Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

July 23, 2009 17:58 ET

Canexus Income Fund Announces Second Quarter Results

Canexus' Advantages Continue to Deliver Strong Results

CALGARY, ALBERTA--(Marketwire - July 23, 2009) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") t oday announced its results for the second quarter ended June 30, 2009. Unless otherwise noted, the Fund is reporting the 100 percent results of Canexus Limited Partnership ("Canexus LP"), of which the Fund indirectly owns 34.7 percent.

Highlights:

  • Distributable cash of $19.5 million for the three months ended June 30, 2009, was 8 percent higher than the same period last year; For the six months ended June 30, 2009, distributable cash was 21 percent higher than the comparable period in 2008; Fund declared cash distributions of $4.5 million during the quarter for a payout ratio of 67 percent (55 percent for the six months ended June 30, 2009); Distributable cash has been reduced by $2.7 million for cash costs associated with the closure of our Bruderheim sodium chlorate plant and also reflects the full impact of the scheduled 12-day plant turnaround at our North Vancouver chlor-alkali facility; Full year guidance for payout ratio of 60 to 70 percent reiterated.
  • North American sodium chlorate business unit delivered solid financial performance with gross margins increasing to 36 percent from 28 percent in the second quarter of 2008; Higher gross margins resulted from a greater percentage of our total production coming from our expanded low-cost Brandon plant, higher prices and a weaker Canadian dollar, despite a 21 percent decline in sales volume.
  • North American chlor-alkali business unit achieved strong results, with higher caustic soda prices and lower energy costs offsetting lower chlorine prices and higher fixed costs, driving improved gross margins; The North Vancouver plant completed a 12-day scheduled maintenance turnaround expensing $1.9 million, the last maintenance turnaround before TCP start-up, which remains on schedule for start-up in the first quarter of 2010; Significant price increases announced for chlorine for the third quarter are expected to moderate lower caustic soda prices.
  • South America business unit generated strong margins; Improved demand from our major customer commencing in July expected to continue for the balance of the year; 4,400 tonne sodium chlorate expansion of Brazil plant is on schedule to start-up in the first quarter of 2010; US $6.2 million hydrochloric acid expansion project is underway and expected to be operational in the third quarter of 2010 supported by long-term take-or-pay contract.
  • North American Terminal Operations business unit completed Phase 2 of site development in the second quarter and began butane transloading services in July; The Board approved $9.8 million for the construction of rail infrastructure to allow access by a second major rail line, the purchase of an adjacent parcel of land and the front-end engineering design for Phase 3 to capitalize on our existing cavern storage. The additional rail line access is expected to provide an immediate benefit to our chlor-alkali business.
  • Total borrowings under committed credit facilities at June 30, 2009, were $325 million with remaining available capacity of approximately $188 million; no debt maturing before August 2011.

"Canexus delivered excellent financial results duri ng the second quarter, contributing to a strong first half for 2009," said Gary Kubera, President a nd CEO. "Our low-cost advantages were a key factor in our performance during a period of relatively weak sales volumes due to general economic conditions. Significant gross margin improvements in all of our business units reflected the investments we have made to enhance our low-cost advantages, previous price increases for caustic soda and sodium chlorate and the positive impact from the lower Canadian dollar compared to 2008."

"The benefits of our 2008 Brandon expansion, combin ed with the permanent closure of our high- cost Bruderheim, Alberta, sodium chlorate facility, enabled us to effectively manage the impact of lower sodium chlorate sales volumes. During the quarter, pulp mills continued to curtail production, though there were indications of improving pulp market conditions, which in turn supported higher sodium chlorate demand in the latter part of the quarter. We currently estimate that improving market conditions will increase sodium chlorate volumes for the second half of 2009 by approximately 10 percent over the first half of the year."

"Our North American Terminal Operations business un it became operational in April with the transloading of condensate. The $3.0-million Phase 2 expansion project at the site was completed during the quarter, further diversifying our hydrocarbon handling capabilities. We have now begun transloading butane and are evaluating further growth opportunities for this business. The Board approved $9.8 million for the construction of rail infrastructure to allow access by a second major rail line, the purchase of an adjacent parcel of land and the front-end engineering design for Phase 3 to capitalize on our existing cavern storage. The additional rail line access is expected to provide an immediate benefit to our chlor-alkali business. "

"In South America, our primary customer's second qu arter sales volumes were 8 percent higher than the same period in 2008 based largely on strong pulp sales to China and we expect to benefit from their forecasted high operating rates for the remainder of 2009. As we are no longer providing the service of purchasing caustic soda for resale, our sales revenue for this business unit was down compared to last year but absolute margins were improved with the help of a weaker Canadian dollar. Our previously announced sodium chlorate and hydrochloric acid expansion projects at our Brazil plant continue on schedule for completion during 2010."

