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Canexus 1Q 2014 results: Chlor-alkali results affected by weakness in caustic soda and hydrochloric acid markets

By Thu, May 08, 2014
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CALGARY, AB, May 7, 2014 (Marketwired) -Canexus Corporation today announced its financial results for the first quarter ended March 31, 2014.

Highlights:

  • Cash operating profit was $25.9 million (before one-time costs of approximately $3.7 million; including these costs, cash operating profit was $22.2 million) compared to $24.6 million in the fourth quarter of 2013. Cash operating profit in the current quarter was less than the first quarter of 2013 ($30.3 million) mainly due to lower results from our North American chlor-alkali business. Distributable cash was $7.0 million for the first quarter of 2014 after being reduced by $9.4 million for realized foreign currency translation losses on repayment of US dollar debt.
  • The Board of Directors declared a quarterly dividend of $0.10 per common share, representing a 27% reduction from the previous quarterly dividend of $0.1368. This change results in Canexus retaining significant capital as we complete the North American Terminal Operations ("NATO") unit train expansion project. The dividend is payable July 15, 2014 to shareholders of record on June 30, 2014.
  • Start-up and commissioning activities of the initial phase of the unit train project were completed at the end of February. Canexus loaded seven and 12 unit trains in the months of March and April, respectively, and expects to load approximately 16 unit trains in May. To date, unit train activity levels have been negatively affected by rail service and vapour incineration system issues identified during early start-up and commissioning activities.
    The next staged expansion, to further increase unit train loading capacity at the Bruderheim Terminal and connect it to the Cold Lake pipeline system, is expected to start-up in late August. The Corporation plans to take a 60- to 90-day period of downtime, commencing in June, to most efficiently complete the remaining work. Canexus does not expect to reach planned activity levels of 10.5 unit trains per week until sometime in 2015 given start-up and commissioning commencing in late August, the ramp up of the expanded capacity and uncertain timing for implementation of design changes to the vapour incineration system. The total estimated cost of the project remains as previously announced.
  • The diluted bitumen and crude oil ("DBCO") truck-to-rail transload ("manifest") operations averaged physical volumes of approximately 17,200 bbls/day compared to 16,200 bbls/day in the fourth quarter of 2013. Challenging winter weather conditions impacted operations. The highest daily transload volume to date was established at just over 27,100 bbls/day compared to a transload capacity of 30,000 bbls/day. Canexus completed its DBCO capacity expansion in the third quarter of 2013. The planned downtime for the unit train project will not affect manifest operations.
  • Canexus' chlor-alkali results continue to be affected by weakness in caustic soda and hydrochloric acid ("HCl") markets. Caustic soda netback pricing (delivered price net of freight) improved approximately 2% in the first quarter and a similar improvement is expected in the second quarter. Weakness in the Canadian dollar should support caustic soda prices as competing product imported from Asia is priced in US dollars. HCl demand was solid in the first quarter of 2014 and continued into April prior to spring break-up in Western Canada which affects the oil and gas end-use market. HCl netback pricing improved over Q4/13, with greater sales volumes into Western Canada. Netback pricing was materially lower than Q1/13 with lower delivered prices in both Canada and the United States and with the significant incremental sales volumes in 2014 being placed into the United States.
  • Canexus' North American sodium chlorate business had a solid quarter. Cash operating profit was up slightly from the fourth quarter of 2013 with higher production volumes from our low-cost Brandon plant. Volumes have remained stable and new contract settlements entering 2014 at slightly lower prices have been largely offset by the strengthening US dollar, as approximately two-thirds of the Corporation's sales take place in the United States. North American sodium chlorate operating rates are expected to remain in the low 90% range for the balance of 2014, assuming no capacity rationalization in the industry. Our Brandon plant is expected to run at capacity and the Corporation continues to implement modest de-bottleneck projects.
  • Canexus' Brazil operations achieved record cash operating profit for the quarter of $7.6 million. First quarter results benefited from strong demand from our major customer and the stronger US dollar. Our long-term fixed US dollar margin contract with our major customer should generate solid results for the balance of 2014.

"I am generally pleased with how our business performed during the first quarter. The chemical business met our expectations, with Brazil achieving record results, and we continue to move forward at NATO. The unit train expansion project at NATO is very important to Canexus and represents the opportunity for significant low-risk future cash flow growth," stated Richard Ott, Interim President and CEO. "NATO is anchored by take-or-pay contracts and there is high demand for transport options for crude oil in Western Canada. To date, we have 60-70% of our unit train planned activity levels contracted for multiple years and we continue to meet with existing and potential customers for the remaining volumes. We are no longer in active discussions with the prospective customer referenced last quarter for an additional 2 unit trains per week.

