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Executives

Richard A. Ott – Interim President and Chief Executive Officer

Richard T. McLellan – Senior Vice President-Finance and Chief Financial Officer

Brian P. Bourgeois – Senior Vice President-Sales and Marketing

Analysts

Joel D. Jackson – BMO Capital Markets

Yaroslava Teslya – CIBC World Markets, Inc.

Robert Hope – TD Securities Inc.

Patrick Kenny – National Bank Financial

Canexus Corporation (OTCPK:CXUSF) Q4 2013 Earnings Conference Call March 14, 2014 10:00 AM ET

Operator

Thank you for standing by. This is the conference operator. Welcome to the Canexus Corporation Fourth Quarter and Year-End Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there we will be an opportunity to ask questions. (Operator Instructions).

At this time, I’d like to turn the conference over to Richard McLellan, Chief Financial Officer. Please go ahead.

Richard T. McLellan

Good morning everyone and welcome. As like previous quarters, we have posted the presentation on our website to accompany our discussion today and we will refer to that document during our comments this morning. I will remind everyone to please refer to the forward-looking statements at the end of the document, which includes important disclaimers about today’s discussion.

Starting on Page 2, our objective for today’s call will be to provide you with an update on several key issues that will be influencing our performance in the coming months. We have recognized that these are challenging times for Canexus and our intent is to be as open as possible regarding the status of these issues. And the next steps we expect to take to address them. There are a number of variables that will impact our results in the coming quarters and we want to provide as much context around them as we can.

I would like to begin the conference call by introducing Rick Ott, who is joining me on today’s call. As you all aware, Canexus announced on March 6th that Rick will be acting as Interim CEO, while a search process is underway for permanent CEO following the departure of Gary Kubera.

Also joining me on today’s call is Brian Bourgeois, Senior Vice President of Sales and Marketing. He will provide you with an update on our Chemicals business. I will ask Rick to begin by sharing some of his professional background. Following Rick’s comments on Page 3, we will provide you with an update of our business and financial process. Rick?

Richard A. Ott

Thanks, Rich. Good morning everyone. First, I would like to share a bit of my background and my mandate for Canexus over the next couple of quarters. The Board and I recognize that the company’s performance has not met our expectation in recent quarters. we’re committed to improvement. We take our commitments to our shareholders, employees, customers and other stakeholders very seriously.

As you may have read in my bio, I have 36 years in the chemical industry, many of those on the manufacturing side for operational excellence and meeting deadlines were non-negotiable. I also spent time in a spinoff with Shell Chemical, where the company was owned by private equity firm and successfully brought down the two things, performance and creditability, both factors; I see Canexus needing to improve.

Canexus has an excellent history and great potential with a strong chemicals business. We’re growing it to a whole new area and that learning has come out to the significant expense. My mandate is to press forward with our plans on the unit train project to NATO, and optimize the performance of the terminal as we ramp up operations. I also plan to work to find additional ways to increase the profitability of our chemicals business.

That concludes my remarks. and I’ll turn things back over to Rich and Brian to provide you with business and financial updates. Rich?

Richard T. McLellan

Thanks, Rick. Starting with NATO, we’ve made progress into our last quarterly conference call, but still have some challenges ahead. On Page 4, you can see the recent photo of the unit train terminal in operation. This picture is of the west side of the loading rack, while a series of 12 railcars are being loaded with Access Western Blend.

I have summarized on Page 5, the key issues that we’re managing at NATO that will influence our operating results in the coming quarters. I’ll highlight them briefly, and then go into more detail.

First, the contract negotiations are progressing well, and we’re nearing completion of the sales agreement that will substantially contract up the facility. I’m pleased to report that we successfully started up operations at the terminal in December. we’ve encountered a couple of factors that are constraining our ability to achieve our target volumes, which we are working to address and I’ll provide more detail on those shortly.

We’ve also made a series of changes to our unit train project management structure, aimed at improving the effectiveness of our execution going forward. With respect to our project execution plan, our project team has concluded that it will be necessary for us to take an extended operational shutdown to complete the project. While we are preferred not to take this downtime, we’ve concluded that it is the most efficient process for completing the work, and allows us the highest profitability of meeting our revised budget expectation. Finally, I’ll comment on the recent regulatory developments in the United States and why we do not expect a significant impact on our operations.

Now I will go into more detail on each of the above factors. On page 6, while I would like to have been in a position today to announce a signed contract with the four customers, we run additional two unit trains a week. we’ve not quite completed the process. however, we are in an advanced stage of discussions with the party that is an excellent fit for the terminal, and I’m very comfortable with how the negotiations are progressing.

