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Canexus 2Q 2014 results: Cash operating profit up 52% from year ago to $29.2 million, chlor-alkali business benefitted from a contract settlement

By Wed, Aug 06, 2014
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CALGARY, AB, Aug. 6, 2014 (Marketwired) -

Canexus Corporation today announced its financial results for the second quarter ended June 30, 2014.

Highlights:

  • Cash operating profit was $29.2 million for the three months ended June 30, 2014, representing a 52% increase over the same quarter last year that reported $19.3 million in cash operating profit. Performance improved as Brazil continued to generate excellent results, our chlor-alkali business benefitted from a contract settlement and our North American Terminal Operations ("NATO") began to contribute to cash operating profit even though unit train operations were shut down for the second half of June for the planned expansion. The cash payout ratio for the second quarter was 92%.

  • The Board of Directors declared a quarterly dividend of $0.10 per common share payable October 15, 2014 to shareholders of record on September 30, 2014.

  • Canexus is continuing to advance discussions with parties that have expressed potential interest in certain of our assets. The Corporation is currently engaging financial advisors to assist with the discussions. There is no assurance that a transaction, if pursued, will be concluded.

  • At NATO, the planned shutdown of the unit train operation began on June 17, 2014. Construction to further increase unit train loading capacity and connect this facility to the Cold Lake pipeline system continues to progress on schedule and is in line with the revised cost estimate (previously announced on July 2, 2014). Inter Pipeline Ltd. ("IPL") has completed the dilbit (diluted bitumen) pipeline lateral off the Cold Lake pipeline system from Beaverhill Station to Lamont Station, which is the tie-in point to NATO. The IPL pipeline lateral is scheduled for line fill with Cold Lake Blend product later this month. The Corporation expects to complete the shutdown and recommence loading unit trains in late August.

  • Canexus is scheduled to ship seven unit trains loaded through its diluted bitumen and crude oil ("DBCO") truck-to-rail transload ("manifest") operations in the July to October timeframe. The significant railcar storage capabilities associated with the manifest facility provide a unique opportunity for Canexus' manifest customers to capture unit train shipment economics. During the second quarter, the manifest operation transloaded physical DBCO volumes of approximately 10,400 bbls/day compared to 17,200 bbls/day in the first quarter of 2014. Billable volumes in the second quarter inclusive of take-or-pay volumes were 21,600 bbls/day. The manifest operation has a transload capacity of 30,000 bbls/day for DBCO.

  • Canexus' North American chlor-alkali business generated $9.8 million in cash operating profit for the quarter with only marginal improvements in caustic soda prices. Results, however, benefitted from the settlement of a take-or-pay contract obligation for hydrochloric acid ("HCl") contributing $3.0 million to cash operating profit in the quarter. During the second quarter, chlor-alkali operating rates were reduced as the plant experienced premature degradation of anode coatings in some of the electrolytic cells. Canexus has contracted three sets of replacement cells and expects to return to normal operating rates late September. HCl demand continued to be quite strong in the second quarter as relatively high oil and gas commodity prices supported drilling activity. In the US, demand from the well servicing market was strong while supply was tight due to a series of byproduct supply outages. In Western Canada, HCl demand exceeded expectations due to a relatively short spring breakup period. With strong demand, price increases have been implemented in some markets where contracts allow.

  • Canexus' North American sodium chlorate business had a slightly weaker quarter with somewhat lower demand from customers. Cash operating profit was $12.1 million and is expected to return to first quarter levels for the balance of 2014. 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.

  • Canexus' Brazil operations had a second consecutive quarter of record performance, generating cash operating profit of $7.6 million. Our major customer continues to operate at high rates resulting in strong demand for our products which are sold under a long-term fixed US dollar margin contract.

  • Looking forward, cash operating profit for Q3/14 will be affected by the planned maintenance in Brazil that occurred in July at both the sodium chlorate and chlor-alkali plants, a planned maintenance shutdown at our North Vancouver chlor-alkali facility in September and the current shutdown at NATO for the unit train expansion project. In addition, with the IPL lateral completed on July 1, 2014, Canexus is now committed to paying a monthly pipeline and facility fixed fee.

