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Press release from Marketwire

Canexus Income Fund Announces First Quarter Results

Strong Market Dynamics Expected to Drive Performance in 2011

Wednesday, May 04, 2011

Canexus Income Fund Announces First Quarter Results19:32 EDT Wednesday, May 04, 2011CALGARY, ALBERTA--(Marketwire - May 4, 2011) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the first quarter ended March 31, 2011. Unless otherwise noted, the Fund is reporting the 100% results of Canexus Limited Partnership ("Canexus LP"), of which the Fund indirectly owns 100% as of February 7, 2011.Highlights:Distributable Cash was $9.1 million for Q1 2011, resulting in a payout ratio of 173% (inclusive of TCP severance payments of $1.6 million in the quarter). The first quarter is typically our weakest quarter due to the seasonality of chlorine demand for water treatment. We took advantage of this to perform a planned maintenance shutdown of our North Vancouver chlor-alkali facility for 12 days in March and also made minor modifications to enhance production reliability. The plant set a production record of just over 18,000 metric electrochemical units ("MECU") in the month of April and is expected to continue to run at near capacity for the next two quarters. Despite a very strong Canadian dollar, we continue to expect to deliver significantly increasing operating cash flow over the balance of the year, resulting in a payout ratio of 90 to 95%. Our original guidance for 2011 was established assuming an exchange rate of US$0.97 which we have now modified to US$1.02. We expect to deliver operating cash flow of $25-$30 million in Q2, $35-$40 million in Q3 and $30-$35 million in Q4. Our guidance for 2012 is unchanged with an expected payout ratio of about 70%, despite also modifying our exchange rate assumption from US$0.97 to US$1.02 for 2012. Sustainable high North American sodium chlorate industry operating rates, combined with termination of contract price increase restrictions affecting 2011 (on contracts negotiated in 2009 during the economic crisis), are expected to support upward price momentum that should offset the stronger Canadian dollar. North America sodium chlorate sales volumes increased 1% over Q1 2010 and 2% over Q4 2010, benefiting from continued strength in pulp markets. All of our sodium chlorate plants are running at capacity which is expected to continue through 2011 and into 2012. Realized netback prices, despite being negatively affected by the stronger Canadian dollar relative to the US dollar (Q1/11 - US$1.00; Q4/10 - US$0.98; Q1/10 - US$0.95), increased 1% over Q4 2010 and 4% over Q1 2010. Price increases of $50/MT took effect Q2 2011 where contracts allow. North American sodium chlorate industry operating rates are currently estimated to be 96%, which should allow for continued pricing momentum in 2011 and 2012. Sodium chlorate production in the quarter was 93,171 MT's of which 82% came from our low-cost Brandon plant. The power line capacity upgrade to our Brandon plant is expected to be completed in 2012, setting the stage for further possible expansion opportunities.Sales revenue for the North American chlor-alkali business was 16% higher than the prior year, resulting from higher sales volumes of chlorine (28%) and acid (30%) offset by lower realized netback prices for both chlorine (28%) and acid (16%). Caustic soda volumes were flat between periods (includes significant volumes purchased for resale) and realized netback prices increased 17% over Q1 2010. Electricity consumption/MECU produced decreased 21% with the benefit of the new membrane plant technology over the prior-year period but was offset by 19% higher effective electricity prices per unit due to the plant running at about 70% of practical capacity in the quarter (the demand charge component for electricity was spread over fewer units of production). Q1 2011 variable costs were also negatively impacted by $0.6 million of salt handling charges relating to Q4 2010. Plant fixed costs were $1.7 million higher than the year ago quarter due to the maintenance shutdown in March referred to above which added about $1.4 million. Plant fixed costs are also higher than expected due to a slight delay in realizing all of the expected cost reduction benefits from TCP relating to manpower reductions and natural gas consumption which added about $1.5 million in the quarter. We expect to achieve the remaining cost reduction benefits of TCP over the balance of 2011. Sales revenue for the North American chlor-alkali business increased 5% compared to Q4 2010. Higher acid (21%) and chlorine (15%) sales volumes were offset by lower realized netback prices of about 10% for each product. Caustic realized netback prices improved 7% over Q4 2010 with caustic sales volumes down 7% (which impacted caustic resale volumes only and not produced volumes). Chlor-alkali price increases of about $40/MT for caustic and $35/MT for chlorine have been announced for Q2 2011 as