Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

February 19, 2009 19:53 ET

Canexus Income Fund Announces Fourth Quarter and Year-End Results

Canexus Delivers Record Financial Performance in 2008

CALGARY, ALBERTA--(Marketwire - Feb. 19, 2009) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the fourth quarter and year ended December 31, 2008. Unless otherwise noted, the Fund is reporting the 100 percent results of Canexus Limited Partnership ("Canexus LP"), of which the Fund indirectly owns 36.5 percent.

Highlights:

- Record financial performance for 2008 with distributable cash of $83.3 million, the highest distributable cash generated since the Fund's inception and an increase of 43 percent over 2007, achieved with an average exchange rate of US$0.96 per Canadian dollar;

- Revenue increased 15 percent to $474.4 million from $413.6 million in 2007; fourth quarter revenue of $124.5 million increased 21 percent from $103.3 million in the same period last year;

- Total distributions for the year were $51.2 million, including a special distribution of $0.0456 per unit declared in December. Our 2008 payout ratio of 61 percent was in line with guidance and DRIP participation has continued at an overall participation rate of approximately 71 percent; cash distributions of $5.9 million were declared by the Fund during the quarter, for a payout ratio of 83 percent (65 percent when adjusted for the timing of maintenance capital spending);

- Solid financial performance from our North American sodium chlorate and chlor-alkali business units with improved gross margins over 2007 of 3 percent and 2 percent respectively; our Brandon sodium chlorate plant expansion completed in 2008 continues to perform above design capacity contributing to enhanced margins;

- The Technology Conversion Project ("TCP") at our North Vancouver chlor-alkali facility remains on schedule for start-up in the first quarter of 2010. Approximately $150 million of the $208 million budget was committed at year end with $64 million spent. Total borrowings under our committed credit facilities at December 31, 2008 were $295 million with remaining available capacity of $225 million. We have no debt maturing before August 2011;

- The 2,000-tonne sodium chlorate expansion project at our Brazil plant was completed at the end of January 2009. The further 4,400-tonne expansion previously announced is underway and expected to start-up in the first quarter of 2010;

- An $8.1 million project is nearing completion to expand truck loading, rail capacity and product handling capabilities at our Bruderheim, Alberta facility. When operational in April 2009, the project will facilitate increased chlor-alkali distribution through the terminal and enable trans-loading of hydrocarbons.

"Our record results for 2008, achieved despite a very strong Canadian dollar throughout most of the year, strengthened our financial position heading into 2009," said Gary Kubera, President and CEO. "In addition to excellent financial performance, we made significant progress on strategic growth projects to secure our long-term future. We completed two growth projects - the Brandon Phase 7 expansion and the 2,000-tonne Brazil expansion - and made significant progress on TCP, with construction approximately 25 percent complete. In addition, we began another expansion at our Brazil facility and a hydrochloric acid project at North Vancouver. Currency option protection secured in anticipation of volatile markets in 2009 provides exchange rate certainty at US$0.8185 while still allowing us to benefit if the Canadian dollar stays below this level. Overall, our achievements enhance our low-cost advantages and position us to better meet the challenges of the current economy."

"We had a solid year in our North American sodium chlorate business unit. The 33,000 tonne expansion completed last February at our flagship plant in Brandon, Manitoba, continues to exceed expectations. The Brandon expansion was approved on the expectation of delivering incremental annual operating cash flow of $10 million but is actually contributing about $12 million on an annualized basis. During the fourth quarter, we took advantage of lower volume demand to accelerate maintenance work at our Brandon and Beauharnois facilities. We expect prices to US and Canadian customers in local currencies to be stable even though we are anticipating lower volumes into 2009. We will continue to monitor demand trends and the North American supply situation and will consider the need to rationalize capacity at our higher cost plants if needed."

