Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

October 22, 2009 17:59 ET

Canexus Income Fund Announces Third Quarter Results

Excellent Third Quarter Results Keep Canexus on Track for Record Year

CALGARY, ALBERTA--(Marketwire - Oct. 22, 2009) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the third quarter ended September 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 34.1 percent.

Highlights:

- Fund declared cash distributions of $4.6 million during the quarter for a payout ratio of 62 percent (58 percent normalized for maintenance capital spending); maintaining full-year guidance for payout ratio of 60 to 70 percent

- North American sodium chlorate business unit sales volumes increased 17 percent from the second quarter as pulp market conditions improved; compared to the same period last year, decreased sales volumes were partially offset by higher realized prices and gross margin increased to 37 percent compared to 32 percent benefiting from a higher percentage of total production from our low-cost Brandon plant

- North American chlor-alkali results compared to same period last year reflected significantly lower realized prices for caustic soda partially offset by increased chlorine prices, and slightly lower chlorine equivalent sales volumes due to decreased hydrochloric acid demand; the North Vancouver plant is operating at high rates which are expected to continue through the fourth quarter and will benefit from previously announced price increases for chlorine and caustic soda; the Technology Conversion Project (TCP) at our North Vancouver plant continues to make good progress toward start-up around the end of Q1 2010. Our existing plant is expected to continue to operate at full rates until the transition shutdown. This project is expected to substantially enhance our competitive strength in the chlor-alkali business, generating an estimated $35 to $43 million of incremental annual operating cash flow. Sixty percent of the project value is generated by cost savings

- South America business unit had 10 percent stronger sodium chlorate sales volumes over previous quarter due to improved demand from our major customer which is expected to continue for the balance of the year; both previously announced expansion projects in Brazil are on-budget and on-schedule

- North American Terminal Operations project for the construction of rail infrastructure to allow access by a second major rail line got underway during the quarter, with early frost at the Bruderheim site moving completion to spring; the completed rail line is expected to immediately benefit our chlor-alkali business and to attract additional hydrocarbon transloading business

- Call option contracts in place for the remainder of 2009 protect virtually all US dollar cash flow ($10 million per month) when the Canadian dollar is above US$0.8185; all long-term debt is borrowed in US dollars to further manage currency exposure

- An $86-million convertible unsecured subordinated debenture financing was successfully completed on August 31, 2009; net proceeds are being used to fund Canexus' portfolio of growth opportunities, to repay existing indebtedness and for general corporate purposes

- Total borrowings under committed credit facilities at September 30, 2009, were $292 million with remaining available capacity of approximately $214 million; no debt maturing before August 2011; at September 30, 2009, Canexus had cash on hand of $57 million.

"Our results for the third quarter maintained the strong performance trend for Canexus in 2009," said Gary Kubera, President and CEO. "Each of our production business units benefited from improving market conditions from the previous quarter and we anticipate high operating rates for the remainder of this year."

"Increased pulp mill production in the quarter, particularly in the US, and significantly reduced pulp inventories supported a 17 percent increase in volumes for our North American sodium chlorate business compared to the second quarter, consistent with our earlier estimate that chlorate volumes for the second half of 2009 would be up approximately 10 percent over the first half of the year. Our margins benefit from the low-cost, high-capacity advantages at Brandon and we also expect high utilization rates at our Nanaimo and Beauharnois facilities. Sodium chlorate prices were relatively stable in the third quarter and this is expected to continue over the next two quarters subject to supply-demand balance being maintained in the North American market."

"Our North American chlor-alkali business also experienced stronger market conditions in the third quarter, with increased volumes and announced price increases reflecting reduced industry capacity and increased chlorine demand from seasonal water treatment. While MECU realized prices, volumes and gross margin were down from last year, the third quarter appears to have marked a low point for MECU pricing. Previously announced price increases for chlorine continue to be implemented while caustic soda price increases have been announced for the fourth quarter. Our existing North Vancouver facility should operate at high rates for the balance of 2009 and into 2010 based on market conditions and allowing for some inventory build up in advance of the TCP transition shutdown."

"In South America, we are operating at high rates compared to the previous quarter and expect this to continue in the fourth quarter based on stronger pulp mill demand from our primary customer Aracruz. Our previously announced sodium chlorate and hydrochloric acid expansion projects at our Brazil plant continue on-schedule and on-budget for completion during 2010."

"North American Terminal Operations unit is benefiting from the recent expansion that enables butane transloading. The previously announced $9.8 million project to construct rail infrastructure for a second major rail line and further enhancements to the Bruderheim site is underway, with early frost delaying project completion until the spring. We are encouraged by the significant opportunities that are available to expand this business."

"The second half of this year is unfolding much as we expected. Improvements in economic conditions and reduced industry capacity are generally supporting supply-demand balance in our markets. While the weakening of the US dollar is reducing our realized prices, we benefit from our Canadian dollar call option contracts. We continue to expect that our payout ratio for this year will be between 60 and 70 percent. Looking further ahead, our current growth projects will further extend our low-cost advantage while generating significant incremental annual operating cash flow beginning in 2010. We anticipate providing a more formal outlook for next year in December," said Mr. Kubera.



