Canexus Corporation Announces Fourth Quarter and Year-End 2013 Results

T.CUS

CALGARY, ALBERTA--(Marketwired - March 13, 2014) - Canexus Corporation (TSX:CUS) (the "Corporation" or "Canexus") today announced its financial results for the fourth quarter and year ended December 31, 2013.

Highlights:

  • Cash Operating Profit was $101.5 million for the year ended December 31, 2013, compared to $134.3 million for the year ended December 31, 2012. Cash Operating Profit was $24.6 million for the fourth quarter of 2013. Distributable Cash for 2013 was $54.1 million ($0.38 per common share), resulting in a Cash Payout Ratio of 120%.
  • Canexus announced the start-up of the initial phase of the pipeline connected unit train expansion at the Corporation's North American Terminal Operations ("NATO" or "Bruderheim Terminal") at Bruderheim, Alberta in mid-December. Start-up and commissioning activities, complicated by severe winter weather, have continued through to the end of February, limiting unit train shipments to date. The Corporation anticipates loading approximately 12 to 15 unit trains per month for each of the next few months and then plans to take a 60- to 90-day period of downtime, currently targeted to commence in June, to complete remaining work, which will further increase unit train loading capacity at the Bruderheim Terminal and connect it to the Cold Lake pipeline system. The efficiencies of taking an uninterrupted period should allow Canexus to meet the revised total estimated cost of this project announced on January 14, 2014. The planned downtime will not affect truck-to-rail operations at NATO. Currently, 60% to 70% of planned unit train activity is contracted for multiple years. The Corporation expects to have unit train operations fully contracted in the near term. The financial contribution of the NATO unit train facility in 2014 will depend upon the timing of ramp-up of the expanded facility as it becomes fully operational.
  • The diluted bitumen and crude oil ("DBCO") truck-to-rail transload ("manifest") capacity expansion at NATO was completed in the third quarter of 2013. Canexus exited December 31st at a transload rate of approximately 23,800 bbls/day and averaged 16,200 bbls/day in the fourth quarter. Transload volumes will be lower in Q1/14 than the 2013 exit rate, mainly due to challenging winter weather conditions. Our highest daily transload volume to date was established on February 21, 2014, at just over 27,100 bbls/day.
  • Canexus' chlor-alkali results continued to be adversely affected by weakness in caustic soda and hydrochloric acid ("HCl") markets in the fourth quarter and these conditions seem likely to persist in 2014. Caustic soda pricing improved about 4% on January 1st, 2014. The weakness in the Canadian dollar should be supportive of caustic soda prices, as competing product imported from Asia is priced in US dollars. HCl demand for the first two months of 2014 has met expectations; however, pricing levels in the oil and gas segment in Western Canada are lower by about 10%. A number of exploration companies are currently active in the Swan Hills region, where larger quantities of HCl are typically consumed. Also, the large volume of HCl inventory that was imported into Western Canada in totes in late 2012 and early 2013 is now believed to have been depleted, reducing supply.
  • Canexus' North American sodium chlorate business had a solid fourth quarter and full year 2013. Pricing concessions made late in 2013 on contract renewals had a modest impact on fourth quarter performance. The significant strengthening of the US dollar relative to the Canadian dollar should largely offset this in 2014, as roughly two-thirds of our sales take place in the United States. North American sodium chlorate operating rates are expected to remain in the low 90% range for 2014, assuming there is no capacity rationalization in the industry. Our low-cost Brandon plant is expected to run at capacity. The Corporation continues to analyse de-bottleneck opportunities at its Brandon plant for decision in 2014 on potential implementation.
  • Canexus' Brazil operations continue to be very stable with our primary customer running at high rates. Performance in 2013 was solid. Merchant sales of sodium chlorate were lower in Q4/13 due to competitor supply intended for merchant customers becoming available.
  • On February 5, 2014, Canexus closed a $150 million common share financing, the net proceeds from which will be used to fund the remaining planned capital expenditures at NATO including expenditures incurred but not yet paid.
  • The Board of Directors declared the regular quarterly dividend of $0.1368 per common share payable April 15, 2014 to shareholders of record on March 31, 2014.

