $3.5 million), similar to the prior year levels as income taxes were fully deferred. Capital taxes have been allocated to Superior’s four business segments operating in Canada based on net taxable capital deployed. For 2006, cash taxes in the United States are expected to increase as a result of a full year’s ownership of JWA. Canadian cash taxes are anticipated to be consistent with 2005 levels. 36 Interest expense on Superior’s revolving term bank credits and term loans was $22.8 million in 2005, an increase of $7.3 million over 2004, due to higher United States and Canadian dollar ﬂoating interest rates as well as increased average debt levels incurred principally to partially ﬁnance the acquisition of JWA. Interest on the Fund’s convertible unsecured subordinated debentures (the “Debentures”) was $12.9 million in 2005, down $0.7 million from 2004, due to the conversion of $48.4 million 8% Debentures into 2.6 million trust units during 2005 as well as conversions throughout 2004. (See “Cash Flow and Financing Activity”). This was partially offset by interest associated with the issuance of $175.0 million 5.75% Debentures in June 2005 and $75.0 million 5.85% Debentures in October 2005. Superior Plus Income Fund Quarterly Financial and Operating Information Quarterly ﬁnancial and operating information for 2005 and 2004 are provided in the table below. Superior’s overall operating cash ﬂow and working capital funding requirements are modestly seasonal as approximately three-quarters of Superior Propane’s operating cash ﬂow is generated during the ﬁrst and fourth quarters of each year as approximately 50% of its sales are generated from space heating end-use applications. Net working capital funding requirements follow a similar seasonal trend, peaking during the ﬁrst quarter of each year and declining to seasonal lows during the third quarter. The seasonality of Winroc’s operating cash ﬂow and working capital funding requirements are modestly complementary to Superior Propane’s as new construction and remodelling activity typically peaks during the second and third quarter of each year. ERCO Worldwide, JWA and SEM’s operating cash ﬂow and net working capital requirements do not have signiﬁcant seasonal ﬂuctuations. Quarterly Financial and Operating Information (1) (millions of dollars except per trust unit amounts) Propane sales volumes (millions of litres) Chemical sales volumes (thousands of metric tonnes) Aluminum sales volumes (millions of pounds) Natural gas sales volumes (millions of GJs) Gross proﬁt Net earnings Per basic trust unit Per diluted trust unit Distributable cash ﬂow Per basic trust unit Per diluted trust unit Net working capital (2) 2005 Quarters 2004 Quarters Fourth Third Second First Fourth Third Second First 420 225 71.0 9 185.5 21.7 277 224 – 9 286 175 – 9 485 164 – 9 438 170 – 7 290 163 – 7 302 161 – 7 514 155 – 7 149.6 24.0 137.2 18.9 163.8 41.5 155.2 33.5 130.2 20.8 116.0 21.1 141.4 37.0 $ 0.25 $ 0.30 $ 0.24 $ 0.54 $ 0.45 $ 0.28 $ 0.29 $ 0.53 $ 0.25 $ 0.30 $ 0.24 $ 0.52 $ 0.44 $ 0.27 $ 0.29 $ 0.49 60.0 33.4 29.9 63.7 55.8 36.7 31.4 60.5 $ 0.70 $ 0.42 $ 0.38 $ 0.83 $ 0.74 $ 0.50 $ 0.44 $ 0.86 $ 0.67 $ 0.42 $ 0.38 $ 0.79 $ 0.70 $ 0.49 $ 0.43 $ 0.77 249.2 96.4 64.3 54.9 97.9 62.9 36.2 (3.8) (1) (2) Restated to give retroactive effect of change in accounting for natural gas customer acquisition costs. (See Note 3(b) to the Consolidated Financial Statements). Net working capital reﬂects amounts as at the quarter-end and is comprised of accounts receivable and inventories, less accounts payable and accrued liabilities. Distributions Paid to Unitholders As detailed in Note 1 to the Consolidated Financial Statements, distributable cash ﬂow reached $187.0 million in 2005 or $2.35 per trust unit as compared to $184.4 million or $2.54 per trust unit in 2004. The Fund increased its regular monthly distribution by 2.5% to $0.205 per trust unit effective with the November 2005 monthly distribution, based on expected sustainable distributable cash ﬂow including accretion from the acquisition of JW Aluminum. For 2005, distributions paid to Unitholders reached $2.41 per trust unit, an increase of 6% over 2004 distributions of $2.28 per trust unit. As detailed in the table on page 38, the Fund paid out 37 103% and 90% of its distributable cash ﬂow in 2005 and 2004 respectively resulting in $5.0 million of excess distributions being funded from debt in 2005 as compared to undistributed distributable cash ﬂow of $18.4 million in 2004 which was reinvested in the business. The payout ratio exceeded 100% in 2005 principally due to the soft performance from Superior Propane and ERCO Worldwide’s sodium chlorate business in the fourth quarter. 2005 Annual Report (millions of dollars except per trust unit amounts) Distributions paid in the calendar year Less: March “top-up” distribution paid with respect to prior year Distributions paid with respect to current year’s distributable cash ﬂow Distributable cash ﬂow (funded from debt) reinvested Distributable cash ﬂow (Note 1 to the Consolidated Financial Statements) Distribution payout ratio 2005 2004 Trust Unit Trust Unit 192.0 $ 2.41 179.1 $ 2.465 – – (13.1) (0.185) 192.0 $ 2.41 (5.0) (0.06) 187.0 $ 2.35 166.0 18.4 184.4 $ $ 2.28 0.26 2.54 103% 90% Capital Resources and Financing Activity The Fund’s distributions to Unitholders are sourced entirely from its equity and Shareholder Note investments in Superior. The Fund’s investments are in turn ﬁnanced by trust unit equity and by the Debentures. The quoted market value of the Fund’s trust unit capital and Debentures was $2.0 billion and $341 million, respectively, based on closing prices on December 31, 2005 on the Toronto Stock Exchange. Superior’s net working capital requirements are ﬁnanced from revolving term bank credit facilities and by proceeds raised from a trade accounts receivable sales program. Maintenance capital requirements are funded from operating cash ﬂow. Distributions are funded by operating cash ﬂow after deducting amortization of natural gas customer acquisition costs, maintenance capital expenditures and other provisions as deemed appropriate. Capital required to ﬁnance Superior’s growth is funded by a combination of equity capital, retained distributable cash ﬂow, and debt as appropriate to maintain a strong and ﬂexible ﬁnancial position to support the efﬁcient execution of its business plans. Superior and the Fund have ﬁnanced their growth over time consistent with these ﬁnancing policies as demonstrated by the following table: (millions of dollars) 2001 2002 2003 2004 2005 Total Acquisitions & other capital expenditures Superior Propane ERCO Worldwide JWA Winroc Financed by: Total debt (1) Trust unit capital (2) Distributable cash ﬂow reinvested (borrowed) 38 Debt leverage: Senior Debt/EBITDA (3) (4) (5) Total Debt/EBITDA (1) (4) (5) 2.1 (5.1) (0.3) – – – 584.5 130.1 – – – – 2.1 579.4 129.8 4.2 5.7 – 116.4 126.3 2.1 – – 549.1 30.3 – 2.1 579.4 1.7 2.8 2.6 4.2 (295.3) (18.3) 413.1 12.0 129.8 2.0 3.1 126.2 18.4 126.3 2.2 2.7 27.5 58.6 407.3 31.9 525.3 314.0 216.3 (5.0) 525.3 2.4 3.5 28.4 778.9 407.3 148.3 1,362.9 551.6 785.9 25.4 40% 58% 2% 1,362.9 100% (1) (2) (3) (4) (5) Total Debt ﬁnancing includes changes in senior debt, proceeds from the trade accounts receivable sales program, and Debentures issued by the Fund, net of Debentures converted into trust unit capital and notes payable and deferred consideration issued to vendors of businesses acquired. Trust unit capital ﬁnancing represents trust unit capital issued directly and through conversion of Debentures and Warrants into trust units. Senior Debt includes senior debt and proceeds from trade accounts receivable sales programs. EBITDA is a non-GAAP measure that represents earnings before interest, taxes, depreciation and amortization 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. Superior’s calculation of EBITDA may differ from similar calculations used by comparable entities. Restated to give retroactive effect to change in accounting for natural gas customer acquisition costs. Superior Plus Income Fund Net working capital funding requirements, excluding acquisitions, increased by $58.7 million in 2005 over 2004 due mainly to the impact of higher wholesale propane costs at Superior Propane and the impact of higher aluminum costs at JWA since its acquisition. (See Note 17 to the Consolidated Financial Statements for comparative net working capital levels by division). Growth capital expenditures amounted to $525.3 million in 2005 (2004 – $126.3 million) and were comprised of $485.1 million of acquisitions and $40.2 million of other capital expenditures. Details on growth capital expenditures by division are provided in the table on page 38 as well as in the reviews of operating results by division. For 2005, ﬁnancing requirements totaled $591.0 million, including increased net working capital requirements of $58.7 million, growth capital expenditures of $525.3 million and $7.0 million of capitalized natural gas customer acquisition costs which were funded by net proceeds received from the issuance of trust units and the exercise of warrants of $167.9 million, net proceeds received from issue of convertible debentures of $239.4 million, additional revolving term debt and term loan borrowings of $169.8 million and $13.9 million of notes payable and deferred consideration issued to vendors of businesses acquired in 2005. Liquidity (millions of dollars) Revolving term bank credit facilities Accounts receivable sales program As at December 31, 2005 Total Amount 425.0 100.0 Borrowings 248.8 100.0 Letters of Credit Issued Amount Available 22.3 – 153.9 – Superior has revolving, three year term, bank credit facilities with nine banks aggregating $425.0 million, an increase of 20% over prior year end levels. The credit facilities are renewable annually. As at December 31, 2005, $153.9 million was available under the credit facilities and is considered to be sufﬁcient to meet Superior’s net working capital funding requirements and expected growth capital expenditures. Principal covenants are described in “Contractual Obligations and Other Commitments” on page 40. Superior has entered into an agreement to sell, with limited recourse, certain accounts receivables on a 30-day revolving basis to an entity sponsored by a Canadian Chartered Bank to ﬁnance a portion of its working capital requirements and represents an off-balance sheet obligation. The receivables are sold at a discount to face value based on prevailing money market rates. As at December 31, 2005, proceeds of $100.0 million (2004 – $100.0 million) had been raised from this program and were used to repay revolving term bank credits. (See Note 5 to the Consolidated Financial Statements). Superior is able to adjust the size of the sales program on a seasonal basis in order to match the ﬂuctuations of its accounts receivable funding requirements. The program requires Superior to maintain a minimum secured credit rating of BB and meet certain collection performance standards. Superior is currently fully compliant with program requirements. Superior’s secured long-term debt credit ratings are BBB (low) by the Dominion Bond Rating Service with a stable outlook and 39 BBB- by Standard & Poor’s (BB+ unsecured) with a stable outlook. On March 3, 2006, Superior completed a 10 year, $200.0 million 5.50% senior secured debt issue in the Canadian public bond market. Proceed will be used to repay the JW Aluminum bank acquisition credit facility and other revolving bank debt. 2005 Annual Report Contractual Obligations and Other Commitments (millions of dollars) Revolving term bank credits & term loans Convertible Debentures Operating leases (2) Natural gas, aluminum, propane & electricity purchase commitments Future employee beneﬁts