Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

February 09, 2006 23:59 ET

Canexus Income Fund Announces Fourth Quarter and 2005 Results

CALGARY--(CCNMatthews - Feb. 9) - Canexus Income Fund (TSX: CUS.UN) (the "Fund") today announced its results for the fourth quarter and period from August 18 to December 31, 2005.

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 LP, of which the Fund indirectly owns 38.6 per cent.

Highlights:

- Declared total distributions of $10.3 million ($0.3252 per unit) for a payout ratio of 91 per cent (85 per cent when normalized for timing of maintenance capital expenditures)

- Gross margins increased to 31 per cent from 28 per cent in 2004, despite the strengthening Canadian dollar and higher energy costs, as a result of a 24 per cent increase in production from our low-cost Brandon plant and a strong chlor-alkali market

- Foreign exchange options contract generated realized gains of $3.0 million and unrealized gains of $1.3 million

- Board approval received for broadening current study of expansion options for Brandon plant and for detailed engineering phase of project to upgrade North Vancouver plant to a lower-cost technology



Fund's Statements of Distributable Cash

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

For the Period
-------------------------------------
Aug 18 - Oct 1 - Aug 18 -
Sept 30, Dec 31, Dec 31,
2005 2005 2005
Canexus Limited Partnership
Net Income $ 19,362 $ 10,844 $ 30,206
Provision for Income Taxes 629 (742) (113)
Depreciation and Amortization 4,353 9,129 13,482
Interest Expense 1,075 2,167 3,242
-------------------------------------
EBITDA 25,419 21,398 46,817
Unrealized (Gains) Losses on
Currency Translation (7,345) 2,316 (5,029)
Change in Fair Value of Foreign
Exchange Options (4,174) 2,897 (1,277)
Interest Expense (1,075) (2,167) (3,242)
Maintenance Capital Expenditures (2,029) (5,298) (7,327)
-------------------------------------
Distributable Cash from Canexus LP 10,796 19,146 29,942
-------------------------------------
-------------------------------------
Canexus Income Fund
Weighted average share of
distributable cash from Canexus LP 4,018 7,390 11,408
Trust Administration Expenses (85) (15) (100)
-------------------------------------
Distributable Cash from Canexus
Income Fund 3,933 7,375 11,308
-------------------------------------
-------------------------------------
Cash Distributions paid or
declared $ 3,381 $ 6,944 $ 10,325
-------------------------------------
-------------------------------------
Payout Ratio 86% 94% 91%

Payout Ratio Normalized(1) for
Timing of Maintenance Capital
Expenditures 83% 86% 85%
-------------------------------------

(1) $14.0 million divided by four quarters is $3.5 million per quarter


"The transition to a public entity was a significant event in 2005 for Canexus," said Gary Kubera, President and CEO. "We met or exceeded our key targets for the year and now with the transition behind us, are looking to the year ahead with optimism."

"Continued high and volatile energy prices in much of the North American power market reinforce our strong competitive position, which is based largely on stable, low-cost hydroelectric power sources. We have experienced steady progress in improving prices for our products and we expect market conditions to remain favourable in 2006," said Mr. Kubera.

"Based on our 2006 plan, we expect to maintain our current distributions of $27.8 million, or $0.8748 per unit, in 2006. We further expect our payout ratio will average 91 per cent during the year, assuming a Canadian dollar exchange rate of $0.85 US for the last five months of 2006."

"We are excited by our Board's approval to continue to support our plans to further develop our plants and enhance our competitive position. We have a number of options for further developing Brandon as the lowest cost producer of sodium chlorate in North America, at capital costs well below green-field expansion. In addition, at our chlor-alkali facility in North Vancouver, we will be preparing final estimates for converting to membrane technology that will reduce costs and increase capacity if implemented."