"Canexus experienced a very challenging year in 2013, reporting disappointing results that fell short of our Cash Operating Profit guidance through the year, particularly in the chlor-alkali and NATO businesses," said Richard Ott, Interim President and CEO. "In our chlor-alkali business, we underestimated the severity of and prolonged weakness in caustic soda prices. The expectations developed for hydrochloric acid demand in Western Canada, while established in conjunction with our customers, were also not met. In addition, our manifest business expansion and unit train project at NATO experienced delays, and as previously announced, a significant cost overrun is anticipated on the unit train project when this is completed."

"Looking ahead to 2014, although we expect continued challenges in the chlor-alkali business for the balance of the year, our NATO manifest business is ramping-up transload volumes and should start to generate meaningful results for this business. Canexus has already taken significant steps to ensure the successful completion of the unit train project on its revised cost and schedule, and we are working diligently to finalize contracting of the expanded facility. Both our North American sodium chlorate and Brazil operations are expected to continue to deliver strong, consistent results this year," he added.

Reconciliation of Cash Operating Profit to Distributable Cash for the Three Months and Years Ended December 31, 2013 and 2012

  Three Months Ended
December 31
  Year Ended
December 31
 
CAD thousands, except as noted 2013   2012   2013   2012  
Cash Operating Profit   24,597     35,300     101,537     134,257  
  Interest Expense (1)   (3,292 )   (4,200 )   (12,250 )   (19,699 )
  Realized Foreign Currency Translation Gains (Losses)   (136 )   3,351     (2,642 )   2,574  
  Maintenance Capital Expenditures   (8,440 )   (5,602 )   (25,817 )   (19,437 )
  Provision for Current Income Taxes   (669 )   (892 )   (3,903 )   (4,604 )
  Technology Conversion Project ("TCP") Severance Costs Paid   -     -     (274 )   (888 )
  Cumulative Pension Funding in Excess of Pension Expense   (438 )   (542 )   (2,342 )   (1,690 )
  Other   62     (1,194 )   (238 )   (2,865 )
Distributable Cash   11,684     26,221     54,071     87,648  
                         
Distributable Cash per Share $ 0.08   $ 0.19   $ 0.38     0.70  
Dividends Declared per Share $ 0.1368   $ 0.1368   $ 0.5472   $ 0.5472  
Cash Payout Ratio (Net of DRIP Participation)   139 %   55 %   120 %   59 %
Payout Ratio   179 %   70 %   150 %   78 %

Note:

(1) Excluding amortization of transaction costs of extendible revolving credit facility and senior secured notes, net interest cost on net defined benefit plan liabilities and accretion of provisions.

Reconciliation of Net Cash Generated from Operating Activities to Distributable Cash for the Three Months and Years Ended December 31, 2013 and 2012

  Three Months Ended
December 31
  Year Ended
December 31
 
CAD thousands 2013   2012   2013   2012  
Net Cash Generated from Operating Activities 11,942   35,438   77,221   100,920  
  Changes in Non-Cash Operating Working Capital 5,736   (6,255 ) (1,514 ) 7,414  
  Non-Cash Change in Income Tax Payable and Interest Payable 2,553   2,522   1,860   764  
  Interest Income 67   103   526   412  
  Maintenance Capital Expenditures (8,440 ) (5,602 ) (25,817 ) (19,437 )
  Realized Foreign Currency Translation Gains (Losses) on Cash (61 ) (83 ) 1,754   (600 )
  TCP Severance Costs Paid -   -   (274 ) (888 )
  Operating Non-Cash Items (1) (113 ) 98   315   (937 )
Distributable Cash 11,684   26,221   54,071   87,648  

Note:

(1) Operating non-cash items represent items such as the timing of recognition of: (i) pension funding and pension expense, and (ii) the cost of foreign exchange option contracts. The cost of foreign exchange option contracts is recognized as a decrease in net cash generated from operating activities in the period purchased. For purposes of calculating Distributable Cash the cost is being recognized as a decrease in Distributable Cash over the term of the foreign exchange option contracts.

Segmented Information for the Three Months and Years Ended December 31, 2013 and 2012

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 performance by segment for the three months and years ended December 31, 2013 and 2012.

