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Press release from Marketwire

Canexus Income Fund Announces Second Quarter Results

Thursday, July 29, 2010

Canexus Income Fund Announces Second Quarter Results19:25 EDT Thursday, July 29, 2010 CALGARY, ALBERTA--(Marketwire - July 29, 2010) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the second quarter ended June 30, 2010. Unless otherwise noted, the Fund is reporting the 100 percent results of Canexus Limited Partnership ("Canexus LP"), of which the Fund indirectly owns 36.2 percent. Highlights: -- Startup of four growth projects during the quarter, including startup at the end of June of the Technology Conversion Project (TCP) at North Vancouver chlor-alkali facility which is expected to contribute an estimated $35-$43 million in incremental annual operating cash flow as production increases to planned levels -- Completed projects include the build-in of the second major rail line into our North American Terminal Operations (NATO) site at Bruderheim, Alberta, and the 4,400MT sodium chlorate expansion and hydrogen project in Brazil; the hydrochloric acid projects at North Vancouver and Brazil are scheduled for startup in August -- North America chlor-alkali results reflect TCP transition and are expected to improve as the year progresses; markets for chlorine and caustic soda are strengthening with price increases announced for the third quarter; negative gross margin in the second quarter of $4.4 million resulted from having no production for two months in the quarter and included $1.6 million of costs incurred to source product for our customers and $2.6 million of planned maintenance expenses -- North America sodium chlorate is beginning to benefit from improved pulp markets; moderate delivered price increases during the second quarter were more than offset by the stronger Canadian dollar and slightly lower sales volumes due to maintenance outages at customers. This combined with lower production volumes resulted in a lower gross margin percent compared to Q1/2010; further price increases will take effect in the third quarter and Canexus plants are expected to operate at capacity for the remainder of 2010 -- South America business unit results were lower than both Q1/2010 and the same period last year as a result of a planned maintenance shutdown and process difficulties experienced by our major customer that have since been rectified; maximum operating rates for both chlorate and chlor- alkali are expected for the balance of 2010 and into 2011; a $7.3 million gain was recorded from the settlement of an outstanding contract matter relating to hydrogen supply -- Canadian dollar foreign exchange call option contracts were acquired to protect US$5 million per month at US$0.9524 from July 1 to September 30, 2010 -- Fund declared cash distributions of $5.0 million during the second quarter, at a payout ratio of 182 percent; our payout ratio for the first six months of 116 percent is consistent with prior guidance (inclusive of other gains realized in the first half of 2010); with the delay in startup of TCP, our full-year payout ratio is expected to exceed our prior guidance of 90 percent and could range between 95 and 125 percent depending on how quickly we achieve planned production rates at TCP. "After considering the delay in startup of TCP, our results for the second quarter are generally in line with our expectations for the first half of 2010. The startup of key strategic growth projects has Canexus set to begin delivering the financial benefits. As we ramp up our expanded operations, we see favorable market conditions for our business units continuing into the second half of the year and 2011. For 2011, we currently believe our operating cash flow can support current distributions at an after-tax payout ratio of between 65 and 75 percent," said Gary Kubera, President and CEO."With TCP at North Vancouver accounting for the majority of expected operating cash flow gains, its full contribution will likely not be seen until later in the year as startup activities are completed. Our operating results and timetable were affected by the TCP transition being extended due to delays in completion of construction and other design improvements required prior to startup. We are currently operating at about 70 percent of design capacity and stabilizing following a recent shutdown to replace a critical valve. Not unusual in the startup of a large brownfield project such as TCP, we have identified three bottlenecks that are currently preventing us from operating at full rates. These bottlenecks are currently expected to involve minor (both in terms of downtime and cost) modifications and will be dealt with in the next few months. The modifications will address brine flow stability, cell liquor flow affecting one of the seven electrolytic circuits and an electrical buss limitation. We also plan to startup our hydrochloric acid expansion project in August.""North American chlor-alkali markets showed modest improvement during the second quarter, with increased industry operating rates and MECU prices compared to the