Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

July 12, 2006 23:59 ET

Canexus Income Fund Announces Second Quarter Results

CALGARY--(CCNMatthews - July 12) - Canexus Income Fund (TSX: CUS.UN) (the "Fund") today announced its results for the second quarter ended June 30, 2006. 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:

- Cash distributions of $6.9 million declared during the quarter, for a payout ratio of 80 per cent (81 per cent when normalized for timing of maintenance capital expenditures)

- Board approved expansion of Brandon will boost plant capacity by approximately 12 per cent commencing in 2008, further leverage our competitive advantage and generate incremental cash flow per unit

- Continued strong gross margins across all business units despite the strengthening Canadian dollar

- Price increases implemented for North America sodium chlorate for third quarter

"Results for the second quarter continued to meet our expectations. We've seen some volume reductions in our North American sodium chlorate business which were anticipated for the second quarter, and we continue to be on track for the year as a whole in meeting distributions at the payout ratio guidance provided earlier in the year," said Gary Kubera, President and CEO.

"The approved expansion of our world-class Brandon facility allows us to further develop our low-cost competitive advantage," said Mr. Kubera. "This $50-million project will come on stream in early 2008 and be immediately accretive to our cash flow per unit while further enhancing our market leadership."




Fund's Statement of Distributable Cash

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

For the Period
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Second Quarter 2006 Year-to-date 2006
ended June 30 ended June 30
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Canexus Limited Partnership
Net Income $ 21,784 $ 32,306
Provision for Income Taxes 873 1,532
Depreciation and Amortization 9,942 19,903
Interest Expense 2,634 5,079
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EBITDA 35,233 58,820
Unrealized Gains on Currency
Translation (6,256) (6,473)
Change in Fair Value of Foreign
Exchange Options (376) 3,418
Interest Expense (2,634) (5,079)
Maintenance Capital Expenditures (3,382) (5,376)
Cash Income Taxes (115) (165)
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Distributable Cash within
Canexus LP 22,470 45,145
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Canexus Income Fund
Weighted average share of
Canexus LP's distributable cash 8,670 17,419
Trust Administration Expenses (30) (46)
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Distributable Cash available to
Canexus Income Fund 8,640 17,373
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Cash Distributions paid or
declared $ 6,944 $ 13,887
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Payout Ratio 80% 80%

Payout Ratio Normalized(1) for
Timing of Maintenance Capital
Expenditures 81% 83%
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(1) Annual Maintenance Capital Expenditures of $13.7 million prorated for
the period


Brandon Expansion Project

After evaluating expansion alternatives, the Canexus Board approved a $50-million project to increase production capacity of the Brandon facility, the world's largest sodium chlorate plant. Highlights of the project include:

- Installation of a new chlorate cell line that improves both energy and production efficiency, also providing for future, cost-effective capacity increases, if market justified

- Annual production capacity of plant will increase by 33,000 tonnes to 296,000 tonnes, furthering Canexus' cost leadership position in North America

- Completion scheduled for January 2008 and project to be financed with existing bank credit facilities

- Based on current business conditions, it is estimated that net annual distributable cash could increase by $0.065 per unit once the plant is on stream, a seven per cent increase over current annual distributions of Canexus Income Fund

- We will continue to assess North American sodium chlorate market conditions as the Brandon expansion project proceeds, and are committed to rationalizing higher cost excess capacity. North American pulp supply has tightened over the past 18 months as a result of mill closures, supporting pulp price increases, with Northern Bleached Softwood Kraft (NBSK) pulp prices now at their highest level since early 1996. Although we have seen some impact to our North American sodium chlorate volumes as a result of mill closures, our North American plant system continues to run at operating rates above 91 per cent and we have been able to implement price increases in early 2006 and again commencing in the third quarter.

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: Sales revenue for the North American sodium chlorate business unit decreased 6% from $47.0 million in the second quarter of 2005 to $44.0 million in 2006. Sales volumes were down 8% or 7,300 tonnes from the first quarter of 2006 (down 4% or 3,400 tonnes from the first quarter of 2005), resulting from two mill closures and a strike at a customer site. Lower volumes affecting the second quarter are expected to be representative for the balance of 2006. Realized selling prices were 4% lower quarter over quarter due to the significant strengthening of the Canadian dollar with the average $Cdn/$US foreign exchange rate increasing from US$0.81 for the second quarter of 2005 to US$0.88 for the second quarter of 2006, offset to some extent by price increases. Gross margins were flat between quarters at 26% reflecting our lower fixed cost structure in 2006 resulting from Nexen's closure of the Amherstburg, Ontario, facility in July 2005. We have successfully implemented price increases for sodium chlorate for the third quarter as contracts allow.

