Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

October 31, 2007 07:00 ET

Canexus Income Fund Announces Third Quarter Results

Strong performance from all three business units delivers excellent results

CALGARY, ALBERTA--(Marketwire - Oct. 31, 2007) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the third quarter ended September 30, 2007. Unless otherwise noted, the Fund is reporting the 100 per cent results of Canexus Limited Partnership (Canexus LP), of which the Fund indirectly owns 38.6 per cent.

Highlights:

- Distributable cash of $21.1 million reflects strong performance from all three business units. Strong product pricing, robust sales volumes and lower realized electricity costs in Alberta contributed to a successful quarter. The Fund declared $6.9 million in cash distributions for the third quarter at a payout ratio of 86 per cent (90 per cent normalized for the timing of maintenance capital spending); estimated payout ratio for the year remains at 122 per cent as a result of the strong Canadian dollar and the timing of maintenance capital spending;

- Canadian dollar foreign exchange call options on US$5 million per month purchased in August entitle Canexus to sell US dollars at a price of US$0.9497 per Canadian dollar (to receive $5.3 million Canadian per month) from September 5, 2007, to February 27, 2008;

- North American sodium chlorate sales revenue increased two per cent from the comparable quarter last year with higher prices offsetting the strong Canadian dollar and slightly lower volumes; Brandon plant expansion project remains on schedule for commissioning in early January 2008, boosting capacity of the low-cost facility by 12 per cent and adding an estimated $10.0 million in EBITDA annually based on current business conditions;

- Strong demand in Brazil is expected to continue due in part to a recently completed debottleneck and yield improvement project at our primary customer's mill and ongoing merchant demand;

- Chlor-alkali market fundamentals continue to support strong caustic soda pricing, with increases announced for the fourth quarter; the technology conversion project at the North Vancouver plant is expected to be considered by the Board of Directors in December, and will provide significant cost savings and expand capacity if approved.

"Our strong third quarter results are in line with our expectations and support achieving our targets for the year," said Gary Kubera, President and CEO. "Our plant system operated reliably and at high rates. Despite the dramatic surge in the Canadian dollar since the end of the quarter, we continue to believe our outlook is appropriate due to our continued high operating rates, pricing strength and the foreign exchange options we have in place."

"In South America, our plant continues to experience strong demand from both our primary customer and the merchant market, and with attractive growth and investment opportunities we are considering debottleneck options at our plant."

"Market conditions continue to support stronger sodium chlorate prices, particularly to US customers as the Canadian dollar rises. Our 2008 sodium chlorate contracts are providing an early indication of pricing strength. We look forward to the additional low-cost capacity that will become available in mid-February with the completion of our Brandon expansion project. With our expansion project now over 90 per cent committed, we expect a final project cost of $53.0 million, approximately six per cent above our original cost estimate of $50.0 million."

"Our chlor-alkali markets in North America continued to perform well through the end of the third quarter. Caustic soda demand remains strong, supporting increased sales volumes. Announced price increases for caustic soda should offset seasonal weakening of chlorine demand in the fourth quarter. We are also encouraged by the announced end to the strike by British Columbia coastal forestry workers."

"We continue to advance the technology conversion project for the North Vancouver chlor-alkali facility that will provide significant cost savings and expand our capacity. We anticipate an announcement on the project in early December 2007 after it has been considered for approval by our Board of Directors. At that time, we will be in a position to discuss our financing plans and distribution policy," said Mr. Kubera.



Fund's Statement of Distributable Cash

(Expressed in Thousands of
Canadian Dollars, except per unit amounts) Three Months Ended
(Unaudited) September 30, 2007
----------------------------------------------------------------------------

Canexus LP
Net Income 21,361
-------------------

Charges and Credits to Income Not Involving Cash:
Future Income Taxes 1,220
Amortization 11,034
Unrealized Gains on Currency Translation (12,070)
Change in Fair Value of Foreign Exchange Options (670)
Change in Fair Value of Electricity Forward Swaps 2,908
Other (1,192)
-------------------
1,230
-------------------
Contributions to Defined Benefit Pension Plan (590)
-------------------
Expenditures on Asset Retirement Obligations (32)
-------------------
Purchase of Foreign Exchange Options (360)
-------------------
Changes in Non-Cash Operating Working Capital
and Due to Affiliates, Net 1,126
-------------------
Cash From Operating Activities 22,735

