Chemtrade Logistics Income Fund reports 2010 second quarter results

TORONTO, July 28 /CNW/ - Chemtrade Logistics Income Fund (TSX: CHE.UN) today announced results for the three months and six months ended June 30, 2010.

Cash flow from operating activities for the second quarter was $5.8 million (2009: $6.8 million) and Distributable cash after maintenance capital expenditures for the period was $8.1 million, or $0.27 per unit (2009: $11.0 million, or $0.36 per unit), generated from revenue of $137.4 million (2009: $124.6 million). Distributable cash after maintenance capital expenditures for the quarter was negatively impacted by the shutdown of Chemtrade's Beaumont, Texas plant following a fire on May 15, 2010. The results do not include any potential insurance proceeds which will be included in Distributable cash when received. The revenue increase reflected the improvement in demand and increased volume over last year in the Sulphur Products & Performance Chemicals (SPPC) segment, and higher sulphur prices in SPPC and International. EBITDA for the second quarter was $15.0 million (2009: $17.5 million) and net loss was $1.1 million compared with net earnings of $13.6 million in the same period in 2009.

For the six months ended June 30, 2010 cash flows from operating activities were $35.1 million (2009: negative $3.1 million), and Distributable cash after maintenance capital expenditures was $23.1 million (2009: $20.6 million), or $0.75 per unit (2009: $0.67 per unit). EBITDA was $39.5 million (2009: $35.7 million), and revenue was $264.2 million (2009: $286.4 million). Net earnings for the first six months of 2010 were $12.7 million (2009: $14.9 million).

Mark Davis, President and Chief Executive Officer of Chemtrade, said, "Overall business conditions in the second quarter this year were better than a year ago. Demand levels are well above 2009 levels, and prices for sulphuric acid, our major product by volume, while still lower than a year ago, continued the improvement trend seen during the first quarter of this year. It is unfortunate that the benefit of these improved conditions was offset by the impact of the incident at Beaumont. We estimate that this incident adversely impacted second quarter distributable cash by $2.5 million, or 8 cents per unit. Despite this, for the first half of 2010, Distributable cash of $0.75 per unit was comfortably ahead of our distributions of $0.60 per unit."

Sulphur Products & Performance Chemicals (SPPC) generated revenue of $82.0 million in the second quarter compared with $77.9 million in the second quarter of 2009. The main reasons for the increase in revenue were higher volumes and higher sulphur prices. These positive factors more than offset the negative impact of the stronger Canadian dollar on U.S. denominated revenue. EBITDA for the second quarter was $13.2 million compared with $15.2 million in 2009. The lower EBITDA relative to the second quarter last year was due primarily to the Beaumont plant being off-line for half of the quarter and to extra costs incurred to ensure customer operations were not disrupted. Additionally, results for the second quarter of 2009 benefited from an insurance recovery of $2.3 million related to an incident at the Beaumont plant in 2008.

Pulp Chemicals reported second quarter revenue of $11.2 million compared with $13.2 million in 2009, reflecting lower sales volume of sodium chlorate. EBITDA was $4.0 million compared with $4.7 million in 2009 with lower costs partially offsetting the impact of lower volumes.

International reported revenue of $44.3 million for the second quarter, compared with $33.5 million in 2009, the increase due mainly to higher prices for sulphur. EBITDA for the quarter was $3.7 million compared with $4.9 million reported last year, which included a few high margin contracts.

Corporate costs during the second quarter of 2010 were $1.4 million lower than the second quarter of 2009. Of this, $0.6 million was due to lower LTIP costs. Additionally, in the second quarter of 2009 unrealized losses of $0.6 million relating to natural gas swaps were recorded, whereas there were no swaps in 2010.

During the second quarter of 2010, the Fund issued $10.0 million of 6% convertible unsecured subordinated debentures due March 31, 2017 pursuant to an over-allotment option granted to the underwriters who purchased the $80.0 million convertible debentures issuance in the first quarter. The Fund also repaid approximately $25.0 million of outstanding term debt, bringing total repayments for the year to approximately $79.0 million.

Mr. Davis said, "Looking forward, demand for our products remains stable. Vale has now settled its strike and is expected to return to full production soon. Finally, we also expect our Beaumont plant will be re-started by the end of October. The results for the first half of the year, despite these issues, again demonstrated the resilience of our business and business model. The strong performance of our underlying businesses along with the strength of our balance sheet supports our belief that the current distribution rate is sustainable."

Distributions

Distributions declared in the second quarter totalled $0.30 per unit, comprised of monthly distributions of $0.10 per unit.

This news release contains certain statements which may constitute "forward-looking" statements within the meaning of certain securities laws, including the "safe harbour" provisions of the Securities Act (Ontario). The use of any of the words "anticipate", "continue", estimate", "expect", "expected", "intend", "may", "will", "project", "plan", "should", "believe" and similar expressions are intended to identify forward-looking statements. These statements are based on a number of material factors and assumptions and involve known and unknown risks and uncertainties that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. As a result, we cannot guarantee that any forward-looking statement will materialize. Forward-looking statements in this news release describe the expectations of Chemtrade as of the date of this news release. Forward-looking statements do not take into account the effect that transactions or non-recurring items announced or occurring after the statements are made may have on our business. We disclaim any intention or obligation to update any forward-looking statement even if new information becomes available, as a result of future events or for any other reason.

This news release contains forward-looking statements about the objectives, strategies, financial condition, results of operations and businesses of the Fund, including, but not limited to:

    
    -   the strength of demand for our products going forward;
    -   the timing of a return to full production by Vale;
    -   the timing of Chemtrade's Beaumont plant re-start; and
    -   the sustainability of the Fund's distribution rate.
    

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.

Further information can be found in the disclosure documents filed by Chemtrade Logistics Income Fund with the securities regulatory authorities, available at www.sedar.com.

A conference call to review the second quarter 2010 results will be webcast live on www.chemtradelogistics.com and www.newswire.ca/webcast on Thursday, July 29, 2010 at 10:00 a.m.

    
    CHEMTRADE LOGISTICS INCOME FUND
    Consolidated Balance Sheets
    (in thousands of dollars)

                                                       June 30,  December 31,
                                                          2010          2009
    -------------------------------------------------------------------------
                                                    (unaudited)

    ASSETS

    Current assets
      Cash and cash equivalents                    $    26,219   $    19,885
      Accounts receivable (note 3)                      84,476        75,748
      Inventories                                       20,616        20,107
      Prepaid expenses and other assets
       (note 10(b))                                      3,904         2,284
    -------------------------------------------------------------------------
                                                       135,215       118,024

    Restricted cash                                      2,438         2,599
    Notes receivable                                     2,662         2,627
    Property, plant and equipment                      146,613       156,960
    Other assets                                         2,287         2,164
    Future tax asset                                    17,521        14,084
    Intangibles (note 4)                                96,290       108,389
    Goodwill                                            91,298        90,630
    -------------------------------------------------------------------------
                                                   $   494,324   $   495,477
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES AND UNITHOLDERS' EQUITY

    Current liabilities
      Accounts payable                                  42,323        42,918
      Accrued and other liabilities (notes 7(f)
       and 10(b))                                       51,528        42,920
      Distributions payable                              3,067         3,067
      Income taxes payable                               1,687         2,855

    -------------------------------------------------------------------------
                                                        98,605        91,760

    Long-term bank debt (note 5)                        80,951       160,105
    Convertible unsecured subordinated debentures
     (note 6)                                           76,193             -
    Other long-term liabilities (notes 7(f)
     and 10(b))                                          9,718        19,075
    Post-employment benefits                             3,649         4,051
    Future tax liability                                17,092        20,082

    Unitholders' equity
      Units (note 7(b))                                377,144       377,144
      Contributed surplus                                9,720         9,720
      Equity component of convertible debentures
       (note 7(c))                                      10,151             -
      Deficit                                         (148,798)     (143,112)
      Accumulated other comprehensive (loss)
       (note 8)                                        (40,101)      (43,348)

    -------------------------------------------------------------------------
                                                       208,116       200,404

    -------------------------------------------------------------------------
                                                   $   494,324   $   495,477
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.



    CHEMTRADE LOGISTICS INCOME FUND
    Consolidated Statements of Earnings
    (in thousands of dollars, except per unit amounts)
    (unaudited)

                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
                              2010          2009          2010          2009
    -------------------------------------------------------------------------

    Revenue            $   137,406   $   124,624   $   264,230   $   286,447

    Cost of sales and
     services (excluding
     depreciation
     disclosed below)      110,624        96,539       200,282       234,061

    -------------------------------------------------------------------------
    Gross profit            26,782        28,085        63,948        52,386

    Selling, general,
     administrative and
     other costs            11,806        10,625        24,495        16,650

    -------------------------------------------------------------------------
    Earnings before the
     under-noted            14,976        17,460        39,453        35,736

    Unrealized foreign
     exchange loss (gain)
     and ineffectiveness
     of cash flow hedges     1,685        (9,147)        1,271        (5,244)
    Debt extinguishment
     costs (note 5)            128             -           699             -
    Depreciation and
     amortization
     (note 4)               14,419        11,272        25,232        22,437
    Net interest and
     accretion expense       3,011         2,342         5,275         4,445

    -------------------------------------------------------------------------
    (Loss) earnings
     before income
     taxes                  (4,267)       12,993         6,976        14,098

    Income taxes
      Current                  402         1,124         1,457         1,832
      Future                (3,576)       (1,704)       (7,197)       (2,628)

    -------------------------------------------------------------------------
                            (3,174)         (580)       (5,740)         (796)

    -------------------------------------------------------------------------
    Net (loss)earnings $    (1,093)  $    13,573   $    12,716   $    14,894
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net (loss) earnings
     per unit (note
     7(d))
      Basic            $     (0.04)  $      0.44   $      0.41   $      0.48
      Diluted          $     (0.04)  $      0.44   $      0.41   $      0.48
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Cost of sales and services for the three months and the six months ended
    June 30, 2010 does not include $6,327 and $11,750 respectively (2009 -
    $5,717 and $11,254 respectively) of depreciation relating to plant
    buildings and equipment.

    See accompanying notes to consolidated financial statements.



    CHEMTRADE LOGISTICS INCOME FUND
    Consolidated Statements of Changes in Unitholders' Equity
    (in thousands of dollars)
    (unaudited)

                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
                              2010          2009          2010          2009
    -------------------------------------------------------------------------

    Units
    Balance, beginning
     of period         $   377,144   $   377,144   $   377,144   $   389,932
    Re-purchase of
     units                       -             -             -       (12,788)
    -------------------------------------------------------------------------
    Balance, end of
     period            $   377,144   $   377,144   $   377,144   $   377,144
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Contributed surplus
    Balance, beginning
     of period         $     9,720   $     9,720   $     9,720   $     5,272
    Re-purchase of
     units                       -             -             -         4,448
    -------------------------------------------------------------------------
    Balance, end of
     period            $     9,720   $     9,720   $     9,720   $     9,720
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Equity component
     of convertible
     debentures
    Balance, beginning
     of period         $     8,395   $         -   $         -   $         -
    Issuance of
     debentures (notes
     6 and 7(c))             1,756             -        10,151             -
    -------------------------------------------------------------------------
    Balance, end of
     period            $    10,151   $         -   $    10,151   $         -
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Deficit
    Balance, beginning
     of period         $  (138,504)  $  (161,108)  $  (143,112)  $  (153,141)
    Net (loss)
     earnings               (1,093)       13,573        12,716        14,894
    Distributions           (9,201)       (9,201)      (18,402)      (18,489)
    -------------------------------------------------------------------------
    Balance, end of
     period            $  (148,798)  $  (156,736)  $  (148,798)  $  (156,736)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Accumulated other
     comprehensive
     (loss) (note 8)
    Balance, beginning
     of period         $   (47,864)  $   (20,319)  $   (43,348)  $   (24,127)
    Other comprehensive
     income (loss)           7,763       (11,534)        3,247        (7,726)
    -------------------------------------------------------------------------
    Balance, end of
     period            $   (40,101)  $   (31,853)  $   (40,101)  $   (31,853)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.


    Consolidated Statements of Comprehensive Income
    (in thousands of dollars)
    (unaudited)

                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
                              2010          2009          2010          2009
    -------------------------------------------------------------------------

    Net (loss)
     earnings          $    (1,093)  $    13,573   $    12,716   $    14,894

    Change in unrealized
     loss on translation
     of self-sustaining
     foreign operations      7,612       (12,924)        2,081        (7,444)
    Change in unrealized
     loss on derivatives
     designated as cash
     flow hedges               680         1,390           564          (282)
    Losses on derivatives
     designated as cash
     flow hedges in prior
     years transferred
     to net income in the
     current year             (529)            -           602             -
    -------------------------------------------------------------------------
    Other comprehensive
     income (loss)           7,763       (11,534)        3,247        (7,726)

    -------------------------------------------------------------------------
    Comprehensive
     income            $     6,670   $     2,039   $    15,963   $     7,168
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.