In addition, we are continuing to pursue exploratory discussions with several parties, including some current customers that have expressed an interest in contracting capacity at the terminal and I’m confident that the business fundamentals remain very solid.

Turning to the unit train operations, our early operating experience has identified a couple of constraints to achieving our target volumes. As you recall, we previously anticipated loading 14 trains in February and that was not achieved. From the start of our operations, in mid-December through the end of February, we’ve loaded a total of 11 unit trains. One of the key constraints we’ve encountered early on is a design limitation in our vapor combustion system. Unfortunately, our original incinerator design is not well clipped to handle the wide of vapor compositions discharging from railcars as they are loaded.

As a result, we have had to curtail operations twice to make modifications and repairs have just lower loading rates through the terminal to allow for safe and incinerator operations. We have identified design modifications, we need to address this issue and we are currently developing a plan for our best to implement these changes.

We’ve also been constrained by railroad service levels. as you’re likely aware, there has been a great deal of media attention in recent weeks given to the shipment of grain from the Canadian prairies, following the record harvest in 2013. This as a resulted of an increasing pressure on the railroads to haul grain and last week, the Canadian government enacted in the Chlorine Council obligating the railroads to haul minimum volumes of grain.

Also the severe winter weather experience not just in Canada, but across North America has left the rail systems operating well below peak efficiency. The combination of these factors has resulted in the rail service levels at the unit train terminal being well below our initial expectations.

This has impacted our ability to ship trains in timely manner and received empty cars for loading. We hope to see these conditions improve in coming weeks as weather improves. We met last week the senior level management of our primary carrier and we will work with them on an active basis in the pending months to improve service levels of the terminal.

I would like to emphasize that the operation of the unit train terminal and supporting railroad logistics hasn’t yet reached a normalized operating state and we expect to gain clarity on the expected operational performance of this asset over the coming months.

Moving to the unit train project on Page 7, we have included another picture of the unit train rack, this time showing the east side of the rack. What’s important to note in this picture is the work yet to be done to fully complete the project.

On other side, we haven’t yet installed the loading arms or gangways on this side of the rack. Installation of these arms will require operational tie-ins with a drill bit piping headers already contained in the rack. In addition, we will be building the shed structure around the entire rack that will contain the chemical fire suppression systems.

Please bear these points in mind, when we return to the plan for completing the project in a moment. Rick is now going to speak to Slide 8. Rick?

Richard A. Ott

Thanks, Rich. On Page 8, as reported we have made several changes to the management of the project to the goal of ensuring better execution going forward. We have engaged the services of a major capital project consultant for an experience in major projects to provide both in personnel and systems to supplement and replace internal resources previously managing the project.

The areas of cost control, scheduling and project management are all receiving attention and additional resources. Also, Andy Lacara, our Senior Vice President of Operations has been assigned full-time for the management of the project following other changes to our internal organization. Since last our update in January, I can report that we have not had any surprises on bid received for the remaining work and our estimate for total spending remains intact.

Turning back to project execution plan, as we pointed out on the previous slide, we have a significant amount of work remain to be done in and around the areas of loading rack. We had initially planned to schedule this work during the quite times between loading unit trains, however our current operating experience now tells us that this will be impractical.

We determined that the arrival and departure of trains is too unpredictable at this time, to allow us to efficiently schedule the work in this manner. As a result, our project team has concluded that the most efficient path of doing the work in the loading rack area is to take a complete shutdown of the unit train terminal for 60 to 90-day period to get all the work done at once.

In addition to the work required in the rack area, we are also required to take a shutdown of our pipeline to complete the connection to the Cold Lake system and this work will be completed simultaneously. This shutdown impacts only the unit trains side of the terminal and will not impact manifest operations.

As I mentioned earlier, we would have preferred to avoid this measure and we believe it provides us the best probability of assuring that we will meet our budget commitment for the project.

Under our current scenario, we are targeting the maintenance shutdown in June and resume operations with the Cold Lake connection completed during quarter three. I should emphasize that the planning for this project or this phase of the project is still underway. There are several factors that will influence the timing and duration to shutdown and we expect to have a better understanding of conditions as we have approach the May time period, and we will communicate more details there.