previous quarter. Chlorine demand is increasing with water treatment season and caustic soda prices are recovering. With chlor-alkali markets strengthening and price increases expected in the third quarter, we look forward to the reduced costs and additional cash flow expected from TCP following startup.""Our North American sodium chlorate business continues to benefit from robust pulp markets. Global pulp inventories remained at relatively low levels in the second quarter and market prices have reached record levels following six consecutive quarters of increases. Increased supply and slightly softer demand indicates pulp markets are moving from extremely tight to more balanced conditions. Previously idled Canadian pulp capacity has been restarted and additional restarts are expected during the third quarter. Strong demand for sodium chlorate resulted in a 16 percent increase in North American industry shipment volumes compared to the second quarter last year. While modest price increases were implemented during the recent quarter and further increases are expected, realized prices were negatively affected by the stronger Canadian dollar. We expect to operate our chlorate plants at capacity for the remainder of this year.""In South America, we reached a number of growth milestones at our Brazil facility in the second quarter and continue to have a positive outlook. Along with the successful startup of the sodium chlorate expansion, we completed the project to sell excess hydrogen. Our hydrochloric acid project is expected to startup in the next few weeks supported by a 10-year take-or-pay contract and enabling us to optimize chlor-alkali capacity utilization. Together, these projects will add approximately $5 million to our annual cash flow. Our second quarter chlorate volumes reflected temporary process difficulties at our major customer. Strong demand for Brazilian pulp will support high chlorate consumption by our major customer and sales to other customers, resulting in maximum operating rates for the rest of 2010.""At our NATO business near Bruderheim, we have completed the build-in of the second major rail line into our site that enhances both service and value for our customers. We have been successful in broadening our prospective customer base and continue to advance plans for the next development phase of the site that could be operational in 2012," said Mr. Kubera. Statement of Distributable Cash Three Months Ended Six Months Ended June 30 June 30 CAD thousands, except as noted 2010 2009 2010 2009 ---------------------------------------------------------------------------- Canexus LP Net Income (Loss) (18,251) 17,132 (2,110) 22,881 Realized Foreign Exchange (Gains) Losses on Cash (131) 1,137 440 1,173 Charges and Credits to Income Not Involving Cash Provision for (Recovery of) Future Income Taxes 337 2,921 (517) 4,914 Amortization 12,881 11,644 24,424 23,387 Unrealized (Gains) Losses on Currency Translation 16,705 (22,943) 9,361 (17,819) Change in Fair Value of Foreign Exchange Options 1,159 (1,559) 1,746 4,390 Change in Fair Value of Foreign Exchange Forward - 1,880 - 3,796 Change in Fair Value of Interest Rate Swaps 561 (1,493) 1,071 (984) Reversal of Long-term accrual for TCP Severance Costs - - - (981) Impairment of Sodium Chlorate Assets - 17,227 - 17,227 Other 738 987 1,804 2,616 ---------------------------------------------------------------------------- Contributions to / Payments for Defined Benefit Plans (664) (1,228) (1,234) (1,229) Interest Income on Restricted Investments - (66) (1) (229) Expenditures on Asset Retirement Obligations (127) (50) (152) (83) Purchase of Foreign Exchange Options (451) - (451) - Changes in Non-Cash Operating Working Capital and Due from/to Affiliates, Net and Interest Payable to Affiliates 6,284 5,116 8,700 368 ---------------------------------------------------------------------------- Cash From Operating Activities 19,041 30,705 43,081 59,427 Changes in Non-Cash Operating Working Capital and Due from/to Affiliates, Net and Interest Payable to Affiliates (6,284) (5,116) (8,700) (368) Maintenance Capital Expenditures (4,448) (4,000) (6,888) (7,111) Amortization of the Purchase Cost of Foreign Exchange Options (741) (1,254) (1,798) (2,507) Realized Foreign Exchange Gains (Losses) on Cash 131 (1,137) (440) (1,173) TCP Severance Costs Paid (576) - (576) - Operating Non-Cash Items 847 291 203 (1,304) ---------------------------------------------------------------------------- Distributable Cash within Canexus LP (1) 7,970 19,489 24,882 46,964 ---------------------------------------------------------------------------- Canexus Income Fund Share of Canexus LP's Distributable Cash 2,846 6,817 8,669 16,665 Trust Administration Expenses (84) (75) (259) (186) ---------------------------------------------------------------------------- Distributable Cash available to Canexus Income Fund (1) 2,762 6,742 8,410 16,479 ---------------------------------------------------------------------------- Distributions Declared 5,021 4,541 9,725 9,041 ---------------------------------------------------------------------------- Payout Ratio (1) 