CAD thousands, except as noted North America                  
Three Months Ended
December 31, 2013
Sodium
Chlorate
  Chlor-
alkali
  South
America
  NATO (2)   Other   Total  
Sales Revenue                        
  Total Segment 60,076   51,432   22,817   6,675   -   141,000  
  Inter-Segment 608   -   -   581   -   1,189  
Total Sales Revenue from External Customers 59,468   51,432   22,817   6,094   -   139,811  
Cost of Sales 37,078   31,248   19,220   4,975   (883 ) 91,638  
Distribution, Selling and Marketing                        
  Total Segment 8,163   17,435   146   1,672   705   28,121  
  Inter-Segment -   664   -   -   -   664  
Total External Distribution, Selling and Marketing 8,163   16,771   146   1,672   705   27,457  
General and Administrative (1) 3,052   3,723   1,033   145   2,475   10,428  
Operating Profit (Loss) 11,175   (310 ) 2,418   (698 ) (2,297 ) 10,288  
Add:                        
Depreciation and Amortization 3,272   5,962   2,647   904   287   13,072  
Share-based Compensation Expense -   -   -   -   1,237   1,237  
Cash Operating Profit (Loss) 14,447   5,652   5,065   206   (773 ) 24,597  
Cash Operating Profit Percentage 24 % 11 % 22 % 3 %     18 %
                     
CAD thousands, except as noted North America                  
Three Months Ended
December 31, 2012
Sodium
Chlorate
  Chlor-
alkali
  South
America
  NATO (2)   Other   Total  
Sales Revenue                        
  Total Segment 60,603   57,537   23,840   4,227   -   146,207  
  Inter-Segment 84   -   -   406   -   490  
Total Sales Revenue from External Customers 60,519   57,537   23,840   3,821   -   145,717  
Cost of Sales 35,322   32,226   17,626   3,382   (136 ) 88,420  
Distribution, Selling and Marketing                        
  Total Segment 7,861   15,834   375   1,632   706   26,408  
  Inter-Segment -   490   -   -   -   490  
Total External Distribution, Selling and Marketing 7,861   15,344   375   1,632   706   25,918  
General and Administrative (1) 2,543   3,101   1,036   121   1,727   8,528  
Operating Profit (Loss) 14,793   6,866   4,803   (1,314 ) (2,297 ) 22,851  
Add:                        
Depreciation and Amortization 3,219   5,656   1,767   876   346   11,864  
Share-based Compensation Expense -   -   -   -   585   585  
Cash Operating Profit (Loss) 18,012   12,522   6,570   (438 ) (1,366 ) 35,300  
Cash Operating Profit (Loss) Percentage 30 % 22 % 28 % (11 %)     24 %
                     
CAD thousands, except as noted North America                  
Year Ended
December 31, 2013
Sodium
Chlorate
  Chlor-
alkali
  South
America
  NATO (2)   Other   Total  
Sales Revenue                        
  Total Segment 233,155   202,766   97,034   23,664   -   556,619  
  Inter-Segment 1,318   -   -   2,340   -   3,658  
Total Sales Revenue from External Customers 231,837   202,766   97,034   21,324   -   552,961  
Cost of Sales 140,321   122,801   79,394   19,293   (639 ) 361,170  
Distribution, Selling and Marketing                        
  Total Segment 31,363   66,014   708   5,504   2,933   106,522  
  Inter-Segment -   2,681   -   -   -   2,681  
Total External Distribution, Selling and Marketing 31,363   63,333   708   5,504   2,933   103,841  
General and Administrative (1) 11,421   13,931   4,093   543   9,092   39,080  
Operating Profit (Loss) 48,732   2,701   12,839   (4,016 ) (11,386 ) 48,870  
Add:                        
Depreciation and Amortization 13,102   23,000   8,305   4,422   978   49,807  
Share-based Compensation Expense -   -   -   -   2,860   2,860  
Cash Operating Profit (Loss) 61,834   25,701   21,144   406   (7,548 ) 101,537  
Cash Operating Profit Percentage 27 % 13 % 22 % 2 %     18 %
                     