Changes in Non-Cash Operating Working Capital
and Due to Affiliates, Net (1,126)
Maintenance Capital Expenditures (2,518)
Amortization of the Purchase Cost of Foreign
Exchange Options (60)
Operating Non-Cash Items 2,088
-------------------
Distributable Cash within Canexus LP 21,119
-------------------
-------------------

Canexus Income Fund
Share of Canexus LP's Distributable Cash 8,149
Trust Administration Expenses (85)
-------------------
Distributable Cash available to Canexus Income Fund 8,064
-------------------
-------------------

Cash Distributions Declared 6,943
-------------------
-------------------

Payout Ratio 86%
-------------------
-------------------

Payout Ratio Normalized for Timing of Maintenance
Capital Expenditures of $14.0 million for 2007 90%
-------------------
-------------------


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:

-- Third quarter sales revenue for the North American sodium chlorate segment was $48.3 million in 2007, a two per cent increase from the comparable period in 2006. Lower sales volumes were offset by higher realized selling prices. Gross margins for the quarter increased to 33 per cent from 28 per cent in the comparable quarter of last year as a result of higher realized selling prices, lower realized electricity costs in Alberta and lower fixed costs per unit of production as a result of three per cent higher production volumes. Electricity cost savings in Alberta were achieved through both the sale of our fixed-cost supply of electricity for September due to a planned maintenance shutdown at the Bruderheim facility and to spot sell-back opportunities, in periods of peak electricity prices, of some of the fixed-cost electricity supply in July 2007.

-- Price increases for sodium chlorate continue to be supported by market factors. Pulp mill capacity utilization remains high in response to a strong pulp market and high pulp prices. The continued weakening in the US dollar is contributing to higher global pulp prices which are denominated in US dollars. The combination of higher pulp prices in US dollars and the improved competitiveness of US pulp mills relative to mills outside of the US, supports stronger sodium chlorate pricing to US customers. We are starting to see indications of increased demand for sodium chlorate in the US that could impact any decision to rationalize higher cost capacity with our Brandon expansion scheduled for commissioning in early January 2008. Canexus remains committed to review the balance of its North American sodium chlorate capacity consistent with the impact of the Brandon expansion on the supply to demand balance.

-- The Brandon plant expansion project is on schedule and with total expected costs now over 90 per cent committed we expect a final project cost of $53.0 million. The expansion will increase plant capacity by an estimated 12 per cent and add an estimated $10.0 million of EBITDA annually.

- North America chlor-alkali:

-- Sales revenue for the North American chlor-alkali segment was $34.9 million in the third quarter of 2007, an increase of four per cent from the same period in 2006. The increase is primarily a result of higher sales volumes. Gross margins for the third quarter of 2007 increased to 38 per cent from 35 per cent in the same period of 2006 primarily due to increased sales of caustic soda and slightly lower electricity, natural gas and salt costs.

-- Supply-demand fundamentals for caustic soda remain strong in Western Canada and the US Pacific Northwest. North American industry operating rates remain high with continued strong demand supporting price increases in the fourth quarter. Demand was minimally impacted by the recently ended British Columbia coastal forestry workers' strike. A modest slowdown in chlorine demand is projected in the fourth quarter as seasonal demand for water treating abates and due to a projected softening of PVC demand associated with softer construction demand in the US.

-- The technology conversion project at the North Vancouver plant, which will provide significant cost savings and expand capacity, is expected to be considered for approval by the Board of Directors in December.

- South America:

-- Third quarter sales revenue in Brazil was $21.8 million, an increase of eight per cent from the comparable period of 2006. An increase in chlor-alkali sales volumes and increases in realized selling prices for both sodium chlorate and chlor-alkali was partially offset by a decline in sodium chlorate sales volumes. Gross margins increased to 31 per cent from 28 per cent in the prior year due primarily to lower sodium chlorate sales into the merchant market which provide lower gross margins.

-- Canexus operations in Brazil are well positioned to deliver strong results for the final quarter of 2007, with demand for sodium chlorate continuing to be strong in the region. South America remains a key investment region for the sodium chlorate industry given the significant access to low cost, renewable wood fibre for pulp and paper production, the number of new pulp production expansion projects planned for the region, relatively stable energy prices and supportive government policy.

