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Canexus Income Fund Announces Second Quarter Results

2008-07-24 17:51:00

Canexus Income Fund Announces Second Quarter Results

Canexus Income Fund Announces Second Quarter Results

Strong Second Quarter Confirms Expectations for Balance of 2008

CALGARY, ALBERTA–(EMWNews – July 24, 2008) – Canexus Income Fund (TSX:CUS.UN) (the “Fund”) today announced its results for the second quarter ended June 30, 2008. Unless otherwise noted, the Fund is reporting the 100 percent results of Canexus Limited Partnership (Canexus LP), of which the Fund indirectly owns 37.9 percent.


– Distributable cash up 128 percent to $18.0 million from the same period last year; Fund declared $4.4 million in cash distributions at a payout ratio of 65 percent (70 percent normalized for the timing of maintenance capital spending)

– On May 2, 2008 (see news release) announced the closing of financing agreements increasing committed credit facilities to $480 million to accommodate North Vancouver Technology Conversion Project (TCP), resulting in realized currency translation gains of $3.1 million; DRIP participation at 70 percent has exceeded expectations demonstrating confidence in Canexus

– TCP is progressing on time and on budget; $90 million of the $208 million budget has been committed to date

– Significant caustic soda price increases announced for the third quarter. Strong caustic soda revenues helped offset weaker chlorine sales due to a slow start to water treating season in the North America chlor-alkali business

– Board approval of $8.6 million project to increase North American hydrochloric acid production capacity by 70 percent, adding approximately $1.6 million in operating cash flow annually beginning in March 2010

– North American sodium chlorate sales volumes for second quarter increased 10 percent from same period last year at higher margins with more production coming from Brandon expansion

– Brandon sodium chlorate plant expansion project performing above target with price increases announced for the third quarter; post expansion debottlenecking opportunities could add up to an additional 40,000 tonnes of capacity over the next two to five years

– South America sales revenue increased 23 percent from same period last year driven by significant increases in both caustic soda (18 percent) and sodium chlorate (10 percent) sales volumes; 2,000 tonne sodium chlorate expansion at plant in Brazil scheduled for startup in January 2009

“Our second quarter performance keeps us on track with the improved guidance announced in April. Our payout ratio is expected to be between 75 and 80 percent for 2008 based on the Canadian dollar at parity. Market conditions are providing support for caustic soda and chlorate price increases announced for the third quarter,” said Gary Kubera, President and CEO. “In the quarter there was good progress from each of our business units. The Brandon plant expansion continues to exceed expectations with operating rates above design. Additionally, the debottleneck analysis to further increase plant capacity is expected to be completed by the end of the year. At North Vancouver, our chlor-alkali facility operated at higher rates than the North American industry on average for the first half of the year despite a decrease in chlorine demand for PVC chlorine derivatives and a slow start to the water treating season. In South America, results continue to be strong and our major customer is purchasing more chlorate, caustic and hydrochloric acid volume than expected. Overall, it was a solid quarter that advanced our strategic projects to grow capacity and enhance our competitive, low-cost position.”

“Our Nanaimo sodium chlorate plant, which accounts for only about five percent of our overall capacity, was affected by Pope & Talbot’s bankruptcy in the second quarter. We have entered into a short term sales agreement to allow Nanaimo to operate for the remainder of 2008 while we await the outcome of the Pope & Talbot situation.”

“During the second quarter, caustic inventories were high as a result of a delayed shipment. We also reduced operating rates at our North Vancouver chlor-alkali facility until late in the quarter based on market conditions, but are now running near full rates with caustic price increases announced for the third quarter. To provide long-term flexibility for managing chlorine production, the board approved an $8.6 million project to convert more chlorine into higher value hydrochloric acid. The project will add approximately $1.6 million in operating cash flow annually beginning in March 2010 and will increase acid capacity by 70,000 tonnes.”

“The North Vancouver Technology Conversion Project is moving ahead on budget and on schedule for start-up in the first quarter of 2010. Approximately $90 million of the $208 million budget is committed to date. The site development is on target to allow major construction to start in the late summer.”

“Our operation in Brazil is performing exceptionally well with high demand for products from our major customer. This highly stable operation continues to exceed our expectations. The 2,000 tonne sodium chlorate expansion is on track for completion in January 2009 and we are considering a further 3,000-4,000 tonne expansion,” said Mr. Kubera.