Statement of Distributable Cash

Three Months Ended Nine Months Ended
September 30 September 30
CAD thousands, except as noted 2009 2008 2009 2008
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Canexus LP
Net Income 38,364 4,768 61,245 10,875
Realized Foreign Exchange (Gain) Loss
on Cash (11) 281 1,162 (215)
Charges and Credits to Income Not
Involving Cash:
Future Income Taxes 1,633 (3,073) 6,547 (1,961)
Amortization 11,775 11,151 35,162 31,814
Unrealized (Gains) Losses on Currency
Translation (22,541) 12,946 (40,360) 21,766
Change in Fair Value of Foreign
Exchange Options (362) 374 4,028 1,679
Change in Fair Value of Foreign
Exchange Forward - (630) 3,796 (630)
Change in Fair Value of Interest Rate
Swaps 632 420 (352) (1,625)
Change in Fair Value of Foreign
Exchange Swap (11) - (11) -
Accrual for Future TCP Severance
Costs - - (981) 7,310
Impairment of Sodium Chlorate Assets - - 17,227 -
Other 1,000 3,425 3,616 5,222
Contributions to / Payments for
Defined Benefit Plans (1,298) - (2,527) (2,444)
Purchase of Foreign Exchange Options - (372) - (1,102)
Expenditures on Asset Retirement
Obligations (135) (417) (218) (446)
Interest Income on Restricted
Investments (13) (72) (242) (261)
Changes in Non-Cash Operating Working
Capital and Due from/to Affiliates,
Net (3,675) 10,176 (3,307) (10,780)
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Cash From Operating Activities 25,358 38,977 84,785 59,202
Changes in Non-Cash Operating Working
Capital and Due from/to Affiliates,
Net 3,675 (10,176) 3,307 10,780
Maintenance Capital Expenditures (6,244) (2,126) (13,355) (5,934)
Amortization of the Purchase Cost of
Foreign Exchange Options (1,254) (582) (3,761) (942)
Realized Foreign Exchange (Gain) Loss
on Cash 11 (281) (1,162) 215
Operating Non-Cash Items 308 (1,108) (996) 106
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Distributable Cash within
Canexus LP (1) 21,854 24,776 68,818 63,688
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Canexus Income Fund
Share of Canexus LP's Distributable
Cash 7,506 9,306 24,171 24,225
Trust Administration Expenses (89) (58) (275) (234)
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Distributable Cash available to
Canexus Income Fund (1) 7,417 9,248 23,896 23,991
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Distributions Declared 4,573 4,405 13,614 13,120
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Payout Ratio (1) 62% 48% 57% 55%
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Payout Ratio Normalized for Timing of
Maintenance Capital Expenditures
of $19.5 million for 2009 (1) 58% 50% 58% 59%
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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:

-- Third quarter sales revenue for this segment decreased four percent from $58.0 million for the three months ended September 30, 2008, to $55.7 million for the three months ended September 30, 2009, due to a 12 percent decrease in sales volumes, partially offset by a nine percent increase in realized selling prices. Realized selling prices increased as a result of the weaker Canadian dollar relative to the US dollar in the third quarter of 2009 (US $0.90) as compared to the third quarter of 2008 (US $0.97). The increase in the gross margin percentage from 32 percent for the three months ended September 30, 2008, to 37 percent for the three months ended September 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, but has begun to recover in the third quarter.

- North America Chlor-alkali:

-- Third quarter sales revenue for this segment decreased 13 percent from $40.9 million for the three months ended September 30, 2008, to $35.7 million for the three months ended September 30, 2009, due to 35 percent lower realized caustic soda prices on 13 percent higher sales volumes more than offsetting increases in chlorine prices. The impact of the weaker Canadian dollar compared to the third quarter last year contributed to realized prices, especially for chlorine. The slight decline in chlorine-equivalent 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 decreased from 34 percent to 25 percent due to the decrease in realized MECU selling prices and slightly higher fixed costs, partially offset by lower natural gas costs and higher production volumes.

-- Caustic soda price increases are being implemented in the fourth quarter, supported by demand improvement, lower production in Asia and a weaker US dollar.

- South America:

-- Third quarter sales revenue for this segment of $23.5 million for the three months ended September 30, 2009, was 25 percent lower than sales revenue of $31.4 million for the three months ended September 30, 2008. The decline in sales revenue was due to lower resale volumes of caustic soda as well as slightly lower sodium chlorate sales volumes to our primary customer and to lower chlorine equivalent sales volumes to the merchant market. In addition to the impact from the weaker Canadian dollar on our fixed US-dollar margins and lower fixed costs, the improvement in gross margin percentage from 25 percent to 32 percent is due to no longer purchasing caustic soda for resale to our primary customer as a service at no margin.