"I am generally pleased with how our business performed during the quarter. Brazil continued to deliver excellent results and we are making solid progress on the NATO unit train expansion," commented Doug Wonnacott, President and CEO. "2014 is a year that will position Canexus for the future. We expect to complete the unit train expansion at NATO in late August and then focus on ramping up operations. Canexus has an impressive portfolio of assets that provide a lot of opportunity and we continue to explore options to maximize their value."

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

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

Highlights for each business unit are as follows:

North America Sodium Chlorate:

  • Q2 2014 versus Q1 2014:Sales revenue for the North America sodium chlorate segment decreased 9% to $53.8 million for the three months ended June 30, 2014 as compared to $58.9 million for the three months ended March 31, 2014 primarily as a result of lower sales volumes (9%). Realized netback prices increased marginally as a result of the continued weakening of the Canadian dollar (three months ended June 30, 2014 - US $0.91 as compared to US $0.92 for the three months ended March 31, 2014). Cash operating profit percentage decreased from 26% to 23% as a result of lower production volumes from both our low-cost Brandon and Beauharnois plants, partially offset by lower freight and salt costs.

  • Q2 2014 versus Q2 2013:Sales revenue for the North America sodium chlorate segment was $53.8 million for the three months ended June 30, 2014 and 2013. Lower realized netback prices (2%) were offset by an increase in sales volumes. Downward market pressure on netback prices experienced late in 2013 and into 2014 was partially offset by the weakening of the Canadian dollar (three months ended June 30, 2014 - US $0.91 as compared to US $0.98 for the three months ended June 30, 2013). Cash operating profit percentage decreased from 27% to 23% as a result of marginally lower production volumes and higher electricity rates and fixed costs.

North America Chlor-alkali:

  • Q2 2014 versus Q1 2014:Sales revenue for the North America chlor-alkali segment increased 10% to $55.4 million for the three months ended June 30, 2014 as compared to $50.4 million for the three months ended March 31, 2014. This increase was due to higher sales volumes (caustic soda - 10% and chlorine - 4%), higher caustic soda delivered prices (2%) and the settlement of a contract obligation for HCl that contributed $3.0 million, more than offsetting lower HCl sales volumes (8%). Cash operating profit percentage increased from 10% to 18% primarily as a result of higher metric electrochemical unit ("MECU") production volumes (2%) and lower non-electricity energy costs as a result of greater hydrogen versus natural gas usage, lower fixed costs and the contract settlement noted in the preceding sentence, partially offset by lower MECU realized netback prices (2%) and increased salt and electricity costs.

  • Q2 2014 versus Q2 2013:Sales revenue for the North America chlor-alkali segment increased 19% to $55.4 million for the three months ended June 30, 2014 from $46.5 million for the three months ended June 30, 2013. This increase was due to higher HCl and caustic soda sales volumes (87% and 10%, respectively), higher caustic soda delivered prices (4%) and the contract settlement noted in the preceding paragraph, more than offsetting lower HCl and chlorine delivered prices (22% and 10%, respectively) and lower chlorine sales volumes (24%). Cash operating profit percentage increased from 4% to 18% as a result of an increase in our HCl capacity and market demand for HCl supporting additional conversion of low margin chlorine into higher margin HCl, higher MECU production volumes (9%), and lower purchased product, salt and fixed costs and the contract settlement noted in the preceding sentence, partially offset by higher electricity rates. Fixed costs were higher for the three months ended June 30, 2013 due to a planned maintenance shutdown which was extended by nine days as a result of an equipment failure during the attempted start-up of the plant.

South America:

  • Q2 2014 versus Q1 2014:Sales revenue for the South America segment increased 3% to $24.2 million for the three months ended June 30, 2014 from $23.5 million for the three months ended March 31, 2014. The increase in sales revenue was primarily due to higher realized sodium hypochlorite (10%) and sodium chlorate (2%) netback prices and higher sodium chlorate sales volumes (3%), partially offset by lower caustic soda sales volumes (2%). Cash operating profit percentage remained consistent at 32% with increases in realized MECU netback prices (3%), higher sodium chlorate production volumes (12%) and lower fixed costs being offset by lower MECU production volumes (4%) and higher electricity and general and administrative costs.