"2014 is not without its challenges though. We continue to face headwinds in the North American chlor-alkali business and we need to complete the construction and ramp up of the NATO unit train expansion. Railroad capacity and power continues to be an issue we expect will resolve itself.

"To ensure we continue to maintain financial flexibility, the board believed it was prudent to revise our dividend. We remain committed to paying a dividend and will re-evaluate the level each quarter as we continue to realize the expected cash flow from the manifest and unit train operations at NATO. Lastly, I am pleased to report we are making solid progress in our search for a permanent Calgary-based President and CEO to lead Canexus," Mr. Ott added.

Highlights for each business unit are as follows:

  • North America Sodium Chlorate:
    • Q1 2014 versus Q4 2013:Sales revenue for the North America sodium chlorate segment decreased 1% to $58.9 million for the three months ended March 31, 2014 as compared to $59.5 million for the three months ended December 31, 2013 as a result of lower realized netback prices (2%) on consistent sales volumes. The weakening of the Canadian dollar (three months ended March 31, 2014 - US $0.92 as compared to US $0.96 for the three months ended December 31, 2013) partially offset the market driven declines in realized netback prices. Cash operating profit percentage increased from 24% to 26% as a result of higher production volumes from our low-cost Brandon plant.
    • Q1 2014 versus Q1 2013:Sales revenue for the North America sodium chlorate segment remained consistent at $58.9 million for the three months ended March 31, 2014 and 2013. The weakening of the Canadian dollar (three months ended March 31, 2014 - US $0.92 as compared to US $1.00 for the three months ended March 31, 2013) partially offset market driven declines in realized netback prices. Cash operating profit percentage decreased from 27% to 26% percent as a result of higher production volumes primarily from our low-cost Brandon plant, being slightly more than offset by higher electricity rates and fixed costs.
  • North America Chlor-alkali:
    • Q1 2014 versus Q4 2013:Sales revenue for the North America chlor-alkali segment declined 2% to $50.4 million for the three months ended March 31, 2014 as compared to $51.4 million for the three months ended December 31, 2013. The decrease was due to lower sales volumes (caustic soda - 11% and chlorine - 10%) and lower chlorine delivered prices (10%) which more than offset higher hydrochloric acid sales volumes (16%) and delivered prices (19%), and higher caustic soda delivered prices (3%). Cash operating profit percentage decreased from 11% to 10% as a result of higher metric electrochemical unit ("MECU") realized netback prices (3%) and lower salt costs being more than offset by lower MECU production volumes (7%) and higher natural gas costs.
    • Q1 2014 versus Q1 2013:Sales revenue for the North America chlor-alkali segment decreased 6% to $50.4 million for the three months ended March 31, 2014 from $53.6 million for the three months ended March 31, 2013. This decrease was due to higher hydrochloric acid sales volumes (67%) being more than offset by lower delivered prices (hydrochloric acid - 35%, chlorine - 6% and caustic soda - 4%) and lower sales volumes (caustic soda - 4% and chlorine - 20%). Cash operating profit percentage decreased from 19% to 10% as a result of higher MECU production volumes (5%) and lower caustic soda purchased product costs being more than offset by lower MECU realized netback prices (12%) and higher electricity, gas and fixed costs, including maintenance expense.
  • South America:
    • Q1 2014 versus Q4 2013:Sales revenue for the South America segment increased 3% to $23.5 million for the three months ended March 31, 2014 from $22.8 million for the three months ended December 31, 2013. The increase in sales revenue was primarily due to higher sodium chlorate (7%) and sodium hypochlorite (13%) sales volumes, partially offset by lower sodium chlorate (4%) and caustic soda (2%) realized netback prices and lower caustic soda sales volumes (2%). Cash operating profit percentage increased from 22% to 32% as a result of higher merchant market sodium chlorate sales volumes, higher sodium chlorate production volumes (21%) and lower purchased product, general and administrative and fixed costs. Sodium chlorate production, purchased product costs and fixed costs were negatively impacted in the fourth quarter of 2013 by the failure of a transformer.
    • Q1 2014 versus Q1 2013:Sales revenue for the South America segment decreased 3% to $23.5 million for the three months ended March 31, 2014 from $24.2 million for the three months ended March 31, 2013. The decrease in sales revenue was primarily due to lower realized netback prices (sodium chlorate - 4%, caustic soda - 2% and hydrochloric acid - 10%) and lower sales volumes (sodium chlorate and caustic soda, 2% each) which more than offset higher sodium hypochlorite sales volumes (15%). Cash operating profit percentage increased to 32% percent from 25% as a result of the favourable foreign exchange impact resulting from the weakening of both the Brazilian Real/Canadian dollar as compared to the US dollar, lower electricity costs not passed through to our major customer, and lower fixed and general and administrative costs. These gains more than offset lower sodium chlorate production volumes (4%). General and administrative costs were lower as a result of lower salaries and wages.
  • North American Terminal Operations:
    • Q1 2014 versus Q4 2013:Cash operating profit for the three months ended March 31, 2014 was $0.7 million, inclusive of transloading services of $0.6 million for inter-segment chlor-alkali products, as compared to $0.8 million, inclusive of transloading services of $0.6 million for inter-segment chlor-alkali products, for the three months ended December 31, 2013. External sales revenue increased 26% for the three months ended March 31, 2014, as compared to the three months ended December 31, 2013, primarily as a result of higher DBCO transload volumes (38% - inclusive of revenues earned under take-or-pay contracts for minimum transload volume commitments) and the start-up of unit train activity.

