Canexus Announces 2014 Third Quarter Results

CALGARY, AB--(Marketwired - November 06, 2014) - Canexus Corporation (TSX: CUS) (the "Corporation" or "Canexus") today announced its financial results for the third quarter ended September 30, 2014.

Highlights:

• Cash operating profit was $16.9 million for the three months ended September 30, 2014 (Q2/14 - $29.2 million; Q3/13 - $27.4 million). While the North American sodium chlorate business had a solid quarter, planned shutdowns in Brazil, at our North Vancouver chlor-alkali plant and at our North American Terminal Operations ("NATO") significantly impacted results. The Corporation expects improved fourth quarter results as its chemical plants return to historical operating levels and NATO ramps up unit train volumes.
• Canexus has received numerous proposals from North American parties regarding the potential purchase of NATO. Certain parties are being invited to complete their reviews and submit definitive offers. There is no assurance that a transaction, if pursued, will be concluded.
• The Board of Directors declared a quarterly dividend of $0.10 per common share payable January 15, 2015 to shareholders of record on December 31, 2014.
• Canexus' North American sodium chlorate business posted solid performance, which is expected to continue into the fourth quarter. Cash operating profit was $14.5 million for the third quarter (Q2/14 - $12.1 million) as customer demand returned to higher levels. North American sodium chlorate operating rates are expected to remain in the low 90% range for the balance of 2014 and into 2015, assuming no capacity rationalization in the industry. Our industry-leading, low-cost Brandon plant is expected to run at capacity and the Corporation continues to analyze de-bottleneck opportunities for future expansions.
• Canexus' North American chlor-alkali business generated $4.5 million in cash operating profit for the quarter (Q2/14 - $9.8 million) as production volumes were affected by the premature degradation of anode coatings in some of the electrolytic cells and a planned maintenance shutdown commencing late in the quarter. In addition, caustic soda prices were down marginally (1%) quarter over quarter and the previous quarter's results benefitted from the settlement of a take-or-pay contract obligation for hydrochloric acid ("HCl") which added $3 million to cash operating profit. The maintenance shutdown of the plant is now complete but required more downtime than expected affecting October's volumes somewhat as well. To address the premature degradation of anode coatings, Canexus has contracted three sets of replacement cells to accelerate the return to higher operating rates. During the quarter, HCl demand continued to be strong as relatively high oil and gas commodity prices supported drilling activity. With strong demand and tight supply, price increases were implemented and contributed positively to the Corporation's third quarter results.
• Canexus' Brazil operations generated cash operating profit of $4.8 million (Q2/14 - $7.6 million) during the third quarter. Planned maintenance shutdowns at both the sodium chlorate and chlor-alkali plants impacted results. Brazil's operations continue to be stable with our primary customer running at high rates resulting in strong demand for our products which are sold under a long-term fixed US dollar margin contract.
• At NATO's unit train facility, construction to further increase loading capacity and connect this facility to the Cold Lake pipeline system began in mid-June and was completed in mid-September. The unit train facility is now capable of loading both Access Western Blend ("AWB") product from MEG Energy Corp.'s Stonefell Terminal and Cold Lake Blend ("CLB") from Lamont Station. With the commissioning and start-up of the expanded facility completed, the Corporation resumed operations and loaded three unit trains with AWB in September. For the fourth quarter, both customers with contracted volumes have nominated to deliver bitumen blend to NATO.
• During the third quarter, Canexus' NATO manifest (truck-to-rail) operations transloaded physical diluted bitumen and crude oil ("DBCO") volumes of approximately 9,733 bbls/day compared to 10,400 bbls/day in the second quarter of 2014. Billable volumes in the third quarter, inclusive of take-or-pay volumes, were 12,924 bbls/day. The significant railcar storage capabilities associated with the manifest facility provide a unique opportunity for Canexus' manifest customers to capture unit train shipment economics. During the third quarter, the manifest operation loaded five unit trains for customers and is scheduled to ship eight unit trains in the fourth quarter. The manifest operation has a transload capacity of 30,000 bbls/day for DBCO.
• Canexus has solid relationships with its lenders and recently obtained further relaxation of its debt covenants well into 2016.

