Operating Costs
Cash operating and administrative costs were $83.5 million in fourth quarter of 2012, an increase of $0.2 million or nil% from the prior year quarter. The slight increase in expenses was primarily due to a one-time pension settlement expense and $3.0 million of restructuring charges offset in part by higher fixed-price energy services costs as the prior year included a reduction in the risk reserve allowance.
Impairment
On October 20, 2012, a kerosene leak was discovered in the bottom of a storage tank at U.S. refined fuels Marcy terminal location. The leak was investigated and contained by the environmental group. U.S. refined fuels than notified the Department of Environmental Conservation (DEC) which performed an independent review of the leak and other tanks at this location. On December 27, 2012, the DEC issued a notice of violation based on their inspections and subsequent to discussions between management and the DEC, a consent order was issued to U.S. refined fuels on February 4, 2013. The consent order identified that the secondary containment system and storage tanks are not in compliance with DEC design requirements and need to be rebuilt to specific standards by September 1, 2013 in order to remain operational. Management is assessing the implications of the consent order on the future operations of the facility and potential alternatives to completing the repair work required. This event is not expected to have an impact on the operations of U.S. refined fuels or operating results going forward. Also, management is assessing the impact of additional remediation costs although they are not expected to be material.
Due to the leak and receipt of the consent order, management has performed a detailed impairment review of the Marcy terminal to assess whether the carrying value of all the storage tanks does not exceed the recoverable amount. The recoverable amount of the assets was based on management's estimate of the fair value less costs to sell. Based on a detailed review by management, the fair value less costs to sell of the storage tanks was lower than the carrying value. An impairment charge of $4.7 million was recorded against net earnings along with a $4.7 million reduction in the carrying value of the impaired storage tanks.
Outlook
Superior expects business conditions in 2013 for its Energy Services segment to be similar to 2012. EBITDA from operations is anticipated to be higher in 2013 than in 2012 due in part to the assumption that weather will be consistent with the five-year average in 2013. Superior's 2012 results were negatively affected by warm weather, as average temperature in the first quarter of 2012, as measured by degree days, across Canada and the Northeastern U.S. was at record or near-record levels. Additionally, Superior expects to realize ongoing improvements in its financial results as a result of the business initiatives noted below.
Initiatives to improve results in the Energy Services business continued during the fourth quarter of 2012 in conjunction with Superior's goal for each of its businesses to become best-in-class. Business improvement projects for 2013 include: a) improving customer service, b) improving overall logistics and procurement functions, c) enhancing the management of margins, d) working capital management, and e) improving existing and implementing new technologies to facilitate improvements to the business.
In addition to the significant assumptions detailed above, refer to "Risk Factors to Superior" for a detailed review of significant business risks affecting the Energy Services' businesses.
Specialty ChemicalsSpecialty Chemicals' condensed operating results for 2012 and 2011;----------------------------------------------------------------------------(millions of dollars except per metric Three months ended Twelve months ended tonne (MT) amounts) December 31, December 31, 2012 2011 2012 2011---------------------------------------------------------------------------- $ per MT $ per MT $ per MT $ per MTChemical revenue(1) 139.1 694 138.4 740 542.2 703 529.1 685Chemical cost of sales (1) (76.1) (380) (71.4) (382)(283.9) (368)(290.4) (376)----------------------------------------------------------------------------Chemical gross profit 63.0 314 67.0 358 258.3 335 238.7 309Less: Cash operating and administrative costs(1) (33.9) (169) (32.5) (174)(130.8) (170)(123.5) (160)----------------------------------------------------------------------------EBITDA from operations 29.1 145 34.5 184 127.5 165 115.2 149Chemical volumes sold (thousands of MTs) 200 187 771 772--------------------------------------------------------------------------------------------------------------------------------------------------------(1) In order to better reflect the results of its operations, Superior has reclassified certain amounts for purposes of this Financial Discussion related to derivative financial instruments, non-cash amortization and foreign currency translation losses or gains related to U.S.-denominated working capital. See "Reconciliation of Divisional Segmented Revenue, Cost of Sales and Cash Operating and Administrative Costs Included in this Financial Discussion" for detailed amounts.