contracts allow. Higher sales volumes in our South American business unit for all products resulted in Q1 2011 operating cash flow of $6.9 million as compared to $3.0 million in Q4 2010 and $6.9 million in Q1 2010. This Q1 2011 result was despite the impact of the stronger Canadian dollar on our US dollar fixed margin contract with our major customer, and higher maintenance costs in Q1 2011 that resulted in higher plant fixed costs of $1.5 million, as compared to Q1 2010. Demand from our major customer was strong in the first quarter and is expected to continue for the balance of 2011, keeping our plants running at or close to capacity. In late March, we completed the transloading facilities to handle biodiesel at our North American Terminal Operations ("NATO") site at Bruderheim. Mechanical integrity re- verification of our two 650,000 barrel salt caverns is expected to be completed in the third quarter. This will support the potential large-scale development of the site to service the oilsands region. Long-term debt is borrowed in US dollars to manage our US dollar currency exposure. This resulted in $7.2 million of unrealized currency translation gains in the quarter. Effective February 22, 2011, maturity of Canexus LP's senior secured revolving credit facilities was extended to June 30, 2014, resulting in lower borrowing costs of 50 bps and revised financial covenants with relaxation modified and extended through September 30, 2011. As of March 31, 2011, total borrowings under committed credit facilities were $338.0 million with remaining available undrawn capacity of approximately $93.0 million. On February 7, 2011, Nexen disposed of its entire interest in Canexus through a secondary offering on a bought deal basis. Nexen no longer owns any Fund Units or securities convertible into Fund units and the Fund owns 100 percent of Canexus LP. Immediately prior to Nexen's disposition, the Fund owned 34.1 percent of Canexus LP. "For Canexus, 2011 is a year in which we will benefit from our recent investment program and rapidly improving market conditions. First quarter performance was below our expectations due to higher costs and lower volumes at North Vancouver, as well as a stronger Canadian dollar. Historically, Q1 is our lowest quarter and we expect significant improvement during the balance of the year," said Gary Kubera, President and CEO."Underlying our optimism is the strength in global pulp markets. Both bleached softwood pulp and bleached hardwood pulp inventories decreased during the quarter, closing March at 24 and 29 days of supply, respectively, a level generally regarded as tight for pulp markets. Softwood pulp prices have begun to increase accordingly, in some cases approaching the record levels experienced in the first half of 2010. Global pulp demand continues to be strong, particularly in China. Chinese demand has been a key driver for global pulp markets over the past 12 months. Looking ahead, global pulp demand is expected to grow in 2011 consistent with global economic growth. With little new global pulp capacity projected to become operational over the next two years, we continue to anticipate a healthy pulp market in the medium term.""A strong pulp market has led to increased demand for sodium chlorate in North America, in part from several pulp mill restarts. Canexus is operating its plants at full rates and began implementing price increases in the second quarter of last year. Most recently, Canexus announced a $50 per tonne increase for the second quarter that is being implemented as contract terms allow. Despite the effect of the stronger Canadian dollar, we expect to see realized prices improving in the coming quarters. Some price restrictions do exist in our chlorate business, but those conditions expire at the end of 2011, resulting in a solid increase expected for Q1 2012. Tight market conditions are expected to continue, further supporting price momentum in this business.""The North American chlor-alkali industry operated at an estimated 91% of effective capacity in Q1 2011, compared with 84% in the prior quarter and 87% in Q1 2010. The improvement in operating rates is a result of increased chlorine derivative exports to Asia from the US Gulf Coast. Strong chlorine derivative exports to Asia are projected to continue over the near-to mid-term. North American hydrochloric acid supply currently exceeds demand, putting pressure on prices.""North America MECU price increases were realized in Q1 2011 due to caustic soda price improvement. Additional price increases announced for both chlorine and caustic soda are expected to result in further MECU price improvement in Q2 2011. Supply disruptions resulting from the Japanese earthquake and tsunami have resulted in increased Asian caustic prices, raising the cost of imports into Western Canada at a time when demand is strong. With no planned downtime at North Vancouver, we believe that Q2 will be the first quarter that demonstrates the potential of our TCP investment.""Brazilian