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Press release from Marketwire

Canexus Income Fund Announces Third Quarter Results

Thursday, November 04, 2010

Canexus Income Fund Announces Third Quarter Results18:27 EDT Thursday, November 04, 2010CALGARY, ALBERTA--(Marketwire - Nov. 4, 2010) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the third quarter ended September 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 36.8 percent. Highlights:Highlights since the previous quarter include increased sales volumes in all three business units, price increases for both sodium chlorate and chlor-alkali products in North America, stable production from our technology conversion project ("TCP") for two months in the quarter starting to deliver benefits, and the completion of all other 2010 growth projects. North America sodium chlorate business unit continued to benefit from robust pulp markets. Sales volumes increased by 10 percent compared to the second quarter and the same period in the prior year. Price increases announced in the second and third quarters were offset by the impact of the stronger Canadian dollar in the third quarter compared to a year ago and lower delivered prices going into 2010. Sodium chlorate selling prices in local currencies are expected to trend upward through 2011. Modest price increases are expected in the fourth quarter of 2010. The project to upgrade power line capacity at our Brandon, Manitoba facility is underway to enable capacity expansion and is expected to be completed in the first half of 2012. Both debottleneck and major projects are currently under consideration to provide additional expansion opportunities at this facility. The North Vancouver chlor-alkali facility operated at 72 percent and 80 percent of capacity in August and September respectively, and at 80 percent in October following the completion of the startup phase of the TCP in late July. The expected benefits of the TCP are beginning to be realized with improved electricity efficiency, elimination of natural gas consumption and reductions in manpower. The plant is expected to be able to operate at full design capacity following minor modifications in early November that will enable realization of the full increase in plant capacity. The hydrochloric acid expansion was successfully completed in the third quarter. Strong demand for sodium chlorate from our primary customer and the merchant market in Brazil contributed to an increase in sales revenues in the third quarter as compared to the same period in 2009. Gross Margin declined as a result of the impact of the stronger Canadian dollar on our fixed US dollar margin contract, as well as higher maintenance costs in part due to the planned shutdown of the chlor-alkali plant in July. The hydrochloric acid expansion project, which is supported by a 10-year take-or-pay contract, was completed during the third quarter and should allow us to optimize chlor-alkali capacity utilization in the future. On September 28, 2010, the Fund issued $60 million of 5.75 percent convertible unsecured subordinated debentures. The net proceeds were used by Canexus LP to repay long-term debt. Canadian dollar foreign exchange call option contracts were acquired to protect US$5 million per month at US$0.9434 from October 1 to December 31, 2010. The Fund declared cash distributions of $5.2 million during the third quarter at a payout ratio of 49 percent (inclusive of the Fund's share of $19.4 million of realized currency translation gains on Canexus LP's long-term debt triggered in the third quarter to minimize borrowing costs). At September 30, 2010, total borrowings under committed credit facilities were $346.3 million with remaining available undrawn capacity of approximately $113 million and cash on hand of $8.9 million. We have no debt maturing before August 2012. "Our results for the third quarter are in line with our expectations given the status of TCP and overall economic conditions. With TCP expected to be able to operate at design capacity later in November and our other five growth projects for 2010 completed, we are focusing on future growth initiatives. The reduction in our long-term debt from the proceeds of our $60 million convertible debenture offering positions the Fund to continue to pursue its growth objectives," said Gary Kubera, President and CEO."Further price improvement for sodium chlorate was realized during the third quarter. With existing pulp mills running at high rates and idle mills re-started, North America sodium chlorate operating rates continued to improve in the third quarter, approaching 95 percent of nameplate capacity. Sustained improvement in operating rates is expected to strengthen upward price momentum for the remainder of 2010 and 2011. Our North American sodium chlorate plants are running at full capacity which is expected to continue for the balance of this year and next.""Global pulp markets remain strong, having moderated somewhat in the third quarter after moving through a period of extreme tightness in the second quarter. By late in the third quarter or early fourth quarter, all of the remaining