"Our North American chlor-alkali business unit performed above expectations for the year primarily due to increases in MECU prices, with significantly higher caustic soda prices more than offsetting downward pressure on chlorine pricing. During the fourth quarter our operating rates were well above the industry average. TCP remains on time and within budget. Looking ahead, demand for chlorine is projected to increase during the high demand water treating season in early spring/summer."

"In South America, we just completed a 2,000-tonne sodium chlorate expansion, and have a further 4,400 tonne expansion underway. In the fourth quarter, sodium chlorate sales volumes were impacted by reduced pulp production rates at our primary customer to manage high pulp inventory levels. Pulp production returned to more normal levels early in December, which is continuing into 2009. Fourth quarter chlor-alkali production and sales volumes were also lower due to a decline in demand for chlorine in the merchant market. Into 2009, reduced demand for chlorine is projected to continue through the first quarter but we are optimistic that we will be able to continue to operate our plant at high rates. We will continue to benefit from our long-term fixed US dollar margin contract with our primary customer in 2009, while actively pursuing growth opportunities in the region."

"Canexus is pleased to be nearing completion of a value-enhancing initiative that leverages the strategic location of our Bruderheim, Alberta facility and demonstrates our ability to develop creative growth opportunities for our assets. The $8.1 million terminal expansion project is a directional step toward supporting chlor-alkali sales in Alberta and it expands the scope of products that can be handled on the site located northeast of Edmonton. We will apply our logistics experience to trans-load hydrocarbons for nearby Alberta Heartland and oil sands operations beginning in April 2009."

"We started to experience softening of sodium chlorate volumes during the fourth quarter while our customers were managing their inventories. Pricing, however, remained relatively stable as some higher cost production capacity was taken offline by one competitor and a second competitor sought Chapter 11 bankruptcy protection in the US in early January. Looking ahead, we are cautiously confident all of our business units are positioned to deliver solid results during this period of economic uncertainty. Our low-cost position serves us well in this environment and the growth projects further extend our advantages, reduce costs and increase capacity commencing in the first quarter of 2010."

"We have reviewed our projections against today's uncertain economic environment and remain confident in our previously announced guidance for the year ahead. Our payout ratio for 2009 reflects the benefit of the weaker Canadian dollar, confirmed through our call option protection, and is expected to be between 60 and 70 percent, similar to our performance in 2008," said Mr. Kubera.



Statement of Distributable Cash

Year Ended
Fourth Quarter December 31
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CAD thousands, except as noted 2008 2007 2008 2007
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Canexus LP
Net Income (Loss) (16,910) 4,210 (6,035) 54,547
Realized Foreign Exchange Gain on Cash (1,803) - (1,803) -
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Charges and Credits to Income Not
Involving Cash:
Future Income Taxes (3,128) 1,574 (5,089) 4,388
Amortization 11,594 11,566 43,408 44,370
Unrealized Losses (Gains) on Currency
Translation 39,792 (4,456) 61,558 (34,488)
Change in Fair Value of Foreign
Exchange Options (3,478) 719 (1,799) 31
Change in Fair Value of Foreign
Exchange Forward Swaps (3,167) 5 (3,797) -
Change in Fair Value of Interest Rate
Swaps 4,428 800 2,803 -
Change in Fair Value of Electricity
Forward Swaps - - - 2,229
Accrual for Future TCP Severance Costs - - 7,310 -
Other 1,338 3,395 6,560 3,952
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Total Charges and Credits to Income
Not Involving Cash 47,379 13,603 110,954 20,482
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Contributions to / Payments for
Defined Benefit Plans (1,922) (594) (4,366) (2,370)
Purchase of Foreign Exchange Options (5,015) - (6,117) (360)
Expenditures on Asset Retirement
Obligations (675) (80) (1,121) (616)
Changes in Non-Cash Operating Working
Capital and Due to Affiliates, Net (8,243) 12,414 (19,023) 10,186
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Cash From Operating Activities 12,811 29,553 72,489 81,869
Changes in Non-Cash Operating Working
Capital and Due to Affiliates, Net 8,243 (12,414) 19,023 (10,186)
Maintenance Capital Expenditures (9,166) (3,744) (15,100) (12,731)
Amortization of the Purchase Cost of
Foreign Exchange Options (279) (179) (1,221) (819)
Realized Foreign Exchange Gain on Cash 1,803 - 1,803 -
Operating Non-Cash Items 6,189 (2,133) 6,295 (17)
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Distributable Cash within
Canexus LP (1) 19,601 11,083 83,289 58,116
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Canexus Income Fund
Share of Canexus LP's Distributable
Cash 7,237 4,276 31,462 22,424
Trust Administration Expenses (63) (66) (297) (283)
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Distributable Cash available to
Canexus Income Fund (1) 7,174 4,210 31,165 22,141
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Cash Distributions Declared 5,928 6,077 19,048 26,908
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Payout Ratio (1) 83% 144% 61% 122%
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Note:

(1) See comments concerning non-GAAP Measures at end of release.


Operations Highlights

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

- North America Sodium Chlorate:

-- Annual sales revenue for the North American sodium chlorate segment increased 14 percent to $219.0 million from $192.2 million in 2007 due to a four percent increase in sales volumes and a nine percent increase in realized selling prices. Price increases implemented in the first and third quarters of 2008 more than offset the appreciation in the value of the Canadian dollar relative to the US dollar year over year. Strong demand from US customers during the first three quarters of 2008 contributed to the increase in sales volumes. Gross margins increased to 31 percent from 28 percent primarily due to the increase in realized selling prices and an increase in production at our low-cost Brandon facility partially offset by higher electricity costs and higher fixed costs.

-- Fourth quarter sales revenue for this segment decreased three percent to $56.6 million from $58.0 million in the third quarter of 2008 due to a decline in sales volumes of 11 percent partially offset by a 10 percent increase in realized selling prices. The increase in realized selling prices was due to the devaluation of the Canadian dollar relative to the US dollar during the fourth quarter. The decline in sales volumes was due to the deterioration in global pulp markets in the fourth quarter caused by the economic slowdown. Gross margins increased from 32 percent to 33 percent primarily as a result of higher realized selling prices partially offset by slightly higher electricity prices (primarily in Alberta), slightly higher fixed costs and 16 percent lower production in the fourth quarter. We expect our sodium chlorate volumes for 2009 to decline approximately 10 percent from 2008 levels and have reduced operating rates at our higher cost plants. We will continue to monitor demand trends and the North American supply situation and will consider rationalizing capacity at our higher cost plants if needed. Prices are expected to remain stable in 2009 and will benefit from the weaker Canadian dollar.

-- Our Brandon plant expansion continues to exceed design expectations. There are debottlenecking opportunities at our Brandon plant that could add up to an additional 30,000 to 40,000 tonnes of capacity over the next 2 to 5 years as market conditions warrant.

- North America Chlor-alkali:

-- Annual sales revenue for the North American chlor-alkali segment increased 11 percent to $145.4 million from $130.7 million in 2007 primarily due to higher realized selling prices. Caustic soda price increases implemented in the third and fourth quarters of 2008 more than offset a decline in chlorine selling prices and the appreciation of the Canadian dollar relative to the US dollar year over year. Gross margins increased to 31 percent from 29 percent primarily due to the increase in realized selling prices partially offset by higher natural gas costs and slightly higher fixed costs.

-- Fourth quarter sales revenue for this segment increased two percent to $41.8 million from $40.9 million in the third quarter of 2008 due to a 26 percent increase in realized selling prices for caustic soda which more than offset a 16 percent decline in caustic soda sales volume and a 29 percent decline in chlorine sales volume. The decline in caustic soda sales volume was due to decreased demand, particularly in the pulp sector in Western Canada, in response to the general economic slowdown. The decline in chlorine sales volume was due to the normal seasonal softening in chlorine demand used in water treatment as well as, a larger than anticipated negative impact on chlorine derivative demand as a result of the construction sector slowdown. Gross margins increased to 36 percent from 34 percent in the third quarter due to higher realized selling prices partially offset by higher natural gas and electricity costs and lower production.