    CHEMTRADE LOGISTICS INCOME FUND
    Consolidated Statements of Cash Flows
    (in thousands of dollars)
    (unaudited)

                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
                              2010          2009          2010          2009
    -------------------------------------------------------------------------

    Cash provided by
     (used in):

    Operating activities:
      Net (loss)
       earnings        $    (1,093)  $    13,573   $    12,716   $    14,894
      Items not
       affecting cash:
         Depreciation
          and amor-
          tization          14,419        11,272        25,232        22,437
         Future income
          taxes             (3,576)       (1,704)       (7,197)       (2,628)
         Accretion
          expense              492           146           660           299
         Change in fair
          value of der-
          ivatives and
          unrealized
          foreign ex-
          change loss
          (gain)             1,829        (8,563)        1,471        (4,810)

    -------------------------------------------------------------------------
                            12,071        14,724        32,882        30,192

    (Increase) decrease
     in working capital     (6,256)       (7,952)        2,206       (33,310)

    -------------------------------------------------------------------------
                             5,815         6,772        35,088        (3,118)

    Financing activities:
      Distributions to
       unitholders          (9,201)       (9,211)      (18,402)      (18,601)
      Re-purchase of
       units                     -             -             -        (8,340)
      Increase in
       operating line
       of credit                 -           777             -           777
      Repayment of
       long-term debt      (24,775)            -       (79,189)            -
      Issuance of
       convertible
       debentures           10,000             -        90,000             -
      Financing trans-
       action costs           (364)            -        (4,223)            -
      Debt extinguish-
       ment costs             (914)            -        (3,217)            -
      Increase (decrease)
       in other long-term
       liabilities             214        (2,150)       (6,160)       (1,277)

    -------------------------------------------------------------------------
                           (25,040)      (10,584)      (21,191)      (27,441)

    Investing activities:
      Decrease in
       restricted cash         201             -           161             -
      Additions to
       property, plant
       and equipment,
       net of insurance
       proceeds             (3,469)       (3,993)       (7,524)      (10,080)

    -------------------------------------------------------------------------
                            (3,268)       (3,993)       (7,363)      (10,080)

    Effect of exchange
     rates on cash held
     in foreign
     currencies               (143)           58          (200)           19

    -------------------------------------------------------------------------
    (Decrease) increase
     in cash and cash
     equivalents           (22,636)       (7,747)        6,334       (40,620)

    Cash and cash
     equivalents -
     beginning of
     period                 48,855        15,177        19,885        48,050
    -------------------------------------------------------------------------

    Cash and cash
     equivalents -
     end of period     $    26,219   $     7,430   $    26,219   $     7,430
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental
     information:
      Cash taxes
       paid            $       286   $       468   $     2,625   $     3,737
      Cash interest
       paid            $     1,427   $     2,327   $     3,588   $     4,612

    See accompanying notes to consolidated financial statements.



    CHEMTRADE LOGISTICS INCOME FUND
    Notes to Consolidated Financial Statements
    (in thousands of dollars)
    (unaudited)

    June 30, 2010

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

    1.  ORGANIZATION AND DESCRIPTION OF THE BUSINESS:

        Chemtrade Logistics Income Fund (the "Fund") commenced operations on
        July 18, 2001 when it completed an Initial Public Offering and
        purchased various assets and related businesses from Marsulex Inc.
        The Fund operates in four business segments: Sulphur Products &
        Performance Chemicals (SPPC), Pulp Chemicals, International and
        Corporate. For additional information regarding the Fund's business
        segments see Note 9.

        These interim consolidated financial statements of the Fund have been
        prepared by management in accordance with accounting principles
        generally accepted in Canada. These interim consolidated financial
        statements include the accounts of the Fund and its wholly-owned
        subsidiaries. Inter-company transactions and balances have been
        eliminated. These interim consolidated financial statements have
        been prepared following the same accounting policies and methods of
        computation as the annual consolidated financial statements of the
        Fund for the year ended December 31, 2009. These interim
        consolidated financial statements do not contain all disclosures
        required by generally accepted accounting principles and accordingly
        should be read in conjunction with the annual consolidated financial
        statements and the notes thereto.

    2. RECENT ACCOUNTING PRONOUNCEMENTS:

        (a) Convergence to International Financial Reporting Standards
            (IFRS):

            In February 2008, the Accounting Standards Board of the CICA
            confirmed that the use of International Financial Reporting
            Standards (IFRS) established by the International Accounting
            Standards Board will be required for fiscal years beginning
            January 1, 2011 for publicly accountable enterprises. IFRS will
            replace Canada's current GAAP. The Fund is currently evaluating
            the impact of adopting IFRS.

        (b) Business combinations:

            In January 2009, the CICA issued Handbook Sections 1582,
            Business Combinations; 1601, Consolidated Financial Statements;
            and 1602, Non-Controlling Interests. These sections replace
            Handbook Sections 1581, Business Combinations; and 1600,
            Consolidated Financial Statements. Section 1582 establishes
            standards for the accounting for business combinations that is
            equivalent to the business combination accounting standard
            under IFRS. Section 1582 is applicable for the Fund's business
            combinations with acquisition dates on or after January 1,
            2011. Early adoption of this section is permitted. Sections
            1601 and 1602 establish standards for the preparation of
            consolidated financial statements and for accounting for a non-
            controlling interest in a subsidiary in the consolidated
            financial statements subsequent to a business combination.
            Sections 1601 and 1602 are applicable for the Fund's interim
            and annual consolidated financial statements for its fiscal
            year beginning January 1, 2011. Early adoption of these
            sections is also permitted. If the Fund chooses to early adopt
            any one of these sections, the other two sections must also be
            adopted at the same time. The Fund is currently evaluating the
            effect of these new sections on the consolidated financial
            statements.

    3.  INSURANCE CLAIMS:

        During the second quarter of 2010, a fire occurred at the Fund's
        Beaumont, Texas facility. Currently, it is not possible to estimate
        the amount of income the Fund has lost or the expected amount of
        recovery the Fund will receive under its business interruption
        insurance policies and therefore as at June 30, 2010, no insurance
        recovery has been recorded. An insurance recovery will be recorded
        when the amount of the recovery has been agreed with the insurer or
        when payments are received. The Fund expects the Beaumont plant to be
        back on-line by late 2010.

        During the second quarter of 2010, the Fund wrote off the value of
        equipment that was damaged in the fire. The costs to repair and
        replace these assets are recoverable under the Fund's property
        insurance policy and to the extent payment had not been received
        prior to June 30, 2010 an amount has been included in Accounts
        receivable.

        During the third quarter of 2008, an incident occurred at the Fund's
        Beaumont, Texas facility, which resulted in property damage and
        business interruption. During the second quarter and first half of
        2009, the Fund incurred capital expenditures of US$nil and US$2,587,
        respectively, relating to the repair of damaged property at the
        Beaumont facility.

    4.  IMPAIRMENT LOSS:

        During the second quarter of 2010, the Fund recorded impairment
        losses of $2,108 related to its intangible assets. This impairment
        loss was recorded to depreciation and amortization within the Pulp
        business segment. These intangible assets were related to certain
        impaired customer relationships that had been recognized at the time
        of the acquisition of the business in 2003.

    5.  LONG-TERM BANK DEBT:

        During the six months ended June 30, 2010, the Fund utilized a
        portion of the net proceeds of the convertible unsecured subordinated
        debenture offering (see Note 6) to repay $79,189 (US$76,770) of its
        existing long-term bank debt. The Fund realized a foreign exchange
        loss of $215 and wrote off the remaining transaction costs related to
        the portion of the long-term bank debt repaid in the amount of $270,
        both of which are included in debt extinguishment costs on the
        Consolidated Statements of Earnings.

        The Fund also collapsed the interest rate swap arrangements related
        to the portion of its long-term bank debt that was repaid. As a
        result of collapsing these arrangements, the Fund had to pay $3,217
        to settle the arrangements; however, it recognized a loss of only
        $214 due to amounts previously recognized in net income. This loss
        has been recorded in debt extinguishment costs on the Consolidated
        Statements of Earnings.

    6.  CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES:

        During the first quarter of 2010, the Fund entered into an agreement
        with a syndicate of underwriters to issue $80,000 principal amount of
        convertible unsecured subordinated debentures (the Debentures).
        During the second quarter of 2010, as allowed under provisions of the
        agreement to issue the Debentures, the underwriters purchased an
        additional $10,000 principal amount of the Debentures, increasing the
        aggregate gross proceeds of the public offering to $90,000. The Fund
        incurred transaction costs of $4,223, which included the
        underwriters' fee and other expenses of the offering.

        The Debentures bear interest at a rate of 6% per annum, payable semi-
        annually in arrears on March 31 and September 30 in each year
        commencing September 30, 2010 and will mature on March 31, 2017. The
        Debentures are convertible, at the option of the holder, into units
        of the Fund at any time prior to the earlier of the maturity date and
        the date of redemption specified by the Fund at a conversion price of
        $16.00 per unit. The Debentures will not be redeemable before and
        including March 31, 2013. On or after April 1, 2013 and prior to
        April 1, 2015, the Fund may, at its option, redeem the Debentures in
        whole or in part provided that the volume weighted average trading
        price of the trust units of the Fund on the Toronto Stock Exchange
        during the 20 consecutive trading days ending on the fifth trading
        day preceding the date on which the notice of redemption is given is
        not less than 125% of the conversion price. On or after April 1, 2015
        and prior to the maturity date, the Fund may, at its option, redeem
        the Debentures, in whole or in part, from time to time at par plus
        accrued and unpaid interest.

        Upon issuance, the Debentures were separated into liability and
        equity components based on the respective estimated fair values at
        the date of issuance. The fair value of the liability component is
        estimated based on the present value of future interest and principal
        payments due under the terms of the Debentures using a discount rate
        for similar debt instruments without a conversion feature. The value
        assigned to the equity component is the estimated fair value ascribed
        to the holder's option to convert. Interest expense on the Debentures
        is determined by applying an effective interest rate to the
        outstanding liability component. The difference between actual cash
        interest accrued and interest expense is accreted to the liability
        component.

        The following table allocates the Debentures between debt and equity:

                           Cost of
                         Borrowing          Debt        Equity         Total
        ---------------------------------------------------------------------

        Convertible
         debentures           6.0%   $    79,507   $    10,493   $    90,000

        Transaction
         costs(1)(2)                      (3,731)         (342)       (4,073)
        ---------------------------------------------------------------------
        At issuance                       75,776        10,151        85,927

        Accretion expense                    417             -           417
        ---------------------------------------------------------------------
        As at June 30,
         2010                        $    76,193   $    10,151   $    86,344
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        (1) Transaction costs are capitalized and offset with the debt and
            equity portions of the debentures and amortized over the life of
            the debentures using the effective interest rate.
        (2) Transaction costs offset against the equity portion of the
            convertible debentures are net of income tax recovery of $150.


        For the three months ended June 30, 2010, the net interest expense
        was $1,740, comprised of accrued interest of $1,350 and accretion
        expense of $390. For the six months ended June 30, 2010, the net
        interest expense was $1,873, comprised of accrued interest of $1,456
        and accretion expense of $417.

    7.  UNITS:

        (a) Authorized:

            Unlimited number of units.

        (b) Outstanding:
                                               Number of Units        Amount
        ---------------------------------------------------------------------
        Units
          Balance - December 31, 2009
           and June 30, 2010                        30,670,470   $   377,144
        ---------------------------------------------------------------------


        (c) Equity component of convertible debentures:

            As described in Note 6, during the first quarter of 2010, the
            Fund entered into an agreement to issue $80,000 principal
            amount of Debentures. During the second quarter of 2010, as
            allowed under provisions of the agreement to issue the
            Debentures, the underwriters purchased an additional $10,000
            principal amount of the Debentures, increasing the aggregate
            gross proceeds of the public offering to $90,000. The
            Debentures are convertible, at the option of the holder, into
            units of the Fund at any time prior to the earlier of the
            maturity date and the date of redemption specified by the Fund
            at a conversion price of $16.00 per unit.

            For the three month and six month periods ended June 30, 2010,
            there were no Debentures converted into units.

        (d) Net (loss) earnings per unit:

            Net (loss) earnings per unit has been calculated on the basis
            of the weighted average number of units outstanding.

            The following table provides a breakdown of the numerator and
            denominator used in the calculation of net (loss) earnings per
            unit and diluted net (loss) earnings per unit.

    Numerator
    ------------------------------------------------------------------------
                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
                              2010          2009          2010          2009
    -------------------------------------------------------------------------

    Net (loss)
     earnings          $    (1,093)  $    13,573   $    12,716   $    14,894
    Net interest and
     accretion expense
     on convertible
     debentures(1)               -             -             -             -
    -------------------------------------------------------------------------
    Diluted net (loss)
     earnings          $    (1,093)  $    13,573   $    12,716   $    14,894
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) For the three and six month periods ended June 30, 2010, the
        potential conversion of the convertible debentures has not been
        included as the effect on net (loss) earnings per unit would be
        anti-dilutive.