Statements of Distributable Cash for the Three and Six Months Ended June 30,
2008 and 2007

Three Months Ended Six Months Ended
June 30 June 30
CAD thousands, except as noted 2008 2007 2008 2007
Canexus LP
Net Income 9,454 17,466 6,107 28,976
Charges and Credits to Income Not
Involving Cash:
Future Income Taxes 1,160 1,009 1,112 1,594
Amortization 10,721 10,897 20,663 21,770
Unrealized (Gains) Losses on Currency
Translation 829 (15,027) 8,820 (17,962)
Change in Fair Value of Foreign
Exchange Options 357 (280) 1,305 (18)
Change in Fair Value of Electricity
Forward Swaps - (1,756) - (1,479)
Change in Fair Value of Interest Rate
Swaps (1,879) - (2,045) -
Accrual for Future TCP Severance Costs - - 7,310 -
Other 955 1,004 1,797 1,744
21,597 13,313 45,069 34,625
Contributions to Defined Benefit
Pension Plan (2,444) (593) (2,444) (1,186)
Purchase of Foreign Exchange Options (373) - (730) -
Expenditures on Asset Retirement
Obligations (29) (504) (29) (504)
Changes in Non-Cash Operating Working
Capital and Due to Affiliates, Net (10,409) (606) (20,956) (3,354)
Cash From Operating Activities 8,342 11,610 20,910 29,581
Changes in Non-Cash Operating Working
Capital and Due to Affiliates, Net 10,409 606 20,956 3,354
Maintenance Capital Expenditures (2,372) (4,195) (3,808) (6,469)
Amortization of the Purchase Cost of
Foreign Exchange Options (181) (316) (360) (580)
Operating Non-Cash Items 1,811 181 1,214 28
Distributable Cash within Canexus LP 18,009 7,886 38,912 25,914

Canexus Income Fund
Share of Canexus LP's Distributable Cash 6,862 3,043 14,919 9,999
Trust Administration Expenses (88) (51) (176) (132)
Distributable Cash available to Canexus
Income Fund 6,774 2,992 14,743 9,867
Cash Distributions Declared 4,370 6,944 8,715 13,888
Payout Ratio 65% 232% 59% 141%
Payout Ratio Normalized for Timing of
Maintenance Capital Expenditures of
$15.5 million for 2008 70% 213% 66% 144%


Operations Highlights

Canexus has a total of six manufacturing plants – five in Canada and one in Brazil – organized into three business units. Highlights for each unit are as follows:

- North America sodium chlorate:
- Second quarter sales revenue for the North American sodium chlorate
segment was $52.2 million, a 13 percent increase from the comparable period
in 2007 due to increased sales volumes of 10 percent and two percent higher
realized selling prices. Price increases implemented throughout 2007 and in
January 2008 more than offset the 14 percent appreciation in the average
value of the Canadian dollar relative to the US dollar in the second
quarter of 2008 as compared to the second quarter of 2007. The increase in
sales volumes was due to strong demand from US customers and the
acquisition of customer contracts from Olin Corporation. Gross margins
increased to 28 percent from 26 percent in the same period last year due to
increased production at our low-cost Brandon, Manitoba facility following
start-up on February 17, 2008 of our expansion project, offset by higher
electricity costs incurred by our Bruderheim, Alberta plant and higher
fixed costs.
- Strong demand in the export chlorate market has contributed to the
strong North American market in 2008. Price increases have been announced
for the third quarter and pricing strength should continue through the end
of the year with the North American sodium chlorate market expected to
remain balanced through the second half of 2008.
- The Brandon, Manitoba, Phase 7 plant expansion continues to exceed the
33,000 tonne project target and analysis to determine debottlenecking
opportunities is expected to be completed by the end of the year.