182% 67% 116% 55% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Note: (1) See comments concerning non-GAAP Measures at end of release. Operations Highlights Canexus has a total of five manufacturing plants - four in Canada and one in South America - and a hydrocarbon transloading terminal in Alberta, organized into three business units. Highlights for each unit are as follows: -- North America Sodium Chlorate: -- Second quarter sales revenue for this segment decreased three percent to $49.5 million from $51.1 million for same period in 2009 due to an 18 percent decline in realized selling prices, partially offset by a 16 percent increase in sales volumes. Delivered selling prices to US customers decreased approximately seven percent in the second quarter of 2010 as compared to the second quarter of 2009. Price increases implemented in the second quarter were more than offset by the impact of the stronger Canadian dollar (US$0.98) as compared to the second quarter of 2009 (US$0.82). The decrease in the Gross Margin Percentage from 36 percent for the three months ended June 30, 2009, to 27 percent for the three months ended June 30, 2010, was due to the decrease in realized selling prices and higher electricity costs, partially offset by higher production volumes. -- Completion of the build-in of the second major rail line into our North American Terminal Operations (NATO) site at Bruderheim, Alberta, was completed in July and is expected to add $2 million of incremental operating cash flow annually. -- The pulp market has moved through a period of extreme tightness and a return to more balanced conditions is to be expected. Inventories are at healthy, low levels and the continued global economic recovery should sustain demand for pulp and paper products. With existing pulp mills running at high rates and idle mills being re- started, North America sodium chlorate operating rates continued to improve in the second quarter. Sustained improvement in operating rates is expected to strengthen upward price momentum for the remainder of 2010. -- North America Chlor-alkali: -- Second quarter sales revenue for this segment compared to the same period in 2009 decreased to $32.6 million from $35.4 million. With the two-month shutdown of the North Vancouver facility for TCP transition during the second quarter, the segment had negative Gross Margin of $4.4 million resulting from no production for two months in the quarter and included $1.6 million of costs incurred to source product for our customers and $2.6 million of planned maintenance expenses. We capitalized $3.7 million of TCP commissioning costs and $0.9 million of TCP startup losses during the second quarter. -- The hydrochloric acid project at North Vancouver to improve operational flexibility and increase acid capacity by 70,000 tonnes is scheduled for startup in August and is expected to add $2 million of operating cash flow annually. -- The chlor-alkali market continues to reflect modest improvement in economic conditions. The North America chlor-alkali industry operated at an estimated 88 percent of capacity in the second quarter of 2010, compared with 86 percent in the prior quarter and 75 percent in the second quarter of 2009. Chlorine demand did not change from the prior quarter, with decreased derivative exports offset by the seasonal increase for water treatment applications. Caustic soda production increased modestly from second quarter of 2009 with higher chlorine operating rates. MECU prices are expected to increase in the third quarter due to price improvement from both chlorine and caustic soda. -- South America: -- Second quarter sales revenue for this segment compared to the same period in 2009 decreased two percent to $22.2 million from $22.7 million due to lower sodium chlorate sales volumes to our primary customer as a result of temporary process problems they experienced during the second quarter that have since been corrected and lower chlorine-equivalent sales volumes to the merchant market, partially offset by higher selling prices for chlorine. The decrease in the Gross Margin Percentage from 28 percent to 25 percent was due to the significant strengthening of the Canadian dollar on our US dollar fixed margin contract and higher fixed costs as a result of a planned maintenance shutdown during the second quarter. -- The 4,400 MT sodium chlorate expansion and the project to sell excess hydrogen were successfully completed during the second quarter. Our Brazil hydrochloric acid expansion project is expected to startup in August 2010 supported by a 10-year take-or-pay contract. Together the three projects will add approximately $5 million in incremental annual operating cash flow. -- We recorded a gain of $7.3 million on the settlement of a contract matter related to hydrogen supply. We commenced selling excess hydrogen to a third party under a long-term take-or-pay agreement in the quarter. -- Demand for Brazilian-produced pulp continues to be strong, driven by exports as pulp consumers looked to Brazilian producers for supply due to curtailments elsewhere. Although the global supply/demand