Total contractual obligations Notes (1) 8 9 15 (i) Total 624.8 318.1 91.9 15 (ii)(iii) 1,183.5 10 22.7 2,241.0 Payments Due In 2006 2007-2008 2009-2010 Thereafter 2.0 – 22.5 347.9 4.8 377.2 422.1 68.2 34.9 422.5 9.6 957.3 17.7 – 17.1 286.8 8.3 329.9 183.0 249.9 17.4 126.3 – 576.6 (1) (2) Notes to the Consolidated Financial Statements. Operating lease commitments together with the accounts receivable sales program comprise Superior’s off-balance sheet obligations. Revolving term bank credits and term loans are secured by a general charge over the assets of Superior and certain of its subsidiaries. Debt covenants limit the incurrence of additional long-term debt and payments of distributions to the Fund if Superior’s senior debt (including proceeds raised from the accounts receivable sales program) exceeds three times EBITDA (as previously deﬁned) for the last 12 month period as adjusted for the pro forma impact of acquisitions. At December 31, 2005, this ratio was 2.4 to 1.0 (December 31, 2004 – 2.2 to 1.0). Debentures are obligations of the Fund and consist of $8.9 million Series 1, 8% Debentures maturing July 31, 2007; $59.3 million Series 2, 8% Debentures due November 1, 2008; $174.9 million Series 1, 5.75% Debentures maturing December 31, 2012 and $75.0 million Series 1, 5.85% Debentures maturing October 31, 2015. The 8% Series 1, 8% Series 2, 5.75% Series 1 and 5.85% Series 1 Debentures are convertible at the option of the holder into trust units at $16.00, $20.00, $36.00 and $31.25 per trust unit, respectively. The Fund may elect to satisfy interest and principal Debenture obligations by the issuance of trust units. Superior has swapped $100 million principal amount of the ﬁxed interest Debenture obligations into a ﬂoating interest rate obligation. Including the Fund’s Debentures, Superior’s total leverage ratio increased from 2.7 times at December 31, 2004 to 3.5 times at December 31, 2005. After giving effect to the $200.0 million 10-year bond issue on March 3, 2006, approximately two-thirds of Superior’s revolving term bank credits and term loans and Debenture obligations were not repayable for at least ﬁve years and approximately 50% of Superior’s total debt obligations (including accounts receivable sales program) are subject to ﬁxed interest rates. Operating leases consist of rail cars, premises and other equipment. Rail car leases comprise 31% of total operating lease commitments and are used to transport ERCO Worldwide’s ﬁnished product to its customer locations and by Superior Propane to transport propane from supply sources to its branch distribution locations. 40 Natural gas, propane and aluminum ﬁxed-price supply commitments are used to resource similar volume and term ﬁxed-price sales commitments to customers of SEM, Superior Propane and JWA. ERCO Worldwide has entered into ﬁxed-price electricity contracts for a term of up to 12 years representing approximately 28% of its annual power requirements in deregulated jurisdictions. Superior Propane’s pension plans have an unrecorded accrued net beneﬁt asset of $25.9 million (2004 – $27.6 million) and is not included with future employee beneﬁt obligations shown above. (See Note 10 to the Consolidated Financial Statements). Unitholders’ Capital The weighted average number of trust units outstanding in 2005 increased by 10% to 79.7 million trust units compared to the prior year. The increase resulted from Debenture conversions and the exercise of trust unit warrants in 2004 and 2005, as well as the issuance of 6.2 million trust units in October 2005 to partially ﬁnance the acquisition of JWA. Superior Plus Income Fund As at December 31, 2005 and 2004, the following trust units, and securities convertible into trust units, were outstanding: (millions) Trust units outstanding Series 1, 8% Debentures (convertible at $16 per trust unit) Series 2, 8% Debentures (convertible at $20 per trust unit) Series 1, 5.75% Debentures (convertible at $36 per trust unit) Series 1, 5.85% Debentures (convertible at $31.25 per trust unit) Warrants (exercisable @ $20 per trust unit) Trust units outstanding, and issuable upon conversion of Debenture and Warrant securities December 31, 2005 December 31, 2004 Convertible Securities $ $ 8.9 59.3 $ 174.9 $ 75.0 2.3 Convertible Securities $ 13.9 $ 102.6 – – 3.1 Trust Units 85.5 0.6 3.0 4.9 2.4 2.3 98.7 Trust Units 75.9 0.9 5.1 – – 3.1 85.0 The trust unit warrants are exercisable until May 2008 and represent a potential $46.0 million source of future equity capital. In addition, as at December 31, 2005, there were 1,177,000 trust unit options outstanding (December 31, 2004 – 960,000 trust units) with a weighted average exercise price of $22.82 per trust unit (2004 -$20.71 per trust unit). The number of trust units issued upon exercise of the trust unit options is equal to the growth in the value of the options at the time the options are exercised, (represented by the market price less the exercise price) times the number of options exercised, divided by the current trust unit market price. Foreign Currency Hedging SEM and Superior Propane contract a portion of their ﬁxed-price natural gas and propane purchases in US dollars and enter into forward US dollar purchase contracts to create an effective Canadian dollar ﬁxed-price purchase cost. ERCO Worldwide enters into US dollar forward sales contracts on an ongoing basis to mitigate the impact of foreign exchange ﬂuctuations on sales margins on production from its Canadian plants that is sold in US dollars. Interest expense on Superior’s US dollar debt is also used to mitigate the impact of foreign exchange ﬂuctuations on its US dollar distributable cash ﬂow. Superior’s US dollar debt acts as a balance sheet hedge against its US dollar net assets. Superior hedges its net US dollar future cash ﬂows with external third-party contracts after ﬁrst matching internally SEM’s and Superior Propane’s forward US dollar purchase requirements against ERCO Worldwide’s US dollar revenues where possible. As at December 31, 2005, SEM and Superior Propane had hedged approximately 100% of their US dollar natural gas and propane purchase obligations and ERCO Worldwide had hedged 93%, 55%, and 10% of its estimated US dollar revenue stream for 2006, 2007, and 2008 respectively, as shown in the table below. (See Note 15(iv) to the Consolidated Financial Statements). (US$ millions) SEM – US$ forward purchases Superior Propane – US$ forward purchases ERCO – US$ forward sales Net US$ forward purchases SEM – Average US$ forward purchase rate Superior Propane – Average US$ forward purchase rate ERCO – Average US$ forward sales rate Net average external US$/Cdn$ exchange rate 2006 148.7 0.8 2007 124.7 – 2008 112.7 – (123.1) (71.0) (12.6) 26.4 1.26 1.25 1.27 1.25 53.7 1.23 – 1.24 1.23 100.1 1.22 – 1.23 1.22 2009 107.2 – – 107.2 1.21 – 1.21 1.21 2010 52.9 – – 52.9 1.17 – 1.17 1.17 2011 1.2 – – 1.2 1.14 – 1.14 1.14 Total 547.4 0.8 (206.7) 341.5 1.23 1.25 1.26 1.22 41 2005 Annual Report Outlook In 2006, we anticipate distributable cash ﬂow per trust unit to be comparable to or lower than 2005. Increased distributable cash ﬂow is expected from a full year’s contribution from JWA and improved results at Winroc and SEM. Offsetting this are expected lower results at Superior Propane as a result of record warm weather experienced to date in the ﬁrst quarter, lower results at ERCO Worldwide due to decreasing demand for sodium chlorate from North American bleached pulp producers, and increased borrowing costs. Distributable cash ﬂow per trust unit is expected to improve over time with the return of normal weather and the repositioning of Superior Propane’s cost structure, along with a full year’s contribution from ERCO’s Chile project and stability in North American pulp markets. Over the longer term, the Fund plans to continue its disciplined diversiﬁcation strategy by taking advantage of proﬁtable growth opportunities within each division and to acquire other businesses that have risk proﬁles appropriate for an income fund structure. Acquisitions must be accretive to Unitholder distributions and be ﬁnanced in a manner that maintains Superior’s existing ﬁnancial strength. Sensitivity Analysis The Fund’s estimated cash ﬂow sensitivity in 2005 to the following changes are provided in the following chart: Superior Propane Change in sales margin Change in sales volume ERCO Worldwide Change in sales price Change in sales volume JW Aluminum Change in sales margin Change in sales volumes Winroc Change in sales margin Change in sales volume Superior Energy Management Change in sales margin Change in sales volume Corporate Change in Cdn$/US$ exchange rate (1) Corporate change in interest rates (2) 42 Change Change Impact on Distributable Cash Flow Per Trust Unit $0.005/litre 50 million litres $10.00/tonne 15,000 tonnes $0.01 15 million pounds 1% change in average gross margin 4% of sales revenues $0.02/GJ 2 million GJ 3% 3% 2% 2% 5% 4% 4% 4% 5% 5% $7.3 million $6.3 million $7.0 million $4.2 million $2.1 million $1.9 million $3.5 million $2.4 million $0.8 million $0.8 million $0.01 0.5% 1% 15% $0.5 million $2.1 million $0.09 $0.07 $0.08 $0.05 $0.03 $0.02 $0.04 $0.03 $0.01 $0.01 $0.01 $0.03 (1) (2) After giving effect to US$ forward sales contracts. See “Foreign Currency Hedging”. After giving effect to the March 3, 2006 $200.0 million bond issue. Superior Plus Income Fund Business Risks – Corporate Interest Rates. Superior maintains a substantial ﬂoating interest rate exposure through a combination of ﬂoating interest rate borrowings and the use of derivative instruments. (See Notes 8 and 9 to the Consolidated Financial Statements). Demand levels for approximately 50% of Superior Propane’s sales and substantially all of ERCO Worldwide’s, JWA’s and Winroc’s sales are affected by general economic trends. Generally speaking, when the economy is strong, interest rates increase as does sales demand from Superior’s customers, thereby increasing Superior’s ability to pay higher interest costs and vice versa. In this way, a common relationship between economic activity levels, interest rates and Superior’s ability to pay higher or lower rates are generally aligned, providing Superior with a natural business hedge against interest rates. Foreign Exchange Risk. A portion of Superior’s net cash ﬂows are denominated in US dollars. Accordingly, ﬂuctuations in the Canadian/United States dollar exchange rate can impact proﬁtability. Superior mitigates this risk by hedging. See “Sensitivity Analysis”. Critical Accounting Estimates. Application of accounting estimates requires certain assumptions to be made regarding future events. These estimates require experience and judgement and are subject to the inherent risk of inaccuracy, particularly where they relate to events expected to take place well into the future. Long-term estimates are examined on a regular basis and adjusted prospectively when necessary. The Accounting Standards Board has issued new accounting standards related to the presentation and measurement of Financial Instruments which will apply to interim and annual ﬁnancial statements relating to ﬁscal years beginning on or after October 1, 2006. It will require: • All ﬁnancial instruments be recognized on the balance sheet at their fair value; • Certain gains and losses on the translation of assets and liabilities will be recorded in other comprehensive income, a new line item on the balance sheet; and • Certain gains and losses on items designated as hedges will now be recorded through either the statement of earnings or other comprehensive income, depending on the nature of the hedging relationship. The Fund has not assessed the future impact of these proposals on the ﬁnancial statements. Selected Financial Information (millions of dollars except per trust unit amounts) Total assets (as at December 31) Total revenues Gross proﬁt Net earnings (loss) Per trust unit basic Per trust unit diluted Cash generated from operations before changes in working capital Distributable cash ﬂow Per trust unit Cash distributions per trust unit (2) Current and long-term debt (as at December 31) Years Ended December 31 2005 2,327.8 2,171.4 636.1 106.1 1.33 1.32 205.1 187.0 2.35 2.41 624.8 $ $ $ $ 2004 (3) 2003 (1) (3) 1,552.1 1,552.8 $ $ 542.8 112.4 1.55 1.53 198.8 184.4 $ 2.54 $ 2.465 446.2 1,445.1 1,234.3 471.7 (18.9) $ (0.32) $ (0.32) 15.4 146.5 2.47 2.28 317.8 $ $ 43 (1) (2) (3) 2003 results include a one-time expense of $141.3 million ($92.5 million after tax) related to the internalization of management. (See Note 16(i) to the Consolidated Financial Statements). Cash distributions per trust unit paid in ﬁscal year. Restated to give retroactive effect to change in accounting for natural gas customer acquisition costs. (See Note 3(b) in the Consolidated Financial Statements). 