Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

October 20, 2006 23:59 ET

Canexus Income Fund Announces Third Quarter Results

Pricing supports solid Q3 results; significant progress on Brandon expansion

CALGARY--(CCNMatthews - Oct. 20) - Canexus Income Fund (TSX: CUS.UN) (the "Fund") today announced its results for the third quarter ended September 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 83 per cent (85 per cent when normalized for timing of
maintenance capital expenditures)
- Work is progressing on initial stages of the Brandon plant expansion
project that will boost plant capacity by approximately 12 per cent
when completed early in Q1 2008. Project is on schedule and on budget
with over 40% of total estimated project costs committed
- North America sodium chlorate prices up 2% from the second quarter
despite stronger Canadian dollar, with market fundamentals continuing
to support favourable price dynamics. Fourth quarter price increases
have been announced for implementation as contracts allow
- North America chlor-alkali business continues to operate at full
capacity with realized prices holding firm. The recent facility
closure announcement by The Dow Chemical Co. reduces chlor-alkali
capacity in Canada by approximately 42%, making Canexus the largest
producer, and one of only two chlor-alkali producers, in the Pacific
Northwest region


"Results from the third quarter were outstanding, moving us solidly toward our performance objectives for 2006," said Gary Kubera, President and CEO. "Favourable supply-demand dynamics are supporting stronger prices in our North American operations and we have demonstrated our ability to offset Canadian dollar strength through pricing and aggressive cost management. This will continue to be our primary strategy for managing foreign exchange."

"We are pleased that the expansion of our world-class Brandon facility is progressing on schedule and on budget. With recent and pending sodium chlorate capacity reductions by other suppliers reducing continental supply by more than five per cent, and the healthier North American pulp industry, this $50-million project will enhance our low-cost competitive advantage," said Mr. Kubera. "Strong sales at our North Vancouver chlor-alkali facility and in Brazil also made positive contributions to our results."



Fund's Statement of Distributable Cash

-----------------------------------------

(Expressed in Thousands of
Canadian Dollars, except per
unit amounts) Third quarter 2006 Year-to-date 2006
(Unaudited) ended September 30 ended September 30
-----------------------------------------

Canexus Limited Partnership
Net Income $ 11,043 $ 43,349
Provision for Income Taxes 592 2,124
Depreciation and Amortization 10,001 29,904
Interest Expense 2,807 7,886
-----------------------------------------
EBITDA 24,443 83,263
Unrealized Losses(Gains)
on Currency Translation 10 (6,463)
Change in Fair Value of
Foreign Exchange Options, net 2,732 6,150
Change in Fair Value of
Electricity Contracts 313 313
Interest Expense (2,807) (7,886)
Maintenance Capital Expenditures (2,908) (8,284)
Cash Income Taxes (75) (240)
-----------------------------------------
Distributable Cash within
Canexus LP $ 21,708 $ 66,853
-----------------------------------------
-----------------------------------------

Canexus Income Fund
Weighted average share of
Canexus LP's distributable cash 8,376 25,795
Trust Administration Expenses (50) (96)
-----------------------------------------
Distributable Cash available
to Canexus Income Fund $ 8,326 $ 25,699
-----------------------------------------
-----------------------------------------

Cash Distributions paid or
declared $ 6,944 $ 20,831
-----------------------------------------
-----------------------------------------
Payout Ratio 83% 81%

Payout Ratio Normalized(1) for
Timing of Maintenance Capital
Expenditures 85% 84%
-----------------------------------------

(1) Annual Maintenance Capital Expenditures of $13.7 million prorated for
the period


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
increased 9% to $47.8 million from the second quarter of 2006 and
decreased 3% from the third quarter of 2005. Sales volumes
increased by 7% or 5,900 tonnes from the second quarter of 2006 and
were down 4% or 4,400 tonnes from the third quarter of 2005 (which
included volumes from the Nexen Amherstburg plant, closed at the
end of July 2005). New contract volumes and resumed shipments to a
customer mill that had been on strike positively affected third
quarter volumes and will continue into the fourth quarter.
- Realized selling prices increased 2% over the second quarter of
2006 as we were able to increase prices as contracts allowed.
Realized selling prices declined 2% from the third quarter of 2005
due to the strengthening of the Canadian dollar relative to the US
dollar from US$0.82 to US$0.89 for the third quarter of 2006. Price
increases have been announced for implementation in the fourth
quarter as contracts allow which will further mitigate the stronger
Canadian dollar.
- Gross margins increased to 29% from 26% in the second quarter and
are up slightly from 28% in the third quarter of 2005.