- North America chlor-alkali:
- Sales revenue for the North American chlor-alkali segment increased
slightly to $30.3 million in the second quarter from $30.2 million for the
same period last year. An increase in chlorine sales volumes was offset by
lower MECU realized selling prices and lower caustic soda sales volumes.
Soft chlorine demand in the chemical production sector and an unusually
slow start to the water treating season resulted in significant downward
pressure on chlorine prices through the second quarter of 2008. Chlorine
demand is expected to improve in the third quarter. Gross margins increased
to 21 percent from 19 percent for the same period last year primarily due
to temporary operating problems experienced in the second quarter of 2007,
lower electricity costs in the second quarter of 2008 and to a shorter,
less expensive plant turnaround in the second quarter of 2008 as compared
to 2007, partially offset by higher natural gas costs.
- Caustic soda prices have increased significantly in 2008 as supplies
have tightened with reduced chlor-alkali industry operating rates. Further
significant price increases have been implemented for the third quarter.
- The North Vancouver plant operated at reduced rates for most of the
second quarter with rates now back up as demand from the water treatment
sector has increased.

- South America:
- Second quarter sales revenue in Brazil was $28.3 million, an increase of
23 percent from the same period last year due to a 10 percent increase in
sodium chlorate sales volume and higher realized selling prices for both
sodium chlorate and chlor-alkali products. The increase in sales volumes
was due to continued high demand for both sodium chlorate and caustic soda
by our primary customer. The increase in realized selling prices is due to
the pass-through nature of the contract with our primary customer, which
contributes to higher sales revenues as costs increase. A decline in gross
margin percentages to 21 percent from 28 percent in the second quarter last
year was the result of the significant purchase and resale of caustic soda
to our primary customer which generates no margin, as well as the impact on
our fixed US dollar margins of the significant strengthening in the
Canadian dollar from Q2/07 to Q2/08.
- A 2,000 tonne incremental sodium chlorate expansion is on schedule for
startup in January 2009 at Canexus' Brazil manufacturing plant. An
additional 3,000-4,000 tonne expansion is being evaluated to enable Canexus
to secure additional supply positions in the growing sodium chlorate market.


Technology Conversion Project Update

The TCP at the North Vancouver chlor-alkali facility is scheduled for completion in Q1 2010. The $208-million project is expected to contribute an estimated $35-43 million in incremental annual operating cash flow. Sixty percent of the project value is generated by cost savings. TCP is being financed from excess distributable cash, our Distribution Reinvestment Plan (DRIP) and a committed increase in our credit facilities.

Updates for the quarter include:

– 43 percent of the budget is committed

– 13 percent of the budget has been spent

– Detailed engineering 50 percent complete

– Site preparation work 80 percent complete

– 51,500 man hours worked without a recordable incident

Financial Updates

– Foreign exchange and Long-term debt: Canexus LP has secured Canadian dollar foreign exchange call option contracts on US $5.0 million per month which entitle Canexus LP to sell US dollars and acquire Canadian dollars at a price of US $0.9709 per Canadian dollar through August 31, 2008. These options are designed to protect our cash flows if the Canadian dollar strengthens while still allowing our cash flow to benefit from any devaluation of the Canadian dollar relative to the US dollar. To further manage the exposure to the Canadian/US exchange rate, all long-term debt is borrowed in US dollars and Canexus LP incurs other expenditures in US dollars.

– Mark-to-market losses in fair value of foreign exchange options contracts of $0.4 million in the second quarter of 2008 ($0.3 million of gains in Q2/07) were offset by $0.3 million of realized gains ($0.5 million in Q2/07).

– During the three months ended June 30, 2008, fluctuations in exchange rates resulted in unrealized losses of $0.8 million ($1.3 million on US dollar denominated debt) and realized gains of $4.3 million ($3.1 million as a result of credit facility repayments in the quarter) as compared to $15.0 million of unrealized gains in Q2/07 ($15.7 million on US dollar denominated debt) and $1.4 million of realized losses.

– In March 2008, Canexus LP entered into interest rate swap agreements under which we swap three month US LIBOR floating rates for a fixed rate of 3.2 percent on a notional amount of US$50.0 million for the period April 11, 2008 through April 10, 2013. We recorded mark-to-market gains of $1.9 million in Q2/08.

– Capital expenditures: Capital expenditures for the three months ended June 30, 2008, were $18.5 million as compared to $14.3 million for the same period last year. An increase in expansion capital expenditures of $4.9 million and increased spending on continuous improvement projects of $1.1 million was offset by a decrease in maintenance capital expenditures of $1.8 million. We continue to expect maintenance capital spending for 2008 to be $15.5 million. Higher planned expansion capital expenditures related to the TCP at our North Vancouver plant were offset by lower expenditures related to the expansion of our Brandon, Manitoba sodium chlorate plant.