    Denominator
    -------------------------------------------------------------------------
                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
                              2010          2009          2010          2009
    -------------------------------------------------------------------------

    Weighted average
     number of units    30,670,470    30,672,773    30,670,470    30,968,686
    Weighted average
     convertible
     debenture
     dilutive units(1)           -             -             -             -
    -------------------------------------------------------------------------
    Weighted average
     number of diluted
     units              30,670,470    30,672,773    30,670,470    30,968,686
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) For the three and six month periods ended June 30, 2010, the effect
        of conversion of the convertible debentures has not been included as
        the effect on net (loss) earnings per unit would be anti-dilutive.


        (e) Distributions:

            Distributions paid for the three month and six month periods
            ended June 30, 2010 were $9,201 and $18,402 respectively (2009
            - $9,211 and $18,601 respectively). All of the Fund's
            distributions are discretionary.

        (f) Long-term incentive plan:

            The Fund operates a Total Return Long-Term Incentive Plan (TR
            LTIP) which grants cash awards based on achieving total
            Unitholder return over a performance period. Total Unitholder
            return consists of changes in unit price and distributions paid
            to Unitholders. The Fund treats these awards as liabilities
            with the value of these liabilities being re-measured at each
            reporting period, based upon changes in the intrinsic value of
            the awards. Any gains or losses on re-measurement are recorded
            in the Consolidated Statements of Earnings, provided that the
            aggregate compensation cost accrued during the performance
            period is not adjusted below zero. For the three month and six
            month periods ended June 30, 2010, the Fund recorded expenses
            of $1,593 and $3,768 respectively (2009 - $2,200 and recovery
            of $1,233 respectively) related to the TR LTIP. As at June 30,
            2010 a liability of $14,570 (December 31, 2009 - $15,979) has
            been recorded, of which $8,915 (December 31, 2009 - $5,177) is
            included in Accrued and other liabilities and $5,655 (December
            31, 2009 - $10,802) is included in Other long-term liabilities.

    8.  ACCUMULATED OTHER COMPREHENSIVE (LOSS):

        The components of accumulated other comprehensive (loss) as at June
        30, 2010 and 2009, and other comprehensive (loss) for the six months
        then ended were as follows:

        Accumulated        Opening                                    Ending
         other comp-       balance                                   balance
         rehensive     December 31,                Transferred       June 30,
         (loss)               2009    Net change  to net income         2010
        ---------------------------------------------------------------------

        Unrealized (loss)
         gain on trans-
         lation of self-
         sustaining
         foreign
         operations    $   (40,935)  $     2,081   $   (430)(1)  $(39,284)(2)
        (Loss) gain on
         derivatives
         designated as
         cash flow
         hedges             (2,413)          564       1,032(3)      (817)(4)
        ---------------------------------------------------------------------
        Accumulated
         other comp-
         rehensive
         (loss)        $   (43,348)  $     2,645   $       602   $   (40,101)
        ---------------------------------------------------------------------

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


        Accumulated            Opening                      Ending
         other comp-           balance                     balance
         rehensive         December 31,                    June 30,
         (loss)                   2008    Net change          2009
        -----------------------------------------------------------

        Unrealized (loss)
         gain on trans-
         lation of self-
         sustaining
         foreign
         operations        $   (19,411)  $    (7,444)  $(26,855)(2)
        (Loss) gain on
         derivatives
         designated as
         cash flow
         hedges                 (4,716)         (282)    (4,998)(4)
        -----------------------------------------------------------
        Accumulated
         other comp-
         rehensive (loss)  $   (24,127)  $    (7,726)  $   (31,853)
        -----------------------------------------------------------

        -----------------------------------------------------------
        -----------------------------------------------------------
        (1) Cumulative translation losses on cash flow hedges collapsed
            during the six month period ended June 30, 2010.
        (2) Net of income tax expense of $nil (2009 - $nil).
        (3) Ineffectiveness of cash flow hedges and losses on derivatives
            designated as cash flow hedges in prior years transferred to net
            income in the current year.
        (4) Net of cumulative income tax recovery of $440 (2009 - $2,875).


    9.  BUSINESS SEGMENTS:

        The Fund operates in four business segments: Sulphur Products &
        Performance Chemicals (SPPC), Pulp Chemicals (Pulp), International
        (Intl) and Corporate (Corp).

        SPPC markets, removes and/or produces merchant and re-generated
        sulphuric acid, liquid sulphur dioxide, sodium hydrosulphite,
        elemental sulphur and phosphorous pentasulphide. These products are
        marketed primarily to North American customers.

        Pulp produces sodium chlorate and crude tall oil. These products are
        marketed primarily to Canadian customers.

        International provides removal and marketing services for elemental
        sulphur and sulphuric acid. These products are marketed to customers
        in Europe, the Mediterranean, North Africa, Central and South
        America, North America, as well as in the Pacific region.

        Corporate is a non-operating segment that provides centralized
        services such as treasury, finance, information systems, human
        resources, legal and risk management.

    Three Months Ended June 30, 2010
    -------------------------------------------------------------------------
                        SPPC        Pulp        Intl        Corp       Total
    -------------------------------------------------------------------------

    Revenue from
     external
     customers     $  81,952   $  11,183   $  44,271   $       -   $ 137,406

    Earnings
     before the
     under-noted      13,247       3,987       3,731      (5,989)     14,976
    Unrealized
     foreign ex-
     change (gain)
     loss and in-
     effectiveness
     of cash flow
     hedges                 -          -            -      1,685       1,685
    Debt ex-
     tinguishment
     costs                  -          -            -        128         128
    Depreciation
     and amort-
     ization            9,410      4,530          479          -      14,419
    Net interest
     and accretion
     expense            1,276          -           (5)     1,740       3,011
    Income taxes       (1,671)         -          181     (1,684)     (3,174)

    Net earnings
     (loss)             4,232       (543)       3,076     (7,858)     (1,093)

    Total assets      253,395     73,718      162,965      4,246     494,324

    Goodwill           60,650          -       30,648          -      91,298

    Intangibles        62,994     29,382        3,914          -      96,290

    Capital ex-
     penditures         3,334         59           18         58       3,469
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Three Months Ended June 30, 2009
    -------------------------------------------------------------------------
                        SPPC        Pulp        Intl        Corp       Total
    -------------------------------------------------------------------------

    Revenue from
     external
     customers     $  77,908   $  13,248   $  33,468   $       -   $ 124,624

    Earnings
     before the
     under-noted      15,221       4,745       4,927      (7,433)     17,460
    Unrealized
     foreign ex-
     change (gain)
     loss and in-
     effectiveness
     of cash flow
     hedges                -           -           -      (9,147)     (9,147)
    Depreciation
     and amort-
     ization           8,263       2,435         574           -      11,272
    Net interest
     and accretion
     expense           1,900         462         (20)          -       2,342
    Income taxes      (1,255)          -         675           -        (580)

    Net earnings       6,313       1,848       3,698       1,714      13,573

    Capital ex-
     penditures        3,115         108         605         165       3,993
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Six Months Ended June 30, 2010
    -------------------------------------------------------------------------
                        SPPC        Pulp        Intl        Corp       Total
    -------------------------------------------------------------------------

    Revenue from
     external
     customers     $ 155,452   $  22,094   $  86,684   $       -   $ 264,230

    Earnings
     before the
     under-noted      29,754       8,769      14,016     (13,086)     39,453
    Unrealized
     foreign ex-
     change (gain)
     loss and in-
     effectiveness
     of cash flow
     hedges                -           -           -       1,271       1,271
    Debt ex-
     tinguishment
     costs                 -           -           -         699         699
    Depreciation
     and amort-
     ization          17,389       6,884         959           -      25,232
    Net interest
     and accretion
     expense           2,999         405          (2)      1,873       5,275
    Income taxes      (3,959)          -         998      (2,779)     (5,740)

    Net earnings
     (loss)           13,325       1,480      12,061     (14,150)     12,716

    Total assets     253,395      73,718     162,965       4,246     494,324

    Goodwill          60,650           -      30,648           -      91,298

    Intangibles       62,994      29,382       3,914           -      96,290

    Capital ex-
     penditures        7,183         258          31          52       7,524
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Six Months Ended June 30, 2009
    -------------------------------------------------------------------------
                        SPPC        Pulp        Intl        Corp       Total
    -------------------------------------------------------------------------

    Revenue from
     external
     customers     $ 177,603   $  25,191   $  83,653   $       -   $ 286,447

    Earnings
     before the
     under-noted      24,366       9,531       8,748      (6,909)     35,736
    Unrealized
     foreign ex-
     change (gain)
     loss and in-
     effectiveness
     of cash flow
     hedges                 -          -           -      (5,244)     (5,244)
    Depreciation
     and amort-
     ization           16,556      4,707       1,174           -      22,437
    Net interest
     and accretion
     expense            3,555        958         (68)          -       4,445
    Income taxes       (2,121)         -       1,325           -        (796)

    Net earnings
     (loss)             6,376      3,866       6,317      (1,665)     14,894

    Capital ex-
     penditures         8,873        208         645         354      10,080
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    December 31, 2009
    -------------------------------------------------------------------------
                        SPPC        Pulp        Intl        Corp       Total
    -------------------------------------------------------------------------

    Total assets   $ 241,940   $ 103,821   $ 148,512   $   1,204   $ 495,477

    Goodwill          60,097           -      30,533           -      90,630

    Intangibles       69,934      34,192       4,263           -     108,389
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


        Geographic segments:

        The Fund operates primarily in Canada, the United States and Europe.
        Revenue is attributed to customers based on location of customer.

        Revenue
        ---------------------------------------------------------------------
                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
                              2010          2009          2010          2009
        ---------------------------------------------------------------------
        Canada         $    28,090   $    28,660   $    54,932   $    60,183
        U.S.                65,045        62,496       122,614       142,611
        Europe              44,271        33,468        86,684        83,653
        ---------------------------------------------------------------------
                       $   137,406   $   124,624   $   264,230   $   286,447
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        Property, Plant and Equipment, Goodwill and Intangibles

                                                       June 30,  December 31,
                                                          2010          2009
        ---------------------------------------------------------------------
        Canada                                     $   101,855   $   110,876
        U.S. and other                                 190,048       202,174
        Europe                                          42,298        42,929
        ---------------------------------------------------------------------
                                                   $   334,201   $   355,979
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        For the six months ended June 30, 2010, there were no producers from
        which the Fund obtained product that accounted for more than 10% of
        the Fund's total revenue. For the six months ended June 30, 2009, the
        Fund obtained product from a producer that accounted for 14.6% of the
        Fund's total revenue. For the six months ended June 30, 2010, revenue
        from a customer accounted for 10.5% (2009 - 10.9%) of the Fund's
        total revenues.

    10. FINANCIAL INSTRUMENTS:

        (a) Categories of financial assets and liabilities:

            The following table summarizes information regarding the
            carrying values of the Fund's financial instruments:

                                                       June 30,  December 31,
                                                          2010          2009
            -----------------------------------------------------------------

            Held for trading:
              Cash and cash equivalents            $    26,219   $    19,885
              Restricted cash                            2,438         2,599
              Notes receivable                           2,662         2,627
              Derivatives designated as held
              for trading - (loss) / gain               (3,936)        1,007

            Loans and receivables:
              Accounts receivable                       84,476        75,748

            Other financial liabilities:
              Accounts payable                          42,323        42,918
              Accrued and other liabilities             51,528        42,920
              Distributions payable                      3,067         3,067
              Derivatives designated as cash
               flow hedges - (loss)                          -        (6,677)
              Long-term debt                           157,144       160,105
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (b) Derivatives and hedging:

            -----------------------------------------------------------------
                                      June 30,                 December 31,
                                        2010                       2009
                                     Fair Value                 Fair Value

                       Notional           Liabil-  Notional          Liabil-
                         Amount    Asset     ity     Amount   Asset     ity
           ------------------------------------------------------------------
           Cash flow
            hedges:
             Interest
              rate
              swaps            -  $     - $     - US$153,138 $     - $ 6,677

           Derivatives
            not design-
            ated in a
            formal
            hedging
            relationship:

              Interest
               rate
               swaps   US$76,368  $     - $ 2,631          - $     - $     -

              Foreign
               exchange
               contracts(1)    -        -   1,305          -   1,166     159

              Commodity
               forward
               contracts(2)  N/A       57      57        N/A     148     148
           ------------------------------------------------------------------
           Total                  $    57 $ 3,993            $ 1,314 $ 6,984
           ------------------------------------------------------------------
           ------------------------------------------------------------------

           Current                $    57 $ 1,362            $ 1,314 $   307
           Non-current                  -   2,631                  -   6,677
           ------------------------------------------------------------------
           Total                  $    57 $ 3,993            $ 1,314 $ 6,984
           ------------------------------------------------------------------
           ------------------------------------------------------------------
           (1) See below for notional amounts.
           (2) Includes commitments to buy and sell commodities and commodity
               forward contracts related to those commitments.