pulp production in Q1 2011 was 1% lower than the prior quarter, reflecting a generally stable market on average throughout the quarter. However, market fundamentals were increasing as the quarter progressed, with March pulp exports 14% higher than February. Strong shipments to China during March are consistent with the robust demand in China. Canexus Brazil's primary sodium chlorate customer, Fibria, is on track to meet their 2011 pulp production targets. Accordingly, Canexus' sodium chlorate plant is projected to operate at maximum rates for the duration of 2011.""Going forward, our priorities remain to deliver the results from our recent investments and, concurrently, bring our debt ratios more in line with our longer term expectations. For all of 2011, we expect our payout ratio to be 90-95%, improving to about 70% in 2012. This guidance assumes the Canadian dollar averages US$1.02. At the same time, we will maintain our growth focus and continue to identify and evaluate projects that will refill our growth pipeline.""We believe that 2011 is also a transformational year for us in terms of our ownership and legal structure. Following the exit of Nexen in February, we plan to convert from an income trust to a growth-oriented, dividend-paying corporation, subject to the approval of our unitholders expected tomorrow. The new structure effectively supports the future success of the business by broadening our peer group, providing greater access to capital markets, as well as attracting the attention of a wider base of investors," Mr. Kubera added.Statement of Distributable CashThree Months EndedMarch 31CAD thousands, except as noted20112010Canexus LPNet Income8,92919,294Realized Currency Translation (Gains) Losses on Cash(139)571Provision for Current Income Taxes1,1341,304Income Taxes Paid(160)(931)Interest Expense6,2291,571Interest Paid and not Capitalized(4,927)-Interest Income(92)(48)Charges and Credits to Income Not Involving CashDepreciation, Amortization and Accretion11,6007,932Deferred Income Taxes820(550)Unrealized Gains on Currency Translation(6,913)(7,344)Change in Fair Value of Foreign Exchange Options405587Change in Fair Value of Interest Rate Swaps(383)510Other1,5151,039Contributions to/Payments for Defined Benefit Plans(589)(570)Changes in Non-Cash Operating Working Capital and Due from/to Affiliates, Net(1,791)650Cash From Operating Activities15,63824,015Changes in Non-Cash Operating Working Capital and Due from/to Affiliates, Net1,791(650)Non-Cash Changes in Income Tax Payable and Interest Payable(2,276)(1,944)Interest Income9248Maintenance Capital Expenditures(3,684)(2,440)Amortization of the Purchase Cost of Foreign Exchange Options(211)(1,057)Realized Currency Translation Gains (Losses) on Cash139(571)TCP Severance Costs Paid(1,567)-Operating Non-Cash Items(438)(489)Distributable Cash within Canexus LP (1)9,48416,912Fund Cash General and Administrative Expense(415)(175)Distributable Cash9,06916,737Distributions Declared15,66113,574Payout Ratio (1)173%81%Note:1See comments concerning non-GAAP Measures at end of release.Operations HighlightsCanexus 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 terminal in Alberta. NATO results are included in the North America Chlor-alkali results. Highlights for each unit are as follows:North America Sodium Chlorate:First quarter sales revenue for this segment compared to the same period in 2010 increased 4% to $54.7 million from $52.6 million. Sales volumes increased 1% over Q1 2010 benefiting from continued strength in pulp markets. Realized netback prices (net of freight), despite being negatively affected by the stronger Canadian dollar relative to the US dollar (Q1/11 - US$1.00; Q1/10 - US$0.95), increased 4% over Q1 2010. Our cash operating profit margin percentage (cash operating profit is defined as operating profit before depreciation and includes general and administrative costs and selling and marketing costs allocated to the business unit, divided by revenues) was flat between periods at 29% as a result of higher realized netback prices and slightly higher production volumes offset by higher electricity costs. First quarter sales revenue for this segment compared to the fourth quarter of 2010 increased 2% to $54.7 million from $53.4 million. Sales volumes increased 2% over Q4 2010 benefiting from continued strength in pulp markets. Realized netback prices, despite being negatively affected by the stronger Canadian dollar relative to the US dollar (Q1/11 - US$1.00; Q4/10 - US$0.98), increased 1% over Q4 2010. Our cash operating profit margin percentage increased from 27% in Q4 2010 to 29% as a result of higher realized netback prices, higher sales volumes and lower general and administrative costs more than offsetting lower plant fixed costs in Q4 2010 and slightly lower production volumes in Q1 2011. North America Chlor-alkali:First quarter sales revenue for this segment compared to the same period in 2010 increased 16% to $43.3 million from $37.4 million resulting