      Cash cost of sales (cost of sales before depreciation and amortization included in cost of sales) comprise fixed costs including employee costs, pipeline operating costs and other costs of operating the Bruderheim Terminal. The increase in cash cost of sales ($1.7 million) for the three months ended March 31, 2014, as compared to the three months ended December 31, 2013, was primarily due to the start-up of unit train operations, higher heating and diesel costs associated with cold weather and higher property taxes.
    • Q1 2014 versus Q1 2013:Cash operating profit for the three months ended March 31, 2014 was $0.7 million, inclusive of transloading services of $0.6 million for inter-segment chlor-alkali products, as compared to $0.2 million, inclusive of transloading services of $0.8 million for inter-segment chlor-alkali products, for the three months ended March 31, 2013. External sales revenue increased 68% for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, primarily as a result of the start-up in unit train operations and an increase in the number of DBCO railcars transloaded (56% - inclusive of revenues earned under take-or-pay contracts for minimum transload volume commitments) combined with higher transload fees. The commissioning of four tanks in the third quarter of 2013 in the manifest area facilitated increased transload fees under associated customer contracts for the three months ended March 31, 2014.

      The increase in cash cost of sales ($2.5 million) for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, was primarily due to the start-up of unit train activity in the current quarter ($1.1 million) and an increase in the number of employees to support an increase in DBCO transload volumes.

General Market Fundamentals

  • North America Sodium Chlorate: During the first quarter of 2014, global market conditions remained relatively stable for bleached softwood pulp, while continuing to slowly deteriorate for bleached hardwood pulp. Although demand was materially in line with expectations, deliveries of pulp to customers were negatively impacted by poor logistic services in North America, mainly due to harsh winter conditions and a port strike in Vancouver. The difficult shipping conditions created opportunities for spot pricing appreciation, but these conditions are considered short term and are expected to retreat as the weather improves. Combined producer inventories increased by one day in March from February levels to 37 days, slightly ahead of 2013 levels of 35 days. Softwood pulp stocks declined by one day month-over-month ending at 28 days in March, while hardwood inventories increased by three days month-over-month ending at 48 days in March. Benchmark pricing for Northern Bleached Softwood Kraft is at a 33 month high and is expected to peak over the next few months as market fundamentals erode due to excess hardwood capacity coming on line in Latin America. First quarter 2014 global shipments of pulp are down by 2% from 2013 levels, partly due to the logistics constraints experienced in North America and slower economic growth in China.

    North American demand for sodium chlorate was stable, despite prolonged winter conditions negatively impacting shipping efficiency. Annual 2014 sodium chlorate exports are expected to be consistent with 2013. Operating rates for the North American sodium chlorate industry were steady throughout the first quarter of 2014 and are expected to hold at about 93%.
  • North America Chlor-alkali:The North American chlor-alkali industry operated at 82% of capacity in the first quarter of 2014 compared with 81% in the fourth quarter of 2013. Despite flat chlorine demand in the first quarter of 2014, the annual growth rate is forecast to be 1.5%. New chlorine production capacity in the southeastern US was commissioned in the first quarter of 2014 which is expected to result in lower industry capacity utilization for the balance of the year.