            The Fund has entered into swap arrangements with its principal
            banker, which fix the LIBOR component of its interest rates on
            all of its outstanding term debt until August 2011. During the
            six months ended June 30, 2010, the Fund collapsed a portion of
            its swap arrangements. Losses are included in other long-term
            liabilities and prior to June 29, 2010 the offset was included
            in other comprehensive income, except for the amortization of
            the fair value liability of the interest rate swaps entered
            into during the first quarter of 2009 which was included in
            unrealized foreign exchange (gain) loss and ineffectiveness of
            cash flow hedges. As at June 29, 2010, the Fund de-designated
            its remaining swap arrangements as cash flow hedges. In the
            future, all changes in the fair market value of the swap
            arrangements will be recorded in the Consolidated Statements of
            Earnings. In addition, the Fund will amortize the remaining
            amount in Accumulated Other Comprehensive Income related to the
            swap arrangements to the Consolidated Statements of Earnings
            over the remaining term of the swap arrangements.

            The Fund has entered into foreign exchange contracts to manage
            its exposure to foreign currencies. The Fund buys and sells
            specific amounts of currencies at pre-determined dates and
            exchange rates, which are matched with the anticipated
            operational cash flows. Contracts in place at June 30, 2010
            include future contracts to sell US$5,027, C$7,602 and
            (euro) 1,878 at weighted average exchange rates of (euro)0.79,
            (euro) 0.65 and US$1.22, respectively, for periods through to
            January 2011.

            The Fund's International business segment has commitments to
            buy and sell commodities and has entered into commodity forward
            contracts to manage its exposure to commodity price changes.

            The commitments to buy and sell commodities and the associated
            forward contracts are treated as derivatives and are measured
            at fair value. At June 30, 2010 and December 31, 2009, the net
            unrealized value of these transactions was not significant.

        (c) Fair values of financial instruments:

            Fair value is the value that would be agreed upon in an arm's
            length transaction between willing and knowledgeable counter-
            parties. The carrying amounts of cash and cash equivalents,
            accounts receivable, restricted cash, notes receivable,
            accounts payable, accrued and other liabilities, and
            distributions payable approximate their fair values because of
            the short-term maturity of these financial instruments. The
            carrying amount of long-term debt, excluding transaction costs,
            approximates fair value as the debt accrues interest at
            prevailing market rates.


                       CHEMTRADE LOGISTICS INCOME FUND
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
                 FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2010
    

The information in this Management's Discussion and Analysis, or MD&A, is intended to assist the reader in the understanding and assessment of the trends and significant changes in the results of operations and financial condition of Chemtrade Logistics Income Fund. Throughout this MD&A, the term the "Fund" refers to Chemtrade Logistics Income Fund and its consolidated subsidiaries. The terms "we", "us" or "our" similarly refers to the Fund. This MD&A should be read in conjunction with the unaudited consolidated statements of the Fund for the six month period ended June 30, 2010 and the annual MD&A for the year ended December 31, 2009.

The Fund's financial statements are prepared in accordance with accounting principles generally accepted in Canada, or Canadian GAAP. The Fund's reporting currency is the Canadian dollar. In this MD&A per unit amounts are calculated using the weighted average number of units outstanding for the applicable period unless otherwise indicated.

This MD&A contains certain statements which may constitute "forward-looking" statements within the meaning of certain securities laws, including the "safe harbour" provisions of the Securities Act (Ontario). The use of any of the words "anticipate", "continue", "estimate", "expect", "expected", "intend", "may", "will", "project", "plan", "should", "believe" and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this MD&A describes the expectations of the Fund as of the date of this MD&A. The Fund's actual results could be materially different from its expectations if known or unknown risks affect its business, or if its estimates or assumptions turn out to be inaccurate. As a result, the Fund cannot guarantee that any forward-looking statement will materialize. Forward-looking statements do not take into account the effect that transactions or non-recurring items announced or occurring after the statements are made may have on the Fund's business. The Fund disclaims any intention or obligation to update any forward-looking statement even if new information becomes available, as a result of future events or for any other reason.

This MD&A contains forward-looking statements about the objectives, strategies, financial condition, results of operations and businesses of the Fund including, but not limited to (capitalized terms are as defined in the MD&A):

- all of the risks identified in "RISKS AND UNCERTAINTIES" section;

- all of the forward-looking statements in the "OUTLOOK" section;

- the amount of any TR LTIP payouts and the amounts to be accrued under the TR LTIP;

- the timing of the reversal of deductible temporary differences of certain flow-though subsidiaries;

- with respect to the 2010 Beaumont incident, the amount of income lost, the ability to recover and the quantum of any recovery from the Fund's insurers, and the timing of the plant's return to production;

- the ability to comply with the new emission limits imposed by the EPA and the expected cost of compliance;

- the estimated impact of the Canadian/U.S. dollar exchange rate on the Fund's business;

- the anticipated tax characterization of planned distributions;

- the Fund's ability to renew its term debt at maturity;

- the implementation of planned maintenance capital expenditures, as well as the cost and timing thereof;

- the use and sufficiency of cash flows from operating activities;

- the potential impact of recent accounting pronouncements; and

- with respect to IFRS, the timing of the implementation of various transition steps, the IFRS1 and policy choices made, and the impact thereof.

Financial outlook information contained in the MD&A 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 MD&A should not be used for purposes other than those for which it is disclosed herein.

    
    FINANCIAL HIGHLIGHTS


                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
    ($'000 except per      June 30,      June 30,      June 30,      June 30,
     unit amounts)            2010          2009          2010          2009
    -------------------------------------------------------------------------

    Revenue            $   137,406   $   124,624   $   264,230   $   286,447

    Net (loss)
     earnings          $    (1,093)  $    13,573   $    12,716   $    14,894

    Net (loss)
     earnings per unit
       - Basic         $     (0.04)  $      0.44   $      0.41   $      0.48
       - Diluted       $     (0.04)  $      0.44   $      0.41   $      0.48

    Total assets       $   494,324   $   505,801   $   494,324   $   505,801

    Long-term bank
     debt              $    80,951   $   176,921   $    80,951   $   176,921

    Convertible
     unsecured
     subordinated
     debentures        $    76,193   $         -   $    76,193   $         -

    EBITDA(3)          $    14,976   $    17,460   $    39,453   $    35,736
    EBITDA per unit(1) $      0.49   $      0.57   $      1.29   $      1.15

    Cash flows from
     operating
     activities        $     5,815   $     6,772   $    35,088   $    (3,118)
    Cash flows from
     operating
     activities per
     unit(1)           $      0.19   $      0.22   $      1.14   $     (0.10)

    Adjusted cash
     flows from
     operating
     activities(3)     $    11,301   $    14,782   $    30,109   $    30,210
    Adjusted cash
     flows from
     operating
     activities per
     unit(1)(3)        $      0.37   $      0.48   $      0.98   $      0.98

    Distributable
     cash after
     maintenance
     capital ex-
     penditures(3)     $     8,129   $    10,982   $    23,064   $    20,616
    Distributable
     cash after
     maintenance
     capital ex-
     penditures
     per unit(1)(3)    $      0.27   $      0.36   $      0.75   $      0.67

    Distributions
     declared          $     9,201   $     9,201   $    18,402   $    18,489
    Distributions
     declared per
     unit(2)           $      0.30   $      0.30   $      0.60   $      0.60

    Distributions
     paid              $     9,201   $     9,211   $    18,402   $    18,601
    Distributions
     paid per unit(2)  $      0.30   $      0.30   $      0.60   $      0.60
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    (1) Based on weighted
         average number of
         units outstanding
         for the period
         of:            30,670,470    30,672,773     30,670,470   30,968,686

    (2) Based on actual number of units outstanding on record date.

    (3) See NON-GAAP MEASURES.
    

NON-GAAP MEASURES

EBITDA -

Throughout this MD&A, the term EBITDA is used to describe earnings before any deduction for net interest and accretion expense, taxes, depreciation and amortization and other charges such as unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges. EBITDA is a metric used by many investors and analysts to compare organizations on the basis of ability to generate cash from operations. Management considers EBITDA (as defined) to be an indirect measure of operating cash flow, which is a significant indicator of the success of any business. EBITDA is not intended to be representative of cash flow from operations or results of operations determined in accordance with Canadian generally accepted accounting principles (GAAP) or cash available for distribution.

EBITDA is not a recognized measure under Canadian GAAP. The Fund's method of calculating EBITDA may differ from methods used by other income trusts or companies, and accordingly may not be comparable to similar measures presented by other organizations. A reconciliation of EBITDA to net earnings follows:

    
                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
    ($'000)                   2010          2009          2010          2009
    -------------------------------------------------------------------------

    Net (loss)
     earnings          $    (1,093)  $    13,573   $    12,716   $    14,894
      Add:
        Unrealized
         foreign ex-
         change loss
         (gain) and
         ineffective-
         ness of cash
         flow hedges         1,685        (9,147)        1,271        (5,244)
        Debt extinguish-
         ment costs            128             -           699             -
        Depreciation and
         amortization       14,419        11,272        25,232        22,437
        Net interest and
         accretion
         expense             3,011         2,342         5,275         4,445
        Net taxes           (3,174)         (580)       (5,740)         (796)
    -------------------------------------------------------------------------
    EBITDA             $    14,976   $    17,460   $    39,453   $    35,736
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Cash Flow -

The following table is derived from, and should be read in conjunction with, the consolidated statement of cash flows. Management believes this supplementary disclosure provides useful additional information related to the cash flows of the Fund including the amount of cash available for distribution to Unitholders, repayment of debt and other investing activities. Certain sub-totals presented within the cash flows table below, such as "Adjusted cash flows from operating activities", "Distributable cash after maintenance capital expenditure" and "Distributable cash after all capital expenditure", are not defined terms under Canadian GAAP. These sub-totals are used by management as measures of internal performance and as a supplement to the consolidated statement of cash flows. Investors are cautioned that these measures should not be construed as an alternative to using net income as a measure of profitability or as an alternative to the GAAP consolidated statement of cash flows. Further, the Fund's method of calculating each measure may not be comparable to calculations used by other income trusts bearing the same description.

    
                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
    ($'000)                   2010          2009          2010          2009
    -------------------------------------------------------------------------

    Cash flows from
     operating
     activities        $     5,815   $     6,772   $    35,088   $    (3,118)

    Add (deduct):

    Changes in non-
     cash working
     capital and
     other items             5,486         8,010        (4,979)       33,328
    -------------------------------------------------------------------------
    Adjusted cash flows
     from operating
     activities             11,301        14,782        30,109        30,210

    Less:

    Maintenance capital
     expenditure             3,172         3,800         7,045         9,594
    -------------------------------------------------------------------------
    Distributable cash
     after maintenance
     capital expenditure     8,129        10,982        23,064        20,616

    Less:

    Non-maintenance
     capital expenditure(1)    297           193           479           486
    -------------------------------------------------------------------------
    Distributable cash
     after all capital
     expenditure             7,832        10,789        22,585        20,130

    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Non-maintenance capital expenditures are either pre-funded, usually
        as part of a significant acquisition and related financing or are
        considered to expand the capacity of the Fund's operations.
    

CONSOLIDATED OPERATING RESULTS

Consolidated revenue for the second quarter of 2010 was $137.4 million, which was $ 12.8 million higher than the same quarter of 2009, principally due to higher volumes within the SPPC segment and higher sulphur prices in the International and SPPC segments. On a year-to-date basis, consolidated revenue declined by $22.2 million, mainly due to the impact of the weaker U.S. dollar on U.S. dollar denominated sales.

The Fund's net loss and EBITDA for the second quarter of 2010 were $1.1 million and $15.0 million, respectively, compared with net earnings and EBITDA for the second quarter of 2009 of $13.6 million and $17.5 million, respectively. 2010 second quarter EBITDA was lower than the same quarter of 2009 mainly due to the impact of the Beaumont incidents (as described in the BEAUMONT INCIDENTS section).

The reduction in net earnings during the second quarter of 2010 compared with the second quarter of 2009 was even more pronounced as during 2009, there was a large unrealized foreign exchange gain recorded whereas in the second quarter of 2010 a loss was recorded.

Net earnings and EBITDA for the first six months of 2010 were $12.7 million and $39.5 million respectively. Comparable net earnings and EBITDA for the first six months of 2009 were $14.9 million and $35.7 million respectively. EBITDA during the first six months of 2010 was higher than the same period in 2009 due to the significantly stronger results in the International and SPPC segments generated during the first quarter of 2010. However, this did not result in increased earnings due to the high level of unrealized foreign exchange gains recorded during the first six months of 2009.

RESULTS OF OPERATIONS BY BUSINESS SEGMENT

SPPC -

    
                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
    ($'000)                   2010          2009          2010          2009
    -------------------------------------------------------------------------

    Revenue            $    81,952   $    77,908   $   155,452   $   177,603

    Earnings before
     the under-noted
     (EBITDA)               13,247        15,221        29,754        24,366
    Depreciation and
     amortization           (9,410)       (8,263)      (17,389)      (16,556)
    Net interest and
     accretion expense      (1,276)       (1,900)       (2,999)       (3,555)
    Income tax recovery      1,671         1,255         3,959         2,121
    -------------------------------------------------------------------------
    Net earnings       $     4,232   $     6,313   $    13,325   $     6,376
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

SPPC manufactures and distributes sulphuric acid and other sulphur-based products to an extensive customer base in Canada and the U.S., and provides acid regeneration services to the petroleum industry, primarily in the U.S. Gulf Coast area. SPPC also supplies liquid and powder sodium hydrosulphite, which is sold to the pulp and paper industry and to a lesser extent, to the textile industry.