- North America chlor-alkali: Sales revenue for the North American chlor-alkali business unit decreased 5% from $35.4 million in the second quarter of 2005 to $33.8 million in 2006 due to the strengthening Canadian dollar which carried through to lower gross margins quarter over quarter (2005-41%; 2006-36%). Evaluation of anticipated cost reductions and growth potential from the technology conversion opportunity at North Vancouver continued during the second quarter. We expect to complete our evaluation before the end of 2006.

- South America: Sales revenue in Brazil increased from $17.1 million for the second quarter of 2005 to $19.3 million for the comparable quarter in 2006. The pass-through nature of our contract with our major customer contributes to higher sales revenues as costs increase, resulting in lower gross margin percentages. Gross margin percentages decreased to 31% in the second quarter of 2006 from 38% in 2005 due primarily to higher electricity costs, about 80% of which are passed through under our long-term fixed-margin contract. Aracruz Celulose S.A.'s de-bottleneck expansion at its Espirito Santo mill remains on track for completion in mid-2007, which will increase their sodium chlorate requirements by up to 4,000 tonnes per year.

Financial Updates

- Foreign exchange and Long-term debt:

- During the second quarter, Canexus purchased additional US-dollar foreign exchange options that will come into effect after the August 9, 2006 expiry 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 the entire US-dollar exposure if the Canadian dollar is 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.

- Realized gains on our foreign exchange options contract in the second quarter were $2.8 million. We recorded gains on the mark-to-market change in fair value of foreign exchange options contracts of $0.4 million. These amounts are included in other income 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.

- All long-term debt has been borrowed in US dollars to further mitigate foreign currency exposure. For the three months ended June 30, 2006, we recorded $7.6 million of unrealized currency translation gains on our US-dollar denominated long-term debt. Our debt to EBITDA ratio based on the last twelve months operations is under 1.5 to 1. We plan to borrow up to an additional $50.0 million dollars (in equivalent US dollars) over the next 18 months to finance the expansion of our Brandon facility.

- Capital expenditures: Our maintenance capital program spending in the second quarter was $3.4 million ($2.0 million in the first quarter) and we continue to anticipate full year expenditures of $13.7 million. Work continued on continuous improvement projects incurring $0.3 million of capital expenditures in the quarter. IT/infrastructure spending related to our transition from Nexen Inc. was $2.5 million in the quarter, the funding for which was provided as part of the $11.0 million set up amount payment received from Nexen at closing of our August 18, 2005, initial public offering.

- Expenses: General and administrative costs for the three months ended June 30, 2006, were down from the first quarter of 2006 due to higher public company expenditures in the first quarter and severance costs, and were down from the second quarter of 2005 during which expenditures were being incurred related to Nexen's disposition of the Chemicals Business (Canexus LP's predecessor). Interest expenses incurred on credit facility borrowings were higher in the second quarter due to higher borrowing costs. During the second quarter of 2005, as part of Nexen, the Chemicals Business had no stand-alone borrowings. Depreciation and amortization expense for the three months ended June 30, 2005, includes a $12.1 million impairment charge related to the Amherstburg production facility closed by Nexen. Other income includes the impact of our foreign currency management programs, as noted above.



Operating Results for the Three-Month periods ended June 30, 2006 and
2005

Results for the three-month period ended June 30, 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
June 30, 2006 June 30, 2005
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Revenues
Sales $ 97,055 $ 99,462
Interest on Loans to Affiliates - 201
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97,055 99,663
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Expenses
Cost of Goods Sold 67,230 66,410
Depreciation and Amortization 9,942 22,303
General and Administrative 6,018 7,022
Interest 2,634 -
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85,824 95,735
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Income before Other Income and
Income Taxes 11,231 3,928

Other Income 11,426 2,517
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Income before Income Taxes 22,657 6,445
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Provision for Income Taxes
Current 115 (14)
Future 758 2,005
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873 1,991
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Net Income $ 21,784 $ 4,454
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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 July 12, 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 July 19, 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.

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", http://ecmissql:9090/editor/blockedit.HTMNo."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.

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

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