from higher sales volumes of chlorine (28%) and acid (30%) offset by lower realized netback prices for both chlorine (28%) and acid (16%). Caustic soda sales volumes were flat between periods (includes significant volumes purchased and resold which results in both higher revenues and higher cost of sales with little impact on operating profit) and realized netback prices increased 17% over Q1 2010. Caustic soda purchased for resale in the quarter was $3.2 million higher than in Q1 2010. Our cash operating profit margin decreased from $3.2 million in Q1 2010 to $0.8 million in Q1 2011. Electricity consumption/MECU produced decreased 21% with the benefit of the new membrane plant technology over the prior- year period but was offset by 19% higher effective electricity prices per unit due to the plant running at about 70% of practical capacity in the quarter (the demand charge component for electricity was spread over fewer units of production). Q1 2011 variable costs were also negatively impacted by $0.6 million of salt handling charges relating to Q4 2010. Plant fixed costs were $1.7 million higher than the year ago quarter due to the maintenance shutdown in March which added about $1.4 million and a slight delay in realizing all of the expected cost reduction benefits from TCP relating to manpower reductions and natural gas consumption which added about $1.5 million in the quarter. Our freight costs (included in Distribution, selling and marketing expenses) were also $1.8 million higher due to the higher volumes and higher chlorine transportation costs. We expect to achieve the remaining cost reduction benefits of TCP over the balance of 2011. First quarter sales revenue for this segment compared to the fourth quarter of 2010 increased 5% to $43.3 million from $41.1 million. Higher acid (21%) and chlorine (15%) sales volumes were offset by lower realized netback prices of about 10% for each product. Caustic realized netback prices improved 7% over Q4 2010 with caustic sales volumes down 7% (which impacted caustic resale volumes but had little impact on operating profit). Caustic soda purchased for resale in Q1 2011 was higher than Q4 2010 by $2.9 million. Our cash operating profit margin decreased from $3.6 million in Q4 2010 to $0.8 million in Q1 2011. Q1 2011 variable costs were negatively impacted by $0.6 million of salt handling charges relating to Q4 2010. Our freight costs were also $1.4 million higher due to the higher volumes and higher chlorine transportation costs. Industry operating rates improved to 91% of effective capacity in the first quarter of 2011, as compared to 84% in the prior quarter and 87% in the first quarter of 2010. Chlor-alkali price increases of about $40/MT for caustic and $35/MT for chlorine have been announced for Q2 2011 as contracts allow. South America:First quarter sales revenue for this segment compared to the same period in 2010 increased 18% to $28.0 million from $23.7 million primarily as a result of higher sodium chlorate sales volumes (17%) and higher caustic soda sales volumes (6%). The increase in sodium chlorate sales volumes was due to higher plant capacity (from our 4,400MT annual capacity addition completed in Q2 2010), strong demand for both sodium chlorate and caustic soda and to the reduced demand we experienced from our primary customer in January and February of 2010. Our cash operating profit margin was flat between quarters at $6.9 million as a result of the benefit of higher sales volumes being offset by higher plant fixed costs in Q1 2011 of $1.5 million as a result of a planned chlor-alkali plant maintenance shutdown. We expect reliable performance from this plant going forward. First quarter sales revenue for this segment increased 8% to $28.0 million from $25.8 million in the fourth quarter of 2010 primarily as a result of higher sodium chlorate sales volumes (7%) and higher caustic soda sales volumes (3%) resulting from strong demand for both sodium chlorate and caustic soda from our primary customer. Our cash operating profit margin was $6.9 million in Q1 2011 as compared to $3.0 million in Q4 2010 as a result of the benefit of higher sales volumes and higher plant fixed costs in Q4 2010 from an unplanned shutdown of the chlor-alkali plant in October, and costs incurred in Q4 2010 to purchase product for customers. Demand from our major customer was strong in the first quarter and is expected to continue for the balance of 2011 keeping our plants running at or close to capacity. Financial UpdatesLong-term Debt and Finance Income (Expense):Effective February 22, 2011, maturity of Canexus LP's senior secured revolving credit facilities was extended to June 30, 2014, resulting in lower borrowing costs of 50 bps and revised financial covenants with relaxation modified and extended through September 30, 2011. At March 31, 2011, total borrowings under committed credit facilities were $338.0 million with remaining available undrawn capacity of approximately $93.0 million. At March 31, 2011, Canexus