"Our North American chlor-alkali business unit had good performance while successfully completing a scheduled 12-day maintenance turnaround during the quarter. As expected, chlorine pricing stability began to emerge and we have implemented chlorine price increases during the third quarter. Prices for caustic soda continue to soften due to high inventories and pressure from Asian imports, though the trend is anticipated to level in the third quarter. We expect to operate our North Vancouver facility at high rates for the balance of 2009 based on market conditions and allowing for some inventory build up in the fourth quarter in advance of the TCP switchover early next year. TCP remains on schedule for completion in the first quarter of 2010. We expect the final cost to be $235 million, just above the high end of our $208 million +/- 10 percent budget, as a result of minor scope changes to the project to improve operability and also due to the brown field nature of the project. Project economics continue to be robust and could benefit further from higher MECU values than reflected in the economics at the time of project approval, presuming prices are in line with our recent forecasts which reflect current and expected future economic conditions (a $50/MECU price movement equates to $10.5 million of operating cash flow). Over 60 percent of the project value comes from cost savings inherent in the newer technology and reduced manpower requirements that have been agreed with our unions."

"A more stable economic outlook and improving globa l pulp and paper market conditions have us cautiously optimistic for the second half of this year. Based on our low-cost position and the relatively weaker Canadian dollar, which is confirmed through our call option protection for 2009, we continue to expect that our payout ratio for the year will be between 60 and 70 percent. We also expect that the completion of growth projects currently underway will begin to generate an expected $50 million in incremental annual operating cash flow commencing in 2010 while establishing Canexus as a formidable competitor for the long term," said Mr. Kubera.

Statement of Distributable Cash          
 
    Three Months Ended   Six Months Ended
  June 30   June 30 
CAD thousands, except as noted 2009 2008   2009 2008
Canexus LP          
Net Income 17,132 9,454   22,881 6,107
Realized Foreign Exchange (Gain) Loss on Cash 1,137 (336)   1,173 (496)
Charges and Credits to Income Not Involving Cash:          
  Future Income Taxes 2,921 1,160   4,914 1,112
  Amortization 11,644 10,721   23,387 20,663
  Unrealized (Gains) Losses on Currency Translation (22,943) 829   (17,819) 8,820
  Change in Fair Value of Foreign Exchange Options (1,559) 357   4,390 1,305
  Change in Fair Value of Foreign Exchange Forward 1,880 -   3,796 -
  Change in Fair Value of Interest Rate Swaps (1,493) (1,879)   (984) (2,045)
  Accrual for Future TCP Severance Costs - -   (981) 7,310
  Impairment of Sodium Chlorate Assets 17,227 -   17,227 -
  Other 987 1,034   2,616 1,986
Contributions to / Payments for Defined Benefit Plans (1,228) (2,444)   (1,229) (2,444)
Purchase of Foreign Exchange Options - (373)   - (730)
Expenditures on Asset Retirement Obligations (50) (29)   (83) (29)
Interest Income on Restricted Investments (66) (79)   (229) (189)
Changes in Non-Cash Operating Working Capital and          
  Due from/to Affiliates 5,116 (10,409)   368 (20,956)
Cash From Operating Activities 30,705 8,006   59,427 20,414
Changes in Non-Cash Operating Working Capital and          
  Due from/to Affiliates (5,116) 10,409   (368) 20,956
Maintenance Capital Expenditures (4,000) (2,372)   (7,111) (3,808)
Amortization of the Purchase Cost of Foreign Exchange          
  Options (1,254) (181)   (2,507) (360)
Realized Foreign Exchange Gain (Loss) on Cash (1,137) 336   (1,173) 496
Operating Non-Cash Items 291 1,811   (1,304) 1,214
    19,489 18,009   46,964 38,912
 
Canexus Income Fund          
Share of Canexus LP's Distributable Cash 6,817 6,862   16,665 14,919
Trust Administration Expenses (75) (88)   (186) (176)
Distributable Cash available to Canexus Income Fund (1) 6,742 6,774   16,479 14,743
Distributions Declared 4,541 4,370   9,041 8,715
Payout Ratio (1) 67% 65%   55% 59%
Payout Ratio Normalized for Timing of Maintenance          
  Capital Expenditures of $15.5 million for 2009 (1) 67% 70%   56% 66%
Note:          
(1) See comments concerning non-GAAP Measures at end of release.          

