Chemtrade’s activities during 2003, our second full year of operations, delivered very successful results. We expanded our earnings base thus solidifying our ability to deliver reliable, sustainable and growing distributions. Our increased scale resulted in our unitholders receiving increased distributions during the year and a higher unit price.

Since inception our Chemtrade team has demonstrated the skills necessary to manage challenging market conditions to deliver results and to capitalize on opportunities for growth. During 2003, we successfully integrated the Performance Chemicals operations (acquired at the end of 2002), maintained our key customer relationships despite a prolonged labour dispute at our largest sulphur products supplier, and acquired and integrated the Pulp Chemicals Business.

A busy but successful year. Distributions to our unitholders increased during the year and our unitholders now also have the benefit of a Chemtrade with additional scale and diversity of earnings.

Highlights of the Year

• Increased distributions per unit by 13% from $1.58 per unit in 2002 to $1.78 in 2003. By the end of 2003, the annual rate was $1.80 per unit.
• Increased distributable cash by 59% from $21.9 million in 2002 to $34.9 million in 2003.
• Integrated the Performance Chemicals operations.
• Successfully managed product supply and customer requirements during a three-month labour dispute at our key supplier of sulphur products.
• Acquired and integrated the Pulp Chemicals Business.
• Completed an $86 million new issue of units and raised additional bank debt to fund the Pulp Chemicals acquisition.

Distributions

Cash distributions remain our key measurement of performance, and in 2003 unitholders again enjoyed a steady increase in the distribution rate. Total distributions attributable to 2003 were $1.78 per unit compared with $1.58 per unit in 2002, an increase of about 13%. We continue to follow a conservative distribution policy and our 2003 payout ratio was just under 93% of distributable cash. Our objective is to ensure that our unitholders receive reliable distributions even if unforeseen events affect our operations, as happened in 2003.

2003 Financial Results

Cash available for distribution for the year ended December 31, 2003 was $34.9 million, or $1.92 per unit, compared with $21.9 million, or $1.68 per unit in 2002. This was generated from revenue of $290.6 million (2002: $207 million) and earnings before interest, income taxes, depreciation and amortization of $44.5 million (2002: $26.3 million). (Further detailed discussion of the Fund’s financial performance can be found in Management’s Discussion & Analysis, including the number of units used in calculating the per unit amounts.)

The significant increases over 2002 were due principally to the Performance Chemicals and Pulp Chemicals acquisitions. Other factors affecting the results included the Inco labour dispute, which interrupted supply of sulphur products from our largest supplier, compelling us to locate alternative supplies to continue to meet the needs of our end-use customers. The results also reflect raw material cost increases that impacted Performance Chemicals, and the effects of the stronger Canadian dollar. Our international operation, BCT Chemtrade, met expectations for the year despite the tight worldwide market for sulphuric acid, which limited the opportunities for spot sales.

Expanded and Diversified Earnings Base

One of the most important accomplishments of 2003 was the broadening of our earnings base. At the end of 2002, immediately prior to closing the SHS assets acquisition, Chemtrade’s business was focused entirely on sulphur-based by-product removal services.

Our business model mitigates the financial impact of typical commodity effects such as price and volume; however, by diversifying our sources of earnings and distributable cash, we enhance the reliability and sustainability of our distributions to unitholders.

The Performance Chemicals acquisition – which was fully described in last year’s annual report – was an excellent strategic fit with our removal services business. It is the largest purchaser of liquid SO2 in North America and our largest SO2 customer. Chemtrade now benefits from the increased sales derived from upgrading the SO2 into sodium hydrosulphite, which is a higher value product.

The Performance Chemicals acquisition met a strict set of criteria we have established for any growth opportunity – it must be in areas of our core competence, fit our business model, and be immediately accretive to unitholders. The Pulp Chemicals acquisition, completed at the end of August, also met these criteria. (See separate section for a full description of Pulp Chemicals.)

People

Our success in 2003 was due in large measure to the experienced and dedicated team at Chemtrade. With the completion of the Performance Chemicals acquisition at the end of December 2002, the New Year began with our key objective being the integration of the operations and 120 new employees. This was achieved.

Mid-year brought special challenges for our Sulphur Products group to meet the needs of our end-use customers despite the interruption of product supply from our major supplier. It was the excellent performance of the group that maintained our key customer relationships and mitigated the financial impact of the disruption.

The year ended with another integration – Pulp Chemicals. This, too, was achieved smoothly, including the hiring of several new employees immediately following completion of the acquisition. At the end of 2003, Chemtrade had approximately 260 employees.

In addition to the many new employees who joined as a result of the acquisitions, Claudio D’Ambrosio joined as Chief Operating Officer in September and has made a valuable contribution to Chemtrade since his appointment.

I would also like to thank our Board of Trustees for their continuing guidance and counsel.

Conclusion

The successful integration of Performance Chemicals and the addition of Pulp Chemicals in 2003 should continue to have a positive impact on 2004. The market outlook for most of our products remains favourable and our pulp and paper customers are forecasting a better year, which should help our sodium hydrosulphite and sodium chlorate products. If the Canadian dollar continues to appreciate, the negative impact will be mitigated by the partial hedges we have put in place and by the addition of Pulp Chemicals, which will reduce the amount of distributable cash generated in U.S. dollars from approximately 60% to approximately 46%.

We are confident we will continue to deliver reliable and sustainable distributions to our unitholders.

Mark Davis
President and Chief Executive Officer
April 20, 2004

Detailed description of Pulp Chemicals

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