idle pulp capacity in North America planned for re-start will have been re-started. Going forward, no further pulp capacity re-starts are anticipated for North America and there are no significant new capacity projects underway which will bring immediate supply to the market during the balance of 2010 or 2011.""We are pleased to be starting to see the benefits of the TCP. Operating rates for the past two months at our North Vancouver chlor-alkali facility have been steady at 80 percent, with current production levels at 88 percent of design capacity. While these benefits are tangible, they are less evident because of the negative impact of current market pricing and a strong Canadian dollar. Nevertheless, we are confident the facility will soon be able to run at design capacity and allow us to enjoy the full benefits of the TCP.""Chlor-alkali market conditions improved in the third quarter consistent with the seasonal water treatment demand increase and higher chlorine derivative exports to Asia. The North America chlor-alkali industry operated at an estimated 91 percent of capacity in the third quarter, compared with 88 percent in the second quarter of 2010 and 83 percent in the third quarter of 2009. MECU prices improved in the third quarter with price increases realized for both chlorine and caustic soda. MECU prices are expected to increase again in the fourth quarter due to additional price increases for caustic soda.""Our Brazil sodium chlorate plant is operating at full capacity, consistent with the strong pulp market in Brazil. Based on the forecast for continued strong sodium chlorate demand driven by pulp demand, full operating rates are projected to continue through 2011.""In South America, weaker pulp exports to China in the past year have been counterbalanced by strong demand from European markets. Demand for Brazilian pulp is expected to remain robust into 2011 as European pulp demand continues to be strong and demand in China begins to rebound in the fourth quarter. ""Production commenced on Canexus Brazil's new hydrochloric acid burner in August. Hydrochloric acid sales growth made possible by the new burner will facilitate optimization of chlorine and derivative sales. As a result, Canexus Brazil expects to maintain high chlor-alkali capacity utilization for the foreseeable future.""We continue to see increased interest in our North American Terminal Operations ("NATO") unit at Bruderheim, Alberta, especially now that it is served by both CN and CP rails. The most active immediate business growth area for the terminal in the third quarter was hydrochloric acid ("HCL") transloading growth. Demand for HCL in conventional oilfield services and oilsands production is growing rapidly. Acid throughput at the terminal increased significantly during the quarter and we expect demand to be sustainable." Statement of Distributable Cash Three Months Ended September 30Nine Months Ended September 30CAD thousands, except as noted2010200920102009Canexus LPNet Income7,09838,3644,98861,245Realized Currency Translation (Gains) Losses on Cash(1,475)(11)(1,035)1,162Charges and Credits to Income Not Involving CashProvision for (Recovery of) Future Income Taxes1,0531,6335366,547Amortization14,22211,77538,64635,162Unrealized (Gains) Losses on Currency Translation10,858(22,541)20,219(40,360)Change in Fair Value of Foreign Exchange Options(26)(362)1,7204,028Change in Fair Value of Foreign Exchange Forward---3,796Change in Fair Value of Interest Rate Swaps4106321,481(352)Change in Fair Value of a Foreign Exchange Swap-(11)-(11)Accrual for Future TCP Severance Costs---(981)Impairment of Sodium Chlorate Assets---17,227Other1,0771,0002,8813,616Contributions to / Payments for Defined Benefit Plans(548)(1,298)(1,782)(2,527)Interest Income on Restricted Investments-(13)(1)(242)Expenditures on Asset Retirement Obligations3(135)(149)(218)Purchase of Foreign Exchange Options(310)-(761)-Changes in Non-Cash Operating Working Capital and Due from/to Affiliates, Net, and Interest Payable to Affiliates(5,362)(3,675)3,338(3,307)Cash From Operating Activities27,00025,35870,08184,785Changes in Non-Cash Operating Working Capital and Due from/to Affiliates, Net, and Interest Payable to Affiliates5,3623,675(3,338)3,307Maintenance Capital Expenditures(2,185)(6,244)(9,073)(13,355)Amortization of the Purchase Cost of Foreign Exchange Options(451)(1,254)(2,249)(3,761)Realized Currency Translation Gains (Losses) on Cash1,475111,035(1,162)TCP Severance Costs Paid(1,377)-(1,953)-Operating Non-Cash Items(382)308(179)(996)Distributable Cash within Canexus LP (1)29,44221,85454,32468,818Canexus Income FundShare of Canexus LP's Distributable Cash10,7547,50619,42324,171Trust Administration Expenses(74)(89)(333)(275)Distributable Cash available to Canexus Income Fund (1)10,6807,41719,09023,896Distributions Declared5,2014,57314,92613,614Payout Ratio (1)49%62%78%57%Note: See comments concerning non-GAAP Measures at end of release.Operations HighlightsCanexus has a total of five manufacturing plants – four in Canada and one in South America – and a chemical and hydrocarbon transloading terminal in Alberta, organized into