2005 Annual Report Disclosure Controls and Procedures Disclosure Controls and Procedures are designed and implemented by, or under the supervision of the issuer’s Chief Executive Ofﬁcer (“CEO”) and Chief Financial Ofﬁcer (“CFO”) to ensure that material information relating to the issuer is communicated to them by others in the organizations as it becomes known and is appropriately disclosed as required under the continuous disclosure requirements of securities legislation. In essence, these types of controls are related to the quality and timeliness of ﬁnancial and non-ﬁnancial information in securities ﬁlings. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was conducted as at December 31, 2005, by and under the supervision of Superior’s management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that the Fund’s disclosure controls and procedures, as deﬁned in Multilateral Instrument 52-109, Certiﬁcation of Disclosure in Issuers’ Annual and Interim Filings, are effective to ensure that information required to be disclosed in reports that we ﬁle or submit under Canadian securities legislation is recorded, processed, summarized and reported within the time periods speciﬁed in those rules and forms. Forward-looking Statements Certain information included herein is forward-looking. Forward-looking statements include, without limitation, statements regarding the future ﬁnancial position, business strategy, budgets, litigation, projected costs, capital expenditures, ﬁnancial results, taxes and plans and objectives of or involving the Fund or Superior. Many of these statements can be identiﬁed by looking for words such as “believe,” “expects,” “expected,” “will,” “intends,” “projects,” “anticipates,” “estimates,” “continues” or similar words. The Fund and Superior believe the expectations reﬂected in such forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties some of which are described herein. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Fund’s actual performance and ﬁnancial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. Any forward-looking statements are made as of the date hereof and neither the Fund nor Superior undertakes any obligation to publicly update or revise such statements to reﬂect new information, subsequent or otherwise. Additional information relating to the Fund and Superior, including the 2005 Annual Information Forms are available free of charge on our website at www.superiorplus.com and on the Canadian Securities Administrators’ website at www.sedar.com. 44 Superior Plus Income Fund Management’s Report MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING The ﬁnancial statements of the Superior Plus Income Fund (the “Fund”) and all of the information in this annual report are the responsibility of the management of Superior Plus Inc., the Fund’s wholly-owned subsidiary and operating entity. The Consolidated Financial Statements have been prepared by management in accordance with Canadian generally accepted accounting principles and include certain estimates that are based on management’s best judgements. Actual results may differ from these estimates and judgements. Management has ensured that the Consolidated Financial Statements are presented fairly in all material respects. Management has developed and maintains a system of internal controls to provide reasonable assurance that the Fund’s assets are safeguarded, transactions are accurately recorded, and the ﬁnancial statements realistically report the Fund’s operating and ﬁnancial results in a timely manner. Financial information presented elsewhere in this annual report has been prepared on a consistent basis with that in the Consolidated Financial Statements. The Board of Directors of Superior Plus Inc. is responsible for reviewing and approving the ﬁnancial statements and primarily through its Audit Committee, ensures that management fulﬁlls its responsibilities for ﬁnancial reporting. The Audit Committee meets with management and its external auditors, to discuss internal controls over the ﬁnancial reporting process, auditing matters and ﬁnancial reporting issues, to satisfy itself that each party is properly discharging its responsibilities and to review the annual report, the ﬁnancial statements and the external auditors’ report. The Committee reports its ﬁndings to the Board for the Board’s consideration in approving the ﬁnancial statements for issuance to the Unitholders. The Committee also considers, for review by the Board and approval by the Unitholders, the engagement or re-appointment of the external auditors. Deloitte & Touche LLP, an independent ﬁrm of chartered accountants, was appointed by a vote of Unitholders at the Fund’s last annual meeting to audit the Fund’s Consolidated Financial Statements in accordance with Canadian generally accepted auditing standards. They have provided an independent professional opinion. Deloitte & Touche LLP has full and free access to the Audit Committee. Geoffrey N. Mackey President & Chief Executive Ofﬁcer Superior Plus Inc. Calgary, Alberta February 24, 2006 W. Mark Schweitzer Executive Vice-President and Chief Financial Ofﬁcer Superior Plus Inc. Auditors’ Report TO THE UNITHOLDERS OF SUPERIOR PLUS INCOME FUND: We have audited the consolidated balance sheets of Superior Plus Income Fund as at December 31, 2005 and 2004 and the consolidated statements of net earnings and deﬁcit and cash ﬂows for the years then ended. These ﬁnancial statements are the responsibility of the management of the Fund. Our responsibility is to express an opinion on these ﬁnancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. 45 In our opinion, these ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of the Fund as at December 31, 2005 and 2004 and the results of its operations and its cash ﬂows for the years then ended in accordance with Canadian generally accepted accounting principles. Calgary, Alberta February 24, 2006 Chartered Accountants 2005 Annual Report Consolidated Balance Sheets As at December 31 (millions of dollars) ASSETS CURRENT ASSETS Accounts receivable (Note 5) Inventories (Note 6) Property, plant and equipment (Note 7) Intangible assets (Note 7) Goodwill (Note 7) LIABILITIES AND UNITHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities Distributions and interest payable to Unitholders and Debentureholders Current portion of term loans (Note 8) Revolving term bank credits and term loans (Note 8) Convertible unsecured subordinated debentures (Note 9) Future employee beneﬁts (Note 10) Future income tax liability (Note 11) TOTAL LIABILITIES UNITHOLDERS’ EQUITY Unitholders’ capital (Note 12) Retained earnings from operations Accumulated distributions on trust unit equity Deﬁcit Currency translation account TOTAL UNITHOLDERS’ EQUITY 46 (See Notes to the Consolidated Financial Statements) 2005 336.1 193.4 529.5 1,167.6 89.4 541.3 2,327.8 280.3 25.0 2.0 307.3 622.8 314.3 17.7 262.8 1,524.9 2004 (Restated) 165.0 93.6 258.6 741.0 49.9 502.6 1,552.1 160.7 17.0 – 177.7 446.2 116.0 18.6 121.7 880.2 1,338.3 1,122.0 368.4 (903.1) (534.7) (0.7) 802.9 2,327.8 262.3 (711.1) (448.8) (1.3) 671.9 1,552.1 David Smith Director Peter Valentine Director Superior Plus Income Fund Consolidated Statements of Net Earnings and Deﬁcit Years Ended December 31 (millions of dollars, except per trust unit amounts) REVENUES Cost of products sold Gross proﬁt EXPENSES Operating and administrative Amortization of property, plant and equipment Amortization of intangible assets Interest on revolving term bank credits and term loans (Note 8) Interest on convertible unsecured subordinated debentures Amortization of convertible debenture issue costs Management internalization costs (Note 16(i)) Income tax expense (recovery) of Superior (Note 11) NET EARNINGS DEFICIT, BEGINNING OF YEAR Net earnings Distributions to Unitholders (Note 12) DEFICIT, END OF YEAR Net earnings per trust unit, basic (Note 13) Net earnings per trust unit, diluted (Note 13) (See Notes to the Consolidated Financial Statements) 2005 2,171.4 1,535.3 636.1 382.6 115.3 6.0 22.8 12.9 1.7 1.3 (12.6) 530.0 106.1 (448.8) 106.1 (192.0) (534.7) $ $ 1.33 1.32 2004 (Restated) 1,552.8 1,010.0 542.8 313.2 78.2 5.5 15.5 13.6 1.6 2.6 0.2 430.4 112.4 (382.1) 112.4 (179.1) (448.8) $ $ 1.55 1.53 47 2005 Annual Report Consolidated Statements of Cash Flows Years Ended December 31 (millions of dollars) OPERATING ACTIVITIES Net earnings Items not affecting cash Amortization of property, plant and equipment, intangible assets and convertible debenture issue costs Amortization of natural gas customer acquisition costs Trust unit incentive plan compensation expense (recovery) (Note 14) Future income tax expense of Superior (Note 11) Cash generated from operations before natural gas customer acquisition costs and changes in working capital Natural gas customer acquisition costs capitalized Increase in non-cash operating working capital items Cash ﬂows from operating activities INVESTING ACTIVITIES Maintenance capital expenditures, net Other capital expenditures, net Acquisitions (Note 4) Cash ﬂows from investing activities FINANCING ACTIVITIES Revolving term bank credits and term loans Net proceeds from sale of accounts receivable (Note 5) Distributions to Unitholders Receipt of management internalization loans receivable (Note 16(i)) Proceeds from exercise of trust unit warrants (Note 12) Net proceeds from issue of 5.75% Series 1 convertible unsecured subordinated debentures Net proceeds from issue of trust units, to ﬁnance JW Aluminum Company (“JWA”) acquisition Net proceeds from issue of 5.85% Series 1 convertible unsecured subordinated debentures, to ﬁnance JWA acquisition JWA acquisition credit facility Cash ﬂows from ﬁnancing activities 48 Change in Cash Cash at Beginning and End of Year (See Notes to the Consolidated Financial Statements) 2005 2004 (Restated) 106.1 112.4 123.0 2.4 (4.6) (21.8) 205.1 (7.0) (58.7) 139.4 (17.0) (40.2) (471.2) (528.4) 1.6 – (192.0) 1.3 16.5 167.6 151.4 71.8 170.8 389.0 – – 85.3 1.2 3.2 (3.3) 198.8 (3.1) (28.1) 167.6 (15.8) (6.2) (120.1) (142.1) 142.9 – (179.1) 2.6 8.1 – – – – (25.5) – – Superior Plus Income Fund Notes to Consolidated Financial Statements (Tabular amounts in Canadian millions of dollars, unless noted otherwise, except per trust unit amounts) 1. Distributable Cash Flows Years Ended December 31 Cash generated from operations before natural gas customer acquisition costs and changes in working capital Plus: Management internalization costs (Note 16(i)) Less: Maintenance capital expenditures, net Amortization of natural gas customer acquisition costs Distributable cash ﬂow 2005 205.1 1.3 (17.0) (2.4) 187.0 2004 (See Note 3(b)) 198.8 2.6 (15.8) (1.2) 184.4 Distributable cash ﬂow per trust unit, basic (Note 13) $ 2.35 $ 2.54 Distributable cash ﬂow per trust unit, diluted (Note 13) $ 2.27 $ 2.40 Distributable cash ﬂow of the Superior Plus Income Fund (the “Fund”) available for distribution to its unitholders (“Unitholders”), is equal to cash generated from operations before natural gas customer acquisition costs and changes in working capital, less amortization of natural gas customer acquisition costs and maintenance capital expenditures. Maintenance capital expenditures are equal to capital expenditures incurred to sustain the ongoing operating capacity of Superior Plus Inc. (“Superior”) and are deducted from the calculation of distributable cash ﬂow. Acquisitions and other capital expenditures incurred to expand the capacity of Superior’s operations or to increase its proﬁtability (“growth capital”), are excluded from the calculation of distributable cash ﬂow. Distributable cash ﬂow is the main performance measure used by management and investors to evaluate Fund and business segment performance. Readers are cautioned that distributable cash ﬂow, maintenance capital expenditures and growth capital are not deﬁned performance measures under Canadian generally accepted accounting principles (“GAAP”), and that distributable cash ﬂow cannot be assured. The Fund targets to pay out substantially all of its sustainable distributable cash ﬂow through regular monthly distributions. The Fund’s calculation of distributable cash ﬂow, maintenance capital expenditures and growth capital may differ from similar calculations used by comparable entities. 