Financial Updates

- Foreign exchange and Long-term debt: The current quarter continued to benefit from foreign exchange call options on US$5.0 million per month (approximately half our net US dollar cash flow per month) which entitled us to sell US dollars and acquire Canadian dollars at a price of US$0.87 per Canadian dollar from January 17, 2007, through to July 11, 2007. In August we purchased additional call option protection on US$5.0 million per month at US$0.9497 per Canadian dollar from September 5, 2007, through February 27, 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. All long-term debt is borrowed in US dollars, which resulted in $12.6 million of unrealized exchange gains in the third quarter ($0.1 million unrealized loss for the third quarter of 2006) and $30.4 million year-to-date. Before the impact of hedging instruments and borrowing in US dollars, every US$0.01 change in the Canadian/US dollar exchange rate inversely affects net income before taxes by $1.2 million Canadian per year.

-- We recorded mark-to-market gains in fair value on foreign exchange options contracts of $0.7 million in the third quarter ($2.9 million loss in Q3/06) and $0.6 million of realized gains ($2.4 million in Q3/06).

-- During the three-month period ended September 30, 2007, fluctuations in exchange rates resulted in $1.0 million of realized losses ($0.2 million of gains in Q3/06) and $0.6 million of unrealized losses($nil in Q3/06) on currency translation.

-- Long-term debt at September 30, 2007, was $188.3 million (US$189.0 million) as compared to $173.6 million (US$149.0 million) at December 31, 2006.

- Capital expenditures: Capital expenditures for the three-month period ended September 30, 2007 were $13.6 million compared to $5.1 million for same period in 2006. The increase is due primarily to expenditures on our Brandon expansion project ($9.0 million) and the North Vancouver technology conversion project ($1.9 million) in the quarter. We expect full year spending on maintenance capital of $14.0 million (Q3/07 - $2.5 million), $3.4 million (Q3/07 - $0.2 million) on margin enhancing continuous improvement projects and $52.3 million on expansion capital ($39.6 million related to the Brandon expansion project and $12.7 million on the North Vancouver technology conversion project).

- Expenses and Other Income: General and administrative costs in the third quarter of 2007 increased from the same period in 2006 as a result of higher costs associated with operating our stand-alone Information Technology environment and in performing other finance and administrative functions previously provided by Nexen Inc. under a transition services agreement which was concluded in December 2006. 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 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 third quarter, electricity forward swaps had a mark-to-market change in fair value of $2.9 million (loss) as compared to a $0.3 million loss in Q3/06. These contracts cover over 70 per cent of our 2007 electricity requirements for our Bruderheim, Alberta plant.

- Provision for Income Taxes: Our current provision for income taxes was $1.4 million for the quarter compared to $0.1 million in Q3/06. Our cash tax horizon in Brazil is now expected to begin in 2007 due to the strength of the Brazilian Real relative to the US dollar. Previously unclaimed foreign exchange losses on US dollar denominated debt in our Brazilian subsidiary for tax purposes have been eroded and are no longer sufficient to fully shelter our taxable income.



Operating Results for the Three-Month
periods ended September 30, 2007
and 2006 for Canexus LP

(Expressed in Thousands of
Canadian Dollars) Three months ended
(Unaudited) September 30, September 30,
2007 2006
----------------------------------------------------------------------------

Revenues
Sales 104,990 100,805
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Expenses
Cost of Goods Sold 68,872 70,413
Amortization 11,034 10,001
General and Administrative 7,417 6,236
Interest 3,091 2,807
-------------------------------
90,414 89,457
-------------------------------

Income before Other Income and Income Taxes 14,576 11,348

Other Income 9,408 287
-------------------------------

Income before Income Taxes 23,984 11,635
-------------------------------

Provision for Income Taxes
Current 1,403 75
Future 1,220 517
-------------------------------
2,623 592
-------------------------------

Net Income 21,361 11,043
-------------------------------
-------------------------------


Financial Statements, Conference Call and Webcast

Financial Statements and Management's Discussion and Analysis will be posted on the Canexus web site at www.canexus.ca as soon as available. Management will host a conference call at 10 a.m. ET on October 31, 2007, to discuss the results. Please call 416-644-3425 or 1-800-594-3790 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 November 7, 2007.

Non-GAAP measures

Gross margin, 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, 2006, which is filed on the Fund's SEDAR profile at www.sedar.com. 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.

About Canexus

Canexus produces sodium chlorate and chlor-alkali products in several plants throughout Canada and Brazil, largely for the pulp and paper and water treatment industries. Canexus operates reliable, strategically-located, low-cost production 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 www.canexus.ca.

Contact Information

  • Canexus Limited
    Gary Kubera
    President and CEO
    (403) 571-7300
    or
    Canexus Limited
    Richard McLellan
    CFO
    (403) 571-7300
    Website: www.canexus.ca