three business units. Highlights for each unit are as follows:North America Sodium Chlorate:Third quarter sales revenues for this segment increased one percent from $55.7 million in 2009 to $56.3 million in 2010 due to a 10 percent increase in sales volumes, partially offset by an eight percent decrease in realized selling prices. Price increases implemented in the second and third quarters were more than offset by the impact of the stronger Canadian dollar in the third quarter (US$0.96) as compared to the third quarter of 2009 (US$0.90) and lower delivered prices going into 2010. The decrease in the Gross Margin Percentage from 37 percent for the three months ended September 30, 2009 to 31 percent for the three months ended September 30, 2010 was due to the decline in realized selling prices and slightly higher electricity prices, partially offset by higher production volumes and slightly lower fixed costs. The project to upgrade power line capacity at our Brandon, Manitoba facility to enable additional capacity expansion is underway and is expected to be completed in the first half of 2012. Both debottleneck and major projects are currently under consideration which could provide additional expansion opportunities for this facility. North America Chlor-alkali:Third quarter sales revenues for this segment increased two percent from $35.7 million a year ago to $36.3 million for the third quarter of 2010. Higher caustic soda sales volumes and higher realized selling prices more than offset lower hydrochloric acid sales volumes and lower chlorine realized selling prices. The decrease in Gross Margin Percentage from 25 percent for the three months ended September 30, 2009 to eight percent for the three months ended September 30, 2010 was primarily due to TCP startup completion in late July following almost three months of no production, lower MECU realized selling prices, costs incurred to source product for our customers during the ramp-up of the TCP, higher electricity prices and slightly higher fixed costs. The TCP operated at 72 percent of practical capacity in August and 80 percent in both September and October. We anticipate continued improved financial performance for our North America chlor-alkali business unit in the fourth quarter of 2010 and beyond. We are beginning to realize the expected benefits of the TCP with improved electricity efficiency and the elimination of natural gas consumption. Electricity prices in British Columbia are expected to increase by seven percent in the 2010/2011 year, further reinforcing the importance of the TCP. Our planned manpower reductions have been slower than originally expected with 70 percent of these positions eliminated to date and the remainder to occur in the fourth quarter of 2010 and 2011. In addition, we expect future maintenance costs to be lower as a result of the modernization of the plant. The full benefits of the TCP, which include a one-third increase in plant capacity, are expected to be realized following completion of a five to seven day shutdown in early November to address bottlenecks which are currently preventing us from reaching full design capacity. Our hydrochloric acid expansion project was completed in the third quarter increasing our annual acid production capacity by 73,000 MT or 40 percent and significantly enhancing chlor-alkali production flexibility. South America:Third quarter sales revenues for this segment increased 12 percent from $23.5 million for the three months ended September 30, 2009 to $26.4 million for the three months ended September 30, 2010. The increase in sales revenues was primarily due to higher sodium chlorate sales volumes and realized selling prices to both our primary customer and the merchant market. The increase in sodium chlorate realized selling prices to our primary customer was due to the pass-through nature of the contract that contributes to higher sales revenues as costs increase. The decrease in the Gross Margin Percentage from 32 percent to 23 percent was due to the impact of the significant strengthening of the Canadian dollar on our US dollar fixed margin contract and higher maintenance costs, partially offset by higher production volumes of sodium chlorate. The chlor-alkali plant was shut down for planned maintenance during July 2010, and there were higher overall maintenance costs during the third quarter of 2010 as compared to the same period the prior year. In October, our chlor-alkali plant was shut down for approximately two weeks for unscheduled maintenance. It is currently back operating at capacity. Strong expected demand for sodium chlorate in the fourth quarter should help to offset the negative impact of this unplanned chlor-alkali shutdown. The hydrochloric acid expansion project, which is supported by a 10-year take-or-pay contract, was completed in the quarter. This project will enable us to optimize chlor-alkali capacity utilization and operating cash flow. Financial Updates Foreign Exchange:A substantial portion of our revenues is denominated in or referenced to the US dollar and hence our cash flows benefit from a weaker Canadian dollar. We borrow