For the second quarter of 2010, SPPC generated revenue of $82.0 million, which was $4.0 million higher than the second quarter of 2009, mainly due to higher volumes and higher sulphur prices. These factors more than offset the negative impact of the weaker U.S. dollar on U.S. dollar denominated revenue. In the second quarter of 2010, net earnings and EBITDA were lower than the same period of 2009 by $2.1 million and $2.0 million, respectively. The main reason for these decreases was the effect of the Beaumont incidents (as described in the BEAUMONT INCIDENTS section). Results for the second quarter of 2009 benefited by $2.3 million, due to an insurance recovery relating to the 2008 Beaumont incident; whereas, during the second quarter of 2010, the fire at the Beaumont plant in May 2010 resulted in the plant being off-line for half the quarter and increased costs were incurred to ensure that customer operations were not disrupted.

For the first six months of 2010, revenue declined by $22.2 million from the level achieved during the same period of 2009. This was mainly due to the impact of the weaker U.S. dollar on U.S. dollar denominated revenue. For the first six months of 2010, net earnings and EBITDA improved by $6.9 million and $5.4 million respectively from the levels generated during the same period of 2009. The main reason for these improvements was that during 2009, additional costs were incurred while the Beaumont plant was being re-started after the 2008 incident. Additionally, input costs for certain products were lower in the first six months of 2010 relative to the same period of 2009.

Net interest expenses were lower in the second quarter and first six months of 2010 due mainly to the repayment of long-term bank debt. See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities.

The higher income tax recovery during the second quarter and first six months of 2010 is due mainly to lower taxable income in certain Canadian and foreign corporate subsidiaries.

Pulp Chemicals -

    
                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
    ($'000)                   2010          2009          2010          2009
    -------------------------------------------------------------------------

    Revenue            $    11,183   $    13,248   $    22,094   $    25,191

    Earnings before
     the under-noted
     (EBITDA)                3,987         4,745         8,769         9,531
    Depreciation and
     amortization           (4,530)       (2,435)       (6,884)       (4,707)
    Net interest and
     accretion expense           -          (462)         (405)         (958)
    -------------------------------------------------------------------------
    Net (loss)
     earnings          $      (543)  $     1,848   $     1,480   $     3,866
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Pulp Chemicals produces sodium chlorate and crude tall oil (CTO), both of which are chemicals used in the pulp and paper industry. Sodium chlorate is used to bleach pulp and CTO is used as a less expensive alternative energy source to natural gas.

Second quarter 2010 Pulp Chemicals revenue was $2.1 million lower than the level achieved during the second quarter of 2009, mainly due to lower sales volume of sodium chlorate. The reduced volume also resulted in revenue for the first six months of 2010 being $3.1 million lower than the same period of 2009. The negative impact of the reduced volume was partially offset by lower costs, resulting in a reduction in EBITDA of approximately $0.8 million for the second quarter and first six months of 2010 relative to the comparable periods of 2009.

Depreciation and amortization for the second quarter and first six months of 2010 were higher than the same periods of 2009 due to impairment charges recorded in the value of intangible assets. These intangible assets relate to certain customer relationships and had been recognized at time of the acquisition of this business in 2003.

Net interest expenses were lower in the second quarter and first six months of 2010 due mainly to the repayment of long-term bank debt. See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities.

International -

    
                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
    ($'000)                   2010          2009          2010          2009
    -------------------------------------------------------------------------

    Revenue            $    44,271   $    33,468   $    86,684   $    83,653

    Earnings before
     the under-noted
     (EBITDA)                3,731         4,927        14,016         8,748
    Depreciation and
     amortization             (479)         (574)         (959)       (1,174)
    Net interest income          5            20             2            68
    Income tax (expense)      (181)         (675)         (998)       (1,325)
    -------------------------------------------------------------------------
    Net earnings       $     3,076   $     3,698   $    12,061   $     6,317
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

International operations provide removal and marketing services for elemental sulphur and sulphuric acid. These products are marketed to customers globally.

Revenues for the second quarter and first six months of 2010 were higher than the same periods of 2009, mainly due to higher prices for sulphur. Net earnings and EBITDA for the second quarter of 2010 were $0.6 million and $1.2 million lower than the same period of 2009, as 2009 results benefited from a few high-margin contracts. For the first six months of 2010, net earnings and EBITDA were $5.7 million and $5.3 million higher than the first six months of 2009. These increases were due to significantly higher earnings realized during the first quarter of 2010, when certain customers who had delayed delivery from earlier periods honoured their commitments at pricing that resulted in favourable margins.

Corporate -

    
                          Three Months Ended            Six Months Ended
                       --------------------------  --------------------------
                           June 30,      June 30,      June 30,      June 30,
    ($'000)                   2010          2009          2010          2009
    -------------------------------------------------------------------------

    Cost of services   $     5,989   $     7,433   $    13,086   $     6,909

    Loss before
     the under-noted
     (EBITDA)               (5,989)       (7,433)      (13,086)       (6,909)
    Unrealized foreign
     exchange gain
     (loss) and in-
     effectiveness of
     cash flow hedges       (1,685)        9,147        (1,271)        5,244
    Debt extinguishment
     costs                    (128)            -          (699)            -
    Net interest and
     accretion expense      (1,740)            -        (1,873)            -
    Income tax
     recovery                1,684             -         2,779             -
    -------------------------------------------------------------------------
    Net (loss)
     earnings          $    (7,858)  $     1,714   $   (14,150)  $    (1,665)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

The Corporate segment includes the administrative costs of corporate activities such as treasury, finance, information technology, human resources, legal and risk management, which are not directly allocable to an operating segment.

For the second quarter, corporate costs, excluding unrealized foreign exchange gains and losses, were $1.4 million lower than the second quarter of 2009. During the second quarter of 2010, accruals for the Fund's Total Return Long-Term Incentive Plan (TR LTIP) were $0.6 million lower than the second quarter of 2009. Also, during the second quarter of 2009, the Fund recorded unrealized losses of $0.6 million relating to natural gas swaps, whereas there were no swaps during the second quarter of 2010.

For the first six months of 2010, the main reasons for the $6.2 million increase in corporate costs relative to the first six months of 2009 were a TR LTIP accrual of $3.8 million, compared with a net reversal of $1.2 million in the first six months of 2009 and an expenditure of $0.8 million with respect to diligence activities relating to a potential acquisition that did not result in a transaction. Additionally, costs were lower in the first six months of 2009 because they included realized foreign exchange gains of $1.4 million, whereas there were foreign exchange gains of $0.4 million during the first six months of 2010. The impact of these items was partially offset by higher costs of $0.7 million recorded during the first six months of 2009 relating to unrealized natural gas swaps and additional allowances for doubtful accounts receivable.

The comments on TR LTIP expenses relate to the 2008-2010, 2009-2011 and 2010-2012 TR LTIPs. The 2008-2010, 2009-2011 and 2010-2012 TR LTIP payouts are payable at the beginning of 2011, 2012 and 2013 respectively and will be based upon Total Return, as described in the Fund's Management Information Circular, achieved over the three-year performance periods of each plan. The nature of this calculation makes it difficult to forecast the amount of TR LTIP expenses that will be recordable in any period as it is based upon future distributions and changes in unit value.

The Corporate segment includes unrealized foreign exchange gains on the translation of U.S. dollar denominated debt, which were a result of the appreciation in the Canadian dollar relative to the U.S. dollar during the first six months of 2010. This exchange rate fluctuation also resulted in unrealized foreign exchange losses on the translation of U.S. dollar denominated assets in self-sustaining foreign operations. However, in accordance with accounting rules, those losses are required to be shown in other comprehensive income rather than in earnings.

Also included in unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges is the ineffectiveness of the Fund's cash flow hedges entered into in the first quarter of 2009. See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities - Financial Instruments for more detail.

Debt extinguishment costs for the second quarter and first six months of 2010 of $0.1 million and $0.7 million respectively relate to the repayment of a portion of the Fund's long-term debt which is more fully described in LIQUIDITY AND CAPITAL RESOURCES - Financing Activities. The impact on Distributable cash after maintenance capital expenditure was more significant, as the cash component of this cost was $0.9 million and $3.2 million during the second quarter and first six months of 2010 respectively.

Net interest and accretion expense for the second quarter and first six months of 2010 of $1.7 million and $1.9 million respectively relates to the convertible debentures issued during the first quarter of 2010. See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities.

The income tax recovery of $1.7 million and $2.8 million during the second quarter and first six months of 2010 represents future taxes related to deductible temporary differences of certain flow-through subsidiaries expected to reverse subsequent to 2010.

BEAUMONT INCIDENTS -

During the second quarter of 2010, a fire occurred at the Fund's Beaumont, Texas facility. Currently, it is not possible to accurately estimate the amount of income the Fund has lost or the expected amount of recovery the Fund will receive under its business interruption insurance policies and therefore as at June 30, 2010, no insurance recovery has been recorded. An insurance recovery will be recorded when the amount of the recovery has been agreed with the insurer or when payments are received. The Fund expects the Beaumont plant to be back on-line by late 2010.

During the second quarter of 2010, the Fund wrote off the value of equipment that was damaged in the fire. The costs to repair and replace these assets are recoverable under the Fund's property insurance policy and to the extent payment had not been received prior to June 30, 2010 an amount has been included in Accounts receivable.

During the third quarter of 2008, an explosion occurred at the Fund's Beaumont, Texas facility which resulted in property damage as well as business interruption. After a lengthy period of repairs, the plant was operational during the first quarter of 2009. During the six months of 2009, the Fund incurred operational, legal and consulting costs relating to this incident.

During the second quarter of 2009, the Fund received an interim payment from its insurer of US$2.5 million with respect to the business interruption loss. The Fund allocated US$0.5 million of this towards a receivable that had been previously recorded and the balance was included in selling, general, administrative and other costs in the SPPC segment.

During the fourth quarter of 2009, the Fund concluded its property damage claim and recovered US$9.8 million of its capital expenditures relating to the repair. The Fund also concluded its business interruption claim and recovered an aggregate of US$10.6 million.

U.S. ENVIRONMENTAL PROTECTION AGENCY (EPA) SETTLEMENT

In January 2009, the Fund reached a settlement with the EPA and certain States, whereby new emission limitations would be established at each of its five sulphuric acid manufacturing facilities. The agreement with Chemtrade arose from a broader EPA initiative regarding the domestic sulphuric acid manufacturing industry. Chemtrade's plants have met or will meet these stricter limits by various agreed dates ranging from December 2009 to December 2012. Chemtrade anticipates that these compliance actions will cost approximately US$6.0 million in respect of four facilities, most of which will be spent to bring its Riverton, Wyoming facility into compliance with the new limits by December 2012. Chemtrade is in compliance with these requirements and remains confident that it will fulfill its obligations under this agreement. Because of Chemtrade's existing overall levels of control, the civil penalty paid by Chemtrade was not material and it was recorded in 2008. Certain additional funds and penalties will be expended in respect of Chemtrade's Cairo facility, but those costs will be paid for by Marsulex Inc. pursuant to an indemnity agreement between the two companies.

FOREIGN EXCHANGE

The Fund has operating subsidiaries that are based in the U.S. In addition, BCT Chemtrade Corporation, the Fund's international subsidiary, uses the U.S. dollar as its measurement currency. As the Fund reports in Canadian dollars, its reported earnings are exposed to fluctuations in the Canadian/U.S. dollar exchange rate. The Fund currently estimates that on an unhedged basis, a $0.01 increase in the Canadian/U.S. dollar exchange rate reduces Distributable cash after maintenance capital expenditures by less than $0.1 million on an annual basis and vice-versa.

To manage the volatility of foreign exchange rates, the Fund has entered into a series of foreign exchange contracts with its principal bankers. All foreign exchange contracts are under International Swap and Derivatives Association (ISDA) agreements. Contracts in place at June 30, 2010 include future contracts to sell US$5.0 million, C$7.6 million and (euro)1.9 million at weighted average exchange rates of (euro)0.79, (euro)0.65 and US$1.22, respectively, for periods through to January 2011. There are unrealized losses of $1.3 million from these contracts at June 30, 2010.

The purpose of these contracts is to hedge specific transactions in a foreign currency. The amount of the related derivative is recorded at fair market value at the period end and included with prepaid expenses and other assets or accrued and other liabilities on the balance sheet. The resultant non-cash charge or gain is reported as unrealized foreign exchange (gain) loss. The impact of this non-cash charge or gain is excluded from the computation of Distributable cash after maintenance capital expenditures. See NON-GAAP MEASURES - Cash Flow.

