Chemtrade Logistics







Mark Davis, President & CEO Thank you, and good morning ladies and gentlemen. Chemtrade is in an industry, industrial chemicals, where size and scale are important. During the four years since our IPO, Chemtrade has substantially enhanced its size, scale and diversity of earnings primarily through acquisitions.

		Over this period, our revenues and asset value has greatly increased, our product portfolio has grown, and our geographic reach has expanded across North America and been enhanced in Europe. Additionally, we have diversified our earnings such that the source of the majority of our EBITDA at the time of our IPO now represents less than 20% of EBITDA. Most importantly, Chemtrade's increased scale and diversity increases our ability to fund distributions to unitholders.

		Just over a month ago, we completed our largest acquisition. I would like to spend most of my time today describing the acquisition and how it fits into our growth strategy and business model. Of course, I will also spend a little time reviewing relevant financial matters.

Chemtrade continues to pursue its four-pronged growth strategy being:

		1. A business model that seeks to mitigate commodity risks; 2. A focus on operational excellence to ensure sustainable earnings; 3. Financial prudence; and 4. Increased size and scale leading to diversity and growing distributions.

		The Peak acquisitions that we announced on August 2 are the largest of the three material acquisitions we have completed since our IPO.

		Similar to our other acquisitions, it meets our objectives of diversifying our sources of earnings, adding scope and scale to our business, and, of course, increasing distributable cash. Let me tell you some more about our new businesses and how they fit within our strategy and business model.

We acquired two businesses – Peak Sulfur and Peak Chemical – for a total cost, including all related transaction costs, of approximately $220 million Canadian. On an aggregate basis the purchase price represents a multiple of about 7 times pro forma EBITDA.

		These are quality stable businesses where a large portion of the earnings are generated by contracts that adjust the customer's price for changes in the cost of the major raw material.

As you can see from this map, these new businesses take Chemtrade into new geographic areas in North America. The Peak Sulfur business, which is by far the larger of the two, operates from its four plants in Beaumont, Texas; Shreveport, Louisiana; Riverton, Wyoming; and Tulsa, Oklahoma. The Peak Chemical business is located in Lawrence, Kansas.

		Sulfur processes various types of sulphuric acid – including regenerated sulphuric acid (or “regen”), merchant, and ultra pure. As we have mentioned with respect to our original business, sulphuric acid is one of the most widely used chemicals in the world and is a key input in many different industries.

The foundation of the Sulfur business is the regen/spent acid operations. In most chemical processes where sulphuric acid is used, it is totally consumed. In other processes, however, the acid is only partially consumed and becomes “spent” acid. Spent acid is sent to regeneration facilities where it is then processed into merchant grade sulphuric acid. Peak Sulfur's regen business is based on 2-5 year contracts, which form the foundation of its earnings. The Peak Chemical business in one of only two North American producers of phosphorous pentasulphide, or P2S5 , which is a performance chemical used primarily as a strategic ingredient in the lubricating oil and grease additive markets for the automotive industry. Before describing the operations and the assets we have just acquired, let me add a few comments about how this acquisition fits with our growth strategy and business model.

		• Both Sulfur and Chemical produce, sell and distribute industrial chemicals, which is consistent with our core competencies. In fact, the majority of the acquired business is based on sulphuric acid, a chemical that is already a significant part of our portfolio of products.

		• The Sulfur and Chemical businesses diversify our end use markets. Most of the revenues are derived from the refinery and automotive lubricant industries, which adds substantial new end markets for Chemtrade and reduces our reliance on the pulp and paper industry, as you can see from this chart.

• We significantly diversify our product offering. Chemical's earnings are solely derived from a product (P2S5) that we do not currently market and Chemtrade did not previously process spent acid.

		• Sulfur incrementally expands our existing merchant and ultra pure acid businesses. • The acquisition improves the quality of our earnings. The majority of Sulfur's earnings are derived from 2 to 5 year term Regen or Spent contracts that adjust pricing to changes in certain input costs, particularly natural gas, the key raw material input.

• Business model fit. Both businesses have characteristics which tend to mitigate traditional chemical commodity cyclicality – Sulfur contractually, and Chemical due to industry structure. Let me now describe the businesses in a bit more detail.