    Hydrochloric acid supply and demand was balanced in the first quarter of 2014. Demand from oil and gas drilling activity in Western Canada increased relative to the fourth quarter of 2013 but is expected to decline in the second quarter of 2014 as spring break-up limits the ability to access drilling sites. United States demand remains strong and will provide some offset to the weaker Western Canada demand during spring break-up.

    Caustic soda demand in Western Canada declined slightly in the first quarter of 2014 compared to the fourth quarter of 2013 due to lower consumption from the pulp and paper sector. Supply shortages occurred in Western Canada in the first quarter of 2014 due to production issues impacting a local producer and shipment delays of import supply from Asia.

    MECU prices declined slightly in the first quarter of 2014. Chlorine and hydrochloric acid prices were under pressure in the period, reflecting buyer expectations of excess supply as a result of new capacity entering the market in 2014. Caustic soda prices were mostly flat with suppliers announcing price increases for the second quarter of 2014.
  • South America:Brazilian pulp production in the first quarter of 2014 was 5% higher than the same period in 2013 while Brazilian exports were 18% higher. Pricing pressure previously expected in the second quarter of 2014 is now expected in the third quarter of 2014 due to continued start-up delays on new capacity (Montes de Plata).

    Canexus Brazil experienced higher than expected sodium chlorate demand from its major customer in the first three months of the year due to higher usage. Sodium chlorate sales to the merchant market were slightly better than expected due to a shorter maintenance shutdown, resulting in higher production volumes.

    In the first quarter of 2014 the Brazilian chlor-alkali industry capacity utilization rate was 86%, 2% higher than the same period of 2013. Canexus Brazil`s chlor-alkali capacity utilization was 93% for the first three months of 2014.
  • Oil & Gas:During the first quarter of 2014, price differentials between Western Canada Select ("WCS") and WTI narrowed as compared to the fourth quarter of 2013. The narrowing of the WCS and WTI price differential was due to a variety of factors including increased refinery demand in the US Midwest, a continued increase in crude by rail volumes and a number of pipeline capacity improvements. Price differentials between western Canadian grades and other key benchmarks are expected to remain volatile.

    Drilling activity remained strong during the first quarter of 2014 in Western Canada supporting strong demand for hydrochloric acid. Demand is expected to soften during the second quarter of 2014 due to the seasonal slowdown associated with spring break-up.

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 Q1/14, we recorded an unrealized currency translation loss of $4.2 million on long-term debt as a result of the continued weakening of the Canadian dollar at the end of the quarter compared to the end of 2013 (Q1/13 - $6.2 million unrealized currency translation loss). Canexus also realized foreign currency losses of $9.4 million on repayments of long-term debt in Q1/14 (Q1/13 - $Nil). These amounts are included in finance income (expense).
    • Interest expense in Q1/14 was $2.0 million (Q1/13 - $3.5 million). Interest capitalized on major projects in Q1/14 was $2.7 million (Q1/13 - $1.4 million).
  • Other Income (Expense):
    • In Q1/14, mark-to-market fair value losses of $0.6 million (Q1/13 - $0.2 million) and realized losses of $0.5 million (Q1/13 - $0.2 million) were recorded on foreign exchange range forward contracts.
    • In Q1/14, mark-to-market fair value losses of $0.6 million (Q1/13 - $0.3 million) were recorded on a cross currency swap. 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.
    • The interest rate swaps expired on April 10, 2013. In Q1/13, mark-to-market fair value gains of $0.4 million and realized losses of $0.4 million were recorded.
  • General and Administrative:General and administrative expense in Q1/14 includes $3.4 million and $0.3 million of non-recurring costs associated with severance and the closure of our Houston office, respectively.
  • Capital Expenditures:Capital expenditures in Q1/14 were $45.9 million, of which $40.0 was spent on expansion projects, $4.3 million on maintenance projects and $1.6 million on continuous improvement projects. Expansion capital was primarily spent on the expansion of NATO to include pipeline connected unit train operations. Capital spending for the remainder of the year is estimated to be approximately $80 million, including approximately $45 million to complete expansion of the unit train operation.
  • Provision for Income Taxes:Provision for income taxes is higher in Q1/14, as compared to Q1/13, due to the higher level of income generated in Brazil in Q1/14 over Q1/13. At March 31, 2014, the Corporation had approximately $796 million of future tax deductions resulting from capital expenditures which can be used to shelter future taxable income in Canada.
  • Liquidity:At March 31, 2014, total borrowings under committed credit facilities were $255 million with remaining available undrawn capacity of approximately $124 million. Cash on hand at March 31, 2014 was $3.3 million.

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