The Fund's International and U.S. based operations are considered to be self-sustaining, as they are financially independent. As a result, gains or losses arising from the translation of the assets and liabilities of self-sustaining operations are recorded in other comprehensive income. The changes recorded in the accumulated other comprehensive income account since December 31, 2009 were a result of changes in the Canadian/U.S. dollar exchange rate between December 31, 2009 and June 30, 2010. Until the first quarter of 2010, when it was repaid, the Fund's Canadian based operations had all its term debt denominated in U.S. dollars. The gains or losses arising from the translation of these loans were recorded on the Consolidated Statements of Earnings as unrealized foreign exchange (gain) loss. The rate of exchange used to translate U.S. denominated balances has changed from a rate of US$1.00 (equal sign) $1.05 at December 31, 2009 to US$1.00 = $1.06 at June 30, 2010. See RISKS AND UNCERTAINTIES for additional comments on foreign exchange.

NET INTEREST AND ACCRETION EXPENSE

Net interest and accretion expense was $3.0 million in the second quarter of 2010 compared with $2.3 million in the second quarter of 2009. Net interest and accretion expense was $5.3 million in the first six months of 2010 compared with $4.4 million in the first six months of 2009.

Interest expense in 2010 was higher than 2009 mainly due to the interest rate on the convertible debentures that were issued during the first and second quarters of 2010 being higher than the interest rate on the long-term bank debt which was repaid during the second quarter and first six months of 2010. In addition, there were reversals of accruals in the first quarter of 2009, related to interest accruals from 2008 which were rolled into the fair value of the new interest rate swap arrangements entered into during the first quarter of 2009. See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities - Financial Instruments.

The weighted average effective annual interest rate at June 30, 2010 on the Fund's long-term bank debt was 4.45% (December 31, 2009 - 4.83%). See LIQUIDITY AND CAPITAL RESOURCES - Financing Activities - Financial Instruments for information concerning swap arrangements.

During the second quarter and first six months of 2010 the Fund recorded accretion expense of $0.5 and $0.7 million, respectively, compared to $0.1 million and $0.3 million during the second quarter and first six months of 2009. The higher accretion expense is due to the accretion on the convertible debentures issued during the first and second quarters of 2010.

INCOME TAXES

Current income tax expense was $0.4 million and $1.5 million for the second quarter and first six months of 2010 respectively, compared with $1.1 million and $1.8 million for the second quarter and first six months of 2009 respectively. The future income tax recovery was $3.6 million and $7.2 million for the second quarter and first six months of 2010 compared to the future income tax recovery of $1.7 million and $2.6 million for the second quarter and first six months of 2009 respectively. The effective tax rates for the second quarter and first six months of 2010 differ from the statutory tax rate of 30.6% primarily due to the operating losses in high tax rate jurisdictions and operating profits in low tax rate jurisdictions and flow-through entities.

The increase in future tax asset of $3.4 million at June 30, 2010 relative to December 31, 2009 is the result of increased tax loss carry forwards, net of valuation allowances, and other deductible temporary differences, net of valuation allowances, available in certain Canadian and foreign corporate subsidiaries.

The decrease in future tax liability of $3.0 million at June 30, 2010 relative to December 31, 2009 is the result of the decrease in the taxable temporary differences between the accounting carrying amount and the tax basis of assets associated with certain Canadian and foreign corporate subsidiaries.

At June 30, 2010, the Fund has $9.9 million of deductible temporary differences related to certain flow-through subsidiaries compared with $7.9 million at December 31, 2009. The Fund has recorded $3.9 million for future taxes related to the portion of these deductible temporary differences that are expected to reverse after 2011.

EXCESS CASH FLOWS AND NET INCOME OVER DISTRIBUTIONS PAID

The following table presents excess cash flows from operating activities and net income over distributions paid for the three months and the six months ended June 30, 2010 and for the years ended December 31, 2009 and 2008.

    
                             Three           Six
                            Months        Months          Year          Year
                             Ended         Ended         Ended         Ended
                           June 30,      June 30,  December 31,  December 31,
    ($'000)                   2010          2010          2009          2008
    -------------------------------------------------------------------------

    Cash flows from
     operating
     activities        $     5,815   $    35,088   $    41,133   $   147,904
    Net (loss)
     earnings               (1,093)       12,716        46,920        40,331
    Distributions paid
     during period           9,201        18,402        37,003        40,086
    (Shortfall) excess
     of cash flows from
     operating activities
     over cash dist-
     ributions paid         (3,386)       16,686         4,130       107,818
    (Shortfall) excess
     of net income over
     cash distributions
     paid              $   (10,294)  $    (5,686)  $     9,917   $       245
    -------------------------------------------------------------------------
    

The Fund considers the amount of cash generated by the business in determining the amount of distributions payable to its Unitholders. In general, the Fund does not take into account quarterly working capital fluctuations as these tend to be temporary in nature. The Fund does not generally consider net income in setting the level of distributions as this is a non-cash metric and is not reflective of the level of cash flow that the Fund can generate. This divergence is particularly relevant for the Fund as it has a relatively high level of depreciation and amortization expenses and foreign exchange gains and losses.

For the three months ended June 30, 2010 distributions to Unitholders exceeded cash flows from operating activities mainly due to an increase in working capital. The additional distributions were funded by cash being held by the Fund.

Distributions -

Distributions to Unitholders for the three months ended June 30, 2010 were declared as follows:

    

                                                  Distribution         Total
    Record Date         Payment Date                  Per Unit        ($'000)
    -------------------------------------------------------------------------
    Three months ended June 30:
    April 30, 2010              May 31, 2010           $  0.10      $  3,067
    May 31, 2010                June 30, 2010             0.10         3,067
    June 30, 2010               July 30, 2010             0.10         3,067
    -------------------------------------------------------------------------
                    Sub-Total                          $  0.30      $  9,201

    Three months ended March 31                        $  0.30      $  9,201

    -------------------------------------------------------------------------
    Total for six months ended June 30                 $  0.60      $ 18,402
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Distributions declared in the three months ended June 30, 2009 were as follows:

    
                                                  Distribution         Total
    Record Date         Payment Date                  Per Unit        ($'000)
    -------------------------------------------------------------------------
    Three months ended June 30:
    April 30, 2009              May 29, 2009           $  0.10      $  3,067
    May 29, 2009                June 30, 2009             0.10         3,067
    June 30, 2009               July 31, 2009             0.10         3,067
    -------------------------------------------------------------------------
                    Sub-Total                          $  0.30      $  9,201

    Three months ended March 31                        $  0.30      $  9,288

    -------------------------------------------------------------------------
    Total for six months ended June 30                 $  0.60      $ 18,489
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Treatment of the Fund's distributions for Canadian Income Tax purposes for 2009 and 2010 is as follows:

    
                                               Foreign
                                            Non-Business
                       Other Income             Income               Total
    -------------------------------------------------------------------------
    2009                   74.8%                 25.2%               100.0%
    2010(1)                74.0%                 26.0%               100.0%
    -------------------------------------------------------------------------
    (1) Represents anticipated tax characterization of planned distributions.
        The actual tax treatment of 2010 distributions will be determined by
        February 28, 2011.
    

LIQUIDITY AND CAPITAL RESOURCES

The Fund's distributions to Unitholders are sourced entirely from its investments in operating subsidiary companies. The Fund's investments are financed by trust units held by Unitholders, long-term debt and operating lines of credit. The cash flow of the Fund is required to fund distributions to Unitholders, capital expenditures and payment of interest on long-term debt. The Fund intends to renew its long-term debt prior to maturity.

    
    Cash Flow from Operating Activities
    -----------------------------------
    

Cash flow from operating activities for the second quarter of 2010 was $5.8 million, a decrease of $1.0 million from the level generated during the second quarter of 2009. The decrease in cash flow is due mainly to lower earnings.

For the first six months of 2010, cash flow from operating activities was $35.1 million, an increase of approximately $38.2 million from the level achieved in 2009. The main reason for this difference is the significant increase in working capital during 2009, when working capital increased by $33.3 million. The increase during the first quarter of 2009 was primarily due to a reduction in accounts payable and accruals relating to the timing of certain items. This reduction more than offset a reduction in inventory and accounts receivable.

    
    Financing Activities
    --------------------
    

During the first quarter of 2010, the Fund entered into an agreement with a syndicate of underwriters to issue $80.0 million principal amount of convertible unsecured subordinated debentures (the Debentures). During the second quarter of 2010, as allowed under provisions of the agreement to issue the Debentures, the underwriters purchased an additional $10.0 million principal amount of the Debentures, increasing the aggregate gross proceeds of the public offering to $90.0 million. The Fund incurred transaction costs of $4.2 million, which included the underwriters' fee and other expenses of the offering.

During the six months ended June 30, 2010, the Fund utilized a portion of the net proceeds of the offering to repay $79.2 million (US$76.8 million) of its existing long-term debt. The Fund realized a foreign exchange loss of $0.2 million and wrote off the remaining transaction costs related to the portion of the long-term debt repaid in the amount of $0.3 million, both of which are included in debt extinguishment costs on the Consolidated Statements of Earnings.

The Fund also collapsed the interest rate swap arrangements related to the portion of its long-term debt that was repaid. As a result of collapsing these arrangements, the Fund had to pay $3.2 million to settle the arrangements; however, it recognized a loss of only $0.2 million due to amounts previously recognized in net income. This loss has been recorded in debt extinguishment costs on the Consolidated Statements of Earnings.

Distributions to Unitholders during the second quarter of 2010 were similar to the second quarter of 2009. Distributions to Unitholders during the first six months of 2010 were $0.2 million lower than the first six months of 2009. These decreased distributions were due to lower units outstanding as a result of the buy back and cancellation of units by the Fund pursuant to a normal course issuer bid commenced in September 2008 (as explained in the Normal Course Issuer Bid below).

Normal Course Issuer Bid -

From September 23, 2008 to September 22, 2009, the Fund purchased an aggregate of 2,912,466 of its units by way of a normal course issuer bid through the facilities of the Toronto Stock Exchange (TSX). The purchases were made in accordance with the policies and rules of the TSX and units were purchased for cancellation. The prices that the Fund paid for the units purchased were the market price of such units at the time of acquisition.

During 2009, the Fund purchased 1,039,940 units at an average per unit price of $8.02 for an aggregate purchase amount of $8.3 million. This resulted in $12.8 million being recorded as a reduction to the value of units and $4.4 million being recorded as contributed surplus.

For additional information on cash distributions, see NON-GAAP MEASURES - Cash Flow and EXCESS CASH FLOWS AND NET INCOME OVER DISTRIBUTIONS PAID.

Financial Instruments -

The Fund has entered into swap agreements with its principal bankers in order to fix the interest rates on its term debt. In the first quarter of 2009, the Fund entered into new swap arrangements which will fix interest rates on all of its term debt until August 2011. Previously the Fund had interest rate swaps related to its term debt and operating lines of credit, which fixed interest rates until August 2010. The Fund collapsed all of these interest rate swaps upon entering into the new swap arrangements and rolled the related fair value liability of $9.8 million into its new interest rate swaps. This value was being amortized on a straight-line basis over the remaining term of the term debt in unrealized foreign exchange (gain) loss and ineffectiveness of cash flow hedges. As described above, during the second quarter and first six months of 2010, the Fund collapsed a portion of the swap arrangements. As at June 29, 2010, the Fund de-designated its remaining swap arrangements as cash flow hedges. In the future, all changes in the fair market value of the swap arrangements will be recorded in the Consolidated Statements of Earnings. In addition, the Fund will amortize the remaining amount in Accumulated Other Comprehensive Income related to the swap arrangements to the Consolidated Statements of Earnings over the remaining term of the swap arrangements. The weighted average effective interest rate under the remaining swap arrangements is 4.45%. At June 30, 2010, the fair values of the above noted agreements was a liability of $2.6 million (US$2.5 million). See comments under NET INTEREST AND ACCRETION EXPENSE for comments on these rates.

See RESULTS OF OPERATIONS BY BUSINESS SEGMENT - Foreign Exchange for additional comments on hedging.

    
    Investing Activities
    ---------------------
    

Investment in capital expenditures was $3.5 million in the second quarter of 2010, compared with $4.0 million in the second quarter of 2009. These amounts include $3.2 million in the second quarter of 2010 and $3.8 million in the second quarter of 2009 for maintenance capital requirements. Investment in capital expenditures was $7.5 million for the first six months of 2010, compared with $10.1 million in the first six months of 2009. These amounts include $7.0 million in the first six months of 2010 and $9.6 million in the first six months of 2009 for maintenance capital requirements. As previously disclosed, the Fund intends to continue upgrading its manufacturing assets and currently estimates maintenance capital expenditures for 2010 to be approximately $19.0 million.

Investment in non-maintenance capital expenditures was $0.3 million during the second quarter of 2010 compared to approximately $0.2 million during the second quarter of 2009. Investment in non-maintenance capital expenditures was $0.5 million during the first six months of 2010 which was similar to the first six months of 2009. Non-maintenance capital expenditures are either pre-funded, usually as part of a significant acquisition and related financing or are considered to expand or improve the capacity of the Fund's operations.

Cash Balances -

At June 30, 2010 the Fund had net cash balances of $26.2 million and working capital of $13.5 million. Comparable numbers for December 31, 2009 were $19.9 million and working capital of $9.4 million, respectively. The Fund defines working capital to exclude cash, operating line of credit, distributions payable and current portion of long-term debt. Cash generated by the Fund will be used to fund cash distributions to Unitholders, capital requirements, interest, general corporate purposes and other legal obligations.