-- South America business unit had 10 percent stronger sodium chlorate sales volumes in the third quarter over the previous quarter due to improved demand from our major customer which is expected to continue for the balance of the year.

-- The US$6.2 million hydrochloric acid project, which will enhance the flexibility of chlor-alkali production, is underway and scheduled for completion in Q3 2010. The 4,400 tonne sodium chlorate expansion is on schedule and expected to start-up in the second quarter of 2010.

Technology Conversion Project (TCP) Update

The TCP at the North Vancouver chlor-alkali facility 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 cash on hand, excess distributable cash, our Distribution Reinvestment Plan (DRIP) and our committed credit facilities. Updates for the quarter include:

- TCP continues to make good progress toward start-up around the end of Q1 2010. Our existing plant is expected to continue to operate at full rates until transition shutdown. This project is expected to substantially enhance our competitive strength in the chlor-alkali business.

- As of September 30, $171 million has been incurred with $210 million incurred and committed.

- Safety performance continues to be high.

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.

-- We recorded mark-to-market gains in fair value on foreign exchange option contracts of $0.4 million and realized gains of $3.7 million in the third quarter of 2009 as a result of the increase in the value of the Canadian dollar relative to the US dollar.

-- 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 with call option contracts as explained above. During the third quarter, fluctuations in exchange rates resulted in unrealized currency translation gains on our US dollar denominated debt of $23.7 million and realized gains of $0.8 million, compared to unrealized losses of $10.8 million and realized gains of $0.9 million during the third quarter of 2008.

-- On August 31, 2009, the Fund issued $86 million of convertible unsecured subordinated debentures which mature December 31, 2014. The debentures bear interest at 8 percent payable semi-annually in arrears on June 30 and December 31 of each year.

-- Total borrowings under our committed credit facilities at September 30, 2009, were $292.0 million with remaining available capacity of approximately $214.0 million. We have no debt maturing before August 2011. At September 30, 2009 Canexus had cash on hand of $57 million.

- Capital expenditures: Capital expenditures for the three months ended September 30, 2009, were $53.5 million as compared to $24.5 million for the same period in 2008. This increase was primarily due to increases in expansion capital expenditures of $23.6 million mostly related to TCP and to increases in maintenance capital expenditures of $4.1 million. The increase in maintenance capital expenditures was due to the acceleration of capital maintenance projects in support of TCP.

- Expenses and Other Income: General and administrative costs for the three months ended September 30, 2009, were down $0.5 million from the same period in 2008 as a result of the exercise of general cost constraint through the economic downturn and to adjustments in the third quarter of 2008 to reflect a revised higher year-to-date estimate for employee bonuses, partially offset by higher costs associated with preparation for the conversion to IFRS in 2011 and the review and implementation of SAP chemicals best practice processes.

-- 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 third quarter, we recorded a $0.6 million mark-to-market loss in fair value on interest rate swaps ($0.4 million loss in Q3/2008) and realized losses of $0.4 million ($0.1 million in Q3/2008). Additional closure costs relating to our Bruderheim sodium chlorate plant of $0.7 million are recorded in other income (expense) in the quarter. No further costs are anticipated.

-- Income taxes increased by $5.1 million for the three months ended September 30, 2009, as compared to the same period in 2008, due to higher net income and to the recording of tax expense in certain operating subsidiaries arising from the impact of exchange rate movements.



Operating Results for the Periods Ended September 30, 2009 and 2008

Three Months Ended Nine Months Ended
September 30 September 30
CAD thousands 2009 2008 2009 2008
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Revenues
Sales 114,883 130,373 347,939 349,864

Expenses
Cost of Goods Sold 78,239 90,503 230,623 251,931
Amortization 11,775 11,151 35,162 31,814
General and Administrative 8,361 8,849 26,654 23,788
Interest 1,864 2,992 5,624 8,180
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100,239 113,495 298,063 315,713
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Income before Other Income (Expense),
Impairment and Income Taxes 14,644 16,878 49,876 34,151
Other Income (Expense) 26,266 (14,636) 36,955 (23,665)
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Income before Impairment and Income
Taxes 40,910 2,242 86,831 10,486
Impairment - - 17,227 -
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Income before Income Taxes 40,910 2,242 69,604 10,486
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Provision for (Recovery of) Income
Taxes
Current 913 547 1,812 1,572
Future 1,633 (3,073) 6,547 (1,961)
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2,546 (2,526) 8,359 (389)
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Net Income 38,364 4,768 61,245 10,875
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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 October 23, 2009, to discuss the results. Please call 416-644-3414 or 1-800-814-4859. The conference call will also be accessible via webcast at www.canexus.ca. A replay of the conference call will be available until midnight October 30, 2009. To access the replay, call 416-640-1917 or 1-877-289-8525, followed by passcode 4170463#.

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 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 unitholder returns and delivers high-quality products and services to its customers. Canexus units and convertible debentures trade on the Toronto Stock Exchange under the symbol CUS. 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
    www.canexus.ca