		Sulfur As I noted, the Sulfur business produces regen, merchant, and ultra pure acid, but it generates most of its earnings by processing spent acid for refineries and chemical operations. The balance of its earnings is derived from sales of merchant acid to pulp mills and other industries, and from ultra pure acid sales to the electronics industry.

Oil refineries are the largest producers of spent acid. The sulphuric acid is used by refineries in the production of alkylate, which is an octane enhancer. The spent acid generated in the refining process is sent to a regen plant for reprocessing. Sulfur has a significant market share of the regen acid business in the U.S. Gulf Coast area; it is the only regen facility in the U.S. Rocky Mountain district, and it is one of only five producers of ultra pure sulphuric acid in North America.

		The regen market represents a very attractive opportunity for Chemtrade. According to industry reports, the overall U.S. regen market is expected to grow as refinery alkylate production increases, with the most significant increase in demand being in the Gulf Coast area, where Sulfur's two main plants are located. Sulfur's regen business and the quality of its contracts were a key to this transaction.

		About half of Sulfur's total capacity is used to service regen accounts. The regen industry is characterized by medium to long-term contracts. Over 70% of Sulfur's regen volume is under contract until or past the end of 2007. Approximately another 11% is supplied by truck where Sulfur's plants are the logical geographic facility, making it difficult for more remote regen plants to compete. Accordingly, over 80% of regen volume is very secure through the end of 2007.

In addition to the multi year term of the regen contracts, the other key element of all Sulfur's regen contracts is price adjustments for changes in input costs. At a minimum these contracts provide that the customer's price is adjusted for changes in the price of natural gas, which is the main raw material. Many of the regen contracts are also adjusted annually for changes in labour costs.

		Regarding merchant acid, we have a long history of successfully marketing this product and the acquisition lets us expand into new geography.

Three of Sulfur's four plants – Riverton, Tulsa and Shreveport – are relatively remote geographic locations, and are thus somewhat protected from competition in the merchant acid market. Typically, there are few regional competitors and these Sulfur plants have significant logistical advantages. Many of Sulfur's customers are served by truck, which creates further competitive advantages.

		Finally, Sulfur also participates in the ultra pure acid market. Ultra pure acid is sold into the electronics industry. Chemtrade already participated in this market with production from its Ohio plant.

		The production assets for both Sulfur and Chemical are in good shape. The Sulfur plants typically take shutdowns of 10 days every 12 – 18 months and preventative maintenance programs allow for uptime to be more than 95%. Maintenance capital expenditures for all these plants are estimated at approximately US$3.3 million per year.

		Turning now to financial results, in the third quarter Chemtrade generated distributable cash of $13.6 million, or 48 cents per weighted average unit and distributed 46 cents per unit. The quarter's results reflect only two months of earnings from the Peak acquisitions which were acquired on August 2, and were further reduced by the impact of losing nine days production at the Beaumont plant as a result of Hurricane Rita. I will comment further about the Hurricanes later but as

indicated in our MD & A, we estimate that we lost about US$500,000 of EBITDA or 2 cents per unit of distributable cash in the third quarter as a result of Hurricane Rita. Additional details of our financial results are, of course, contained in our MD & A so instead of elaborating, I would like to spend a little more time discussing the effect of Hurricane Rita on our Q3 and Q4 results, and the potential future effects that both Hurricanes Rita and Katrina may have on Chemtrade. The largest single asset we acquired on August 2 was the plant in Beaumont, Texas. On September 22 with Hurricane Rita just off the coast, we shutdown and evacuated the plant. The shutdown affected our third quarter earnings due to the nine day shutdown. As we reported in our news releases and website updates, the Beaumont plant sustained only minimal damage but did not resume full production until October 21.

		Hurricane Rita had two immediate cost impacts on Chemtrade. First, the cost of repairing the facility was about US$500,000. Secondly, we lost nine days of production in the third quarter and further production losses in the fourth quarter. As previously mentioned in our press releases, Chemtrade carries business interruption insurance. Once the full extent of our losses is known, we will be submitting our claim under this policy. After our deductible of about $300,000 we expect to receive full compensation for these losses.

		Possibly of more lasting effect, both Hurricanes Rita and Katrina resulted not only in much higher natural gas costs but also increased cost of many of our raw materials. To give some perspective, the next slide indicates the difference between the pre and post Hurricane NYMEX futures for natural gas.