"This is a period of transition for Canexus," commented Doug Wonnacott, President and CEO. "We are making solid progress with the sale of NATO and I am pleased with the significant level of interest from a diverse group of potential buyers. A successful disposition of NATO will help stabilize the Corporation by providing funds to de-lever the balance sheet, thereby creating a solid foundation to build upon our impressive portfolio of chemical assets and move Canexus forward."

Segmented Information for the Three-Month Periods Ended September 30, 2014 and 2013

Canexus has a total of six manufacturing plants -- four in Canada and two at one site in Brazil -- organized into three business units. Canexus also provides fee-for-service hydrocarbon transloading at its NATO terminal in Bruderheim, Alberta as a separate business unit. Below is our third quarter performance by segment.

Highlights for each business unit are as follows:

• North America Sodium Chlorate:
• Q3 2014 versus Q2 2014: Sales revenue for the North America sodium chlorate segment increased 12% to $60.3 million for the three months ended September 30, 2014 as compared to $53.8 million for the three months ended June 30, 2014 primarily as a result of higher sales volumes (13%) offset by slightly lower (1%) realized netback prices. Cash operating profit percentage increased from 23% to 24% primarily as a result of higher production volumes from our low-cost Brandon plant, partially offset by slightly lower realized netback prices. 
• Q3 2014 versus Q3 2013: Sales revenue for the North America sodium chlorate segment was $60.3 million for the three months ended September 30, 2014 compared to $59.7 million for the three months ended September 30, 2013 as increased sales volumes (3%) slightly offset lower realized netback prices (3%). The impact of downward market pressure on netback prices in 2014 was partially offset by the weakening of the Canadian dollar (three months ended September 30, 2014 - US $0.92 as compared to US $0.96 for the three months ended September 30, 2013). Cash operating profit percentage decreased from 28% to 24% as a result of higher electricity, salt and fixed costs and lower realized netback prices more than offsetting increased production volumes (6%). 

• North America Chlor-alkali:
• Q3 2014 versus Q2 2014: Sales revenue for the North America chlor-alkali segment decreased 2% to $54 million for the three months ended September 30, 2014 as compared to $55.4 million for the three months ended June 30, 2014. Sales revenue and cash operating profit for the three months ended June 30, 2014 were positively impacted by the settlement of a contractual obligation for HCl which contributed $3 million. Q3/14 sales revenue benefitted from higher HCl sales volumes (4%) and delivered prices (24%) which more than offset lower chlorine sales volumes (22%) and delivered prices (2%) as compared to the previous quarter. Cash operating profit percentage decreased from 18% to 8% primarily as a result of the contract settlement noted in the preceding sentence, lower metric electrochemical unit ("MECU") production volumes (12%) and higher purchased product, fixed and non-electricity energy costs. MECU production volumes were lower as a result of the premature degradation of anode coatings in some of the electrolytic cells and a planned maintenance shutdown that commenced late in the month of September. Fixed costs were higher primarily as a result of the planned maintenance shutdown noted in the preceding sentence. 
• Q3 2014 versus Q3 2013: Sales revenue for the North America chlor-alkali segment increased 5% to $54 million for the three months ended September 30, 2014 from $51.2 million for the three months ended September 30, 2013. This increase was due to higher HCl and caustic soda sales volumes (29% and 4%, respectively) and higher HCl and caustic soda delivered prices (8% and 3%, respectively), partially offset by lower chlorine sales volumes (42%) and delivered prices (11%). Cash operating profit percentage decreased from 15% to 8% as a result of lower MECU production volumes (18%) and higher electricity rates, purchased product, fixed and non-electricity energy costs, partially offset by an increase in HCl capacity and market demand supporting additional conversion of low margin chlorine into higher margin HCl. MECU production volumes were lower as a result of the premature degradation of anode coatings in some of the electrolytic cells and a planned maintenance shutdown that commenced late in the month of September. Fixed costs were higher primarily as a result of the planned maintenance shutdown noted in the preceding sentence. 