Operations Highlights

Canexus has a total of five manufacturing plants – four in Canada and one in South America – organized into three business units. Highlights for each unit are as follows:

  • North America Sodium Chlorate:
    • Second quarter sales revenue for this segment decreased 2 percent from $52.2 million for the three months ended June 30, 2008 to $51.1 million for the three months ended June 30, 2009, due to a 21 percent decline in sales volumes offset by a 22 percent increase in realized selling prices. Realized selling prices increased as a result of price increases implemented in the third quarter of 2008 and the first quarter of 2009 and to the weaker Canadian dollar relative to the US dollar in the second quarter of 2009 (US $0.82) as compared to the second quarter of 2008 (US $1.00). The increase in the gross margin percentage from 28 percent for the three months ended June 30, 2008, to 36 percent for the three months ended June 30, 2009, was due to the increase in realized selling prices, an increase in the proportion of total production from our low-cost Brandon, Manitoba facility, lower electricity costs and lower fixed costs, partially offset by lower production volumes. The decrease in sales volumes was due to the deterioration in global pulp demand resulting from the economic downturn which occurred in the fourth quarter of 2008 and which persisted through the first half of 2009 and the curtailment of pulp production to manage high inventory levels.
    • The closure of sodium chlorate production at Bruderheim announced in April 2009, resulted in Canexus recording impairment of sodium chlorate assets of $17.2 million and severance and other cash closure related costs of $2.7 million in the second quarter.
    • We expect North American volumes to improve in the second half of 2009 by approximately 10 percent over the first half and for prices to be stable.
  • North America Chlor-alkali:
    • Second quarter sales revenue for this segment increased 17 percent from $30.3 million for the three months ended June 30, 2008 to $35.4 million for the three months ended June 30, 2009, due to 15 percent higher realized selling prices, partially offset by a decline in sales volumes of 2 percent. Higher caustic soda prices combined with the weaker Canadian dollar relative to the US dollar in the second quarter of 2009 as compared to the second quarter of 2008 more than offset a decline in chlorine selling prices. The decline in sales volumes was due to a decline in hydrochloric acid sales volume as a result of reduced demand from the oil and gas sector. The gross margin percentage increased from 21 percent to 27 percent due to the increase in realized selling prices, lower electricity and natural gas costs, partially offset by lower production volumes and higher fixed costs. The lower production volumes and higher fixed costs were due to a longer, higher cost annual maintenance turnaround in April 2009 resulting in the plant being shutdown for 12 days (as compared to 3 days in Q2/2008).
    • Chlorine price increases of more than $100 per tonne have been implemented in the third quarter supported by market conditions expected to continue through the remainder of 2009. As chlorine demand improves, industry operating rates will continue to be constrained by stagnant caustic soda demand, which should further support higher chlorine prices
  • South America:
    • Second quarter sales revenue for this segment of $22.7 million for the three months ended June 30, 2009, was 20 percent lower than sales revenue of $28.3 million for the three months ended June 30, 2008. The decline in sales revenue was due primarily to lower resale volumes of caustic soda as well as lower sodium chlorate sales volumes to our primary customer, partially offset by higher realized selling prices which benefited from the weaker Canadian dollar. In addition to the benefit from the weaker Canadian dollar and lower fixed costs, the improvement in our gross margin percentage from 21 percent to 28 percent is due to no longer purchasing caustic soda for resale to our primary customer as a service at no margin.
    • The US$6.2 million hydrochloric acid project, which will enhance the flexibility of chlor- alkali production, is underway and scheduled for completion in mid-2010. The 4,400 tonne sodium chlorate expansion is on schedule and expected to start-up in the first quarter of 2010.
    • Our primary customer's second quarter sales volumes were 8 percent higher than the same period in 2008 based largely on strong pulp sales to China. Demand from our customer improved commencing in July and is expected to continue for the balance of the year based on their forecasted high operating rates for the remainder of 2009.