		With respect to other raw materials, the following slide shows the pre and post Hurricane projections for caustic soda pricing. The key point for Chemtrade is not only the forecasted increases of these products but also the upward pricing pressure being exerted on many raw materials.

These potential cost increases affect two parts of our SPPC business segment (regen and SHS) but in different ways. First, the increased natural gas costs affects the costs we incur to process regen acid. However, with respect to our regen business, a key element of all regen contracts is a price adjustment mechanism for changes in natural gas costs. This permits us to adjust our customer's pricing to account for changes in natural gas costs. The change in pricing occurs the following quarter. Accordingly, there is a lag effect until the pass-through of gas costs takes effect. So, in a quarter with increasing gas costs, margins contract in that quarter until the following quarter when the price adjustments will take effect. As a general statement, every US$1 change in gas costs during a quarter affects the cost of processing regen acid by about US$140,000 until the contracts adjust pricing in the following quarter. We experienced higher costs in the third quarter so our margins contracted but the price for regen services will contractually increase in the fourth quarter.

		We also expect further natural gas cost increases in the fourth quarter so we also anticipate a margin compression in this quarter. The price adjustment for fourth quarter gas increases will be implemented in the first quarter of 2006. Once gas prices stabilize or decrease, our contracts will recoup this margin compression. In summary, due to our contracts, rising natural gas costs will not have a large negative impact on the regen business.

Our major exposure to natural gas and related input costs is in our Performance Chemicals products or SHS. In addition to natural gas itself, the key natural gas affected inputs are caustic soda and sodium formate. We have talked about increasing caustic soda pricing numerous times and have been incurring high caustic costs in 2005. To give you an idea of the impact of these higher costs, at our Leeds plant, caustic soda costs were $1.3 million higher in the third quarter this year compared with the third quarter last year.

		We announced on our second quarter conference call that we expected our second quarter caustic prices to be the peak as a result of the new arrangements with our major supplier. Third quarter pricing was, in fact, lower than the second quarter. However, in our third quarter conference call we advised that due to the Hurricanes' effects, industry reports now imply a higher peak price for caustic than was formerly forecasted. At this stage the extent to which the

Hurricanes will force up pricing is still unclear, but we expect our fourth quarter pricing will also be below second quarter prices. Prices for 2006 are still unclear but if the forecast is correct caustic pricing in the first and second quarter of 2006 may be higher than the second quarter 2005. We also buy about 50 million pounds of sodium formate a year. This industry has also been affected by the step change in natural gas pricing. Formate producers are currently seeking price increases for 2006 which we are resisting and one of our traditional NA suppliers just announced a plant shutdown in Q1 of 2006. We have, in turn, announced price increases on SHS to recoup some of the increased costs. One more comment on natural gas. Although we do not use as much natural gas in producing SHS as we do in processing regen, we have also been working to reduce natural gas costs in our SHS process. We recently entered into an agreement with a provider of an alternative energy system for our South Carolina plant. This provider will build, own and operate a plant on our Leeds property that converts recycled materials into synthetic gas, thereby providing a replacement for natural gas. Depending on permitting, the plant is expected to be operational by the end of 2006. It is expected that once operational this facility will reduce our natural gas costs at Leeds by about $1 million when compared to 2005 pricing.

		As indicated in our MD & A, due to the uncertainties created by the Hurricanes, we are currently unable to clearly forecast our input costs and thus our earnings rate for 2006. What is clear is that the Hurricanes have caused increased pricing pressure on our raw materials which primarily affects our SHS products. We are, in turn, pursuing initiatives to reduce costs and to increase pricing to pass increased costs along to our customers.

In summary we believe that: • our overall business portfolio is strong, although increasing raw material costs are pressuring our SHS margins; • industry analysts forecast lower caustic and natural gas costs in 2007; • post 2006 our largest SHS facility should no longer be purchasing natural gas; • Pulp and International will continue to perform well; • Inco will produce more sulphur products in 2006; and • our initiative to increase pricing and reduce costs will be effective.

		Finally, the Peak acquisitions will be very beneficial. These businesses: • have diversified our earnings by product, geography and end markets; • added necessary scale and scope; and • added high quality earnings due to contracts that pass through changes in the price of natural gas.

		Thank you for your attention.