• South America:
• Q3 2014 versus Q2 2014: Sales revenue for the South America segment decreased 1% to $24 million for the three months ended September 30, 2014 from $24.2 million for the three months ended June 30, 2014. The decrease in sales revenue was primarily due to lower hydrogen (47%) and HCl (5%) sales volumes and lower realized chlorine and HCl netback prices (5% and 3% respectively), partially offset by higher sodium hypochlorite realized netback prices (3%). Cash operating profit percentage decreased to 20% from 32% as a result of lower sodium chlorate and MECU production volumes (5% each) and higher fixed costs, partially offset by higher realized MECU netback prices (1%). Higher fixed costs and lower production volumes were the result of planned maintenance shutdowns at both the sodium chlorate and chlor-alkali plants during the three months ended September 30, 2014.
• Q3 2014 versus Q3 2013: Sales revenue for the South America segment increased 8% to $24 million for the three months ended September 30, 2014 from $22.3 million for the three months ended September 30, 2013. The increase in sales revenue was primarily due to higher sodium hypochlorite (18%) and sodium chlorate (3%) sales volumes and higher sodium hypochlorite (18%), HCl (15%), caustic soda (5%) and sodium chlorate (3%) delivered prices. Cash operating profit percentage remained consistent at 20% with lower MECU and sodium chlorate production volumes (5% and 1%, respectively) and higher fixed costs being offset by higher realized MECU (11%) and sodium chlorate (3%) realized netback prices in part due to a favourable foreign exchange impact resulting from the weakening of both the Brazilian Real and Canadian dollar as compared to the US dollar. 
• North American Terminal Operations:
• Q3 2014 versus Q2 2014: Cash operating loss for the three months ended September 30, 2014 was $4.6 million as compared to cash operating profit of $2.4 million for the three months ended June 30, 2014 (inclusive of transloading services for inter-segment chlor-alkali products of $0.5 million in each three month period). External sales revenue decreased 43% due to reduced unit train loading activity, as a result of the planned construction shutdown (mid-June to mid-September) to further increase unit train loading capacity and connect the facility to the Cold Lake pipeline system. Cash cost of sales (cost of sales before depreciation and amortization included in cost of sales) comprise fixed costs including employee costs, pipeline fixed fee and operating costs, and other costs of operating the terminal. The increase in cash cost of sales ($2.5 million) was primarily due to the completion of the Inter Pipeline Ltd. pipeline lateral off the Cold Lake Pipeline system from Beaverhill Station to Lamont Station at the beginning of July, at which time Canexus became responsible for pipeline fixed fee and other costs associated with the connection, partially offset by lower operating costs associated with reduced unit train loading activity levels during the construction shutdown.
• Q3 2014 versus Q3 2013: Cash operating loss for the three months ended September 30, 2014 was $4.6 million as compared to cash operating profit of $1.1 million for the three months ended September 30, 2013 (inclusive of transloading services for inter-segment chlor-alkali products of $0.5 million in each three month period). The increase in external sales revenue of 8% and cash cost of sales ($5.5 million) was primarily due to the commencement of unit train operations on December 17, 2013. Three unit trains were loaded after re-commencement of operations following the construction shutdown.

General Market Fundamentals

North America Sodium Chlorate: Market pulp operating rates were relatively stable during Q3, with softwood mills operating around 94% and hardwood mills around 86% and with the recent global hardwood capacity additions now at full production rates. This excess capacity has further contributed to pricing erosion in the segment. Two hardwood market pulp producers, one in North America and one in Europe, have announced the permanent closure of their operations citing the inability to compete with lower priced product from South America. As of September, combined producer inventory levels were 33 days, one day lower than the same period last year. Softwood inventory levels in September were at 27 days, while hardwood inventory decreased to 40 days. Year-to-date global shipments of pulp are up by 1.5% (as of September), while Chinese shipments increased by 3.5% for the same period.

North American demand for sodium chlorate was stable throughout the quarter. Year-to-date North American sodium chlorate exports are within expectations, and are projected to reach the same levels observed over the past two years. Operating rates for the North American industry were steady throughout the quarter, and are expected to remain in the low 90% range for the remainder of 2014.

North America Chlor-alkali: The North American chlor-alkali industry operated at 86% of capacity in Q3 compared to 84% in Q2 2014. Consistent with historical results, chlorine demand increased in Q3 due to higher consumption from the vinyl segments and seasonal factors in water treatment segments; Q4 is historically lower.

HCl supply decreased in Q3 due to production issues at several burner and by-product sites. Seasonally high chlorine demand also restricted chlorine availability for burner producers. HCl demand increased as a result of higher drilling and hydraulic fracturing activity in the oil and gas industry.

