Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

April 25, 2006 23:59 ET

Canexus Income Fund Announces 2006 First Quarter Results

CALGARY--(CCNMatthews - April 25) - Canexus Income Fund (TSX: CUS.UN) (the "Fund") today announced its results for the first quarter ended March 31, 2006.

The Fund, which commenced operation upon completion of its initial public offering on August 18, 2005, was previously the Chemicals Business of Nexen Inc. though not all of the operations were acquired from Nexen Inc. 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:

- Declared total cash distributions of $6.9 million during the quarter, for a payout ratio of 80 per cent (85 per cent when normalized for timing of maintenance capital expenditures)

- Sales revenue for the three-month period increased to $106.6 million from $96.5 million for the same period last year and from $101.9 million for the fourth quarter of 2005

- Purchased additional foreign exchange call options contract that comes into effect after expiry on August 9, 2006 of previously purchased options - new contract expires on January 10, 2007, and protects over 50% of US dollar net cash flow exposure when the Canadian dollar is above US $0.85. For 2006, 100 per cent of US dollar net cash flow exposure is protected until August at US $0.813, and over 50 per cent is protected from August through year end at US $0.85

- Continued progress on evaluating the North Vancouver technology conversion and Brandon plant expansion projects

- Management expects business performance for the remainder of the year to support maintaining monthly distributions at $0.0729 per unit for all of 2006

"Our financial performance during the first quarter of 2006 was in line with expectations and we are confident that our competitive cost structure has Canexus well positioned for the balance of the year," said Gary Kubera, President and CEO.

"While a number of factors affected our operations during the quarter, sodium chlorate demand was stable, we experienced robust demand in Brazil and our energy costs were lower than anticipated," said Mr. Kubera. "Like all Canadian exporters we are dealing with the stronger Canadian dollar and are actively managing our US dollar exposure through the purchase of additional currency options and other efforts."



Fund's Statement of Distributable Cash

(Expressed in Thousands of Canadian Dollars, except per unit amounts)
(Unaudited)

For the Period
------------------------------
January 1, October 1,
2006 to 2005 to
March 31, December 31,
2006 2005
------------------------------

Canexus Limited Partnership
Net Income $ 10,522 $ 10,844
Provision for Income Taxes 659 (742)
Depreciation and Amortization 9,961 9,129
Interest Expense 2,445 2,167
------------------------------
EBITDA 23,587 21,398
Unrealized (Gains) Losses on Currency
Translation (217) 2,316
Change in Fair Value of Foreign Exchange
Options 3,794 2,897
Interest Expense (2,445) (2,167)
Maintenance Capital Expenditures (1,994) (5,298)
Cash Income Taxes (50) -
------------------------------
Distributable Cash from Canexus LP 22,675 19,146
------------------------------
------------------------------

Canexus Income Fund
Weighted average share of distributable
cash from Canexus LP 8,749 7,390
Trust Administration Expenses (16) (15)
------------------------------
Distributable Cash from
Canexus Income Fund 8,733 7,375
------------------------------
------------------------------

Cash Distributions paid or declared $ 6,944 $ 6,944
------------------------------
------------------------------
Payout Ratio 80% 94%

Payout Ratio Normalized(1) for
Timing of Maintenance Capital Expenditures 85% 86%
------------------------------

(1) Annual Maintenance Capital Expenditures of $13.7 million (2005 -
$14.2 million) prorated for 3 months


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: First quarter sales revenue for the North American sodium chlorate segment increased two per cent from the same period in 2005 to $49.5 million. Sales volumes and realized selling prices were relatively consistent in both quarters despite a significant strengthening of the Canadian dollar with the average $Cdn/$US foreign exchange rate increasing from US$0.81 for the first quarter of 2005 to US$0.87 for the first quarter of 2006. Gross margins declined from 31 per cent to 26 per cent as a result of increased electricity costs predominantly in Alberta and higher transportation costs driven by high oil prices. The first quarter saw continued progress in the study of several project options for expanding our low-cost Brandon plant to further our cost advantage in North America. With recent pulp mill closure announcements, any capacity addition will be made considering the overall market supply/demand balance.