  • Q2 2014 versus Q2 2013:Sales revenue for the South America segment decreased 12% to $24.2 million for the three months ended June 30, 2014 from $27.6 million for the three months ended June 30, 2013. The decrease in sales revenue was due to lower realized caustic soda (11%) and sodium chlorate (11%) netback prices as a result of lower electricity costs which are predominately passed through to our major customer, and lower sales volumes of sodium chlorate (12%), partially offset by higher sales volumes of sodium hypochlorite (16%), HCl (11%) and caustic soda (3%). Cash operating profit percentage increased to 32% from 20% as a result of higher MECU (11%) and sodium chlorate (3%) production volumes, a favorable foreign exchange impact resulting from the weakening of both the Brazilian Real and Canadian dollar as compared to the US dollar, lower electricity costs not passed through to our major customer, lower purchased product costs and lower fixed costs. Fixed costs were lower in the second quarter of 2014 as a result of a planned maintenance shutdown of the chlor-alkali plant in the three months ended June 30, 2013. These gains were partially offset by lower realized MECU netback prices (3%) and higher salt costs.

North American Terminal Operations:

  • Q2 2014 versus Q1 2014:Cash operating profit for the three months ended June 30, 2014 was $2.4 million as compared to $0.7 million for the three months ended March 31, 2014 (inclusive of transloading services for inter-segment chlor-alkali products of $0.5 million and $0.6 million, respectively). External sales revenue increased 33% primarily as a result of increased unit train transload volumes (75% - inclusive of revenues earned under take-or-pay contracts for minimum transload volume commitments). Prior to March 1, 2014, unit train operating costs net of unit train sales revenues were being capitalized. On March 1, 2014, the unit train facility was determined to be ready for its intended use. 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 ($1.0 million) was primarily due to unit train operating costs no longer being capitalized (net of revenue from unit train operations) after March 1, 2014.

  • Q2 2014 versus Q2 2013:Cash operating profit for the three months ended June 30, 2014 was $2.4 million as compared to $0.6 million for the three months ended June 30, 2013 (inclusive of transloading services for inter-segment chlor-alkali products of $0.5 million in each three month period). External sales revenue increased 94% as a result of unit train operations (Q2/14 unit train transload volumes of 3,803 railcars - inclusive of revenues earned under take-or-pay contracts for minimum transload volume commitments). The increase in cash cost of sales ($3.1 million) was primarily due to unit train operations.

General Market Fundamentals

North America Sodium Chlorate:Global pulp markets performed largely as expected during the second quarter of 2014. Supply of softwood pulp remained restricted in select regions, which provided support for existing price levels and allowed for modest price appreciation in some cases. While slower than expected, hardwood pulp fundamentals continued to deteriorate in the second quarter of 2014, primarily due to excess capacity from new mills in South America and Asia. As a result, combined producer inventories were at 33 days in June, with softwood declining by five days since the beginning of the year to 25 days, while hardwood decreased by two days from its January level of 44 days. Benchmark pricing for Northern Bleached Softwood Kraft, which has held previous highs in recent months, is expected to start a slow decline in the third quarter of 2014 as a result of softening hardwood fundamentals and lower cyclical demand in select end-use segments. As of June, year-to-date global shipments of pulp were up by 0.5%, while pulp shipments into China increased by over 4% compared to the same period last year.

North American demand for sodium chlorate was stable throughout the quarter as producers worked through the shipping challenges caused by the harsh winter and railroad system issues. As of June, year-to-date North American sodium chlorate exports were slightly lower than the same period last year due to shipping restrictions in the beginning of the year and new capacity in South America. However, North American export volumes are expected to mirror 2013 volumes for the second half of 2014. Operating rates for the North American industry were steady throughout the second quarter of 2014, and are expected to remain in the low 90%'s for the remainder of 2014.

North America Chlor-alkali:The North American chlor-alkali industry operated at 84% of capacity in the second quarter of 2014 compared to 82% in the first quarter of 2014. Chlorine production volume grew 6% in the second quarter of 2014, as compared to growth of 1% in the first quarter due to increased demand from vinyl producers, seasonal water treatment and HCl.

Current demand for HCl in North America exceeds supply due primarily to supply constraints at several US by-product sources. Demand from the Western Canadian oil and gas sector was lower than the first quarter of 2014, but higher than seasonal expectations. Continued growth in the US oil and gas sector supported increased demand there.

Caustic soda demand in Western Canada was strong during the second quarter due to high operating rates from the pulp and paper sector. Import product volumes increased during the quarter due to production issues impacting a local producer.

MECU prices increased in the quarter due to caustic soda price improvement. Caustic soda and HCl price increases have been announced for implementation in the third quarter of 2014.