Caustic soda production in North America increased 2%, mirroring the increase in industry operating rates compared to Q2. In Western Canada, a decline in production due to operating issues was offset by increases in Asian imports. Overall demand in the region remains strong, supported by high operating rates in the pulp and paper sector.

MECU prices held stable in Q3, while HCl prices improved significantly based on a tight supply-demand balance. Entering Q4, price increases were announced on chlorine in the western region, and continentally for HCl and caustic soda. Asian caustic soda import prices are expected to remain largely consistent, while US producers seek modestly higher prices both domestically and in the export market. 

South America: Brazilian pulp production and exports in the first nine months of 2014 were 7.7% and 12.8% higher, respectively, on a year-over-year basis. Previously anticipated pricing pressure is no longer expected in Q4 as a result of a pulp mill closure in Europe.

Canexus Brazil experienced slightly higher than expected sodium chlorate demand from its major customer in Q3, partially offsetting the effects of increased competition in the merchant market.

In the first nine months of 2014, the Brazilian chlor-alkali industry capacity utilization rate was 84.3%, 1.1% higher than the same period in 2013. Canexus Brazil's chlor-alkali capacity utilization rate was 95.5% for the same period.

Oil & Gas: Market conditions remained positive in Q3 with price differentials between Western Canadian Select ("WCS") and West Texas Intermediate ("WTI") averaging US $20.18/bbl, just slightly higher than the differential of US $20.04/bbl in Q2 2014. Increased refinery demand in the US Midwest, a continued increase in crude-by-rail volumes and a number of pipeline capacity improvements and expansion projects continue to support strong market conditions. Since the end of Q3, Canadian crude differentials have narrowed to the mid-teens as additional crude-by-rail facilities have opened and new pipeline capacity to Cushing will soon be available. As a result, PIRA Energy Group expects all Western Canadian oil will move to market even with sharply increasing production by year end. 

Demand for crude-by-rail continues to be strong. According to the National Energy Board, Canadian crude oil exports by rail for the first half of the year increased 37% year over year. Interest in crude-by-rail also continues to grow as producers, refiners and even pipeline companies are looking at rail facilities as a solution to pipeline project delays.

During Q3, oil and gas prices decreased slightly from the previous quarter but remained relatively strong with WTI averaging US $97.25/bbl, NYMEX natural gas at US $3.95 per million British thermal units ("mmbtu") and AECO natural gas averaging CAD $4.03 per thousand cubic feet ("mcf"). This level of pricing supported strong drilling activity and HCl demand in Q3 and despite the recent drop in WTI to the US $80/bbl range, oil and gas exploration and production companies have not changed their near term drilling plans.

Financial Updates

• Long-term Debt and Finance Income (Expense):
• Canexus borrows in US dollars and a substantial portion of our revenues are denominated in or referenced to the US dollar. During Q3/14, we recorded an unrealized currency translation loss of $11.7 million on long-term debt as a result of the weakening of the Canadian dollar at the end of the quarter compared to the end of Q2/14 (Q3/13 - $6.9 million unrealized gain). Canexus also realized foreign currency losses of $0.4 million on repayments of long-term debt in the quarter (Q3/13 - $2.9 million). These amounts are included in finance income (expense).
• Interest expense in the quarter was $5.8 million (Q3/13 - $2.3 million). Interest capitalized on major projects was $1.6 million in Q3/14 (Q3/13 - $2.2 million).
• Other Income (Expense):
• In Q3/14, mark-to-market fair value losses of $1.3 million (Q3/13 - $0.2 million gains) were recorded on foreign exchange option contracts and average rate range forward contracts.
• In Q3/14, we recorded mark-to-market fair value losses on a cross currency swap of $0.6 million as a result of the weakening of the Canadian dollar at the end of the quarter compared to the end of Q2/14 (Q3/13 - $0.3 million gains) and realized losses of $0.1 million (Q3/13 - $nil). In Q3/11, we entered into a cross currency swap to effect the payment of interest in US dollars on the Series IV Convertible Debentures issued on June 30, 2011.
• General and Administrative: General and administrative expenses were higher for Q3/14 as compared to Q3/13 as a result of higher professional service costs partially offset by reduced business development activities in the quarter.
• Capital Expenditures: Capital expenditures in Q3/14 were $63.8 million, of which $56.3 million was spent on expansion projects, $4.4 million on maintenance projects and $3.1 million on continuous improvement projects. Expansion capital was primarily spent on the expansion of NATO unit train operations.
• Provision for (Recovery of) Income Taxes: A recovery of income taxes was recognized in Q3/14 as compared to an expense in Q3/13 due to losses in the North American taxable legal entities which are consolidated into the Corporation. As of September 30, 2014, the Corporation had approximately $866 million of future tax deductions resulting from capital expenditures which can be used to shelter future taxable income in Canada.
• Liquidity: At September 30, 2014, total borrowings under committed credit facilities were $265 million with remaining available undrawn capacity of approximately $163 million. Cash on hand at September 30, 2014 was $4.8 million.