- North America chlor-alkali: Despite an unscheduled seven day shutdown of the North Vancouver plant for maintenance, first quarter sales revenue for the North American chlor-alkali segment increased to $36.0 million in 2006 from $32.7 million in the same period of 2005. Improved chlor-alkali market prices consistent with a very strong global chlor-alkali market and an increase in sales volumes were responsible for revenue growth. Gross margins remained steady at 35 per cent year over year with strong sales prices offsetting increased natural gas costs. Progress continued on the opportunity to upgrade the technology of the North Vancouver plant in the first quarter. The anticipated cost reductions and growth potential from the conversion to membrane technology warrants advancing this study further. Canexus is committed to growing the long-term profitability potential of this business unit.

- South America: Sales revenue in Brazil increased to $21.1 million during the first quarter, compared to $15.2 million in the first quarter of last year. Stronger sodium chlorate demand from our primary customer and increased merchant market sales more than offset a small decline in chlor-alkali sales volumes. The pass-through nature of the contract with our primary customer contributes to higher sales revenues as costs increase, resulting in lower gross margin percentages. Gross margins decreased to 29 per cent from 34 per cent the prior year due primarily to an increase in electricity costs, about 80 per cent of which are passed through under our long-term fixed-margin contract. Aracruz Cellulose S.A. is currently expanding its Espirito Santo mill by 10 per cent through debottlenecking. This incremental capacity is expected to be operational by late 2007 and will increase its demand for Canexus products.

On April 3, 2006, Canexus purchased additional US dollar foreign exchange options that will come into effect after the expiry on August 9, 2006, of previously purchased US dollar options. Under the new options contract, Canexus is entitled to sell US $5 million per month and to acquire Canadian dollars at a price of US$0.85 per Canadian dollar for the period August 16, 2006 to January 10, 2007, at a cost of US$696,100, thereby protecting more than half of our US$9.5 million per month US dollar exposure. The previously purchased options contract, which commenced in August 2005, protects our entire US dollar exposure if the Canadian dollar strengthens above US$0.813, until August 9, 2006. Before the impact of hedging instruments, every US$0.01 increase in the Canadian/US dollar exchange rate decreases net income before taxes by $1.5 million Canadian per year. All long-term debt has been borrowed in US dollars to further mitigate foreign currency exposure. Realized gains on our foreign exchange options contract in the first quarter were $3.9 million offset by the mark-to-market change in fair value of foreign exchange options of $3.8 million. These amounts are included in other income (expense) in our results as we do not designate our foreign exchange options contracts or our US dollar denominated long-term debt as hedges for accounting purposes.

General and administrative costs for the three months ended March 31, 2006, were $6.9 million, up from $6.0 million in the first quarter of 2005. The increase was a result of incremental costs associated with Canexus LP becoming a stand-alone entity, including additional staffing levels and costs related to corporate governance, regulatory compliance and external financial reporting much of the annual cost of which is typically incurred in the first quarter. Severance costs were also incurred in the first quarter of 2006. Interest expenses were incurred on credit facility borrowings drawn to partially fund the acquisition of the Chemicals Business from Nexen Inc. During the first quarter of 2005, as part of Nexen, the Chemicals Business had no stand-alone borrowings. Other income (expense) includes the impact of our foreign currency management programs, as noted above, which commenced in the second half of 2005 to coincide with our initial public offering and other allowances.



Operating Results for the Three Month periods ended March 31, 2006 and
2005

Results for the three-month period ended March 31, 2006, are that of
Canexus LP as a stand-alone entity, while results for the same period in 2005
are for the Chemicals Business of Nexen, Canexus LP's predecessor.

(Expressed in Thousands of Canadian Dollars)
(Unaudited)
Three months ended
March 31, March 31,
2006 2005
------------------------------

Revenues
Sales 106,609 96,533
Interest on Loans to Affiliates - 495
------------------------------
106,609 97,028
------------------------------
Expenses
Cost of Goods Sold 75,060 65,074
Depreciation and Amortization 9,961 10,042
General and Administrative 6,942 6,042
Interest 2,445 -
------------------------------
94,408 81,158
------------------------------

Income before Other Income (Expense)
and Income Taxes 12,201 15,870

Other Income (Expense) (1,020) 195
------------------------------

Income before Income Taxes 11,181 16,065
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Provision for Income Taxes
Current 329 179
Future 330 641
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659 820
------------------------------

Net Income 10,522 15,245
------------------------------
------------------------------


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 1 p.m. MT on April 25, 2006, to discuss the results. Please call 416-644-3423 or 1-800-814-4861 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 May 2, 2006.

Non-GAAP measures

EBITDA 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 may not be comparable to similarly titled measures used by other issuers.

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.

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, 2005, 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.

Contact Information

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