2. Organization The Fund is a limited purpose, unincorporated trust governed by the laws of the Province of Alberta. The Fund’s investments in Superior are comprised of Class A and B Common Shares (the “Common Shares”) and $1,469.2 million unsecured subordinated notes, due October 1, 2026, bearing interest at a weighted average rate of 12.4% (the “Shareholder Notes”). Cash is received monthly by the Fund from Superior in the form of interest income earned on the Shareholder Notes, and dividends or returns of capital received on the Common Share investment in Superior. The Fund’s investments in Superior are ﬁnanced by trust unit equity 49 and convertible unsecured subordinated debentures (the “Debentures”). (See Notes 9 and 12). 3. Summary of Signiﬁcant Accounting Policies (a) Basis of Presentation The accompanying Consolidated Financial Statements have been prepared according to GAAP applied on a consistent basis and include the accounts of the Fund, its wholly-owned subsidiary, Superior and Superior’s subsidiaries. The accounting principles applied are consistent with those as set out in the Fund’s annual ﬁnancial statements for the year ended December 31, 2004, except as noted below. All signiﬁcant transactions and balances (including the Shareholder Notes) between the Fund, Superior and Superior’s subsidiaries have been eliminated on consolidation. 2005 Annual Report (b) Change in Accounting Policy Effective January 1, 2005, the Fund retroactively adopted a new accounting policy for Superior Energy Management’s natural gas customer acquisition costs. Previously, customer acquisition costs were expensed at the time natural gas deliveries commenced under new contracts. Under the new policy, customer acquisition costs are capitalized and amortized on a straight-line basis over the term of the customer contract. This new policy provides improved matching of up-front contract acquisition costs with the economic beneﬁts derived from gas sales over the term of the customer contract. The cumulative effect of the change in policy on the balance sheet as at December 31, 2004 was to increase intangible assets by $3.1 million, increase the future income tax liability by $1.1 million and increase retained earnings from operations by $2.0 million. For the year ended December 31, 2004, the effect of the new policy on distributable cash ﬂow resulted in an increase of $1.9 million. The effect on net earnings was to reduce operating and administrative costs by $1.9 million and increase future income taxes by $0.7 million, resulting in an increase in net earnings of $1.2 million. The effect on basic and diluted distributable cash ﬂow per trust unit was an increase of $0.03 to $2.54 and $2.40 per trust unit respectively. The effect on basic and diluted net earnings per trust unit was an increase of $0.02 to $1.55 and $1.53 per trust unit respectively. (c) Business Segments Superior operates ﬁve distinct business segments; the delivery of propane and propane related services and accessories operating under the Superior Propane trade name; the manufacture and sale of specialty chemicals and related products and services operating under the ERCO Worldwide trade name (“ERCO”); the manufacture and sale of specialty ﬂat rolled aluminum products operating as JW Aluminum Company (“JWA” or “JW Aluminum”); the distribution of walls and ceilings construction products operating under the Winroc trade name; and the sale of natural gas under ﬁxed-price term contracts operating under the Superior Energy Management trade name (“SEM”). (See Note 17). (d) Accounts Receivable Sales Program Superior has a revolving trade accounts receivable sales program under which all transactions are accounted for as sales. Losses on sales depend in part on the previous carrying amount of trade accounts receivable involved in the sales and have been included in interest on revolving term bank credits and term loans. The carrying amount is allocated between the assets sold and retained interests based on their relative fair value at the date of the sale which is calculated by discounting expected cash ﬂows at prevailing money market rates. (e) Inventories SUPERIOR PROPANE Propane inventories are valued at the lower of weighted average cost and market determined on the basis of estimated net realizable value. Appliances, materials, supplies and other inventories are stated at the lower of cost and market determined on the basis of estimated replacement cost or net realizable value, as appropriate. Superior has an inventory of appliances rented to customers under rental contracts. The book value of this inventory is carried in the inventory accounts at cost less accumulated amortization. 50 Amortization is provided on a straight-line basis, generally over a period of ﬁve years. ERCO WORLDWIDE Inventories are valued at the lesser of cost and net realizable value, the cost of chemical inventories are determined on a ﬁrst-in, ﬁrst-out basis. Stores and supply inventories are costed on an average basis. Transactions are entered into from time to time with other companies to exchange chemical inventories in order to minimize working capital requirements and to facilitate distribution logistics. Balances related to quantities due to or payable by Superior are included in inventory. JW ALUMINUM Aluminum inventories are valued at the lesser of cost and net realizable value. Cost is calculated on a ﬁrst-in, ﬁrst-out basis. Superior Plus Income Fund WINROC Inventories of building products are valued at the lower of cost and net realizable value. Cost is calculated on an average cost basis. (f) Financial Instruments The net carrying value of accounts receivable, including the allowance for doubtful accounts, approximates fair value due to the short-term nature of these instruments. The collection risk associated with accounts receivable that are sold pursuant to Superior’s accounts receivable sales program (See Note 5), is provided for as part of Superior’s overall allowance for doubtful accounts. Superior has a large number of diverse customers, which minimizes overall accounts receivable credit risk. The carrying value of accounts payable and accrued liabilities, distributions and interest payable to Unitholders and Debentureholders approximates the fair value of these ﬁnancial instruments due to their short-term maturity. The carrying value of revolving term bank credits approximate their fair values due to the ﬂoating interest rate nature and short rollover of these debt securities. The carrying value of term loans and Debentures differs from their fair values due to the ﬁxed interest rate nature and long repayment term of these debt securities. (See Notes 8 and 9 for detailed descriptions of debt securities and mark-to-market disclosure). (g) Property, Plant and Equipment Property, plant, and equipment is recorded at cost less accumulated amortization. Major renewals and improvements, which extend the useful lives of equipment, are capitalized, while repair and maintenance expenses are charged to operations as incurred. Disposals are removed at carrying costs less accumulated amortization with any resulting gain or loss reﬂected in operations. SUPERIOR PROPANE AND WINROC Property, plant and equipment assets are amortized over their respective estimated useful lives using the straight-line method except for loaned propane dispensers which use the declining balance method at a rate of 10%. The estimated useful lives of major classes of property, plant and equipment are: Buildings Tanks and cylinders Truck tank bodies, chassis and other Winroc distribution equipment ERCO WORLDWIDE 20 years 20 years 7 to 10 years Property, plant and equipment assets are amortized on a straight-line basis over estimated useful lives ranging from 3 to 25 years, with the predominant life of plant and equipment being 15 years. JW ALUMINUM Property, plant and equipment are amortized on a straight-line basis over estimated useful lives ranging from 5 to 25 years, with the predominant life of plant and equipment being 15 years. (h) Intangible Assets ERCO WORLDWIDE 51 The value of acquired royalty assets is amortized over the remaining term of the royalty agreements up to 10 years. The costs of patents are amortized on a straight line basis over their estimated useful lives, which approximates 10 years. JW ALUMINUM The value of patented and unpatented technology is amortized over the estimated useful lives, being 10 years. DEFERRED FINANCE CHARGES Superior defers and amortizes the issue costs incurred in conjunction with its long-term credit facilities to interest expense over the term of the credit facility or debt instrument. 