Financial Statements, Conference Call and Webcast
Financial Statements and Management's Discussion and Analysis ("MD&A") will be posted on the Canexus website at www.canexus.ca and filed on SEDAR. Management will host a conference call and webcast at 8 am MT (10 am ET) on November 7, 2014, to discuss the financial and operating results of the Corporation. A presentation will be available on our website to facilitate the conference call. Please call 1-888-818-4097 or 1-800-2787-2090 outside of Canada and the USA. The conference call will also be accessible via webcast at www.canexus.ca. A replay of the conference call will be available until end of day ET on November 21, 2014. To access the replay call 1-800-408-3053 or 1-800-3366-3052, outside of Canada and the USA, followed by passcode 2221841#.

Non-GAAP Measures
Cash operating profit, cash operating profit percentage, payout ratio, cash payout ratio and distributable cash are non-GAAP financial measures, but management believes they are useful in measuring the Corporation's performance. Readers are cautioned that these measures should not be construed as alternatives to net income or loss or other comparable measures determined in accordance with GAAP as an indicator of the Corporation's performance or as a measure of the Corporation's liquidity and cash flow. The Corporation's method of calculating non-GAAP measures may differ from the methods used by other issuers and accordingly, the Corporation's non-GAAP measures are unlikely to be comparable to similarly titled measures used by other issuers. Readers should consult the Corporation's Q3/14 and 2013 MD&A filed on SEDAR for a complete explanation of how the Corporation calculates each such non-GAAP measure.

Forward-Looking Statements
This news release contains forward-looking statements and information relating to expected future events relating to Canexus and its subsidiaries, including with respect to: improved fourth quarter results due to expected operating levels for chemical plants and increased volumes at NATO; the completion and timing of any NATO disposition; expectations for operating performance of the North American Sodium Chlorate business, including operating rates in the fourth quarter and 2015; expectations with respect to capacity rationalization, North American sodium chlorate exports and Canexus' Brandon facility's operating rate; expectations for North American chlor-alkali industry operating rates and for Asian caustic soda import prices; expectations for the alleviation of pulp pricing pressure due to higher pulp production in South America; and expectations for the impact of the disposition of NATO on stabilizing Canexus and the de-levering of Canexus' balance sheet. The use of the words "expects", "anticipates", "continue", "estimates", "projects", "should", "believe", "plans", "intends", "may", "will" or similar expressions are intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements for a variety of reasons, including market and general economic conditions, future costs, treatment under governmental regulatory, tax and environmental regimes and the other risks and uncertainties detailed under "Risk Factors" in the Corporation's Annual Information Form filed on the Corporation's SEDAR profile at www.sedar.com. Management believes the expectations reflected in these forward-looking statements are currently reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon. Due to the potential impact of these factors, the Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Any financial outlook information contained in this news release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on Management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this news release should not be used for purposes other than those for which it is disclosed herein.

About Canexus
Canexus produces sodium chlorate and chlor-alkali products largely for the pulp and paper and water treatment industries. Our four plants in Canada and two at one site in Brazil are reliable, low-cost, strategically located facilities that capitalize on competitive electricity costs and transportation infrastructure to minimize production and delivery costs. Canexus also provides fee-for-service hydrocarbon transloading services to the oil and gas industry from its terminal at Bruderheim, Alberta. Canexus targets opportunities to maximize shareholder returns and delivers high-quality products to its customers and is committed to Responsible Care^® through safe operating practices. Canexus' common shares (CUS) and debentures (Series III - CUS.DB.A; Series IV - CUS.DB.B; Series V - CUS.DB.C; Series VI - CUS.DB.D) trade on the Toronto Stock Exchange. More information about Canexus is available at www.canexus.ca.