Technology Conversion Project (TCP) Update

The TCP at the North Vancouver chlor-alkali facility has fully committed financing and is scheduled for mechanical completion in late 2009, with start-up near the end of Q1 2010. The project is expected to contribute an estimated $35 - $43 million in incremental annual operating cash flow. Sixty percent of the project value is generated by cost savings. TCP is being financed from excess distributable cash, our Distribution Reinvestment Plan (DRIP) and our committed credit facilities. Updates for the quarter include:

  • Detailed engineering is complete
  • Major construction is progressing well with mechanical completion in late 2009
  • Safety performance continues to be very high
  • $195 million of TCP expected cost is committed with $135 million of this spent
  • Forecasted final cost is $235 million, just above the high end of our original $208 million +/- 10 percent budget, due to minor scope changes to improve operability and due to the brown field nature of the project. Project economics continue to be robust and could benefit further from higher MECU values than reflected in the economics at the time of project approval, presuming prices are in line with our recent forecasts which reflect current and expected future economic conditions (a $50/MECU price movement equates to $10.5 million of operating cash flow).

Financial Updates

  • Foreign exchange and Long-term debt: In October 2008, Canexus LP secured Canadian dollar foreign exchange call option contracts on a total of US$10 million per month which entitle Canexus LP to sell US$5 million per month and acquire Canadian dollars at a price of US$0.8200 and to sell US$5 million per month and acquire Canadian dollars at a price of US$0.8170 for the period January 1, 2009, to December 31, 2009. These option contracts cover virtually all of our net exposure to the US dollar for 2009.
    • Total borrowings under our committed credit facilities at June 30, 2009, were $325.0 million with remaining available capacity of approximately $188.0 million. We have no debt maturing before August 2011.
    • We recorded mark-to-market gains in fair value of foreign exchange option contracts of $1.6 million and realized gains of $1.7 million in the second quarter of 2009 (in Q2 2008, $0.4 million mark-to-market loss and $0.3 million of realized gains).
    • During the second quarter, fluctuations in exchange rates resulted in unrealized gains of $22.9 million ($23.0 million unrealized gain on long-term debt) and realized gains of $0.1 million, compared to unrealized losses of $0.8 million ($1.3 million unrealized loss on long-term debt) and realized gains of $4.3 million during the second quarter of 2008. We borrow in US dollars, which creates unrealized currency translation gains as the Canadian dollar strengthens. A substantial portion of our revenues are denominated in or referenced to the US dollar and are protected for 2009 with call option contracts as explained above.
  • Capital expenditures: Capital expenditures for the three months ended June 30, 2009, were $71.4 million as compared $18.5 million for the same period in 2008. This increase was due to increases in maintenance capital expenditures of $1.6 million, continuous improvement capital expenditures of $1.3 million and expansion capital expenditures of $50.5 million, offset by a decrease in infrastructure and IT capital expenditures of $1.7 million.
  • Expenses and Other Income: General and administrative costs for the three months ended June 30, 2009, were up $1.5 million from the same period in 2008 as a result of information technology costs associated with the review and implementation of SAP chemicals best practice processes, costs incurred relating to conversion to International Financial Reporting Standards (IFRS) in 2011, increased business development expenditures and an increase in employee benefit costs, partially offset by a reduction in the bonus estimate.
    • Included in other income (expense) are the realized and unrealized currency translation gains and losses discussed above. We have not designated our US-dollar denominated long-term debt, foreign exchange option contracts, interest rate swaps or foreign exchange forward contracts as hedges for accounting purposes and hence the fair value impact of these items flows through other income (expense) in the quarter. In the second quarter we realized a $2.5 million gain on maturity of our JPY foreign exchange forward ($Nil in Q2/2008) relating to the TCP project and recorded a mark-to-market loss in fair value of $1.9 million ($Nil in Q2/2008). We also recorded a $1.5 million mark-to-market gain in fair value on interest rate swaps ($1.9 million gain in Q2/2008) and realized losses of $0.3 million ($Nil in Q2/2008). The cash closure costs relating to our Bruderheim sodium chlorate plant of $2.7 million are recorded in other income (expense) in the quarter.
    • Income taxes increased by $1.8 million for the three months ended June 30, 2009, as compared to the same period in 2008, due to higher net income and to the recording of future tax expense in certain operating subsidiaries arising from the impact of exchange rate movements.
Operating Results for the Period Ended June 30, 2009 and 2008      
 