Future Liquidity -

The future liquidity of the Fund will be primarily dependant on cash flows of its operating subsidiaries. These cash flows will be used to finance ongoing expenditures, including maintenance capital, distributions to Unitholders and normal course financial commitments. Cash flows are sensitive to changes in volume, sales prices and input costs and any changes in these may impact future liquidity. Management believes that cash flows from operating activities will be sufficient for the Fund to meet future obligations and commitments that arise in the normal course of business activities.

Capital Resources -

At June 30, 2010, the Fund had senior credit facilities of $157.9 million, consisting of a term loan of $81.3 million and a revolving credit facility of $76.6 million. The term bank debt is not due or payable until August 2011. At June 30, 2010, the Fund had nothing drawn on its operating lines of credit, and had committed a total of $11.1 million of its revolving credit facility towards standby letter of credits. Subject to certain limits set out in the credit agreement, the credit facilities may be used to finance working capital, fund acquisitions, invest in capital assets, buy back units and pay distributions to Unitholders.

At June 30, 2010, the Fund had convertible debentures of $90.0 million outstanding which mature on March 31, 2017.

Debt Covenants -

As at June 30, 2010, the Fund was compliant with all debt covenants contained in its credit facility.

SUMMARY OF QUARTERLY RESULTS

    
                                          Three Months Ended
                                          ------------------
                           June 30,     March 31,  December 31, September 30,
    ($'000)                   2010          2010          2009          2009
    -------------------------------------------------------------------------
    Revenue            $   137,406   $   126,824   $   132,756   $   126,989
    Cost of sales and
     services              110,624        89,658        92,289        95,660
    -------------------------------------------------------------------------
    Gross profit            26,782        37,166        40,467        31,329
    Selling, general,
     administrative and
     other costs            11,806        12,689        16,410         9,803
    -------------------------------------------------------------------------
    Earnings before the
     under-noted            14,976        24,477        24,057        21,526
    Unrealized foreign
     exchange loss (gain)
     and ineffectiveness
     of cash flow hedges     1,685          (414)        1,109        (6,802)
    Debt extinguishment
     costs                     128           571             -             -
    Depreciation and
     amortization           14,419        10,813        10,623        11,086
    Loss (gain) on
     disposal of
     property, plant
     and equipment               -             -           (15)           94
    Net interest and
     accretion expense       3,011         2,264         2,126         2,122
    Income taxes (net)      (3,174)       (2,566)       (2,277)       (4,509)
    -------------------------------------------------------------------------
    Net (loss)
     earnings          $    (1,093)  $    13,809   $ 1   2,491   $    19,535
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                          Three Months Ended
                                          ------------------
                           June 30,     March 31,  December 31, September 30,
    ($'000)                   2009          2009          2008          2008
    -------------------------------------------------------------------------
    Revenue            $   124,624   $   161,823   $   292,789   $   393,971
    Cost of sales and
     services               96,539       137,522       255,955       346,615
    -------------------------------------------------------------------------
    Gross profit            28,085        24,301        36,834        47,356
    Selling, general,
     administrative and
     other costs            10,625         6,025        12,630         5,662
    -------------------------------------------------------------------------
    Earnings before
     the under-noted        17,460        18,276        24,204        41,694
    Unrealized foreign
     exchange (gain)
     loss                   (9,147)        3,903        12,195         3,520
    Depreciation and
     amortization           11,272        11,165        11,240         9,893
    Gain on disposal
     of property                 -             -             -          (250)
    Net interest and
     accretion expense       2,342         2,103         4,070         3,639
    Income taxes (net)        (580)         (924)         (841)        5,402
    -------------------------------------------------------------------------

    Net earnings
     (loss)            $    13,573   $     1,321   $    (2,460)  $    19,490
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

Revenues for every quarter during 2008 were high due to exceptionally strong market conditions for sulphuric acid and sulphur. These were particularly noticeable in the International segment. Revenues during the fourth quarter of 2008 started to decline as prices for sulphuric acid and sulphur started to decline in the International markets. During 2009, in addition to these lower prices, revenue was also negatively impacted by generally weaker demand for most products and because the Beaumont plant was off-line for part of the first quarter resulting in lower sales volume. The lower prices for sulphuric acid in the International and SPPC segments continued into the first and second quarter of 2010. In 2010, the stronger Canadian dollar relative to the U.S. dollar also negatively impacted U.S. dollar denominated revenues.

The strong conditions during 2008 resulted in higher earnings. The effect was less pronounced in the fourth quarter of 2008 when the Fund's largest plant located in Beaumont was off-line for the entire quarter. Earnings in the second quarter of 2010 were negatively impacted due to the incident at Beaumont during the quarter (both as described in the BEAUMONT INCIDENTS section).

Selling, general, administrative and other costs (S,G&A) during the third quarter of 2008 were low as they included lower TR LTIP accruals. S,G&A for the fourth quarter of 2008 were high as they included an increase of $3.4 million in the allowance for doubtful accounts. The increase was mainly due to a provision for expected losses in connection with two customers, who then filed for re-organization under Chapter 11 of the U.S. Bankruptcy Code in January 2009. S,G&A during the first quarter of 2009 were low as they included a reversal of $3.4 million with respect to the TR LTIP owing to a reduction in the Fund's unit value. S,G&A during the fourth quarter of 2009 were high as they included an accrual of $10.0 million relating to the Fund's TR LTIP, caused by an appreciation in the Fund's unit value, and high unrealized natural gas losses and realized foreign exchange losses. These additional expenses were partially offset by business interruption insurance claim recoveries booked in the quarter. Finally, S,G&A during the first quarter of 2010 were high as they included an accrual of $2.2 million relating to the Fund's TR LTIP, also caused by an appreciation in the Fund's unit value.

Unrealized foreign exchange losses were higher commencing with the third quarter of 2008 up to and including the first quarter of 2009 due to the impact of the weaker Canadian dollar relative to the U.S. dollar on the Fund's long-term debt which is U.S. dollar denominated. There was a corresponding unrealized gain on the Fund's U.S. dollar denominated assets in self-sustaining foreign operations, but accounting rules require that those be recorded in other comprehensive income. During the second, third and fourth quarters of 2009 and the first quarter of 2010, the Canadian dollar strengthened relative to the U.S. dollar, thereby causing an unrealized foreign exchange gain on the Fund's long-term debt. However, the gain during the fourth quarter of 2009 was more than offset by ineffectiveness booked related to the initial fair value liability on the Fund's interest rate swap arrangements entered into during the first quarter of 2009.

OUTSTANDING SECURITIES OF THE FUND

At July 28, 2010, the Fund had 30,670,470 units outstanding (June 30, 2010 - 30,670,470) and 90,000 convertible unsecured subordinated debentures (June 30, 2010 - 90,000).

CONTRACTUAL OBLIGATIONS

Information concerning contractual obligations is shown below:

    
    Contractual
    Obligations                   Less Than        1-3        4-5    After 5
    ($'000)                Total     1 Year      Years      Years      Years
    -------------------------------------------------------------------------
    Long-Term Debt     $ 171,301  $       -  $  81,301  $       -  $  90,000
    Operating Leases      55,166     17,971     25,395     10,100      1,700
    Interest on Long-
     Term Debt            40,368      9,017     11,101     10,800      9,450
    -------------------------------------------------------------------------
    Total Contractual
     Obligations       $ 266,836  $  26,988  $ 117,797  $  20,900  $ 101,150
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

RISKS AND UNCERTAINTIES

The Fund is one of the world's largest suppliers of sulphuric acid (acid), liquid sulphur dioxide (SO(2)) and sodium hydrosulphite (SHS) and a leading processor of spent acid, particularly in the U.S. Gulf Coast region. The Fund is also a leading regional supplier of sulphur, sodium chlorate and phosphorus pentasulphide, and also produces zinc oxide at three North American locations. The Fund faces various risks associated with its business. These risks include, amongst others, a general reduction in demand for its products, the loss of a portion of its customer base, the interruption of the supply of sulphur-based products or raw materials, price fluctuations in the products sold and/or raw materials purchased, industry over-capacity, acquisition integration and operational and product hazard risks associated with the nature of its business. The Fund imports key raw materials and products from overseas and as such has additional risks associated with the sourcing activity. The Fund makes extensive use of the railway system to transport material within North America. Certain locations are serviced by a sole carrier and thus a disruption in service could have a significant negative impact on results. In addition, the Fund sells a significant portion of its major products to large customers. While many of these customers are under contract, there can be no assurance that these contracts will be renewed. As the Fund's business is international in nature, it is exposed to foreign exchange risks related to the payment of dividends and other transactions by its foreign subsidiaries. For a more detailed discussion of the Fund's risks, please refer to the RISK FACTORS section of the most recently filed Annual Information Form.

The Fund manages the risks associated with its customer base and sales price by seeking to obtain contractual protection to mitigate these risks. The Fund also seeks to differentiate its products and services with customers to mitigate price fluctuations and uses its scale to obtain beneficial raw material contracts.

All members of the Fund's senior management team were involved in an enterprise-wide business risk assessment, which included a review of the North American and international operations. Key risks were identified and prioritized for review and the development of action plans. This enterprise-wide risk review process is an ongoing aspect of the Fund's risk management program. In addition, the Fund maintains an extensive insurance program which includes general liability and environmental coverage.

Credit Risk -

Credit risk arises from the non-performance by counter-parties of contractual financial obligations. The Fund manages credit risk for trade and other receivables through established credit monitoring activities. The Fund does not have a significant concentration of credit risk with any single counter-party or group of counter-parties. The primary counter-parties related to the foreign exchange forward contracts, commodity price contracts and interest rate swaps carry investment grade ratings. The Fund's maximum exposure to credit risk at the reporting date is the carrying value of its receivables and derivative assets.

Potential Preference Claims -

Under U.S. bankruptcy laws, payments made by a debtor to creditors during the 90-day period before the filing of a bankruptcy petition can be reclaimed in certain circumstances as "preferential transfers". In such circumstances, a creditor may have defences available to it with respect to part, or all of a debtor's claim of alleged preferential transfers. The Fund has not made any provision for potential preferential transfer exposure.

Dependence on Vale Relationship -

Vale Limited (Vale) is the Fund's largest sulphur products supplier. Effective January 1, 2008, the Fund renewed its agreement with Vale for the marketing of all sulphur by-products produced by the Vale smelter in Sudbury, Ontario. This 10-year contract contains similar terms to the prior agreements between the parties. For the six months ended June 30, 2010, this supply source accounted for approximately 6% of the Fund's revenues. Vale had a significant collective bargaining agreement which expired on May 31, 2009. The Vale union and management were unable to reach an agreement and a strike commenced on July 13, 2009. In January 2010, despite the strike, Vale resumed partial production. In July 2010, the strike ended and normal operations are expected to resume within a few weeks of the conclusion of the strike.

Exchange Rates -

The Fund is exposed to fluctuations in the exchange rate of the U.S. dollar relative to the Canadian dollar, as a portion of the Fund's Distributable cash after maintenance capital expenditures is earned in U.S. dollars. On an unhedged basis, the Fund currently estimates that a one-cent change in the exchange rate will have an impact on Distributable cash after maintenance capital expenditures of less than $0.1 million per annum.

On an unhedged basis, the Fund also currently estimates that a one-cent change in the exchange rate would have an impact on the translation of the net earnings of its U.S. currency based subsidiaries of less than $0.2 million per annum.

Interest Rates -

The Fund has a credit facility, with term debt and operating lines of credit, which bears variable rates of interest. As at June 30, 2010, on an unhedged basis, a change in interest rates of 1% per annum would have an impact of approximately $0.8 million per annum. As at June 30, 2010, the Fund had fixed interest rates on its term debt until August 2011.

Sulphuric Acid Pricing -

A change in sulphuric acid pricing, net of freight, of $1.00 per tonne, would have an impact on annual revenues in North America of approximately $1.4 million. However, given the risk-sharing aspect of a key supply contract, the impact on EBITDA would range from $1.0 million to $1.1 million. In any specific period, the exact impact would also depend upon the volume that is subject to sales contracts where pricing has been fixed for a period of time. The magnitude of realized price changes also depends upon regional market dynamics.

Sulphur Costs -

The Fund uses sulphur in the manufacturing of several of its products, including sulphuric acid. At current operating levels, an increase of $1.00 per tonne would have an impact of approximately $0.1 million per annum. It is important to note that a change in the cost of sulphur may lead to a change in the price for sulphuric acid as this is a key input cost in the manufacturing of sulphuric acid. Thus, the net impact of changes in sulphur costs would depend upon changes in sulphuric acid pricing.

Sodium Chlorate Pricing -

Approximately 75% of the Fund's sodium chlorate sales are to Canfor on a long-term contract, whereby selling price is adjusted based on changes in virtually all variable costs. Thus, the Fund's exposure to changes in market prices of sodium chlorate is limited to the remainder of its output.