South America:Brazilian pulp production and exports for the first half of 2014 were 5.4% and 12.8% higher, respectively, than the corresponding period of 2013. Pricing pressure is now expected in the fourth quarter of 2014 as a result of new capacity entering the market (Montes de Plata).

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

In the first half of 2014, the Brazilian chlor-alkali industry capacity utilization rate was 84.7%, 0.6% higher than the same period in 2013. Canexus Brazil`s chlor-alkali capacity utilization rate was 96% for the same period.

Oil & Gas:In June 2014, the Canadian Association of Petroleum Producers ("CAPP") provided its annual outlook for crude oil. According to CAPP, oil sands output is expected to grow by nearly 3 million bbls/day, to 4.8 million bbls/day in 2030 from 1.9 million bbls/day last year. This represents a compounded annual growth rate of approximately 6%. With such significant oil sands production growth expected, CAPP predicts that all major proposed transportation infrastructure projects, including crude-by-rail, will be required to meet Western Canada's transportation needs by 2030. Recent uncertainty regarding the timing of some pipeline projects continues to support demand for crude-by-rail in the near term.

In the second quarter of 2014, price differentials between Western Canadian Select ("WCS") and West Texas Intermediate ("WTI") averaged US $20.04/bbl as compared to US $23.13/bbl in the first quarter of 2014. The narrowing of the 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 and expansion projects. PIRA Energy Group expects Canadian crude differentials to improve in the near term as additional crude-by-rail facilities open in the coming months and new pipeline capacity to Cushing and Montreal is added, relieving bottlenecks that currently restrict demand in the Midwest and Ontario during seasonal refinery maintenance.

Drilling activity remained strong during the second quarter of 2014, supported by relatively high oil and gas commodity prices. WTI averaged US $102.99/bbl for the quarter while NYMEX natural gas was US $4.58 per thousand cubic feet ("mcf") and AECO natural gas averaged CAD $4.70 per million British thermal units ("mmbtu"). Since spring break-up, rig count in both the US and Canada has been increasing which should continue to support demand for HCl.

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 Q2/14, we recorded an unrealized currency translation gain of $10.6 million on long-term debt as a result of the strengthening of the Canadian dollar at the end of the quarter compared to the end of Q1/14 (Q2/13 - $10.0 million unrealized loss). Canexus also realized foreign currency losses of $0.7 million on repayments of long-term debt in the quarter (Q2/13 - $0.8 million). These amounts are included in finance income (expense).

    • Interest expense in the quarter was $6.1 million (Q2/13 - $3.2 million). Interest capitalized on major projects was $0.9 million in Q2/14 (Q2/13 - $1.4 million).

  • Other Income (Expense):

    • In Q2/14, mark-to-market fair value gains of $1.4 million (Q2/13 - $0.4 million losses) and realized losses of $0.1 million (Q2/13 - $Nil) were recorded on foreign exchange option contracts and average rate range forward contracts.

    • In Q2/14, we recorded mark-to-market fair value gains on a cross currency swap of $0.8 million as a result of the strengthening of the Canadian dollar at the end of the quarter compared to the end of Q1/14 (Q2/13 - $0.5 million losses) and realized losses of $0.1 million (Q2/13 - $0.1 million). 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 Q2/13, we recorded mark-to-market fair value gains of $0.4 million on interest rate swaps.

  • General and Administrative:General and administrative expenses were lower for Q2/14 as compared to Q2/13 as a result of reduced business development activities in the quarter.

  • Capital Expenditures:Capital expenditures in Q2/14 were $28.1 million, of which $20.2 million was spent on expansion projects, $5.3 million on maintenance projects and $2.6 million on continuous improvement projects. Expansion capital was primarily spent on the expansion of NATO unit train operations.

  • Provision for Income Taxes:Provision for income taxes was higher in Q2/14 as compared to Q2/13 due to higher income in the Canadian and South American taxable legal entities which are consolidated into the Corporation. As of June 30, 2014, the Corporation had approximately $811 million of future tax deductions resulting from capital expenditures which can be used to shelter future taxable income in Canada.

  • Liquidity:At June 30, 2014, total borrowings under committed credit facilities were $232 million with remaining available undrawn capacity of approximately $192 million. Cash on hand at June 30, 2014 was $5.7 million.

About Canexus

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

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