    Three Months Ended Six Months Ended  
    June 30
 
June 30
 
 
  CAD thousands 2009 2008 2009 2008  
  Revenues          
  Sales 109,237 110,763 233,056 219,491  
 
  Expenses          
  Cost of Goods Sold 74,583 83,928 152,384 161,428  
  Amortization 11,644 10,721 23,387 20,663  
  General and Administrative 9,033 7,509 18,293 14,939  
  Interest 1,552 2,746 3,760 5,188  
    96,812 104,904 197,824 202,218  
 
  Income before Other Income (Expense),          
  Impairment and Income Taxes 12,425 5,859 35,232 17,273  
  Other Income (Expense) 25,553 5,405 10,689 (9,029)  
  Income before Impairment and Income Taxes 37,978 11,264 45,921 8,244  
 
  Impairment 17,227 - 17,227 -  
  Income before Income Taxes 20,751 11,264 28,694 8,244  
 
  Provision for Income Taxes          
  Current 698 650 899 1,025  
  Future 2,921 1,160 4,914 1,112  
    3,619 1,810 5,813 2,137  
 
  Net Income 17,132 9,454 22,881 6,107  

New Director Appointed to Canexus Board

The Canexus Board of Directors is pleased to announce that Eric Miller, Vice President, General Counsel and Secretary of Nexen Inc., has joined the Board effective immediately.

Mr. Miller has worked at Nexen since 1993, prior thereto having practised law in Calgary with Burnet, Duckworth & Palmer (1989-1993) in the corporate commercial area. Eric has held several senior legal positions within Nexen's domestic and international divisions. Mr. Miller is the Past - President and has been a Director of the Association of General Counsel of Alberta since 2003. He received a Bachelor of Commerce Degree from the University of Calgary in 1985, and his Bachelor of Laws and Masters of Business Administration Degrees from Osgoode Hall Law School and the Schulich School of Business (York) in 1989. In 2007 he completed the Directors Education Program of the Institute of Corporate Directors (ICD) Haskayne/Rotman Program.

Financial Statements, Conference Call and Webcast

Financial Statements and Management's Discussion and Analysis will be posted on the Canexus web site at www.canexus.ca as soon as available. Management will host a conference call at 10 a.m. ET on July 24, 2009, to discuss the results. Please call 416-644-3416 or 1-800-733-7560. The conference call will also be accessible via webcast at www.canexus.ca. A replay of the conference call will be available until midnight July 31, 2009. To access the replay, call 416- 640-1917 or 1-877-289-8525, followed by passcode 21309857#.

Non-GAAP measures

Gross margin, gross margin percentage, payout ratio and distributable cash are non-GAAP financial measures, but management believes they are useful in measuring the Fund's performance. Readers are cautioned that these measures should not be construed as alternatives to net income or loss or other comparable measures determined in accordance with GAAP as an indicator of the Fund's performance or as a measure of the Fund's liquidity and cash flow. The Fund's method of calculating non-GAAP measures may differ from the methods used by other issuers and accordingly, the Fund's non-GAAP measures are unlikely to be comparable to similarly titled measures used by other issuers.

Forward Looking Statements

This news release contains forward-looking statements and information relating to expected future events and financial and operating results of the Fund, Canexus LP and its subsidiaries, including with respect to the stability of sodium chlorate prices or chlor-alkali prices, expected volumes of sodium chlorate or of chlor-alkali products, expected currency exchange rates, the Fund's expected payout ratio, global caustic soda demand, expectations for MECU netbacks, expectations regarding North Vancouver facility operations, the timing of TCP completion, the expenses related thereto and its contribution to operating cash flow. 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. These 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 Fund's Annual Information Form filed on the Fund'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 Fund and Canexus LP disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Financial outlook information contained in this press 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. Such financial outlook information 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 one in South America are reliable, low-cost, strategically-located facilities that capitalize on competitive electricity costs and

transportation infrastructure to minimize production and delivery costs. Canexus targets opportunities to maximize unitholder returns and delivers high-quality products to its customers. Canexus is listed on the Toronto Stock Exchange under the symbol CUS.UN. More information about Canexus is available at www.canexus.ca.

Contact Information

  • Canexus Limited
    Gary Kubera
    President and CEO
    (403) 571-7300

    or

    Canexus Limited
    Richard McLellan
    CFO
    (403) 571-7300
    Website: www.canexus.ca