2005 Annual Report CONVERTIBLE DEBENTURE ISSUE COSTS Superior defers and amortizes Debenture issue costs over the term of the Debentures adjusted for conversions. (i) Goodwill The excess of the Fund’s cost of investment in Superior’s Common Shares and Shareholder Notes over the corresponding interest in Superior’s current assets and property, plant and equipment less current liabilities, long-term debt and future income taxes on the dates of acquisition, has been attributed to goodwill. Superior’s cost of subsequent acquisitions in excess of the fair value of the net assets acquired is also recorded as goodwill. Goodwill is not amortized, but is tested for impairment on an annual basis. The net carrying value of goodwill would be written down if the value were permanently impaired. (j) Revenue Recognition SUPERIOR PROPANE Revenues from sales are generally recognized at the time of delivery, or when related services are performed. Amounts billed to customers for shipping and handling are classiﬁed as revenues, with the related shipping and handling costs included in cost of goods sold. ERCO WORLDWIDE Revenues from chemical sales are recognized as products are shipped. Revenues associated with the construction of chlorine dioxide generators are recognized using the percentage-of-completion method based on cost incurred compared to total estimated cost. JW ALUMINUM AND WINROC Revenue is recognized when products are delivered to the customer. Revenue is stated net of discounts and rebates granted. SUPERIOR ENERGY MANAGEMENT Revenues are recognized as gas is delivered to local natural gas distribution companies. Costs associated with balancing the amount of gas used by SEM’s customers with the volumes delivered by SEM to the local distribution companies are recognized as period costs. (k) Rebates – Winroc Purchase rebates are recognized as a reduction of cost of goods sold when the related performance is completed and the inventory is sold. Vendor rebates that are contingent upon Winroc completing a speciﬁed level of purchases are recognized as a reduction of cost of goods sold based on a systematic and rational allocation of the cash consideration to each of the underlying transactions that results in progress toward earning that rebate or refund, assuming that the rebate can be reasonably estimated and it is probable that the speciﬁed target will be obtained. Otherwise, the rebate is recognized as the milestone is achieved and the inventory is sold. (l) Future Employee Beneﬁts Superior has a number of deﬁned beneﬁt and deﬁned contribution plans providing pension and other post-employment beneﬁts 52 to most of its employees, and accrues its obligations under the plans and the related costs, net of plan assets. Past service costs and actuarial gains and losses in excess of 10% are amortized into income over the expected average remaining life of the active employees participating in the plans. (See Note 10). (m) Income Taxes The Fund is a unit trust for income tax purposes. As such, the Fund is only taxable on any taxable income not allocated to the Unitholders. During 2005 and 2004, the Fund has allocated all of its taxable income to Unitholders, and accordingly, no provision for income taxes has been recorded at the Fund level. Superior is subject to corporate income taxes and follows the liability method of accounting for income taxes. (See Note 11). Superior Plus Income Fund (n) Foreign Currency Translation The accounts of the operations of ERCO, JWA and Winroc in the United States and ERCO’s operations in Chile are considered to be self-sustaining foreign operations and are translated using the current rate method, under which all assets and liabilities are translated at the exchange rate prevailing at the balance sheet date, and revenues and expenses at average rates of exchange during the period. Other monetary assets and liabilities held by Superior are converted using the current rate method. (o) Stock-Based Compensation Superior has a Trust Unit Incentive Plan (“TUIP”) as described in Note 14. The TUIP is a Stock Appreciation Right as deﬁned by the Canadian Institute of Chartered Accountants (“CICA”). Compensation expense recognized represents the difference between the market price of the trust units and the grant price for the outstanding options multiplied by the number of options, reﬂecting the vesting features of the plan. Upon exercise, the compensation is settled in trust units of the Fund. (p) Net Earnings per Trust Unit Basic net earnings per trust unit is calculated by dividing the net earnings by the weighted average number of trust units outstanding during the period. The weighted average number of trust units outstanding during the year is calculated using the number of trust units outstanding at the end of each month during the year. Diluted net earnings per trust unit is calculated by factoring in the dilutive impact of the dilutive instruments, including the exercise of trust unit options, the conversion of Debentures to trust units, and the exercise of trust unit warrants. Superior uses the treasury stock method to determine the impact of dilutive instruments, which assumes that the proceeds from in-the-money trust unit options are used to repurchase trust units at the average market price during the period. (q) Derivative Financial Instruments Superior utilizes derivative and other ﬁnancial instruments to manage its exposure to market risks related to interest rates, foreign currency exchange rates and commodity prices. Gains or losses relating to derivatives that are hedges are deferred and recognized in the same period and in the same ﬁnancial statement category as the gains and losses on the corresponding hedged transactions. A derivative must be designated and effective to be accounted for as a hedge. For cash ﬂow hedges, effectiveness is achieved if the changes in the cash ﬂows of the derivatives substantially offset the changes in the cash ﬂows of the hedged position and the timing of cash ﬂows is similar. In the event that a derivative does not meet the designation or effectiveness criterion, the gain or loss on the derivative is recognized in income. If a derivative that qualiﬁes as a hedge is settled early, the gain or loss at settlement is deferred and recognized when the gain or loss on the hedged transaction is recognized. Premiums paid or received with respect to derivatives that are hedges are deferred and amortized to income over the term of the hedge. Interest Rate Hedging Superior enters into interest rate swap agreements to alter the interest characteristics of a portion of its outstanding debt from a ﬁxed to ﬂoating rate basis or vice versa. The differential between the amounts paid and received is accrued and recognized as an adjustment to interest expense related to the underlying debt. 53 Foreign Exchange Hedging Superior enters into foreign exchange contracts to hedge the effect of exchange rate changes on identiﬁable foreign currency denominated revenues and expenses in order to mitigate the potential negative impact of foreign exchange rate ﬂuctuations. (See Note 15(iv)). Superior has foreign currency denominated assets and liabilities which create an exposure to changes in exchange rates. Superior uses a combination of foreign currency derivatives and US dollar denominated debt to hedge this net exposure. 2005 Annual Report Electrical Hedging ERCO uses ﬁxed cost electrical contracts in deregulated electrical markets to help mitigate ﬂuctuations in electricity costs which are the most signiﬁcant variable productions costs. (See Note 15(iii)). Commodity Price Hedging SUPERIOR PROPANE Superior Propane offers various ﬁxed price propane sales programs to its customers. Customer ﬁxed price volume commitments are resourced with a combination of physical inventory and forward purchase contracts for similar terms, in order to mitigate the potential negative impact of a change in propane commodity pricing. JW ALUMINUM JWA ﬁxes the price of metal input costs through a combination of physical inventory and forward purchase contracts upon request by its customers. JWA uses ﬁxed price natural gas contracts to mitigate ﬂuctuations in natural gas costs which are a signiﬁcant variable production cost. SUPERIOR ENERGY MANAGEMENT SEM offers ﬁxed price natural gas contracts to its natural gas customers for terms of up to ﬁve years. Fixed price customer volume commitments are resourced with a combination of physical and ﬁnancial contracts for similar terms, in order to mitigate the potential negative impact of a change in natural gas commodity pricing. 4. Acquisitions The following acquisitions were completed by Superior during 2005 and 2004: On October 19, 2005, Superior acquired the shares of JW Aluminum Holding Company, a leading manufacturer of specialty ﬂat rolled aluminum products in the United States, for consideration of $405.4 million (US $344.2 million). On June 7, 2005, ERCO acquired a chloralkali/potassium business in Port Edwards, Wisconsin for consideration of $22.4 million (the “Port Edwards” acquisition). On April 11, 2005, Winroc acquired the shares of Leon’s Insulation Inc., and associated entities (collectively “Leon’s”), a distributor of specialty walls and ceilings construction products for consideration of $31.7 million of which $28.7 million was paid in cash (net of $5.3 million in cash acquired). Notes payable of $3.0 million bears interest at the prime bank rate and is repayable over a ﬁve year period. Additional consideration of up to $5.0 million is contingently payable over a period of ﬁve years based upon Leon’s achieving speciﬁed annual targets. Future payments will be treated as additional consideration as the amounts become payable, with a corresponding increase to goodwill. On February 2, 2005, Superior Propane acquired the business of Foster Energy Corporation, a wholesale marketer of natural gas 54 liquids, for consideration of $25.6 million of which $14.7 million was paid in cash (net of $2.3 million in cash acquired). Deferred consideration is payable over a ﬁve-year period and has been recorded at its fair market value of $10.9 million, calculated by discounting future cash payments. Foster Energy is now being operated under the trade name Superior Gas Liquids (“SGL”). On December 7, 2004, Winroc acquired the assets of Interior Building Supplies Company Ltd. (“IBS”), for consideration of $12.2 million. On June 11, 2004, Superior acquired all of the shares of the Winroc Corporation, Winroc Supplies Ltd. and Allroc Building Products Ltd. (collectively “Winroc”), a distributor of specialty walls and ceiling construction products in North America, for consideration of $104.2 million. Superior Plus Income Fund During 2004, Superior Propane acquired the assets of one propane-related business and one fuel oil distribution business, for consideration of $3.7 million. Using the purchase method of accounting for acquisitions, Superior consolidated the assets and liabilities from the acquisitions and included earnings as of the closing dates. The consideration paid for these acquisitions has been allocated as follows: 2005 Acquisition of JWA ERCO’s Acquisition of Port Edwards Winroc’s Acquisition of Leon’s Superior Propane’s Acquisition of SGL Cash consideration paid Transaction costs Total cash consideration Notes payable and deferred consideration (1) Total consideration Property, plant and equipment Goodwill Intangibles Working capital, net Future income tax liability Other liabilities 403.6 1.8 405.4 – 405.4 468.9 – 31.0 71.1 (165.6) – 405.4 21.6 0.8 22.4 – 22.4 22.1 – – 3.2 – (2.9) 22.4 28.2 0.5 28.7 3.0 31.7 3.1 16.2 2.0 10.4 – – 31.7 14.6 0.1 14.7 10.9 25.6 – 22.7 1.3 1.6 – – 25.6 Total 468.0 3.2 471.2 13.9 485.1 494.1 38.9 34.3 86.3 (165.6) (2.9) 485.1 (1) Notes payable and deferred consideration are unsecured obligations and have been included in revolving term bank credits and term loans on the Consolidated Balance Sheets. Cash consideration paid Transaction costs Total cash consideration Property, plant and equipment Goodwill Working capital, net Other liabilities 2004 Winroc’s Acquisition of IBS Acquisition of Winroc Superior Propane Acquisitions 11.9 0.3 12.2 0.9 6.0 5.8 (0.5) 12.2 103.2 1.0 104.2 18.2 52.5 37.1 (3.6) 104.2 3.7 – 3.7 1.4 1.0 1.3 – 3.7 Total 118.8 1.3 120.1 20.5 59.5 44.2 (4.1) 120.1 5. Accounts Receivable Superior sells, with limited recourse, certain trade accounts receivable on a revolving basis to an entity sponsored by a Canadian chartered bank, and has accounted for the sales in accordance with the CICA guidelines relating to transfers of receivables. The accounts receivable are sold at a discount to face value based on prevailing money market rates. Superior has retained the servicing responsibility for the accounts receivable sold and has therefore recognized a servicing liability. The level of accounts receivable sold under the program ﬂuctuates seasonally with the level of accounts receivable. At December 31, 2005, proceeds of $100.0 million (2004 – $100.0 million) had been received. The fair value of the retained interest arising from the sale at December 31, 2005 was $12.9 million (2004 – $13.1 million) and was estimated by discounting expected cash ﬂows at prevailing money market rates. 