CAD thousands, except as noted North America                  
Year Ended
December 31, 2012
Sodium
Chlorate
  Chlor-
alkali
  South
America
  NATO (2)   Other   Total  
Sales Revenue                        
  Total Segment 235,478   235,231   102,224   12,077   -   585,010  
  Inter-Segment 334   -   -   2,250   -   2,584  
Total Sales Revenue from External Customers 235,144   235,231   102,224   9,827   -   582,426  
Cost of Sales 138,666   135,114   80,471   10,388   156   364,795  
Distribution, Selling and Marketing                        
  Total Segment 29,711   61,371   1,317   3,116   2,770   98,285  
  Inter-Segment -   2,584   -   -   -   2,584  
Total External Distribution, Selling and Marketing 29,711   58,787   1,317   3,116   2,770   95,701  
General and Administrative (1) 10,579   12,904   3,774   503   7,884   35,644  
Operating Profit (Loss) 56,188   28,426   16,662   (4,180 ) (10,810 ) 86,286  
Add:                        
Depreciation and Amortization 12,731   21,933   7,155   2,725   913   45,457  
Share-based Compensation Expense -   -   -   -   2,514   2,514  
Cash Operating Profit (Loss) 68,919   50,359   23,817   (1,455 ) (7,383 ) 134,257  
Cash Operating Profit (Loss) Percentage 29 % 21 % 23 % (15 %)     23 %

Notes:

(1) North America general and administrative expenses are for functional areas such as human resources, finance, information technology and legal and are allocated to the NATO operating segment based on an assessment of the level of support provided and to the other North American operating segments based on their respective practical production capacities.
(2) NATO charges a transloading fee (an approximation of market rates charged by third party terminals) to the North America chlor-alkali operating ("NACA") segment, for hydrochloric acid and caustic soda transloaded from railcars into trucks for delivery to NACA customers, which is eliminated for financial reporting purposes.

Highlights for each business unit are as follows:

  • North America Sodium Chlorate:
    • Year Ended December 31, 2013 versus 2012: Sales revenue for the North America sodium chlorate segment decreased 1% to $231.8 million for the year ended December 31, 2013 from $235.1 million for the year ended December 31, 2012 as a result of a 3% decrease in sales volumes on slightly higher realized netback prices. Cash Operating Profit Percentage decreased to 27% from 29% primarily as a result of increased electricity rates, higher salt costs and lower production volumes more than offsetting lower purchased product costs and slightly lower fixed costs.
    • Q4 2013 versus Q3 2013: Sales revenue for the North America sodium chlorate segment remained relatively consistent at $59.5 million for the three months ended December 31, 2013 as compared to $59.7 million for the three months ended September 30, 2013. Cash Operating Profit Percentage decreased from 28% to 24% as a result of higher salt and fixed costs, partially offset by higher production volumes.
    • Q4 2013 versus Q4 2012: Sales revenue for the North America sodium chlorate segment decreased 2% to $59.5 million for the three months ended December 31, 2013 from $60.5 million for the three months ended December 31, 2012 as a result of a 4% decrease in sales volumes, partially offset by a slight increase in realized netback prices. Realized netback prices were positively impacted by the weakening of the Canadian dollar (three months ended December 31, 2013 - US $0.97 as compared to US $1.01 for the three months ended December 31, 2012). Cash Operating Profit Percentage decreased from 30% to 24% as a result of lower production volumes, higher salt and fixed costs along with increased electricity rates.
  • North America Chlor-alkali:
    • Year Ended December 31, 2013 versus 2012: Sales revenue for the North America chlor-alkali segment decreased 14% to $202.8 million for the year ended December 31, 2013 from $235.2 million for the year ended December 31, 2012. The decrease in sales revenue was due to lower caustic soda sales volumes (6%) and realized netback prices (13%), lower chlorine sales volumes (9%) and lower hydrochloric acid realized netback prices (44%), partially offset by higher hydrochloric acid sales volumes (56%). Cash Operating Profit Percentage decreased from 21% to 13% as a result of lower MECU realized netback prices (15%), slightly higher electricity rates and salt costs, partially offset by higher MECU production volumes (5%), lower caustic soda purchased product costs and lower fixed costs. 
    • Q4 2013 versus Q3 2013: Sales revenue for the North America chlor-alkali segment remained relatively consistent at $51.4 million for the three months ended December 31, 2013 as compared to $51.2 million for the three months ended September 30, 2013. Lower chlorine sales volumes (20%) and lower hydrochloric acid (19%) and caustic soda (2%) realized netback prices were offset by higher hydrochloric acid (15%) and caustic soda (4%) sales volumes. Cash Operating Profit Percentage decreased from 15% to 11% as a result of lower MECU realized netback prices (2%), lower MECU production volumes (2%), slightly higher salt and fixed costs, and higher purchased product costs.
    • Q4 2013 versus Q4 2012: Sales revenue for the North America chlor-alkali segment decreased 11% to $51.4 million for the three months ended December 31, 2013 from $57.5 million for the three months ended December 31, 2012 due to higher hydrochloric acid sales volumes (102%) and higher chlorine realized netback prices (33%) being more than offset by lower chlorine sales volumes (16%) and lower hydrochloric acid (55%) and caustic soda (17%) realized netback prices. Cash Operating Profit Percentage decreased from 22% to 11% as a result of higher MECU production volumes (13%) and lower purchased product costs being more than offset by lower MECU realized netback prices (18%), higher salt costs and slightly higher fixed costs.
  • South America:
    • Year Ended December 31, 2013 versus 2012: Sales revenue for the South America segment decreased 5% to $97.0 million for the year ended December 31, 2013 from $102.2 million for the year ended December 31, 2012. The decrease in sales revenue was primarily due to lower sodium chlorate (3%), hydrochloric acid (5%), chlorine (5%) and caustic soda (2%) realized netback prices and lower sodium chlorate (4%) and hydrochloric acid (7%) sales volumes, partially offset by higher chlorine (8%) and caustic soda (3%) sales volumes. Lower electricity costs resulted in lower sodium chlorate and caustic soda realized netback prices due to the pass through nature of our fixed US dollar margin contract with our major customer. Cash Operating Profit Percentage declined slightly to 22% from 23% as a result of higher fixed costs and lower production volumes being largely offset by lower electricity costs and slightly lower salt costs.
    • Q4 2013 versus Q3 2013: Sales revenue for the South America segment increased 2% to $22.8 million for the three months ended December 31, 2013 from $22.3 million for the three months ended September 30, 2013. The increase in sales revenue was primarily due to higher sodium hypochlorite sales volumes (9%) and higher caustic soda (7%) and sodium chlorate (5%) realized netback prices, partially offset by lower sodium chlorate (5%) and caustic soda (2%) sales volumes. Cash Operating Profit Percentage increased from 20% to 22% as a result of higher realized netback prices for products sold into the merchant market, partially offset by lower sodium chlorate production volumes stemming from the failure of a transformer in the period. Sodium chlorate inventories in Brazil and product supplied from our North American business unit were used to supplement production volumes while a replacement transformer was sourced and installed.
    • Q4 2013 versus Q4 2012: Sales revenue for the South America segment decreased 4% to $22.8 million for the three months ended December 31, 2013 from $23.8 million for the three months ended December 31, 2012. The decrease in sales revenue was primarily due to lower sodium chlorate sales volumes (16%) and lower hydrochloric acid sales volumes (5%) and realized netback prices (3%), partially offset by higher caustic soda sales volumes (14%) and higher caustic soda (7%) and sodium chlorate (2%) realized netback prices. Cash Operating Profit Percentage decreased to 22% from 28% as a result of higher salt costs, lower sodium chlorate (24%) and MECU (5%) production volumes and higher fixed costs, partially offset by higher MECU realized netback prices (6%). Sodium chlorate production volumes and fixed costs in Q4 2013 were negatively impacted by the transformer failure mentioned previously.
  • North American Terminal Operations:
    • Year Ended December 31, 2013 versus 2012: Cash Operating Profit for the year ended December 31, 2013 was $2.7 million, inclusive of transloading services of $2.3 million for inter-segment chlor-alkali products, as compared to $0.8 million, inclusive of transloading services of $2.3 million for inter-segment chlor-alkali products, for the year ended December 31, 2012. External sales revenue increased 117% for the year ended December 31, 2013, as compared to the year ended December 31, 2012, primarily as a result of an increase in the number of railcars transloaded (57%) combined with higher transload fees. In the second and third quarters of 2013, four tanks were commissioned in our manifest business resulting in higher transload fees under associated customer contracts.

      Cash cost of sales (cost of sales before depreciation and amortization included in cost of sales) comprise employee costs and other costs of operating the Bruderheim Terminal. The increase in cash cost of sales ($7.2 million) for the year ended December 31, 2013, as compared to the year ended December 31, 2012, was primarily due to an increase in the number of employees and other operating costs associated with the significant increase in transload volumes. The increase in distribution, selling and marketing costs was primarily due to an increase in railcar lease costs and the number of selling and marketing employees as a result of an increase in transload volumes, and to higher truck wait time charges incurred in 2013, primarily in the first quarter.