-- MECU netbacks continued to rise through the fourth quarter due to caustic soda price improvement and the positive currency exchange impact on US sales. With global caustic soda demand expected to decline in the first quarter of 2009 caustic soda prices are projected to moderate in 2009. For 2009 our realized MECU netbacks are expected to be somewhat higher than 2008 on moderately lower volumes.

- South America:

-- Annual sales revenue in Brazil increased 21 percent to $110.0 million from $90.7 million for 2007. This increase is primarily the result of higher realized selling prices for both sodium chlorate and chlor-alkali products. The increase in realized selling prices was due to the pass-through nature of the contract with our primary customer which contributes to higher sales revenues as costs increase. The gross margin percentage declined from 28 percent to 21 percent primarily due to an increase in the purchase of caustic soda at higher spot prices for resale to our primary customer which generates no margin, higher fixed costs and the impact of the stronger Canadian dollar in 2008 on our fixed US dollar margins, partially offset by slightly higher production of both sodium chlorate and chlor-alkali products.

-- Fourth quarter sales revenue in Brazil decreased 17 percent to $26.1 million from $31.4 million from the third quarter of 2008 due to lower sales volumes of both sodium chlorate and chlor-alkali products partially offset by increases in realized selling prices of both sodium chlorate and caustic soda. The decline in sales volumes of sodium chlorate and caustic soda was due to a reduction in pulp production rates in November by our primary customer to manage high pulp inventory levels resulting from the global economic situation. The decline in chlor-alkali sales volumes was due to a reduction in our chlor-alkali plant operating rate in December in response to a decline in merchant chlorine demand in Brazil. Gross margin percentages decreased to 14 percent in the fourth quarter from 25 percent in the third quarter primarily as a result of the reduction in our chlor-alkali plant operating rate which necessitated the purchase and resale of caustic soda on the spot market at higher prices than could be billed to our primary customer (for the production shortfall below the chlor-alkali plant's capacity) to meet our primary customer's requirements partially offset by the impact of the weaker Canadian dollar against the US dollar during the fourth quarter on our fixed US dollar margins. Our primary customer returned to more normal operating rates in early December which are expected to continue through 2009. Into 2009, reduced demand for chlorine is projected to continue through the first quarter but we are optimistic that we will be able to continue to operate our plant at high rates. We will continue to benefit from our long-term fixed US dollar margin contract with our primary customer in 2009.

Technology Conversion Project (TCP) Update

The TCP at the North Vancouver chlor-alkali facility is scheduled for completion in 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 98 percent complete

- Major construction began with 25 percent of total construction complete

- Safety performance continues at a very high level

- $150 million of TCP budget committed.

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 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 December 31, 2008 were $295.0 million with remaining available capacity of $225.0 million. We have no debt maturing before August 2011.

- We recorded mark-to-market gains in fair value of foreign exchange option contracts of $3.5 million in the fourth quarter of 2008 ($0.7 million of mark-to-market losses offset by realized gains of $1.1 million in Q4/07). Realized gains of $1.1 million and mark-to-market fair value gains of $1.8 million were recorded on foreign exchange option contracts in 2008 (realized gains of $2.3 million in 2007).

- During the fourth quarter, fluctuations in exchange rates resulted in unrealized losses of $39.8 million ($38.4 million on US dollar denominated long-term debt) and realized gains of $4.0 million, compared to unrealized gains of $4.5 million ($1.5 million on US dollar denominated long-term debt) and realized losses of $2.5 million during the fourth quarter of 2007. During the year, fluctuations in exchange rates resulted in unrealized losses of $61.6 million ($58.8 million on US dollar denominated long-term debt) and realized gains of $10.6 million ($3.6 million on US dollar long-term debt repayments), compared to unrealized gains of $34.5 million ($32.0 million on US dollar denominated long-term debt) and realized losses of $4.7 million in 2007. We borrow in US dollars, which creates unrealized currency translation losses as the Canadian dollar weakens, as a substantial portion of our revenues are denominated in or referenced to the US dollar and hence our cash flows benefit from a weaker Canadian dollar.