Richard T. McLellan

Thanks, Rick. Turning to Page 9, I would like to touch briefly on the evolving regulatory environment. There has been a great deal of activity in the regulatory area recently and I would like to comment on how we expect this to impact Canexus. The most immediate and urgent development was the emergency order issued by the U.S. Department of Transportation on February 25. The emergency order was in fact substantially similar to previous issue directed from Transport Canada. The principal impact of both regulations is to prohibit the shipping of any crude oils in the U.S. under Packing Group III, in favor of Packing Groups I or II.

Packing Groups I and II impose stricter handling conditions on the railroads. The Packing Group I being the most rigorous. Also the order require shippers of crude to test the properties of the oil prior to shipment to ensure proper classification. These measures effectively discontinue the use of AAR211 tank cars as well.

Canexus is fully in compliance with these regulations and we have experienced no disruptions to our operations. All crude shipping from our Bruderheim facility is being classified as Packing Group I or II. Canexus is neither the offer – order of freights, nor safety [ph] of records the requirement for testing and ensuring appropriate classification falls to our customers.

We have been working closely with our customers to verify that the proper testing and documentation are in place. Also, there were very few AAR211 cars in service across North America above 1% of the crude oil fleet and any cars in Canexus service have been eliminated. But it’s important to note that regulatory environment for crude by rail is evolving rapidly, particularly in the area of railcar design. We do expect the regulatory change may have some impact on the portion of the existing DOT-111 cars in oil transportation service, possibly in the form of retrofit program. It’s too early yet to know what the outcome of that process will be, but we are continuing to monitor developments closely and remain in active dialogue with our customers.

At this point, I’ll ask Brian to provide you with an update on our chemicals business units. Brian?

Brian P. Bourgeois

Thanks, Rich and good morning all. Starting with sodium chlorate on Page 10, our chlorate business remains stable and healthy. We have observed the modest shift in the supply and demand balance in late 2013, early 2014. On the demand side, we’re seeing closure two pulp mills announced and on supply side, we’re seeing some modest capacity creep at exists in chlorate plants.

The result of these two factors has led to slightly lower operating rates in the low-90% range, but rates have remained healthy for the industry. We did face price pressure during the 2014 contract negotiations, as a result of lower operating rates, but the impact of this system largely offset by the weaker Canadian dollar.

As a result, we expect our chlorate business to continue to generate solid reliable cash flow. We have the same expectations at Brazil. Our Brazil business generated good results again in Q4 and we expect this to continue in to 2014.

And our chlor-alkali business in Page 11, we continue to experience market headwinds that we expect will continue for much of the year. caustic prices could move modestly higher, supported by weaker Canadian dollar and higher freight costs experienced by our competitors.

Market fundamentals in the Northeast Asian market, our primary competitor in the western market show further signs of any significant improvement in the near-term. While we do believe what we’ll – a floor has been reached the caustic soda pricing, the price about Asian producer cash cost. this is unlikely to start increasing materially until either demand accelerates or excess global capacity is shut down clearly, from the system.

Relative to build chlorate an asset, the outlook is similar. North American hydrochloric acid capacity will continue to expand later in 2014 and 2015. and we expect it moves to pressure pricing in the future. With the chlorate merchant market, we have the jerk conditions deteriorate modestly, as one former merchant market chlorine customer has started up backward integrated on site production, displacing merchant market material in the second startup is forthcoming.

As a result, chlorine pricing has been below our expectations in early 2014. however, price initiatives have been announced in the market that could lead to improvement in prices, in the anticipation of the seasonal upturn, driven by the water treatments out there.

That concludes my remarks, Rich.

Richard T. McLellan

Thanks, Brian. That concludes our formal comments for this morning. Operator, at this time, we would be happy to open the lines to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from Joel Jackson of BMO Capital Markets. Please go ahead.

Joel D. Jackson – BMO Capital Markets

Hi, good morning. could you give a bit of guidance now, how you see CapEx playing out in 2014? How much last at NATO and how much for the company in total? Thanks.

Richard T. McLellan

2014 CapEx, Joel, maintenance capital should be around $25 million. as we stated in our prospectus, we had some bills to pay related to the NATO unit train projects, so roughly $40 million there. And then there is approximately $70 million or $80 million remaining to be spent going forward to complete phases one, two and the expansion of phase three as well. In addition to that, we have one other project, it’s a caustic modernization project at North Vancouver, and there is sort of $10 million or so to be spent on that.

Joel D. Jackson – BMO Capital Markets

Okay. And you’re talking about some of the work that you’re trying to figure out NATO, in terms of the vapor incineration. you’ve indicated that you don’t expect additional capital increases – or cost increases. What kind of work that we’ve done so far to figure out what’s going on and why do know that there won’t be any more cost increases? Thanks.