    • Q4 2013 versus Q3 2013: Cash Operating Profit for the three months ended December 31, 2013 was $0.8 million, inclusive of transloading services of $0.6 million for inter-segment chlor-alkali products, as compared to $1.1 million, inclusive of transloading services of $0.5 million for inter-segment chlor-alkali products for the three months ended September 30, 2013. External sales revenue increased 13% for the three months ended December 31, 2013, as compared to the three months ended September 30, 2013, primarily as a result of higher DBCO volumes (4%) and revenue associated with take-or-pay contracts where volumes were not realized, partially offset by lower transload volumes of other hydrocarbon products (56%) resulting from lower volumes of biodiesel and condensate. The decreases in biodiesel and condensate transload volumes were due to seasonality, and a sourcing constraint experienced by a customer, respectively.

      The increase in cash cost of sales ($0.3 million) for the three months ended December 31, 2013, as compared to the three months ended September 30, 2013, was due to a slight increase in operating costs resulting from colder weather. Distribution, selling and marketing costs for the three months ended September 30, 2013 included favourable settlement of truck wait time fees.

    • Q4 2013 versus Q4 2012: Cash Operating Profit for the three months ended December 31, 2013 was $0.8 million, inclusive of transloading services of $0.6 million for inter-segment chlor-alkali products, as compared to $Nil, inclusive of transloading services of $0.4 million for inter-segment chlor-alkali products, for the three months ended December 31, 2012. External sales revenue increased 59% for the three months ended December 31, 2013, as compared to the three months ended December 31, 2012, primarily as a result of an increase in the number of railcars transloaded (24%) combined with higher transload fees. The commissioning of four tanks during 2013 facilitated increased transload fees under associated customer contracts for the three months ended December 31, 2013.

      The increase in cash cost of sales ($1.6 million) for the three months ended December 31, 2013, as compared to the three months ended December 31, 2012, was primarily due to an increase in the number of employees as a result of an increase in transload volumes. The increase in distribution, selling and marketing costs was due to an increase in the number of selling and marketing employees and increased railcar lease costs as a result of higher transload volumes.

General Market Fundamentals

North America Sodium Chlorate: Demand for bleached pulp in all major end segments remained stable through the end of 2013. Combined producer inventories in December rose by one day to 32 days, a level considered to be well balanced given current fundamentals. Softwood pulp stocks rose by two days December over November ending at 27 days, while hardwood inventories decreased by one day December over November ending at 39 days. Producers of both fibre types continued to push for price increases late in the fourth quarter, in what has turned out to be a good year for pulp prices as all major grades are above previous year highs. Global shipments of pulp in 2013 have increased by over 2.5% as compared to 2012, despite Chinese pulp shipments contributing at their lowest level of growth in recent years (approximately 5%). A decision by the Chinese government to apply tariffs on specialty pulp grades will impact North American producers. Short term shifts in geographical markets and swings in certain specialty end segments are expected, but demand for bleaching chemicals should remain relatively unchanged.

As North American bleached pulp production was firm throughout the fourth quarter of 2013, demand for sodium chlorate was also stable. Exports of sodium chlorate from North America in 2013 were consistent with 2012 volumes, but short of the record volume set in 2011. Although operating rates for the North American sodium chlorate industry have been impacted by recent pulp mill closures, they remain at healthy levels and are estimated to be around 93% for 2014.

North America Chlor-alkali: The North American chlor-alkali industry operated at 81% of capacity in the fourth quarter of 2013, a level consistent with the prior quarter. Demand in the first quarter of 2014 is expected to be similar to the fourth quarter of 2013; however, the industry capacity utilization rate is expected to trend down due to the commissioning of new production capacity in the U.S. 

North American hydrochloric acid supply and demand in the fourth quarter of 2013 was balanced to tight. Demand from oil & gas drilling activity in Western Canada improved and supply declined due to the expected seasonal slowdown in byproduct supply from the refrigerant and isocyanates sectors and production issues experienced by several burner producers. Strong demand is expected to continue through the first quarter of 2014 offset by increasing supply as byproduct and burner producers operate at higher rates; supporting the forecast of a balanced market. 