in US dollars as a natural hedge of our US dollar revenue stream. Canadian dollar foreign exchange call option contracts to sell US$5 million per month and acquire Canadian dollars at a price of US$0.9434 from October 1 to December 31, 2010 are currently in place. In the third quarter, realized gains of $0.2 million were recorded on foreign exchange call option contracts ($3.7 million of realized gains in Q3/09). During the third quarter, we recorded realized gains of $20.5 million on repayments of the Extendible Revolving Credit Facility that were previously recorded as unrealized gains, resulting in unrealized currency translation losses of $10.7 million for a net gain of $9.8 million. We intentionally triggered $19.4 million of realized currency translation gains on temporary repayments of our Extendible Revolving Credit Facility to minimize borrowing costs. During the third quarter 2009 we recorded an unrealized currency translation gain of $23.7 million and realized gains of $0.8 million for a total gain of $24.5 million. Long-Term Debt:At September 30, 2010, total borrowings under committed credit facilities were $346.3 million with remaining available undrawn capacity of approximately $113 million and cash on hand of $8.9 million. We have no debt maturing before August 2012. On September 28, 2010, the Fund issued $60 million of 5.75 percent Series III Convertible Debentures at a price of $1,000 per Series III Convertible Debenture. Proceeds from the issue of the Series III Convertible Debentures were used to purchase $60 million of unsecured subordinated debentures of Canexus LP (the "Series III Debentures") which bear interest at 5.75 percent. The net proceeds were used by Canexus LP to repay long-term debt. Capital Expenditures: Capital expenditures for the three months ended September 30, 2010 were $18.2 million, a $35.3 million drop from $53.5 million in the 2009 comparable quarter. This decline was due to a decrease in expansion capital expenditures of $29.7 million, maintenance capital expenditures of $4.1 million and remediation capital expenditures of $1.6 million. The decrease in expansion capital expenditures was due to the substantial completion of construction of the TCP in the second quarter of 2010. Expenses and Other Income:Other income includes the foreign exchange gains and losses discussed above. Operating Results for the Periods Ended September 30, 2010 and 2009Three Months Ended September 30Nine Months Ended September 30CAD thousands2010200920102009Revenues Sales119,040114,883337,079347,939Expenses Cost of Goods Sold92,39078,239263,763230,623 Amortization14,22211,77538,64635,162 General and Administrative8,4598,36124,30226,654 Interest5,2971,8649,3025,624120,368100,239336,013298,063Income (Loss) before Other Income, Impairment and Income Taxes(1,328)14,6441,06649,876 Other Income10,08126,2668,66236,955Income before Impairment and Income Taxes8,75340,9109,72886,831 Impairment---17,227Income before Income Taxes8,75340,9109,72869,604Provision for (Recovery of) Income Taxes Current6029134,2041,812 Future1,0531,6335366,5471,6552,5464,7408,359 Net Income7,09838,3644,98861,245Financial Statements, Conference Call and WebcastFinancial Statements and Management's Discussion and Analysis will be posted on the Canexus website at www.canexus.ca and filed on SEDAR when available. Management will host a conference call at 10 a.m. ET on November 5, 2010, to discuss the results. Please call 416-644-3415 or 1-877-974-0445 to access the call. The conference call will also be accessible via webcast at www.canexus.ca. A replay of the conference call will be available until midnight November 12, 2010. To access the replay, call 416-640-1917 or 1-877-289-8525, followed by pass code 4371247#.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 timing of full design capacity utilization and expected benefits from the TCP; the impact of HCL expansion on chlor-alkali capacity utilization in Brazil; 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 and utilization of idle pulp capacity; expected operating rates of Canexus Brazil's primary customer; expected future levels of maintenance capital expenditures; completion of power capacity upgrades at Brandon and potential debottleneck and major projects: the expectation that Canexus plants will operate at capacity for the remainder of 2010; demand for HCL and expectations for HCL throughput at NATO; the expected favorability of market conditions continuing into the fourth quarter of 2010 and into 2011; the expected improvement of MECU prices in the fourth quarter and the expected price improvement for caustic soda; the expected improvement in sodium chlorate prices in the fourth quarter and through 2011.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 to its customers. Canexus trust units (CUS.UN) and convertible debentures (Series I – CUS.DB; Series III – CUS.DB.A) trade on the Toronto Stock Exchange. More information about Canexus is available at www.canexus.ca.FOR FURTHER INFORMATION PLEASE CONTACT: Gary KuberaCanexus LimitedPresident and CEO(403) 571-7300ORRichard McLellanCanexus LimitedCFO(403) 571-7300www.canexus.ca