Other Input Costs -

There are several other large input costs, such as natural gas, zinc, salt and electricity, but in most cases there are contractual arrangements with customers, or other offsets within the business, which mitigate the exposure to changes in these costs.

Labour Relations -

The Fund has several collective bargaining agreements and expiry dates range from 2010 to 2014. The Fund's operations could be disrupted if new collective bargaining agreements are not concluded prior to their expiry dates.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Significant judgements and estimates include provisions for non-performance of customer and supplier contracts, allowance for doubtful accounts, insurance recoveries, goodwill and intangibles.

RECENT ACCOUNTING PRONOUNCEMENTS

Business Combinations -

In January 2009, the CICA issued Handbook Sections 1582, Business Combinations; 1601, Consolidated Financial Statements; and 1602, Non-Controlling Interests. These sections replace Handbook Sections 1581, Business Combinations; and 1600, Consolidated Financial Statements. Section 1582 establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under IFRS. Section 1582 is applicable for the Fund's business combinations with acquisition dates on or after January 1, 2011. Early adoption of this section is permitted. Sections 1601 and 1602 establish standards for the preparation of consolidated financial statements and for accounting for a non-controlling interest in a subsidiary in the consolidated financial statements subsequent to a business combination. Sections 1601 and 1602 are applicable for the Fund's interim and annual consolidated financial statements for its fiscal year beginning January 1, 2011. Early adoption of these sections is also permitted. If the Fund chooses to early adopt any one of these sections, the other two sections must also be adopted at the same time. The Fund is currently evaluating the effect of these new sections on the consolidated financial statements.

Convergence to International Financial Reporting Standards -

In February 2008, the Canadian Accounting Standards Board (AcSB) announced that 2011 is the changeover date for publicly accountable companies to use IFRS, replacing Canada's own GAAP. The changeover date applies to interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. For the Fund, the transition date of January 1, 2011 (Transition Date) will require the re-statement for comparative purposes of amounts reported by the Fund for the year ended December 31, 2010. The following outlines the Fund's IFRS conversion plan.

The Fund's IFRS Changeover Plan: Assessment as of June 30, 2010:

    
    -------------------------------------------------------------------------
    Key Activity              Milestones            Status / Deadlines
    -------------------------------------------------------------------------
    IFRS Conversion       Review of current         The review is complete
    Scoping Phase         standards vs. IFRS.       and the determination
                          Identification of         of financial impact is
                          significant               in progress.
                          differences.
                                                    Changes to Canadian GAAP
                          Assessment of             and IFRS are monitored
                          available resources.      and assessed on an
                                                    ongoing basis.
                          Assignment and training
                          of cross-functional
                          and core team.

                          Monitoring of changes to
                          Canadian GAAP and IFRS
                          and their impact to the
                          Fund.
    -------------------------------------------------------------------------
    Decisions on          Formal review of          All review sessions have
     Accounting Policies  differences in each area  been completed.
     and IFRS1            with the core team and
                          members of cross-         All IFRS1 and accounting
                          functional team as        policy choice decisions
                          required.                 made.

                          Assessment of differences
                          between IFRS and the
                          Fund's current practices.

                          Decision on accounting
                          policy choices and IFRS1
                          for each assessed area.
    -------------------------------------------------------------------------
    Information           Identification of IT      The Fund has upgraded its
    Technology            requirements, both        ERP software in readiness
    Evaluation            hardware and software,    for IFRS and believes
                          for IFRS conversion.      that minimal further IT
                                                    changes will be required.
                          Development of
                          implementation plan for
                          new or upgraded software
                          and any additional
                          hardware required.
    -------------------------------------------------------------------------
    Control Environment:  Review and assessment of  Appropriate changes to
    Internal Control Over impact of accounting      ensure the integrity of
    Financial Reporting   policy choices and        internal control over
    and Disclosure        changes relating to IFRS  financial reporting and
    Controls and          conversion.               disclosure controls and
    Procedures                                      procedures are being
                          Update of internal        made based on IFRS
                          control testing           accounting policy
                          procedures and            decisions and IFRS1
                          documentation for all     choices.
                          accounting policy choices
                          and changes.

                          Implementation of
                          appropriate changes:

                          -  MD&A Disclosure
                             Requirements
                          -  Key Performance
                             Indicators
                          -  Investor Relations
                             Communication Process
    -------------------------------------------------------------------------
    Financial Statement   Identification of         Skeleton financial
    Preparation           transactions impacted     statements will be
                          by IFRS conversion.       developed in 2010.

                          An assessment of these
                          transactions, appropriate
                          changes and re-mapping
                          will be completed.

                          The assessment and
                          re-mapping will form
                          the skeleton of the IFRS
                          compliant financial
                          statements.
    -------------------------------------------------------------------------
    Financial Impact      Analysis of differences   Quantification of
    Analysis for          between Canadian GAAP     differences between
    Transactional Areas   and IFRS that was         Canadian GAAP and IFRS
                          completed will be         has commenced and will be
                          quantified. Senior        completed during 2010.
                          Management to review and
                          sign-off.
    -------------------------------------------------------------------------
    Business Activities   Identification of impacts Assessments and
    Impact                on business activities    identifications of
                          to be completed.          impacts of the conversion
                                                    to IFRS are underway.
                          Completion of any
                          re-negotiations.          Identification of impacts
                                                    is to be completed
                                                    during 2010 and any
                                                    necessary re-negotiations
                                                    are to be completed
                                                    during that period.
    -------------------------------------------------------------------------

    Impact of Adoption of IFRS
    ---------------------------
    

IFRS are premised on a conceptual framework similar to Canadian GAAP, however, significant differences exist in certain matters of recognition, measurement and disclosure. The following disclosure highlights areas in which adjustments are required to be made on adoption of IFRS in order to provide an opening balance sheet and the significant accounting policies, required or expected to be applied by the Fund subsequent to adoption of IFRS that will be significantly different from the Fund's current accounting policies. Some of these adjustments have now been quantified and are disclosed below. In some areas, the Fund is still quantifying the impacts of identified differences.

IFRS1 - First Time Adoption of International Financial Reporting Standards

The Fund's adoption of IFRS will require the application of IFRS1 First Time Adoption of International Financial Reporting Standards (IFRS1), which provides guidance for an entity's initial adoption of IFRS. IFRS1 generally requires that an entity apply all IFRS effective at the end of its first IFRS reporting period retrospectively. However, IFRS1 does require certain mandatory exceptions and limited optional exemptions in specified areas of certain standards from this general requirement. The following are the optional exemptions available under IFRS1 significant to the Fund.

    
    Property, Plant and Equipment - IFRS1 provides a choice between measuring
    property, plant and equipment at its fair value at the date of transition
    and using those amounts as deemed cost or using the historical valuation
    under the prior GAAP. The Fund will continue to apply the cost model for
    property, plant and equipment and will not re-state property, plant and
    equipment to fair value under IFRS. The Fund will use the historical
    bases under Canadian GAAP as this approximates the historical cost under
    IFRS at the Transition Date. Therefore, an adjustment to the opening
    balance sheet on the Transition Date will not be required.

    Borrowing Costs - IFRS1 allows an entity to choose the date to apply
    capitalization of borrowing costs relating to all qualifying assets. This
    date is either the later of January 1, 2009 or the date of transition to
    IFRS; or an earlier date. The Fund has elected to prospectively apply the
    capitalization of borrowing costs relating to all qualifying assets from
    January 1, 2011 onwards. Therefore, an adjustment to the opening balance
    sheet on the Transition Date will not be required.

    Business Combinations - IFRS1 allows for the guidance under IFRS3
    Business Combinations to be applied retrospectively. Retrospective
    application would require that the Fund re-state all business
    combinations that occurred prior to the Transition Date. The Fund will
    not elect to retrospectively apply IFRS3 to business combinations that
    occurred prior to the Transition Date. Therefore, an adjustment to the
    opening balance sheet on the Transition Date will not be required.

    Cumulative Translation Differences - IAS21 The Effects of Changes in
    Foreign Exchange Rates requires an entity to determine the translation
    differences in accordance with IFRS from the date on which a subsidiary
    was formed or acquired. IFRS1 permits cumulative translation gains and
    losses recorded in accumulated other comprehensive income to be re-set to
    zero at the Transition Date. The Fund will elect to re-set all cumulative
    translation gains and losses to zero in opening retained earnings at the
    Transition Date. The Fund had cumulative translation losses of $40.9
    million at December 31, 2009, therefore on the Transition Date, Deficit
    will increase by $40.9 million and Accumulated other comprehensive (loss)
    will decrease by $40.9 million.

    Post Employment Benefits - Under IAS19 Employee Benefits, an entity may
    elect to use a "corridor" approach that leaves some actuarial gains and
    losses unrecognized. Under IFRS1, a first time adopter may elect to
    recognize all cumulative actuarial gains and losses at the date of
    transition of IFRS. If a first time adopter uses this election, it shall
    apply the election to all defined benefit plans. However, this election
    can be used even if the entity uses the corridor approach for subsequent
    actuarial gains and losses. The Fund will elect to recognize all
    actuarial gains and losses at the Transition Date. The Fund had an
    unamortized net actuarial gain of $0.2 million at December 31, 2009,
    therefore on the Transition Date, Deficit and Post employment benefits
    will both decrease by $0.2 million.

    IFRS1 allows for certain other optional exemptions; however, the Fund
    does not expect such exemptions to be significant to its adoption of
    IFRS.
    

Ongoing IFRS to Canadian GAAP Differences

    
    Property, Plant and Equipment
    ------------------------------

    Componentization - Componentization requirements under IFRS are more
    explicit than Canadian GAAP. Component accounting is required for
    significant parts and also required if the useful life and/or
    depreciation method is different for the significant part than for the
    remainder of the asset. This requirement will have an impact on the
    Fund's property, plant and equipment values. The impact to the Fund's
    financial statements on the Transition Date will be a decrease in
    Property, plant and equipment of $1.8 million and an increase in Deficit
    of $1.8 million.

    Borrowing Costs - Under IFRS, borrowing costs that are directly
    attributable to the acquisition, construction, or production of a
    qualifying asset are capitalized as part of the cost of the qualifying
    asset. Under Canadian GAAP the Fund does not capitalize borrowing costs;
    however, IAS23 Borrowing Costs is more explicit than Canadian GAAP. The
    Fund is currently in the process of assessing the impact of the IAS23
    requirements; however, it does not expect the impact of this requirement
    to be material.

    Share-Based Payments
    --------------------

    IFRS2 Share-based Payment will require the Fund's TR LTIP accrual to be
    calculated based on a fair value approach. Under Canadian GAAP the
    accrual for TR LTIP is calculated based on an intrinsic value approach.
    The Fund expects that this change in valuation method will have an impact
    on its Accrued and Other Liabilities, Other Long-Term Liabilities and
    Selling, General, Administrative and Other Costs. The Fund is currently
    in the process of assessing the impact of this change.

    Post Employment Benefits
    ------------------------

    As permitted under IAS19 Employee Benefits, the Fund will choose to
    recognize actuarial gains and losses directly in other comprehensive
    income rather than through profit and loss. The effect of actuarial gains
    and losses will no longer affect net income under the Fund's accounting
    policy choice; however, equity is expected to be subject to variability
    as the effects of actuarial gains and losses will be recognized
    immediately, rather than being deferred and amortized over a period of
    time.
    

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

The Fund maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Fund publicly files is recorded, processed, summarized and reported within a timely manner and that such information is accumulated and communicated to the Fund's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer have evaluated the Fund's disclosure controls procedures as of June 30, 2010 through inquiry and review. The Chief Executive Officer and the Chief Financial Officer have concluded that, as at June 30, 2010, the Fund's disclosure control procedures were effective.

The Fund also maintains a system of internal controls over financial reporting designed under the supervision of the Fund's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The Fund continues to retain an independent third party consultant to assist in the assessment of its internal control procedures.

The Fund's management, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting and evaluating its effectiveness. Management has used The Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework to evaluate the effectiveness of the Fund's internal control over financial reporting as of June 30, 2010. Based on this evaluation, management has concluded that as at June 30, 2010, the Fund's internal controls over financial reporting were effective. There have been no changes to the design of internal controls over financial reporting that occurred during the most recent interim period ended June 30, 2010 that have materially affected or are measurably likely to materially affect the internal controls over financial reporting.

OUTLOOK

The general improvement in demand levels that we saw during the first quarter continued during the second quarter. In particular, demand for our largest product by volume, acid was well above 2009 levels. The lengthy strike at Vale's Sudbury site, our largest source of acid, has now ended and normal operations are expected to resume over the next few weeks, so we are well positioned to benefit from any increased demand.

Although it is hard to predict future demand for our products, the nature of our business model, coupled with our strong balance sheet are more than sufficient to sustain our current distribution rate.

OTHER

Additional information concerning the Fund, including the Annual Information Form, is filed on SEDAR and can be accessed at www.sedar.com.



For further information: For further information: Mark Davis, President and CEO, Tel: (416) 496-4176; Rohit Bhardwaj, Vice-President, Finance and CFO, Tel: (416) 496-4177


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