55 2005 Annual Report 2004 100.0 1,164.2 (1,164.2) 100.0 2004 31.2 15.0 7.7 8.7 – 31.0 93.6 Net Book Value 26.3 83.3 513.2 102.8 – 15.4 741.0 Cash ﬂows related to this sales program were as follows: Net proceeds, beginning Proceeds from collections re-invested in revolving period sales Remittances of amounts collected on sales Net proceeds from accounts receivable sales 6. Inventories Propane Propane retailing materials, supplies, appliances and other Chemical ﬁnished goods and raw materials Chemical stores, supplies and other Aluminum ﬁnished goods, raw materials and other Walls and ceilings construction products 7. Property, Plant and Equipment, Intangible Assets and Goodwill 2005 100.0 1,116.0 (1,116.0) 100.0 2005 77.9 13.2 8.9 9.9 47.2 36.3 193.4 Land Buildings ERCO plant and equipment Superior Propane retailing equipment JWA plant and equipment Winroc distribution equipment Property, plant and equipment ERCO royalty assets and patents JWA technology assets Winroc intangible assets Superior Propane intangible assets Natural gas customer acquisition costs Deferred ﬁnance charges Intangible assets 56 Goodwill Total property, plant and equipment, Intangible assets and Goodwill 2005 Accumulated Amortization Net Book Value – 28.5 168.1 298.0 7.1 4.5 28.5 87.0 494.0 90.1 446.7 21.3 Cost 28.5 115.5 662.1 388.1 453.8 25.8 Cost 26.3 103.9 600.8 392.9 – 17.6 1,673.8 506.2 1,167.6 1,141.5 2004 Accumulated Amortization – 20.6 87.6 290.1 – 2.2 400.5 50.6 10.3 40.3 49.0 30.7 2.1 2.8 11.7 21.4 117.7 633.4 14.9 0.6 0.2 1.8 4.0 6.8 28.3 34.1 30.1 1.9 1.0 7.7 14.6 89.4 – – – 4.6 11.3 66.5 92.1 541.3 594.7 – – – 1.5 4.8 16.6 92.1 – – – 3.1 6.5 49.9 502.6 2,424.9 626.6 1,798.3 1,802.7 509.2 1,293.5 During the year, ERCO determined that it would shut down its chlorate manufacturing facility in Thunder Bay, Ontario during the ﬁrst quarter of 2006, as a result of high electrical costs. As at December 31, 2005, the remaining net book value of the facility is $5.7 million and will be amortized prior to its closure. During 2005, amortization incurred with respect to this facility was $41.1 million. In connection with the closure, ERCO has recorded $1.1 million in costs for the year ended December 31, 2005, related to severance. The remainder of the costs associated with the plant closure are expected to be approximately $3.9 million and will be recognized and recorded in the period in which they are incurred. Superior Plus Income Fund 8. Revolving Term Bank Credits and Term Loans Revolving term bank credits (1) Bankers Acceptances (“BA”) 2008 Floating BA rate plus applicable credit spread 137.7 176.8 Maturity Dates Effective Interest Rates (4) 2005 2004 LIBOR Loans (US$95.3 million; 2004 – US$58.3 million) 2008 Floating LIBOR rate plus applicable credit spread Other Debt Notes payable Deferred consideration 2009, 2010 Prime 2010 Non-interest bearing Mortgage payable (US$0.9 million; 2004 – US$1.4 million) 2011 7.53% 111.1 248.8 70.1 246.9 8.0 11.3 1.1 20.4 5.0 – 1.7 6.7 Senior Secured Notes JWA acquisition credit facility (US$145.0 million) (2) Senior secured notes subject to ﬂoating interest rates (US$85.0 million; 2004 – US $85.0 million) (3) Senior secured notes subject to ﬁxed interest rates (US$75.0 million; 2004 – US $75.0 million) (3) Total revolving term bank credits and loans Less current maturities Revolving term bank credits and term loans 2007 Floating LIBOR rate plus applicable credit spread 169.1 – 2015 Floating LIBOR plus1.7% 99.1 102.3 2013, 2015 6.65% 87.4 355.6 624.8 2.0 90.3 192.6 446.2 – 622.8 446.2 (1) (2) (3) (4) During 2005, Superior and its wholly-owned subsidiaries, Superior Plus US Holdings Inc. and Commercial e Industrial ERCO (Chile) Limitada, renewed and expanded their secured revolving term bank credit facilities. Superior has revolving term credit capacity of $425.0 million, an increase of $70.0 million from December 31, 2004 levels. These facilities are secured by a general charge over the assets of Superior and certain of its subsidiaries. On October 19, 2005, Superior Plus US Holdings Inc. entered into a secured non-revolving term bank facility for US $145.0 million (Cdn$169.1 million at December 31, 2005) to partially ﬁnance the acquisition of JWA. The facility is secured by a general charge over the assets of Superior and certain of its subsidiaries. Senior Secured Notes (the “Notes”) totaling US$160.0 million (Cdn$186.5 million at December 31, 2005) are secured by a general charge over the assets of Superior and certain of its subsidiaries. Principal repayments begin in 2009. The estimated fair value of the Notes at December 31, 2005 was Cdn$183.5 million. In conjunction with the issue of the Notes, Superior swapped US$85.0 million (CDN $99.1 million at December 31, 2005) of the ﬁxed rate obligation into a US dollar ﬂoating rate obligation. The estimated fair value of the US$85.0 million interest rate swap at December 31, 2005 was a gain of $0.2 million (2004 – $2.4 million gain). The ﬁxed interest rate obligation on $100.0 million of the Fund’s Debentures (see Note 9) was swapped into a ﬂoating-rate obligation. The estimated fair value of this swap agreement at December 31, 2005 was a gain of $2.6 million (2004 – $5.8 million gain). Repayment requirements of the revolving term bank credits and term loans are as follows: Current portion Due in 2007 Due in 2008 Due in 2009 Due in 2010 Subsequent to 2010 Total 57 2.0 171.1 251.0 12.6 5.1 183.0 624.8 Interest paid on revolving term bank credits and term loans during 2005 amounted to $22.8 million (2004 – $15.5 million) comprised of $26.1 million (2004 – $22.3 million) related to debt, net of payments received of $3.3 million (2004 – $6.8 million) under interest rate swap agreements. 2005 Annual Report 9. Convertible Unsecured Subordinated Debentures The Fund has issued four series of Debentures denoted as 8% Series 1, 8% Series 2, 5.75% Series 1 and 5.85% Series 1 as follows: Maturity date Fixed distribution rate Conversion price per trust unit Debentures outstanding December 31, 2003 Conversion of Debentures and amortization of discount during 2004 Debentures outstanding December 31, 2004 Issuance of 5.75% Series 1 Debentures on June 14, 2005 Issuance of 5.85% Series 1 Debentures on October 19, 2005 Conversion of Debentures and amortization of discount during 2005 Debentures outstanding December 31, 2005 Quoted market value December 31, 2005 Series 1 Series 2 Series 1 Series 1 Unamortized Discount Total Carrying Value July 31, 2007 8.0% $16.00 25.6 (11.7) 13.9 November 1, 2008 December 31, 2012 October 31, 2015 5.75% $36.00 5.85% $31.25 8.0% $20.00 208.9 (106.3) 102.6 (1.5) 233.0 1.0 (0.5) (117.0) 116.0 175.0 (3.1) 171.9 (5.0) 8.9 13.3 (43.3) 59.3 72.4 (0.1) 174.9 177.6 75.0 – 75.0 77.6 (0.6) 74.4 0.4 (3.8) (48.0) 314.3 The Debentures may be converted into trust units at the option of the holder at any time prior to maturity and may be redeemed by the Fund in certain circumstances. The Fund may elect to pay interest and principal upon maturity or redemption by issuing trust units 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 trust units issued will be determined based on market prices for the trust units at the time of issuance. 10. Future Employee Beneﬁts Superior Propane and ERCO Worldwide have deﬁned beneﬁt (“DB”) and deﬁned contribution (“DC”) pension plans covering most employees. The beneﬁts provided under DB pension plans are based on the employees’ years of service and on the highest average earnings for a speciﬁed number of consecutive years. Information about Superior’s DB and other post-retirement beneﬁt plans as at December 31, 2005 and 2004 in aggregate, is as follows: 58 Superior Plus Income Fund Accrued beneﬁt obligation, beginning of year Current service cost Past service cost Interest cost Beneﬁts paid Actuarial loss (gain) Accrued beneﬁt obligation, end of year Fair value of plan assets, beginning of year Actual return on plan assets Transfers to deﬁned contribution plan Employer contributions Beneﬁts paid Fair value of plan assets, end of year Funded status – plan surplus (deﬁcit) Unamortized net actuarial loss Unamortized past service costs Unamortized transitional asset Accrued net beneﬁt asset (1) Accrued net beneﬁt obligation Current portion of accrued net beneﬁt obligation recorded in accounts payable and accrued liabilities Long-term accrued net beneﬁt obligation (2005: $17.7 million; 2004: $18.6 million) Superior Propane Pension Beneﬁt Plans (1) ERCO Pension Beneﬁt Plans Total Other Beneﬁt Plans 2005 52.9 0.3 – 3.1 (4.0) 3.7 56.0 64.3 5.3 (2.2) – (4.0) 63.4 7.4 18.8 – (0.3) 25.9 2004 53.3 0.3 – 3.2 (3.9) – 52.9 65.5 5.3 (2.6) – (3.9) 64.3 11.4 16.9 – (0.7) 27.6 2005 50.2 2.2 – 3.0 (1.9) 3.4 56.9 39.7 3.6 – 3.7 (1.9) 45.1 (11.8) 3.3 0.9 – 2004 44.8 2.1 – 3.0 (0.8) 1.1 50.2 30.2 2.6 – 7.7 (0.8) 39.7 (10.5) 0.7 1.2 – 2005 17.3 0.4 – 1.1 (1.1) 8.2 25.9 – – – 1.1 (1.1) – (25.9) 10.8 – – 2004 18.9 0.2 – 1.0 (1.1) (1.7) 17.3 – – – 1.1 (1.1) – (17.3) 2.8 – – (7.6) (8.6) (15.1) (14.5) (3.9) (3.7) (3.4) (5.2) (1.1) (1.1) (14.0) (13.4) (1) None of which is recorded on the balance sheet or income statement. The accrued net beneﬁt obligation related to the ERCO Worldwide pension beneﬁt plan in 2005 was $7.6 million (2004 – $8.6 million) and an expense of $2.6 million (2004 – $2.7 million) which have been recorded in the consolidated ﬁnancial statements. The accrued net beneﬁt obligation related to the total other beneﬁt plans of Superior Propane and ERCO Worldwide in 2005 was $15.1 million (2004 – $14.5 million) and an expense of $1.7 million (2004 – $1.4 million) which have been recorded in the consolidated ﬁnancial statements. Superior’s DC pension plans are fully funded by their nature. Accordingly, DC pension plan assets equal the related obligation. The total cost of Superior Propane’s DC plan in 2005 was $2.2 million (2004 – $2.6 million) and was fully funded and offset by the return earned on the unrecognized DB plan’s net beneﬁt asset. Superior Propane expects to continue to fund its required annual obligation under the DC pension plan over the medium term from returns earned on the DB plan’s net beneﬁt asset. 59 The signiﬁcant actuarial assumptions adopted in measuring accrued beneﬁt obligations are as follows: Discount rate Expected long-term rate-of-return on plan assets (1) Rate of compensation increase (1) Based on market related values. DB Plans Other Beneﬁt Plans 2005 5.25% 7.00% 3.25% 2004 6.00% 7.00% 4.00% 2005 5.25% – 3.25% 2004 6.00% – 4.00% 2005 Annual Report The weighted average annual assumed health care cost inﬂation trend used in the calculation of accrued Other Beneﬁt Plan Obligations is 10.0% initially, decreasing gradually to 5.0% in 2010 and thereafter. A 1% change in the health care trend rate would result in a change to the accrued beneﬁt obligation of $2.6 million and a change to the current service expense of $0.3 million. The most recent funding valuation dates for Superior’s deﬁned beneﬁts plans range from January 1, 2003 to December 31, 2005. The next funding valuation dates are scheduled between January 1, 2006 and December 31, 2008. The fair value of deﬁned beneﬁt plan assets at December 31, 2005 are comprised of the following major investment categories: Cash and cash equivalents 1% (2004 – 2%); Bonds 46% (2004 – 41%); Equities 53% (2004 – 57%). 