Richard T. McLellan

Well, incineration unit in the system itself is not an overly costly piece of equipment to begin with. and I’m not intermittently, familiar with the design fixes. but understanding the vapor composition and being able to adjust the oxygen and fuel mixture inside the incinerator to be able to deal with it is something that we’re working on. We don’t anticipate it to come with a significant price tag.

There are other options as well for dealing with the vapors in the event that we were to have continued to trouble with the incinerator chemical absorptions and other methods. So there’s lots of options here, and we think we’ve got a solution and are moving forward with that and it shouldn’t able to process.

Joel D. Jackson – BMO Capital Markets

Okay. and finally what – are there any conditions that would make you here, consider a potentially, temporally cutting the dividend 2014 to bridge to the transition period? Thanks.

Richard A. Ott

We’re not considering anything at this time. as you know, the Board just declared a regular quarterly dividend. each quarter’s dividend decision is made at that time and it’s based on liquidity, future operating cash flow expectations and capital requirements, just to reinforce our strategy is to continue to pursue a dividend level.

Joel D. Jackson – BMO Capital Markets

Thank you.

Operator

The next question comes from Jacob Bout of CIBC World Markets. Please go ahead.

Yaroslava Teslya – CIBC World Markets, Inc.

Hi, this is actually Slava in for Jacob. I have a question about, on chlor-alkali, sort of given that significant price increase in 2014. Do you expect 2014 being similar to the previous year, our EBITDA roughly around $26 million?

Richard T. McLellan

Yes, Slava. we don’t expect an improvement in chlor-alkali results for 2014 over 2013. And in fact, we might see a little bit of softening, because as we went through 2013, the hydrochloric acid prices came down through the year, and given where we’re at today, prices on average through the balance of the year will be softer that will be offset somewhat by having the availability of that the hydrochloric acid expansions that we did in 2013 for the full year. So, it’s a bit of a balance. But generally speaking, we are expecting our chemical operations to generate results in 2014 similarly to – similar to 2013.

Yaroslava Teslya – CIBC World Markets, Inc.

All right. Thank you. And revenue for Bruderheim, it was $6 million in this quarter. do you guys have a breakdown between by truck by trail – sorry crude by truck and crude by rail?

Richard T. McLellan

Are you – do you mean – separating the unit train revenue from the Canexus revenue. Is that your question?

Yaroslava Teslya – CIBC World Markets, Inc.

Yes.

Richard T. McLellan

Yes. We’re not – we’re still in operational, our start-up mode on the unit trains. So there was nothing in December at all, or in the fourth quarter last year at all for unit train operations, that would be anything in January and February. So, we’re capitalizing the net impact of whatever revenue and whatever costs are being incurred to run the facility. And that’s really, because of the downtime, we’ve experienced with the incinerator unit. but now that it’s back up and operating. starting with March, we will go to kind of normal accounting, if you will, and you’ll start to see what that looks like in the first quarter results.

Yaroslava Teslya – CIBC World Markets, Inc.

That’s great. And just the last question is on the timing for the fourth contract. Do you guys expect to sign that – what is the timeline for capacity? when do you guys – do you think you will be 100% contracted?

Richard A. Ott

Well, all of these contracts are unique. The thing, I think freezes me is that we’ve had – we’ve been in conversation with the contract customer that we mentioned a minute ago. For some time, they are strategic to the terminal. we’re delighted to be working with them, and we’ll expect to get that contract included here over the year next month or so. As you might expect, all these contracts involve multiple parties, people have to be able to source through. They have to be able to transload it. They have to be able to offload it, sell it or use it. and so there’s multiple pieces, and unfortunately, we don’t control it. We’re just one piece. So we’re delighted to continue to be working with the same parties we have been for a while and we’re confident we’ll get the contract executed.

Yaroslava Teslya – CIBC World Markets, Inc.

All right. Thank you. That’s all from me.

Operator

The next question comes from Rob Hope of TD Securities. Please go ahead. Mr. Hope, your line is open. please proceed.

Robert Hope – TD Securities Inc.

Thank you. Good morning. I was just wondering the $50 million of EBITDA or cash operating profit that you had guided to before for the unit train operations, is that still in effect?

Richard T. McLellan

I don’t know that we ever guide $15 million or $50 million.

Robert Hope – TD Securities Inc.

$50 million.

Richard T. McLellan

Yes. at a run rate of 10.5 unit trains a week, that number is still intact.