Fourth Quarter Highlights:

- Declared total distributions of $6.9 million ($0.2187 per unit), for a payout ratio of 94 per cent (86 per cent when normalized for timing of maintenance capital expenditures)

- Successful execution of maintenance capital program heavily weighted to the fourth and third quarters will continue to contribute to high reliability and operating rates

"During the last three months of 2005, we continued to focus on improving our cost position and production reliability," said Mr. Kubera. "Total maintenance capital expenditures for 2005 were $14.2 million and in line with expectations, with the same level of maintenance capital spending planned for 2006. In addition, we have identified $3.0 million of margin-enhancing continuous improvement projects for 2006 and we also expect to spend a further $4.0 million on IT and other related infrastructure capital as we transition away from Nexen. Transition funds of $11 million were paid to Canexus LP on closing of the IPO and were used to temporarily reduce our long-term debt."

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: Gross margins for the North American sodium chlorate business increased two per cent over 2004 despite the strengthening Canadian dollar and escalating energy costs. Improved margins resulted from a 24 per cent increase in production volumes at our low-cost Brandon plant, reflecting the expansion of the plant completed at the end of 2004. Total shipments of sodium chlorate decreased by approximately 5 per cent due to reduced operating rates at Bruderheim because of high electricity rates late in 2005 and the closure of the Amherstburg plant, which was not acquired by Canexus LP. Sales revenue of $192.9 million for this business unit accounted for 49 per cent of 2005 total sales revenues for Canexus LP. The board of directors has approved broadening the current study of expansion options for Brandon, which collectively could increase annual capacity by 70,000 tonnes from the current 265,000 tonnes over five years. The study will examine a phased approach to expansion, with the first phase likely to come on stream in the second half of 2007. Expansion efforts will be flexible to market conditions and supported by low-cost hydroelectricity and a strong product distribution network.

- North America chlor-alkali: A strong global chlor-alkali market and high energy costs supported improved market prices and helped increase the gross margin for this business unit to 34 per cent, compared to 27 per cent in 2004. Our margins benefited despite higher energy costs as a result of our low-cost hydroelectric competitive advantage at North Vancouver. These stronger sales prices were slightly offset by a production volume decrease of six per cent from a successful nine-day scheduled maintenance shutdown at the North Vancouver plant in September and higher energy costs. Chlor-alkali sales revenue for the year increased by 23 per cent to $136.7 million, representing approximately 34 per cent of total sales revenues. The engineering phase of a project to convert our North Vancouver plant to membrane technology has been approved by the board of directors. Conversion would significantly reduce costs, increase capacity and improve product quality. This phase will develop detailed cost estimates for a final project plan that is expected to be considered by the board later this year. If approved, conversion would be completed in late 2008.

- South America: Sales revenue for 2005 increased by 15 per cent to $67.8 million, representing 17 per cent of total sales revenue, based on stronger demand for both sodium chlorate and chlor-alkali from primary customer Aracruz and increased merchant market sales. Gross margin decreased to 32 per cent in 2005 from 36 per cent in 2004 primarily due to higher electricity costs, about 80 per cent of which are passed through to our major customer under our long-term fixed-margin contract. We continue to pursue business development opportunities in the fast-growing South America market, which has significant access to low-cost renewable wood fibre and a number of planned pulp production projects.

The strength of the Canadian dollar throughout the fourth quarter negatively impacted realized sales prices and reduced our gross margin in the quarter to 29 per cent. Offsetting this in the fourth quarter were realized gains of $1.9 million ($3.0 million for 2005) on our foreign exchange options, which are included in other income. In December, we commenced purchasing natural gas used in the evaporation process in our North Vancouver plant in U.S. dollars, further reducing our exposure to the U.S. dollar. This allowed us to unwind US$1.5 million of our US$11.0 million per month foreign exchange option program in January, realizing gains of $770,000. Our entire U.S. dollar net cash stream continues to be protected from the Canadian dollar strengthening above US$0.813 until August 2006.