- North America chlor-alkali:
- Sales revenue of $33.5 million for the North American chlor-alkali
business unit was consistent with the second quarter of 2006 as
well as the third quarter of 2005. Gross margins are essentially
flat from the second quarter of 2006 and benefited from lower fixed
costs in the quarter, lower natural gas prices and lower
distribution costs. Gross margins also improved significantly from
the same quarter last year (2006-35%; 2005-30%) as the third
quarter of 2005 was impacted by a nine-day shut down for scheduled
maintenance. Higher sales volumes in the third quarter of 2006
versus 2005 were offset by lower realized selling prices as a
result of the significant strengthening of the Canadian dollar as
noted above.
- Evaluation of anticipated cost reductions and growth potential from
the technology conversion opportunity at North Vancouver continued
during the third quarter. With an estimated cost of approximately
$130 million, the project will be considered for approval in early
2007. The pending closure of The Dow Chemical Co. chlor-alkali
facility in Fort Saskatchewan, Alberta, will reduce Canadian supply
by approximately 42% or 435,000 metric electro-chemical units
(MECUs) and is expected to support caustic soda prices. Canexus is
also evaluating investment options to improve existing North
Vancouver infrastructure to allow it to effectively import caustic
soda to supplement existing production and better serve our
existing customers that will be affected by the Dow facility
closure.

- South America:
- Sales revenue in Brazil increased from $16.7 million in the third
quarter of 2005 to $19.5 million due to higher sales volumes and
energy costs. 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 were consistent with the third quarter of 2005 and down
from the second quarter of 2006 due primarily to higher maintenance
costs from a scheduled maintenance turnaround in the quarter, about
80% of which are passed through under our long-term fixed-margin
contract.

Financial Updates

- Foreign exchange and Long-term debt:
- US-dollar foreign exchange options entitle Canexus to sell
US$5million 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 thereby protecting more than half of our
US$9.5 million per month US-dollar exposure. We have also been
successful in purchasing materials and equipment for the Brandon
expansion project in US dollars amounting to US$5.7 million that
will be paid out in 2007. Before the impact of hedging instruments,
every US$0.01 change in the Canadian/US dollar exchange rate
inversely affects net income before taxes by $1.5 million Canadian
per year.
- Realized gains on our foreign exchange options contracts were
$2.4 million. We recorded losses on the mark-to-market change in
fair value of foreign exchange options contracts of $2.9 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. We have recorded $7.2 million
of unrealized currency translation gains on our US-dollar
denominated long-term debt this year.

- Capital expenditures: Our maintenance capital program spending in the
third quarter was $2.9 million ($8.3 million year to date) and we
continue to anticipate full year expenditures of $13.7 million.
Spending on our Brandon expansion project in the quarter was
$1.8 million. We capitalized $0.3 million of project spending on our
North Vancouver technology conversion project in the quarter.

- Expenses and Other Income: General and administrative costs were up
slightly from the second quarter of 2006 and in line with
expectations. Interest expenses incurred on credit facility borrowings
were higher in the third quarter of 2006 as compared to the second
quarter due to higher average borrowings outstanding in the quarter
and higher borrowing costs. Other income includes the impact of our
foreign currency management programs. In addition we recorded a
mark-to-market loss of $0.3 million on electricity forward rate swap
contracts entered into to protect our exposure to deregulated
electricity prices in Alberta for 2007. We have entered into
electricity forward rate swap contracts covering over 70% of our 2007
electricity requirements for our Bruderheim, Alberta plant. In Brazil,
due to the planned maintenance outage, we were able to purchase
electricity in excess of our requirements at our contracted rates and
resell it into the spot power market for a gain of $0.5 million.


Operating Results for the Three-Month periods ended September 30, 2006

and 2005

Results for the three-month period ended September 30, 2006, are that of Canexus LP as a stand-alone entity, while results for the same period in 2005 are the combined results for Canexus LP and the Chemicals Business of Nexen Inc., Canexus LP's predecessor.



(Expressed in Thousands of Canadian Dollars)
(Unaudited) Three months ended
Sept 30, 2006 Sept 30, 2005
-------------------------------------------------------------------------

Revenues
Sales $100,805 $ 99,524

Expenses
Cost of Goods Sold 70,413 71,779
Depreciation and Amortization 10,001 9,265
General and Administrative 6,236 6,821
Interest 2,807 1,075
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89,457 88,940
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Income before Other Income
and Income Taxes 11,348 10,584

Other Income 287 14,155
----------------------------------------

Income before Income Taxes 11,635 24,739
----------------------------------------

Provision for Income Taxes
Current 75 593
Future 517 344
----------------------------------------
592 937
----------------------------------------

Net Income $ 11,043 $ 23,802
----------------------------------------


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 20, 2006, to discuss the results. Please call 416-644-3414 or 1-800-814-4941 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 October 27, 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", "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