11. Income Taxes of Superior The Fund is a unit trust for income tax purposes and is only taxable on any taxable income not allocated to the Unitholders. During 2005 and 2004, the Fund has allocated all of its taxable income to the Unitholders and accordingly no provision for income taxes was recorded at the Fund level. A provision for income taxes was recognized for the Fund’s subsidiaries that are subject to tax, including large corporation tax, provincial capital taxes, United States income tax and United States non-resident withholding tax. Total income taxes are different than the amount computed by applying the Canadian enacted statutory rate for 2005 of 33.6% (2004 – 33.9%). The reduction in statutory rates reﬂects previously enacted Federal and Alberta tax rate reductions. The reasons for these differences are as follows: Net earnings Income of the Fund taxed directly in the hands of the Unitholders Income tax expense (recovery) of Superior Loss of the Fund before taxes and after distribution of income to Unitholders Computed income tax recovery Higher effective foreign tax rates Changes in future federal and provincial income tax rates Federal and provincial capital taxes Non-deductible costs and other Income tax expense (recovery) of Superior 2005 106.1 (144.9) (12.6) (51.4) (17.3) 1.7 (1.6) 3.4 1.2 (12.6) 2004 (See Note 3(b)) 112.4 (121.9) 0.2 (9.3) (3.1) – (0.4) 3.5 0.2 0.2 The components of the future income tax liability as at December 31, 2005 and 2004 are as follows: 60 Carrying value of tangible assets over tax values Accounting reserves, deductible when paid Beneﬁt of tax loss carry forwards Other Future income tax liability 2005 (284.1) 15.8 6.4 (0.9) (262.8) 2004 (See Note 3(b)) (150.8) 14.7 14.0 0.4 (121.7) Taxes paid during 2005 totaled $9.2 million (2004 – $3.5 million) and were comprised solely of federal large corporation tax, provincial capital tax of $3.4 million (2004 – $3.5 million), United States income tax and United States non-resident withholding tax of $5.8 million (2004 – Nil). Superior Plus Income Fund 12. Unitholders’ Equity Authorized The Fund may issue an unlimited number of trust units. Each trust unit represents an equal undivided beneﬁcial interest in any distributions from the Fund and in the net assets in the event of termination or wind-up of the Fund. All trust units are of the same class with equal rights and privileges. Unitholders’ equity, December 31, 2003 (1) Conversion of Debentures – (8% Series 1 – $11.7 million converted @ $16 per trust unit; and 8% Series 2 – $106.3 million converted @ $20 per unit) (Note 9) Exercise of trust unit options (Note 14) Exercise of trust unit warrants Trust unit incentive plan compensation expense (Note 14) Repayment of management internalization loans receivable (Note 16(i)) Currency translation adjustment Net earnings (1) Distribution to Unitholders Unitholders’ equity, December 31, 2004 (1) Conversion of Debentures – (8% Series 1 – $5.0 million converted @ $16 per trust unit 8% Series 2 – $43.3 million converted @ $20 per trust unit, and 5.75% Series 1 – $0.1 million converted @ $36 per trust unit) (Note 9) Exercise of trust unit warrants Trust unit incentive plan compensation recovery (Note 14) Repayment of management internalization loans receivable (Note 16(i)) Trust units issued to ﬁnance the JW Aluminum acquisition Option value associated with the issue of 5.75% and 5.85% Series 1 debentures Currency translation adjustment Net earnings Distributions to Unitholders Unitholders’ equity, December 31, 2005 (1) See Note 3(b). Issued Number of Trust Units (millions) 69.4 6.0 0.1 0.4 – – – – – 75.9 2.6 0.8 – – 6.2 – – – – 85.5 Unitholders’ Equity 611.7 114.4 – 8.1 3.2 2.6 (1.4) 112.4 (179.1) 671.9 48.0 16.5 (4.6) 1.3 151.4 3.7 0.6 106.1 (192.0) 802.9 Unitholders’ capital and deﬁcit as at December 31, 2005 and 2004 consists of the following components: Unitholders’ capital Trust unity equity Conversion feature on warrants and convertible debentures Contributed surplus Deﬁcit Retained earnings from operations Accumulated distributions on trust unit equity 2005 1,332.3 4.8 1.2 1,338.3 368.4 (903.1) (534.7) 2004 (See Note 3(b)) 1,114.5 1.6 5.9 1,122.0 262.3 (711.1) (448.8) 61 At December 31, 2005, the Fund had 2.3 million trust unit warrants outstanding (2004 – 3.1 million), exerciseable at $20 per trust unit warrant. The trust unit warrants expire May 8, 2008. 2005 Annual Report 13. Net Earnings and Distributable Cash Flow per Trust Unit Net earnings per trust unit computation, basic Net earnings Weighted average trust units outstanding Net earnings per trust unit, basic Distributable cash ﬂow per trust unit computation, basic Distributable cash ﬂow Weighted average trust units outstanding Distributable cash ﬂow per trust unit, basic Net earnings per trust unit computation, diluted Net earnings Dilutive effect of: Debentures Net earnings, assuming dilution Net earnings, weighted average trust units outstanding Dilutive effect of: Debentures Trust unit options Trust unit warrants Weighted average trust units outstanding, assuming dilution 2005 106.1 79.7 $1.33 187.0 79.7 $2.35 106.1 0.8 106.9 79.7 0.6 0.1 0.8 81.2 2004 112.4 72.7 $1.55 184.4 72.7 $2.54 112.4 1.7 114.1 72.7 1.1 0.2 0.8 74.8 Net earnings per trust unit, diluted $1.32 $1.53 Distributable cash ﬂow per trust unit computation, diluted Distributable cash ﬂow Dilutive effect of: Debentures Distributable cash ﬂow, assuming dilution Distributable cash ﬂow, weighted average trust units outstanding Dilutive effect of: Debentures Trust unit options Trust unit warrants Weighted average trust units outstanding, assuming dilution 62 187.0 13.1 200.1 79.7 7.4 0.1 0.8 88.0 184.4 14.0 198.4 72.7 9.1 0.2 0.8 82.8 Distributable cash ﬂow per trust unit, diluted $2.27 $2.40 Trust unit options and Debentures that were anti-dilutive were excluded from this calculation. Superior Plus Income Fund 14. Trust Unit Incentive Plan (“TUIP”) Under the terms of the Fund’s TUIP, market growth options may be issued to directors, senior ofﬁcers and employees of Superior. The number of trust units issued is equal to the growth in value of the options at the time the options are exercised, represented by the market price less the exercise price times the number of options exercised, divided by the current market price of the trust units issued. Under the terms of the TUIP, options granted prior to 2003 were granted for a four-year term and are exercisable as to one- third immediately and an additional one-third on the ﬁrst and second anniversary of the date of grant. Options granted subsequent to 2003 were granted for a ﬁve-year term and are exercisable as to one-ﬁfth immediately, and an additional one-ﬁfth on each anniversary date of the grant. During 2005, a nominal amount of trust units were issued under the TUIP (2004 – 0.1 million trust units). A summary of the status of the Fund’s TUIP as at December 31, 2005 and 2004 and changes during these years is summarized below: Options outstanding at beginning of year Granted Exercised Forfeited Options outstanding at end of year Options exercisable at end of year 2005 2004 Weighted Average Exercise Price $ 20.71 28.75 19.56 – $ 22.82 $ 21.24 Options (000’s) 960 298 (81) – 1,177 563 Weighted Average Exercise Price $ 19.60 26.26 17.92 21.37 $ 20.71 $ 20.09 Options (000’s) 1,060 118 (193) (25) 960 403 The following summarizes information about the trust unit options outstanding as at December 31, 2005: Range of Exercise Prices $17.46 – $21.00 $22.80 – $28.76 $29.29 – $32.19 Options Outstanding Options Exercisable Weighted Average Remaining Contractual Life 2.4 3.3 4.4 Weighted Average Exercise Price $ 19.72 $ 25.14 $ 31.18 (000’s) Outstanding 446 71 46 Weighted Average Exercise Price $ 19.65 $ 24.82 $ 31.18 (000’s) Outstanding 756 193 228 15. Commitments (i) Lease commitments for rail cars, premises and other equipment for the next ﬁve years and thereafter are as follows: 2006 2007 2008 2009 2010 2011 and thereafter 22.5 19.1 15.8 10.5 6.6 17.4 63 2005 Annual Report (ii) Purchase commitments under long-term natural gas, aluminum and propane contracts for the next ﬁve years and thereafter are as follows: 2006 2007 2008 2009 2010 2011 and thereafter Cdn$ Natural Gas US$ Natural Gas 63.3 46.9 41.7 39.0 21.0 1.1 155.6 127.0 116.7 107.9 52.9 0.9 US$ Aluminum 44.4 US$ Propane 12.6 – – – – – – – – – – Superior is similarly committed to long-term natural gas and propane sales contracts to supply customers. (iii) ERCO Worldwide has entered into ﬁxed-price electricity purchase contracts for a portion of its Alberta power requirements, for up to twelve years at an average cost of $45.00 per megawatt hour. Commitments for the next ﬁve years and thereafter are as follows: 2006 2007 2008 2009 2010 2011 and thereafter 22.0 17.7 17.7 17.7 17.7 124.2 (iv) Superior has entered into long-term forward contracts to purchase US dollars in order to hedge US dollar out-ﬂows of SEM net of in-ﬂows of ERCO Worldwide as follows: Net US$ Purchases Conversion Rate 2006 2007 2008 2009 2010 2011 and thereafter 26.4 53.7 100.1 107.2 52.9 1.2 1.25 1.23 1.22 1.21 1.17 1.14 As at December 31, 2005, the net mark-to-market loss on long-term foreign currency forward contracts was $16.3 million (2004 – $8.7 million). (v) ERCO Worldwide has entered into a long-term agreement with CMPC Celulosa S.A. (“CMPC”), a division of Empresas S.A. to 64 supply sodium chlorate to CMPC’s three pulp mills in Chile. As part of this agreement, ERCO Worldwide will construct a sodium chlorate manufacturing plant adjacent to the CMPC Paciﬁco Mill at an estimated total cost of $65 million. The new plant is scheduled to start-up in mid-2006. Cumulative expenditures to December 31, 2005 were $28.9 million (2004 – $1.4 million). 16. Related Party Transactions and Agreements (i) Management Internalization Transaction On May 8, 2003, Superior completed the internalization of its management and administration agreements. The internalization process resulted in the elimination of management incentive and administration fees effective January 1, 2003. The funds paid to the Manager and Administrator to terminate the contracts were immediately re-invested into trust units and warrants. As part of the internalization transaction, non-interest-bearing loans aggregating $6.5 million were advanced to the executive ofﬁcers and were used to fund the purchase of 0.325 million trust units at $20.00 per trust unit. The loans are repayable over a four-year period in the form of annual retention bonuses of which $1.3 million was repaid in 2005 (2004 – $2.6 million). As at December 31, 2005, the Superior Plus Income Fund remaining loans receivable of $2.6 million (2004 – $3.9 million) have not been recorded as an asset by Superior, but have been deducted directly from Unitholders’ equity, in recognition of the uncertainty of collection over the remaining two years. (ii) Management Trust Unit Purchase Plan Loan Guarantee A number of senior employees of Superior have obtained guarantees from Superior under the terms of the Management Trust Unit Purchase Plan (the “MTUPP”), whereby participants may acquire trust units of the Fund through open market purchases in pledge accounts established by individual participants with an investment dealer. Participants borrow directly from a chartered bank the entire cash amount required to make the trust unit purchases with Superior guaranteeing up to 66% of the loan amount. As at December 31, 2005, the aggregate quoted market value of trust units owned under the MTUPP was $4.1 million (2004 – $3.0 million). The aggregate amount of participant loans from a chartered bank was $4.0 million (2004 – $1.9 million), which were supported by guarantees of Superior aggregating $2.6 million (2004 – $1.2 million). 