Robert Hope – TD Securities Inc.

And what would it look like at the current contracting level. I’m just trying to get a sense of variable versus fixed costs?

Richard T. McLellan

Without considering the impact of – on the reduced operating cost side, element for the pipeline and the terminal, every unit train on an annualized basis is just over $8 million of revenue. So, that’s one way you can think about it.

Robert Hope – TD Securities Inc.

Okay, that’s great. And maybe, just continuing on NATO, of the $70 million to $80 million that have to be invested still there. what percentage have you locked up in the contracts and what percentage do you have a high degree of visibility on?

Richard T. McLellan

Well, that’s a good question. We have – we’re going through a bidding process now. and some of the contracts that we have in place, even some that carried over from the initial work that was done with our fixed price contracts. I can’t – I mean it’s pretty tough to get fixed price contracts. we’re at the best of time. so I’m not trying to let you or lead you think that a lot of that is locked in. What I can tell you though is that the contractors that we’re using to complete the work are well known to us, because they came in and assisted at the kind of at the tail end of the project to get us operational in December. They exhibited excellent productivity. and so we’re very confident that they’ll be able to do the work in an efficient manner.

Robert Hope – TD Securities Inc.

Okay. Maybe, just one last question. The shutdown during the summer will – is there any effect on the MEG contract or how will that – will there be any changes there?

Richard A. Ott

We have been working closely with our customers to keep them in price of what we’re doing. and I think we’re all committed to one another and we’ll work our way through this period of downtime in a way that makes sense for all of us.

Robert Hope – TD Securities Inc.

Okay. Thank you. I’ll get back in queue.

Operator

The next question comes from Patrick Kenny of National Bank Financial. Please go ahead.

Patrick Kenny – National Bank Financial

Hey, good morning. Rich, just to go back to your comment there on maintaining the dividend model. I believe in the January 16th, in press release, the comment was made that the company remain committed to maintaining its dividend and this comment wasn’t reaffirmed in last financial release or the presentation today. So, just wondering if you can set the record stage here for us. Are you still committed to sustaining the current payout or just curious to partly change your view on dividend policy and payout ratio in any way?

Richard T. McLellan

No, Gary’s departure had nothing to do with; he was obviously fairly supportive of our dividend policy. But dividend policy is set by the Board of Directors and clearly they just acquired a dividend that’s consistent with the dividend that we’ve been paying historically. and I’ll just reiterate path that every quarter the Board revisits the dividend and they look at again, liquidity or cash operating cash flow that we expect to see coming our way and whatever our capital requirements look like they’re going to be, we’ve raised a bunch of equity in February and we’re in good shape for completing the balance of the work and we keep moving forward here. But at the end of the day, NATOs got to deliver and we’ve said that repeatedly and nothing changed that.

Patrick Kenny – National Bank Financial

Okay. And maybe a question for Rick, as it relates to Gary’s departure. Just fine if you can provide us with any color with respect to the reasons for his departure, as well as the timing of the announcement, mainly why this transition period didn’t commence immediately after the cost overrun was announced earlier in the year, or perhaps conversely, holding off on the search until or at least the expansion at NATO is for you up and running later this year?

Richard A. Ott

Yes, I could just comment and say that the decision made relative to Gary was subject to the discussion between the Board and Gary, and the stepping down in terms of timing was coincidental time with our Board meeting. So, there wasn’t any particular association with any actions previously.

Patrick Kenny – National Bank Financial

Okay. Thanks guys. The rest of my questions have been answered.

Richard T. McLellan

Thank you.

Operator

(Operator Instructions) Gentlemen, there appears to be no further questions. Actually, a follow-up question from Robert Hope of TD Securities. Please go ahead.

Robert Hope – TD Securities Inc.

Thank you. Just one last question on the MEG contract, with your announcement that they will be constructed DRU, is this covered under your existing contract or will it have to be reopened. and then I guess maybe, I was follow on, on that will you earn incremental margin there?

Richard T. McLellan

The nature of the product that we’re obligated to handle with MEG today is Access Western Blend spec. so, if you take the building went out of it, then clearly that’s the different spec. So, it makes a good partner, we work with them to hopefully be able to handle the product that comes out of their DRU if they continue to go down that path.

Robert Hope – TD Securities Inc.

Thank you.

Operator

There are now no further questions. I’ll turn the call back over to Richard McLellan for any closing comments.

Richard T. McLellan

Well, thank you everyone. We’ll continue to provide updates on our progress.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.

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