- Capital expenditures: Capital expenditures for the year ended December 31, 2008, were $88.5 million as compared to the year ended December 31, 2007 of $61.3 million. This increase was due to increases in maintenance capital expenditures of $2.4 million, continuous improvement capital expenditures of $3.1 million and expansion capital expenditures of $20.5 million offset by a decrease in infrastructure and IT capital expenditures of $0.4 million.

- Expenses and Other Income: General and administrative costs for the year ended 2008 were up $2.8 million from 2007 as a result of higher bonus amounts for 2008, slightly higher salary and benefit costs and increased spending on business development activities. Included in other income are realized and unrealized currency translation gains and losses as discussed above. We have not designated our US-dollar denominated long-term debt, foreign exchange option contracts, interest rate swaps, foreign exchange forward or electricity forward swap contracts as hedges for accounting purposes and hence the fair value impact of these items flows through other income. In 2008, Canexus did not have any electricity forward swap contracts outstanding. We recorded $2.2 million of mark-to-market losses on electricity forward swap contracts in 2007. The change in fair value of interest rate swaps entered into in 2008 was a mark-to-market loss of $2.8 million and we had realized gains of $0.1 million. In August 2008, we entered into a foreign exchange forward contract to buy Japanese Yen (JPY) 1.74 billion at a rate of 108.11 JPY per US dollar on May 20, 2009, to satisfy a purchase commitment related to TCP. For 2008 we recorded mark-to-market gains of $3.8 million on this foreign exchange forward contract. Also in 2008, in light of market conditions, we recorded a $1.6 million ($0.6 million in 2007) allowance for impairment in our non-bank sponsored asset backed commercial paper and a $0.7 million ($0.3 million in 2007) increase in our general allowance for doubtful accounts receivable. In 2008 we recorded estimated future TCP severance costs of $7.3 million. Following start-up we expect to permanently reduce our workforce at this facility by approximately one-third.



Operating Results for the Three-Month Periods and Years Ended December 31,
2008 and 2007.

Three Months Ended Years Ended
December 31 December 31
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CAD thousands 2008 2007 2008 2007
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Revenues
Sales 124,493 103,331 474,357 413,607
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Expenses
Cost of Goods Sold 87,129 76,469 339,060 295,725
Amortization 11,594 11,566 43,408 44,370
General and Administrative 9,198 7,466 32,986 30,186
Interest 3,478 2,374 11,658 11,377
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111,399 97,875 427,112 381,658
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Income before Other Income (Expense)
and Income Taxes 13,094 5,456 47,245 31,949
Other Income (Expense) (33,391) 994 (57,056) 29,482
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Income (Loss) before Income Taxes (20,297) 6,450 (9,811) 61,431
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Provision for (Recovery of) Income
Taxes
Current (259) 666 1,313 2,496
Future (3,128) 1,574 (5,089) 4,388
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(3,387) 2,240 (3,776) 6,884
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Net Income (Loss) (16,910) 4,210 (6,035) 54,547
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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 February 20, 2009, to discuss the results. Please call 416-644-3419 or 1-800-732-0232 to access the call. The call will be webcast live and archived on the Canexus web site. A replay will be available by telephone until midnight on February 27, 2009. To access the replay, call 416-640-1917 or 1-877-289-8525, followed by passcode 21297681#.

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 timing of the Brazil expansion, the stability of sodium chlorate prices, expected volumes of sodium chlorate, the Fund's expected payout ratio, global caustic soda demand, expectations for MECU netbacks, TCP contributions to operating cash flow and capacity additions resulting from the Brandon debottlenecking opportunities. 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 five 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