17. Business Segments Superior operates ﬁve distinct business segments: the delivery of propane and propane related services and accessories operating under the Superior Propane trade name; the manufacture and sale of specialty chemicals and related products and services operating under the ERCO Worldwide trade name (“ERCO”); the manufacture and sale of specialty ﬂat rolled aluminum products operating as JW Aluminum Company (“JWA” or “JW Aluminum”); the distribution of walls and ceilings construction products operating under the Winroc trade name; and the sale of natural gas under ﬁxed-price term contracts operating under the Superior Energy Management trade name (“SEM”). Superior’s corporate ofﬁce arranges intersegment foreign exchange contracts from time to time between its business segments. Intersegment revenues and cost of sales pertaining to intersegment foreign exchange gains and losses are eliminated under the Corporate cost column. For the year ended December 31, 2005 Revenues Cost of products sold Gross proﬁt Expenses Operating and administrative Amortization of property, plant and equipment Amortization of intangible assets Interest on revolving term bank credits and term loans Interest on convertible unsecured subordinated debentures Amortization of convertible debenture issue costs Management internalization costs Income tax expense (recovery) of Superior Net earnings Add: Amortization of property, plant and equipment, intangible assets and convertible debenture issue costs Future income tax expense (recovery) Trust unit incentive plan recovery Management internalization costs Less: Maintenance capital expenditures, net Distributable cash ﬂow (1) JWA was acquired October 19, 2005. Superior Propane 856.2 571.8 284.4 ERCO 431.6 224.7 206.9 JWA (1) Winroc 112.2 99.7 12.5 486.6 368.8 117.8 SEM 288.4 273.9 14.5 78.6 9.2 186.6 101.9 17.9 – – – – – 87.4 5.1 – – – – 28.8 233.3 51.1 5.1 199.5 7.4 17.9 28.0 – – (2.8) 94.2 92.5 1.3 – – (8.1) 93.1 2.2 7.3 0.6 – – – – (0.7) 9.4 3.1 7.9 (1.9) – – (0.5) 8.6 2.7 0.3 – – –- – 14.1 95.7 22.1 3.0 10.7 – – (5.6) 30.2 – – – – – – 1.9 11.1 3.4 – 1.9 – – – Corporate Total Consolidated (3.6) (3.6) – 4.1 – – 22.8 12.9 1.7 1.3 (61.8) (19.0) 19.0 1.7 (61.8) (4.6) 1.3 – 2,171.4 1,535.3 636.1 382.6 115.3 6.0 22.8 12.9 1.7 1.3 (12.6) 530.0 106.1 123.0 (21.8) (4.6) 1.3 (17.0) 187.0 2005 Annual Report 65 5.3 (44.4) For the year ended December 31, 2004 Revenues Cost of products sold Gross proﬁt Expenses Superior Propane 720.2 433.5 286.7 ERCO 396.0 202.8 193.2 Operating and administrative 173.9 92.2 Amortization of property, plant and equipment Amortization of intangible assets Interest on revolving term bank credits and term loans Interest on convertible unsecured subordinated debentures Amortization of deferred convertible debenture issue costs Management internalization costs Income tax expense (recovery) of Superior Net earnings Add: Amortization of property, plant and equipment, intangible assets and convertible debenture issue costs Future income tax expense (recovery) Trust unit incentive plan expense Management internalization costs Less: Maintenance capital expenditures, net Distributable cash ﬂow (1) JWA was acquired October 19, 2005. (2) Winroc was acquired June 11, 2004. (3) See Note 3(b). 22.1 – – – – – 53.4 5.5 – – – – 32.6 228.6 58.1 15.5 166.6 26.6 22.1 31.4 – – (5.6) 106.0 58.9 13.4 – – (7.6) 91.3 – – – – – – – – – – – – – – – – – – – JWA (1) Winroc (2) SEM (3) Corporate 229.0 179.5 49.5 211.3 197.9 13.4 (3.7) (3.7) – Total Consolidated 1,552.8 1,010.0 542.8 31.3 5.7 10.1 313.2 2.7 – – – – – 5.5 39.5 10.0 2.7 4.3 – – (2.6) 14.4 – – – – – – 2.8 8.5 4.9 – 2.8 – – – 7.7 – – 15.5 13.6 1.6 2.6 (56.2) (12.8) 12.8 1.6 (55.2) 3.2 2.6 – (35.0) 78.2 5.5 15.5 13.6 1.6 2.6 0.2 430.4 112.4 85.3 (3.3) 3.2 2.6 (15.8) 184.4 TOTAL ASSETS, NET WORKING CAPITAL, ACQUISITIONS AND OTHER CAPITAL EXPENDITURES Superior Propane 101.8 695.2 61.3 603.6 14.7 1.9 3.7 0.5 ERCO JWA (1) Winroc (2) SEM (3) Corporate Total Consolidated (3.1) 738.8 84.9 622.2 (8.1) 754.6 – – 22.4 36.2 – 5.7 405.4 1.9 – – 64.1 194.8 50.5 152.9 28.7 0.2 116.4 – (8.3) 42.9 (2.3) 28.6 – – – – 9.8 33.9 (3.5) 12.4 – – – – 249.2 2,327.8 97.9 1,552.1 471.2 40.2 120.1 6.2 As at December 31, 2005 Net working capital Total assets As at December 31, 2004 Net working capital Total assets 66 For the year ended December 31, 2005 Acquisitions Other capital expenditures, net For the year ended December 31, 2004 Acquisitions Other capital expenditures, net (1) JWA was acquired October 19, 2005. (2) Winroc was acquired June 11, 2004. (3) See Note 3(b). Superior Plus Income Fund GEOGRAPHIC INFORMATION Revenues for the year ended December 31, 2005 Property, plant and equipment as at December 31, 2005 Total assets as at December 31, 2005 Revenues for the year ended December 31, 2004 Property, plant and equipment as at December 31, 2004 Total assets as at December 31, 2004 Canada 1,670.7 591.8 1,475.8 1,271.4 663.2 1,402.6 United States 476.7 551.7 814.4 256.3 77.8 149.5 Other 24.0 24.1 37.6 25.1 – – Total Consolidated 2,171.4 1,167.6 2,327.8 1,552.8 741.0 1,552.1 18. Comparative Figures Certain reclassiﬁcations of prior period amounts have been made to conform to current period presentations. 67 2005 Annual Report Corporate Information Board of Directors Superior Plus Inc. Grant D. Billing Executive Chairman Calgary, Alberta Robert J. Engbloom, Q.C. (2) Calgary, Alberta Norman R. Gish (3) Calgary, Alberta Peter A.W. Green (1) (2) Lead Director Campbellville, Ontario Allan G. Lennox (3) Calgary, Alberta James S.A. MacDonald (2) (3) Toronto, Ontario Geoffrey N. Mackey Calgary, Alberta David P. Smith (1) Toronto, Ontario Peter Valentine (1) Calgary, Alberta (1) Member of Audit Committee (2) Member of Governance and Nominating Committee (3) Member of Compensation Committee Ofﬁcers Superior Plus Inc. Grant D. Billing Executive Chairman Geoffrey N. Mackey President and Chief Executive Ofﬁcer W. Mark Schweitzer Executive Vice-President and Chief Financial Ofﬁcer Derren J. Newell Vice-President, Business Process and Compliance Clint G. Warkentin Vice-President and Treasurer Trevor G. Bell Vice-President, Tax Theresia R. Reisch Vice-President, Investor Relations and Corporate Secretary John D. Gleason President, Superior Propane a division of Superior Plus Inc. Paul S. Timmons President, ERCO Worldwide a division of Superior Plus Inc. Don E. Kassing President, JW Aluminum a division of Superior Plus Inc. Paul J. Vanderberg President, Winroc a division of Superior Plus Inc. Greg L. McCamus President, Superior Energy Management a division of Superior Plus Inc. 68 Divisions of Superior Plus Inc. Superior Propane 1111–49 Avenue NE Calgary, Alberta T2E 8V2 Telephone: (403) 730-7500 Facsimile: (403) 730-7512 Toll Free: 1-877-341-7500 Website: www.superiorpropane.com ERCO Worldwide 302 The East Mall, Suite 200 Toronto, Ontario M9B 6C7 Telephone: (416) 239-7111 Facsimile: (416) 239-0235 Website: www.ercoworldwide.com Superior Plus Income Fund JW Aluminum 435 Old Mt. Holly Road Mt. Holly, South Carolina USA 29445 Telephone: (843) 572-1100 Facsimile: (843) 572-1049 Website: www.jwaluminum.com Superior Energy Management 6860 Century Avenue East Tower, Suite 2001 Mississauga, Ontario L5N 2W5 Telephone: (866) 772-7727 Facsimile: (905) 542-7715 Website: www.superiorenergy.ca Winroc 4949–51 Street SE Calgary, Alberta T2B 3S7 Telephone: (403) 236-5383 Facsimile: (403) 279-0372 Website: www.winroc.com Unitholder Information Superior Plus Income Fund Suite 2820, 605–5 Avenue SW Calgary, Alberta T2P 3H5 Telephone: (403) 218-2970 Facsimile: (403) 218-2973 Toll Free: 1-866-490-PLUS (7587) E-mail: info@superiorplus.com Website: www.superiorplus.com Auditors Deloitte & Touche LLP Chartered Accountants 3000 Scotia Centre 700–2 Street SW Calgary, Alberta T2P 0S7 Trustee and Transfer Agent Computershare Trust Company of Canada Suite 710, 530–8 Avenue SW Calgary, Alberta T2P 3S8 or: 9th Floor, 100 University Avenue Toronto, Ontario M5J 2Y1 Telephone: 1-888-564-6253 Facsimile: 1-888-453-0330 E-mail inquiries: careregistryinfo@computershare.com Website: www.computershare.com Annual General Meeting (cid:73)(cid:93)(cid:90)(cid:21) (cid:54)(cid:99)(cid:99)(cid:106)(cid:86)(cid:97)(cid:21) (cid:66)(cid:90)(cid:90)(cid:105)(cid:94)(cid:99)(cid:92)(cid:21) (cid:100)(cid:91)(cid:21) (cid:74)(cid:99)(cid:94)(cid:105)(cid:93)(cid:100)(cid:97)(cid:89)(cid:90)(cid:103)(cid:104)(cid:21) (cid:100)(cid:91)(cid:21) (cid:105)(cid:93)(cid:90)(cid:21) (cid:59)(cid:106)(cid:99)(cid:89)(cid:21) (cid:108)(cid:94)(cid:97)(cid:97)(cid:21) (cid:87)(cid:90)(cid:21) (cid:93)(cid:90)(cid:97)(cid:89)(cid:21) (cid:94)(cid:99)(cid:21) (cid:105)(cid:93)(cid:90)(cid:21) (cid:72)(cid:105)(cid:103)(cid:86)(cid:99)(cid:89)(cid:36)(cid:73)(cid:94)(cid:107)(cid:100)(cid:97)(cid:94)(cid:21) (cid:71)(cid:100)(cid:100)(cid:98)(cid:21) (cid:100)(cid:91)(cid:21) (cid:73)(cid:93)(cid:90)(cid:21) 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(cid:42)(cid:35)(cid:44)(cid:42)(cid:26)(cid:21)(cid:56)(cid:100)(cid:99)(cid:107)(cid:90)(cid:103)(cid:105)(cid:94)(cid:87)(cid:97)(cid:90)(cid:21)(cid:57)(cid:90)(cid:87)(cid:90)(cid:99)(cid:105)(cid:106)(cid:103)(cid:90)(cid:104)(cid:21)(cid:88)(cid:100)(cid:99)(cid:107)(cid:90)(cid:103)(cid:105)(cid:94)(cid:87)(cid:97)(cid:90)(cid:21)(cid:86)(cid:105)(cid:21)(cid:25)(cid:40)(cid:43)(cid:35)(cid:37)(cid:37)(cid:21)(cid:101)(cid:90)(cid:103)(cid:21)(cid:105)(cid:103)(cid:106)(cid:104)(cid:105)(cid:21)(cid:106)(cid:99)(cid:94)(cid:105) (cid:72)(cid:69)(cid:59)(cid:35)(cid:89)(cid:87)(cid:35)(cid:88)(cid:21)(cid:47)(cid:21) (cid:42)(cid:35)(cid:45)(cid:42)(cid:26)(cid:21)(cid:56)(cid:100)(cid:99)(cid:107)(cid:90)(cid:103)(cid:105)(cid:94)(cid:87)(cid:97)(cid:90)(cid:21)(cid:57)(cid:90)(cid:87)(cid:90)(cid:99)(cid:105)(cid:106)(cid:103)(cid:90)(cid:104)(cid:21)(cid:88)(cid:100)(cid:99)(cid:107)(cid:90)(cid:103)(cid:105)(cid:94)(cid:87)(cid:97)(cid:90)(cid:21)(cid:86)(cid:105)(cid:21)(cid:25)(cid:40)(cid:38)(cid:35)(cid:39)(cid:42)(cid:21)(cid:101)(cid:90)(cid:103)(cid:21)(cid:105)(cid:103)(cid:106)(cid:104)(cid:105)(cid:21)(cid:106)(cid:99)(cid:94)(cid:105) SPF.un Unit Price and Volumes – TSX (cid:70)(cid:106)(cid:86)(cid:103)(cid:105)(cid:90)(cid:103)(cid:97)(cid:110)(cid:21)(cid:93)(cid:94)(cid:92)(cid:93)(cid:33)(cid:21)(cid:97)(cid:100)(cid:108)(cid:33)(cid:21)(cid:88)(cid:97)(cid:100)(cid:104)(cid:90)(cid:21)(cid:86)(cid:99)(cid:89)(cid:21)(cid:107)(cid:100)(cid:97)(cid:106)(cid:98)(cid:90)(cid:104)(cid:21)(cid:91)(cid:100)(cid:103)(cid:21)(cid:39)(cid:37)(cid:37)(cid:42)(cid:21)(cid:86)(cid:99)(cid:89)(cid:21)(cid:39)(cid:37)(cid:37)(cid:41) (cid:73)(cid:93)(cid:90)(cid:21)(cid:86)(cid:89)(cid:95)(cid:86)(cid:88)(cid:90)(cid:99)(cid:105)(cid:21)(cid:105)(cid:86)(cid:87)(cid:97)(cid:90)(cid:21)(cid:104)(cid:90)(cid:105)(cid:104)(cid:21)(cid:91)(cid:100)(cid:103)(cid:105)(cid:93)(cid:21)(cid:105)(cid:93)(cid:90)(cid:21)(cid:93)(cid:94)(cid:92)(cid:93)(cid:21)(cid:86)(cid:99)(cid:89)(cid:21)(cid:97)(cid:100)(cid:108)(cid:21)(cid:101)(cid:103)(cid:94)(cid:88)(cid:90)(cid:104)(cid:33)(cid:21)(cid:86)(cid:104)(cid:21)(cid:108)(cid:90)(cid:97)(cid:97)(cid:21)(cid:86)(cid:104)(cid:21)(cid:105)(cid:93)(cid:90)(cid:21)(cid:107)(cid:100)(cid:97)(cid:106)(cid:98)(cid:90)(cid:104)(cid:33)(cid:21)(cid:91)(cid:100)(cid:103)(cid:21)(cid:105)(cid:93)(cid:90)(cid:21)(cid:59)(cid:106)(cid:99)(cid:89)(cid:201)(cid:104)(cid:21)(cid:105)(cid:103)(cid:106)(cid:104)(cid:105)(cid:21)(cid:106)(cid:99)(cid:94)(cid:105)(cid:104)(cid:21)(cid:86)(cid:104)(cid:21)(cid:105)(cid:103)(cid:86)(cid:89)(cid:90)(cid:89)(cid:21)(cid:100)(cid:99)(cid:21)(cid:105)(cid:93)(cid:90)(cid:21)(cid:73)(cid:72)(cid:77)(cid:33)(cid:21)(cid:100)(cid:99)(cid:21)(cid:86)(cid:21) (cid:102)(cid:106)(cid:86)(cid:103)(cid:105)(cid:90)(cid:103)(cid:97)(cid:110)(cid:21)(cid:87)(cid:86)(cid:104)(cid:94)(cid:104)(cid:35) First quarter Second quarter Third quarter Fourth quarter Year High 2005 Low Volume $ 33.15 $ 28.45 9,849,804 $ 32.39 $ 29.25 7,500,262 $ 33.00 $ 24.30 15,637,193 $ 26.80 $ 19.66 22,993,008 $ 33.15 $ 19.66 55,980,267 High $ 28.80 $ 28.17 $ 28.10 $ 30.23 $ 30.23 2004 Low Volume $ 25.13 9,101,767 $ 22.45 10,719,346 $ 25.50 $ 26.70 6,787,031 6,898,924 $ 22.45 33,507,068 a d a n a C n i d e t n i r P . m o c e g d e n . i l r e m w w w . c n I e g d E n i l r e M y b d e c u d o r p d n a d e n g s e D i Suite 2820, 605–5 Avenue SW Calgary, Alberta T2P 3H5 Phone: (403) 218-2970 Facsimile: (403) 218-2973 www.superiorplus.com

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