North American caustic supply and demand was balanced in the fourth quarter of 2013. Production was similar to the prior quarter and is not expected to change in the first quarter of 2014. Domestic demand was stable and export demand increased from US Gulf producers. Import supply from Asia to the west coast of the US and Canada was moderately restricted due to a production issue at a major export producer in Taiwan and less supply availability from several Chinese export focused producers.

North American MECU prices declined in the fourth quarter of 2013. Chlorine prices experienced moderate erosion reflecting buyer expectations of excess supply with new capacity entering the market. Caustic prices also declined moderately but are expected to increase slightly in the first quarter of 2014. Hydrochloric acid prices declined reflecting the anticipation of new capacity entering the market in 2014.

South America: Brazilian 2013 pulp production was 7.3% higher than 2012. Brazilian 2013 exports were 10.8% higher than 2012. Price pressure is now not expected until the second quarter of 2014 due to start-up delays on new capacities (Montes de Plata and Suzano Maranhao Mills).

Canexus Brazil's major sodium chlorate customer had higher sodium chlorate demand in the fourth quarter of 2013 than expected due to higher usage, while its sodium chlorate sales to the merchant market were lower than expected due to competitive pressures during contract negotiations.

Brazilian chlor-alkali capacity utilization rates for 2013 remained consistent with 2012 at 83%. Canexus Brazil's chlor-alkali capacity utilization was 93.3% for the year ended December 31, 2013 and in line with budget expectations.

Oil & Gas: During the fourth quarter of 2013 oil inventories at Cushing increased as crude production flowing into Cushing began to overtake existing takeaway capacity, depressing WTI crude oil prices in comparison to Brent crude oil prices. The price of Western Canadian Select also decreased during the quarter due to the increased Cushing supplies. Price differentials between Western Canadian grades and other key benchmarks experienced seasonal weakness during the quarter and are expected to remain volatile but wide enough to support strong demand for oil transportation services based on rail.

Drilling activity picked up as the winter drilling season commenced in Western Canada supporting increased demand for hydrochloric acid that will continue into the first quarter of 2014 until the seasonal slowdown associated with spring breakup.

Financial Updates

  • Long-term Debt and Finance Income (Expense):
    • Canexus borrows 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. During the fourth quarter of 2013, we recorded an unrealized currency translation loss of $8.1 million as a result of the weakening of the Canadian dollar at the end of the quarter compared to the end of Q3/13 (Q4/12 - $6.6 million). Canexus also realized foreign currency losses of $0.1 million on repayments of long-term debt in the quarter (Q4/12 - $3.4 million gains). These amounts are included in finance income (expense).
    • Interest expense in the quarter was $3.3 million (Q4/12 - $4.2 million). Interest capitalized on major projects was $2.2 million in Q4/13 (Q4/12 - $0.9 million).
  • Other Income (Expense):
    • In the fourth quarter of 2013, mark-to-market fair value losses of $0.2 million (Q4/12 - $Nil) were recorded on foreign exchange range forward contracts.
    • In the fourth quarter of 2013, we recorded mark-to-market fair value losses on a cross currency swap of $0.4 million as a result of the weakening of the Canadian dollar at the end of the quarter compared to the end of Q3/13 (Q4/12 - $0.2 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 the fourth quarter of 2012, we recorded mark-to-market fair value gains of $0.3 million and realized losses of $0.4 million on interest rate swaps.
  • Capital Expenditures: Capital expenditures for the three months ended December 31, 2013 were $120.2 million, of which $8.4 million was spent on maintenance projects, $3.2 million on continuous improvement projects and the balance on expansion projects. Expansion capital was primarily spent on the continued development of our NATO site.
  • Provision for Income Taxes: Provision for income taxes is lower in the fourth quarter of 2013, as compared to the same period in 2012, due to lower income in the taxable legal entities included in the companies comprising the Corporation. As of December 31, 2013, the Corporation had approximately $761 million of future tax deductions resulting from capital expenditures, which can be used to shelter future taxable income in Canada.
  • Liquidity: As of December 31, 2013, total borrowings under committed credit facilities were $325.2 million with remaining available undrawn capacity of approximately $75 million. Cash on hand at December 31, 2013 was $1.5 million.