balance weakened modestly due to supply improvements and reduced buying in China at the close of the second quarter, the impact on Brazilian exports is not expected to be significant in upcoming quarters. Higher sodium chlorate consumption is expected for the remainder of 2010 as Fibria anticipates meeting their annual production target. Brazilian chlorine markets continued to improve during the second quarter. Captive and merchant chlorine sales continue to improve, consistent with healthy Brazilian GDP growth. Financial Updates -- Foreign Exchange: -- A substantial portion of our revenues are denominated in or referenced to the US dollar and hence our cash flows benefit from a weaker Canadian dollar. We also borrow in US dollars which act as a natural hedge of our US dollar revenue stream. -- Canadian dollar foreign exchange call option contracts currently in place to sell US$5 million per month and acquire Canadian dollars at a price of at US$0.9524 from July 1 to September 30, 2010. -- In the second quarter, mark-to-market fair value losses of $1.2 million and realized gains of $0.7 million were recorded on foreign exchange call option contracts. -- During the second quarter of 2010, we recorded an unrealized currency translation loss of $18.4 million on our US dollar denominated long-term debt as a result of the weakening of the Canadian dollar at the end of the quarter and a realized gain of $3.7 million on the repayment of the Senior Secured Revolving Credit Facility and payments on the Extendible Revolving Credit Facility. During the three months ended June 30, 2009, we recorded an unrealized currency translation gain of $23 million. -- Long-Term Debt: -- Effective April 15, 2010, Canexus LP's Extendible Revolving Credit Facility increased from $420 million to $440 million and its US$20 million Senior Secured Revolving Credit Facility has been repaid and cancelled. Maturity of Canexus LP's senior secured credit facilities (which now includes the $440 million Extendible Revolving Credit Facility and the US$10 million EDC Extendible Revolving Credit Facility) has been extended to August 18, 2012. -- On August 31, 2009, the Fund issued $86 million of convertible unsecured subordinated debentures which mature December 31, 2014. The debentures bear interest at 8 percent payable semi-annually in arrears on June 30 and December 31 of each year. As at June 30, 2010, $14.2 million of the debentures had converted. -- Total borrowings under our committed credit facilities at June 30, 2010, were $375.4 million with remaining available undrawn capacity of approximately $58 million. We have no debt maturing before August 2012. At June 30, 2010, Canexus had cash on hand of $2.3 million. -- Capital Expenditures: Capital expenditures for the three months ended June 30, 2010, were $54 million of which $46 million was spent on expansion projects. Expansion capital expenditures relate to the TCP and the hydrochloric acid growth projects at North Vancouver, the NATO projects and the sodium chlorate expansion, hydrogen and hydrochloric acid growth projects at our Brazil plant. -- Expenses and Other Income: -- For the second quarter of 2010, general and administrative expense decreased by $1.8 million compared to the same period last year primarily due to lower bonus accruals and costs incurred in 2009 for SAP chemicals best practice implementation and IFRS conversion. -- Included in other income (expense) are the realized and unrealized currency translation gains and losses discussed above. We have not designated our US-dollar denominated long-term debt, foreign exchange option contracts, interest rate swaps or foreign exchange forward contracts as hedges for accounting purposes and hence the fair value impact of these items flows through other income (expense) on a mark-to-market basis. In the second quarter of 2010, mark-to-market fair value losses of $0.6 million and realized losses of $0.4 million were recorded on interest rate swap agreements. Also included in other income is the $7.3 million gain on the hydrogen settlement in Brazil. -- Income taxes decreased by $1.0 million for the second quarter of 2010 as compared to the same period in 2009, due to foreign exchange rate fluctuations and lower net income in certain foreign subsidiaries. Current income taxes increased with the hydrogen settlement in Brazil. At June 30, 2010, Canexus LP has approximately $426 million of future tax deductions resulting from capital expenditures which can be used to shelter future taxable income. Operating Results for the Periods Ended June 30, 2010 and 2009 Three Months Ended Six Months Ended June 30 June 30 CAD thousands 2010 2009 2010 2009 ---------------------------------------------------------------------------- Revenues Sales 104,324 109,237 218,039 233,056 Expenses Cost of Goods Sold 89,568 74,583 171,373 152,384 Amortization 12,881 11,644 24,424 23,387 General and Administrative 7,512 9,033 15,843 18,293 Interest 2,434 1,552 4,005 3,760 ---------------------------------------------------------------------------- 112,395 96,812 215,645 197,824 ---------------------------------------------------------------------------- Income (Loss) before Other Income (Expense), Impairment and Income Taxes (8,071) 12,425 2,394 35,232 Other Income (Expense) (7,545) 25,553 (1,419) 10,689 ---------------------------------------------------------------------------- Income (Loss) before Impairment and Income Taxes (15,616) 37,978 975 45,921 Impairment - 17,227 - 17,227 ---------------------------------------------------------------------------- Income (Loss) before Income Taxes (15,616) 20,751 975 28,694 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Provision for (Recovery of) Income Taxes Current 2,298 698 3,602 899 Future 337 2,921 (517) 4,914 ---------------------------------------------------------------------------- 2,635 3,619 3,085 5,813 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net Income (Loss) (18,251) 17,132 (2,110) 22,881 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Financial Statements, Conference Call and WebcastFinancial Statements and Management's Discussion and Analysis will be posted on the Canexus web site at www.canexus.ca and filed on SEDAR when available. Management will host a conference call at 10 a.m. ET on July 30, 2010, to discuss the results. Please call 416-644-3416 or 1-800-814-4860. The conference call will also be accessible via webcast at www.canexus.ca. A replay of the conference call will be available until midnight August 6, 2010. To access the replay, call 416-640-1917 or 1-877-289-8525, followed by passcode 4331078#.Non-GAAP MeasuresGross margin, gross margin percentage, payout ratio, distributable cash and operating cash flow 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 StatementsThis news release contains forward-looking statements and information relating to expected future events, conditions and financial and operating results of the Fund, Canexus LP and its subsidiaries, including with respect to the estimated cost, timing of completion and expected benefits from growth projects including the TCP, the Brazil sodium chlorate and hydrochloric acid expansions, the North Vancouver hydrochloric acid expansion and the construction of rail infrastructure at the North American Terminal Operations site in Bruderheim, Alberta; expected levels of sodium chlorate and chlor-alkali product selling prices; expected demand / sales volumes of sodium chlorate and chlor-alkali products, anticipated future sodium chlorate and chlor-alkali industry and Canexus operating rates; expected demand for / supply of pulp, expected operating rates of Canexus Brazil's primary customer; expected future levels of maintenance capital expenditures; the expectation that Canexus plants will operate at capacity for the remainder of the 2010, the expected favorability of market conditions continuing into the second half of 2010 and into 2011; the expectation that the full year payout ratio will exceed 90% and could range between 95% and 125% depending on production at TCP; the expectation that operating cash flow will support current distributions at an after-tax payout ratio of between 65% and 75%; and the expected improvement of MECU prices in the third quarter and the expected price improvement for both chlorine and caustic soda. 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. By their nature, forward looking statements involve a variety of assumptions, known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements 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 filed on the Fund's SEDAR profile at www.sedar.com. Material assumptions include assumptions about: the expected supply and demand for, and prices of, chlor-alkali products, sodium chlorate and pulp; expected operating rates, expected exchange rates, inflation, interest rates, and the availability and price of labor, electricity and salt. These factors are relevant to all of the forward-looking statements that are contained in this news release. 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. Financial outlook information contained in this news release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this news release should not be used for purposes other than those for which it is disclosed herein.About CanexusCanexus produces sodium chlorate and chlor-alkali products largely for the pulp and paper and water treatment industries. Our four plants in Canada and one in South America are reliable, low-cost, strategically-located facilities that capitalize on competitive electricity costs and transportation infrastructure to minimize production and delivery costs. Canexus also provides fee-for-service hydrocarbon transloading services to the oil and gas industry from its terminal at Bruderheim, Alberta. Canexus targets opportunities to maximize unitholder returns and delivers high-quality products and services to its customers. Canexus units and convertible debentures trade on the Toronto Stock Exchange under the symbol CUS. More information about Canexus is available at www.canexus.ca.FOR FURTHER INFORMATION PLEASE CONTACT: Canexus Limited Gary Kubera President and CEO (403) 571-7300 or Canexus Limited Richard McLellan CFO (403) 571-7300 www.canexus.ca