The operating results for the year ended December 31, 2005 reflect the activities of the Chemicals Business of Nexen Inc. from January 1, 2005 to August 17, 2005, not all of the operations of which were acquired by Canexus LP, combined with the activities of Canexus LP for the period August 18, 2005 to December 31, 2005. The comparative figures for 2004 represent the activities of the Chemicals Business of Nexen Inc. making meaningful comparisons of Net Income between periods difficult. The closure of the Amherstburg plant by Nexen in 2005, which was not acquired by Canexus LP, resulted in a $12.1 million impairment charge to depreciation and amortization. In addition, operating results for 2005 are negatively impacted by the operating losses of the Amherstburg facility of $2.1 million ($2.5 million in 2004). Also, 2004 results include $10.6 million ($700,000 in 2005) of interest income on loans to affiliates, which loans were terminated prior to the acquisition of the Chemicals Business from Nexen.

The increase in general and administrative costs over 2004 result from incremental costs associated with Canexus becoming a stand-alone entity and are in line with expectations.

Other income (expenses) includes unrealized currency translation gains on our U.S. dollar denominated debt of $6.9 million and both realized gains of $3.0 million and the mark-to-market change in fair value of foreign exchange options of $1.3 million. Our long-term debt is entirely denominated in U.S. dollars, which acts as an economic hedge of our investment in Brazil and our U.S. sales contracts, with about two-thirds of North American consumption of sodium chlorate being in the U.S.

The increase in future provision for income taxes results from an increase in temporary differences related to Brazil.




Operating Results for the Three Months and Twelve Months ended

December 31, 2005 and December 31, 2004

The combined results for the year reflect the activities of the Chemicals Business from January 1, 2005, to August 17, 2005, and the activities of Canexus LP for the period August 18, 2005, to December 31, 2005. The 2004 comparative figures represent the activities of the Chemicals Business.

--------------------------------------------------
Three Months Twelve Months
------------ -------------

2005
Combined
operating
results
2004 Nexen Inc.- 2004
Nexen Inc.- Chemicals Nexen Inc.-
2005 Chemicals Business and Chemicals
Canexus LP Business Canexus LP Business
--------------------------------------------------
(in thousands of dollars)
(unaudited)
Revenues
Sales $ 101,904 $ 94,573 $ 397,423 $ 377,933
Interest on Loans to
Affiliates 2,656 696 10,587
--------------------------------------------------
101,904 97,229 398,119 388,520
--------------------------------------------------
Expenses
Cost of Goods Sold 71,948 67,755 275,211 273,248
Depreciation and
Amortization 9,129 8,876 50,739 37,100
General and
Administrative 6,606 6,367 26,491 24,046
Interest 2,167 - 3,242 -
--------------------------------------------------
89,850 82,998 355,683 334,394
--------------------------------------------------
Income before Other
Income (Expenses)
and Income Taxes 12,054 14,231 42,436 54,126

Other Income (Expenses) (1,952) 4,900 14,915 2,967
--------------------------------------------------
Income before Income
Taxes 10,102 19,131 57,351 57,093
--------------------------------------------------
Provision for Income
Taxes
Current (808) (785) (50) 270
Future 66 (1,483) 3,056 (339)
--------------------------------------------------
(742) (2,268) 3,006 (69)
--------------------------------------------------
Net Income $ 10,844 $ 21,399 $ 54,345 $ 57,162
--------------------------------------------------
--------------------------------------------------
/T/

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 4 p.m. ET on February 9, 2006, to discuss the results. Please call 416-644-3414 or 1-800-814-4890 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 February 16, 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 may contain forward-looking statements relating to expected future events and financial and operating results of the Fund 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 prospectus dated August 10, 2005 filed with the Canadian securities regulatory authorities. The Fund believes the expectations reflected in those 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 disclaims 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) 699-6700
    or
    Richard McLellan
    CFO
    Canexus Limited
    (403) 699-6700
    Website: www.canexus.ca