Operating Results for the Three Months and Years Ended December 31, 2013 and 2012

  Three Months Ended
December 31
  Year Ended
December 31
 
  2013   2012   2013   2012  
Sales Revenue 139,811   145,717   552,961   582,426  
Cost of Sales (1) 91,638   88,420   361,170   364,795  
Gross Profit 48,173   57,297   191,791   217,631  
Distribution, Selling and Marketing 27,457   25,918   103,841   95,701  
General and Administrative (2) 10,428   8,528   39,080   35,644  
Operating Profit 10,288   22,851   48,870   86,286  
                 
Finance Expense (8,977 ) (8,052 ) (30,146 ) (30,981 )
Income before Other Income (Expense) and Income Taxes 1,311   14,799   18,724   55,305  
Other Income (Expense) (91 ) 3,642   1,712   2,814  
Income before Income Taxes 1,220   18,441   20,436   58,119  
                 
Provision for Income Taxes                
  Current 669   892   3,903   4,604  
  Deferred 895   2,976   4,358   14,492  
  1,564   3,868   8,261   19,096  
                 
Net Income (Loss) (344 ) 14,573   12,175   39,023  

Notes:

(1) Depreciation and amortization included for the three months and year ended December 31, 2013 - $12.8 million and $48.8 million, respectively; depreciation and amortization included for the three months and year ended December 31, 2012 of $11.5 million and $44.5 million, respectively.
(2) Depreciation and amortization included for the three months and year ended December 31, 2013 - $0.4 million and $1.1 million, respectively; depreciation and amortization included for the three months and year ended December 31, 2012 of $0.4 million and $1.0 million, respectively.

Financial Statements, Conference Call and Webcast

Financial Statements and Management's Discussion and Analysis will be posted on the Canexus website at www.canexus.ca and filed on SEDAR. Management will host a conference call at 10 a.m. ET on March 14, 2014, to discuss the results. A Q4 and Year-end 2013 presentation will be available on our website to facilitate the conference call. Please call 1-800-319-4610 or +1-604-638-5340 outside of Canada and the USA. The conference call will also be accessible via webcast at www.canexus.ca. A replay of the conference call will be available until end of day ET March 28, 2014. To access the replay, call 1-800-319-6413 or +1-604-638-9010, followed by passcode 9153#.

Non-GAAP Measures

Cash Operating Profit, Cash Operating Profit Percentage, Payout Ratio, Cash Payout Ratio and Distributable Cash are non-GAAP financial measures, but management believes they are useful in measuring the Corporation'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 Corporation's performance or as a measure of the Corporation's liquidity and cash flow. The Corporation's method of calculating non-GAAP measures may differ from the methods used by other issuers and accordingly, the Corporation's non-GAAP measures are unlikely to be comparable to similarly titled measures used by other issuers. Readers should consult the Corporation's Q3/13 and 2012 MD&A filed on SEDAR for a complete explanation of how the Corporation calculates each such non-GAAP measure.

Forward-Looking Statements

This news release contains forward-looking statements and information relating to expected future events relating to Canexus and its subsidiaries, including with respect to: shipment volume of unit trains from the Bruderheim Terminal; timing of the completion of work on the pipeline connected unit train facility expansion, and the impact thereof on the cost of the pipeline connected unit train facility; expectations for DBCO transload volume for Q1/2014; impact of Canadian dollar exchange rates on caustic soda prices and performance of the North American sodium chlorate business; use of proceeds from the February 5, 2014 common share financing; North American sodium chlorate and Brazil business unit performance in 2014; the impact of newly imposed tariffs on demand for bleaching chemicals; capacity utilization and operating rates for 2014 for the North American sodium chlorate business and the impact of reduced pulp capacity on the North American sodium chlorate industry; expectations for caustic pricing through the first quarter of 2014; expectations for market conditions and industry utilization rates for the chlor-alkali business and the impact of capacity expansions thereon, including on hydrochloric acid prices; North American chlor-alkali demand and capacity utilization rates for the first quarter of 2014; expectations regarding timing of price pressure in Brazil; and seasonal demand increases for hydrochloric acid.
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 Corporation's Annual Information Form filed on the Corporation'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, Canexus disclaims 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 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. Canexus' common shares (CUS) and debentures (Series III - CUS.DB.A; Series IV - CUS.DB.B; Series V - CUC.DB.C) trade on the Toronto Stock Exchange. More information about Canexus is available at www.canexus.ca.

Canexus Corporation
Richard Ott
Interim President and CEO
(403) 571-7300

Canexus Corporation
Richard McLellan
CFO
(403) 571-7300
www.canexus.ca


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