had cash on hand of $6.9 million. We borrow in US dollars, which creates unrealized currency translation gains as the Canadian dollar strengthens. A substantial portion of our revenues are denominated in or referenced to the US dollar. During the first quarter of 2011, we recorded an unrealized currency translation gain of $7.2 million (Q1/10 - $8.6 million) on our US dollar denominated long-term debt included in finance income (expense). Interest expense in the quarter was $6.2 million (Q1/10 - $1.4 million) and is included in finance income (expense). We stopped capitalizing interest associated with TCP capital expenditures on August 1, 2010. Other Income (Expense):In the first quarter, mark-to-market fair value losses of $0.4 million (Q1/10 - $0.6 million) and realized gains of $0.5 million (Q1/10 - $0.7 million) were recorded on foreign exchange call option contracts for a net gain of $0.1 million. In the first quarter of 2011, we recorded mark-to-market fair value gains of $0.4 million (Q1/10 - $0.5 million losses) on interest rate swaps and realized losses of $0.4 million (Q1/10 - $0.4 million). Capital Expenditures: Capital expenditures for the three months ended March 31, 2011 were $11.4 million, of which $3.7 million was spent on maintenance projects and the balance on continuous improvement and expansion projects. Provision for Income Taxes: Deferred income taxes have increased for the first quarter of 2011, as compared to the same period in 2010, due to foreign exchange fluctuations in foreign subsidiaries. As of March 31, 2011, Canexus LP has approximately $415 million of future tax deductions resulting from capital expenditures which can be used to shelter future taxable income.Operating Results for the Three-Month Periods Ended March 31, 2011 and 2010Three Months Ended March 31 CAD thousands20112010Revenues125,976113,715Cost of Sales187,21871,522Gross Profit38,75842,193Distribution, Selling and Marketing20,50118,391General and Administrative27,3057,619Operating Profit10,95216,183Finance Income46,416Income before Other Expense and Income Tax10,95622,599Other Expense(73)(2,551)Income before Income Tax10,88320,048Provision for (Recovery of) Income TaxesCurrent1,1341,304Deferred820(550)1,954754Net Income8,92919,294Notes:1Depreciation included for 2011: $10,752 (2010: $6,930)2Depreciation included for 2011: $253 (2010: $419)Financial Statements, Conference Call and WebcastFinancial Statements and Management's Discussion and Analysis will be posted on the Canexus web site at www.canexus.ca and filed on SEDAR when available. Management will host a conference call at 4 p.m. ET on May 5, 2011, to discuss the results. A Q1 2011 presentation will be available on our website to facilitate the conference call. Please call 416-644-3416 or 1-800-814-4860. The conference call will also be accessible via webcast at www.canexus.ca. A replay of the conference call will be available until midnight May 12, 2011. To access the replay, call 416-640-1917 or 1-877-289-8525, followed by passcode 4431695#.Non-GAAP MeasuresCash operating profit margin, cash operating profit margin percentage, payout ratio, distributable cash and operating cash flow 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 StatementsThis 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 pricing for sodium chlorate and chlor-alkali products, expected volumes of and demand for sodium chlorate or chlor-alkali products, expected currency exchange rates, the Fund's expected payout ratio, global caustic soda demand, expectations for MECU prices, expectations regarding North Vancouver facility operations, the timing of TCP completion, the expenses related thereto and its contribution to operating cash flow, the timing of completion and contribution to operating cash flow of growth projects, including the Brazil sodium chlorate and hydrochloric acid expansions, North Vancouver hydrochloric acid project and NATO rail infrastructure project, available tax deductions and the approval of the unitholders of the conversion from an income trust to a corporate structure. Investors should be cautioned that any decision to pay dividends following the conversion to a corporation will be made by the board of directors of Canexus on the basis of Canexus' earnings, financial requirements and other conditions existing at such future time. 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 CanexusCanexus 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 to the oil and gas industry from its terminal at Bruderheim, Alberta. Canexus targets opportunities to maximize unitholder returns and delivers high-quality products and services to its customers. Canexus trust units (CUS.UN) and convertible debentures (Series I – CUS.DB; Series III – CUS.DB.A) trade on the Toronto Stock Exchange. More information about Canexus is available at www.canexus.ca.FOR FURTHER INFORMATION PLEASE CONTACT: Gary KuberaCanexus LimitedPresident and CEO(403) 571-7300ORRichard McLellanCanexus LimitedCFO(403) 571-7300