– Expenses and Other Income: General and administrative costs in the second quarter of 2008 were down $0.3 million from the same period in 2007 as a result of timing of spending. Included in other income are realized and unrealized currency translation gains and losses as discussed above. We have not designated our US-dollar denominated debt, foreign exchange options contracts, interest rate swaps or electricity forward swap contracts as hedges for accounting purposes and hence the fair value impact of these items flows through other income. In the second quarter of 2008, Canexus did not have any electricity forward swap contracts outstanding. We recorded $1.8 million of mark-to-market gains on electricity forward swap contracts in the second quarter of 2007. As previously reported, in the first quarter we recorded estimated future TCP severance costs of $7.3 million. Following start-up we expect to permanently reduce our workforce at this facility by approximately one-third.

Operating Results for the Three and Six Months Ended June 30, 2008 and 2007

Three Months Ended Six Months Ended
June 30 June 30
CAD thousands 2008 2007 2008 2007

Sales 110,763 99,207 219,491 205,286

Cost of Goods Sold 83,928 75,064 161,428 150,384
Amortization 10,721 10,897 20,663 21,770
General and Administrative 7,509 7,798 14,939 15,303
Interest 2,746 2,878 5,188 5,912
104,904 96,637 202,218 193,369

Income before Other Income (Expense)
and Income Taxes 5,859 2,570 17,273 11,917
Other Income (Expense) 5,405 16,275 (9,029) 19,080
Income before Income Taxes 11,264 18,845 8,244 30,997

Provision for Income Taxes
Current 650 370 1,025 427
Future 1,160 1,009 1,112 1,594
1,810 1,379 2,137 2,021

Net Income 9,454 17,466 6,107 28,976


Financial Statements, Conference Call and Webcast

Financial Statements and Management’s Discussion and Analysis will be posted on the Canexus web site at as soon as available. Management will host a conference call at 8 a.m. MT on July 25, 2008, to discuss the results. Please call 416-644-3416 or 1-800-732-9303 to access the call. The call will be webcast live and archived on the Canexus web site. A replay will be available by telephone until midnight on August 1, 2008.

Non-GAAP measures

Gross margin, gross margin percentage, payout ratio and distributable cash are non-GAAP financial measures, but management believes they are useful in measuring the Fund’s performance. Readers are cautioned that these measures should not be construed as alternatives to net income or loss or other comparable measures determined in accordance with GAAP as an indicator of the Fund’s performance or as a measure of the Fund’s liquidity and cash flow. The Fund’s method of calculating non-GAAP measures may differ from the methods used by other issuers and accordingly, the Fund’s non-GAAP measures are unlikely to be comparable to similarly titled measures used by other issuers.

Forward Looking Statements

This news release contains forward-looking statements and information relating to expected future events and financial and operating results of the Fund, Canexus LP and its subsidiaries that involve risks and uncertainties. The use of the words “expects”, “anticipates”, “continue”, “estimates”, “projects”, “should”, “believe”, “plans”, “intends”, “may”, “will” or similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements for a variety of reasons, including market and general economic conditions, future costs, treatment under governmental regulatory, tax and environmental regimes and the other risks and uncertainties detailed under “Risk Factors” in the Fund’s Annual Information Form for the period ended December 31, 2007, which is filed on the Fund’s SEDAR profile at Management believes the expectations reflected in these forward-looking statements are currently 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. Due to the potential impact of these factors, the Fund and Canexus LP disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Financial outlook information contained in this press release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management’s assessment of the relevant information currently available. Such financial outlook information should not be used for purposes other than those for which it is disclosed herein.

About Canexus

Canexus produces sodium chlorate and chlor-alkali products largely for the pulp and paper and water treatment industries. Our five plants in Canada and one in Brazil are reliable, low-cost, strategically-located facilities that capitalize on competitive electricity costs and transportation infrastructure to minimize production and delivery costs. Canexus targets opportunities to maximize unitholder returns and delivers high-quality products to its customers. Canexus is listed on the Toronto Stock Exchange under the symbol CUS.UN. More information about Canexus is available at

For more information, please contact

Canexus Limited
Gary Kubera
President and CEO
(403) 571-7300


Canexus Limited
Richard McLellan
(403) 571-7300

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