HAMILTON, ON, May 10 /CNW/ - Stelco Inc. (TSX:STE) today reported net
earnings of $49 million ($0.48 per common share) in the first quarter ended
March 31, 2005. This record level of first quarter earnings for the Company is
compared to a net loss of $37 million ($0.36 per common share) in the first
quarter of 2004 and net earnings of $1 million ($0.01 per common share) in the
fourth quarter of 2004.
Net sales revenue in the first quarter was $968 million compared to
$769 million for the same period in 2004. This 26% increase was largely
attributable to the renewal of customer contracts at substantially higher
prices and increased spot market prices due to improved market demand, as well
as selling price surcharges implemented to cover higher raw material and
energy costs.
The cost of sales for the first quarter of 2005 was $821 million compared
to $735 million for the same quarter in 2004. This 12% increase was
attributable to such factors as the rise in raw material and energy costs,
including scrap, coal, coke, natural gas and iron ore; the increased cost of
hot roll and rod as raw materials for Stelco's manufactured products business;
higher employment costs, particularly in the areas of pensions and health
care; higher spending for repairs, maintenance and supplies; and reduced
semi-finished steel production in Hamilton.
Production in the first quarter of 2005 was 1,256,000 semi-finished tons
compared to 1,366,000 semi-finished tons produced during the same period in
2004. Shipments during the first quarter of 2005 totaled 1,200,000 net tons
compared to 1,266,000 net tons shipped during the first quarter of 2004.
As at March 31, 2005, Stelco's consolidated net liquidity position was
$346 million compared to $284 million as at December 31, 2004 and $239 million
as at March 31, 2004. The net liquidity position of the applicants involved in
proceedings under the Companies' Creditors Arrangement Act was $297 million at
March 31, 2005 compared to $237 million at December 31, 2004, and $196 million
at March 31, 2004.
Net cash of $65 million was generated during the first quarter of 2005,
representing a $96 million improvement from the $31 million consumed in the
first quarter of 2004. The strength of operating earnings, driven by high
selling prices, accounted for the majority of the improvement.
Courtney Pratt, Stelco's President and Chief Executive Officer, said,
"Stelco continued to benefit from robust market conditions and steel prices
during the first quarter. Positive factors shaping our outlook for the balance
of the year include the likely continuation of strong steel prices, the
stability provided by our contract customer base, and the strong raw materials
position we enjoy through our ownership of iron ore mining properties,
in-house production of coke, and coal purchase contracts.
"I hope that all stakeholders will take advantage of our positive
performance to work towards our shared goal of a viable and competitive Stelco
rather than allow this opportunity to pass."
Guidance
On March 8, 2005, Stelco provided guidance with respect to 2005 operating
earnings. At that time the Corporation advised that 2005 operating earnings
were estimated to be in the range of $350 to $400 million. It indicated that
this estimate included the impact of a shutdown of the Lake Erie hot strip
mill, but did not include any restructuring-related costs or the impact of the
possible sale of any of its subsidiary companies. The guidance also included
assumptions around a strong first quarter, with spot market prices declining
somewhat over the balance of the year.
Operating earnings in the first quarter of 2005 were strong at
$118 million, in line with the estimate in the guidance provided on
March 8, 2005. The Corporation expects solid second quarter performance
although operating earnings as anticipated are expected to be lower than
record first quarter results. Although the Corporation expects a significant
increase in operating earnings in 2005, given the current dynamics of global
steel markets and the effect on steel prices, the markets have become more
difficult to predict. Issues include fluctuating spot market pricing, raw
materials costs and the currently uncertain automotive sector. The Corporation
is therefore reviewing its March 8, 2005 guidance for the second half of the
year and expects to reaffirm or amend its full year's guidance by the end of
May 2005.
Stelco advises that operating earnings is a non-GAAP financial measure -
for a description of this financial measure please refer to the March 8, 2005
media release and the Corporation's published financial statements which
disclose those statement of earnings line items which the Corporation does not
include in operating earnings.
These forward-looking statements include uncertainties which may cause
actual results to differ from results expressed or implied by our second
quarter guidance. These statements are not a guarantee of future performance
and factors that could affect results include factors disclosed under "Risks
and Uncertainties" set out in the Corporation's 2005 First Quarter
Management's Discussion and Analysis under "General Development of the
Business - Risk Factors" set out in the Corporation's 2004 Annual Information
Form filed on SEDAR.
About Stelco
Stelco Inc. is a large, diversified steel producer. Stelco is involved in
major segments of the steel industry through its integrated steel business,
mini-mills, and manufactured products businesses. This news release may
contain forward-looking information with respect to the Corporation's business
operations, financial performance and conditions. Actual results may differ
from expected results for a variety of reasons including factors discussed in
the Corporation's Management's Discussion and Analysis section of the
Corporation's 2004 Annual Report. To learn more about Stelco and its
businesses, please refer to our Web site at www.stelco.ca.
STELCO INC.
QUARTER 1, 2005
REPORT TO THE SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") is dated May 10, 2005.
The purpose of Stelco Inc.'s ("Stelco" or the "Corporation") MD&A is to
provide commentary on the Corporation's financial situation and future
prospects, focusing on the Corporation's three reportable segments: Integrated
Steel, Mini-mill, and Manufactured Products. The Integrated Steel segment has
been identified as the principal component of the core business. The other two
segments have been identified as non-core. See "Creditor Protection and
Restructuring", below for additional comments. The Corporation prepares its
consolidated financial statements (the "Consolidated Financial Statements") in
accordance with Canadian generally accepted accounting principles ("GAAP").
The following MD&A should be read in conjunction with the MD&A and the annual
audited Consolidated Financial Statements contained in the Corporation's 2004
Annual Report. Additional information about Stelco is available in the
Corporation's 2004 Annual Information Form, which can be accessed from SEDAR
at www.sedar.com.
Certain statements in this MD&A may constitute "forward-looking"
statements which involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of
Stelco, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. When used in this MD&A, such statements use such words as
"may," "will," "expect," "believe," "plan," "intend" and other similar
terminology. These statements reflect current expectations regarding future
events and operating performance and speak only as of the date of this MD&A.
Forward-looking statements involve significant risks and uncertainties, should
not be read as guarantees of future performance or results, and will not
necessarily be accurate indications of whether or not such results will be
achieved. A number of factors could cause actual results to differ materially
from the results discussed in the forward-looking statements, including, but
not limited to, the factors discussed in the MD&A of the Corporation's 2004
Annual Report as well as the risks discussed under "Risks and Uncertainties"
below. Although the forward-looking statements contained in this MD&A are
based upon what management of the Corporation believes are reasonable
assumptions, the Corporation cannot assure investors that actual results will
be consistent with these forward-looking statements. These forward-looking
statements are made as of the date of this MD&A, and the Corporation assumes
no obligation to update or revise them to reflect new events or circumstances.
Creditor Protection and Restructuring
In early 2004, after a thorough financial and strategic review, Stelco
concluded that it faced a serious viability issue. The Corporation incurred
significant operating and cash losses in 2003 and believed that it would have
exhausted available sources of liquidity before the end of 2004 if it did not
obtain legal protection and other benefits provided by a Court-supervised
restructuring process.
Costs had risen dramatically for inputs such as natural gas, electricity
and raw materials, such as coal, coke, and scrap. The cost of employee future
benefits - pensions and health care - were also increasing due to improved
pension benefits negotiated in contracts with unionized employees, increasing
health care costs, lower return on pension plan assets, lower average
retirement age at Stelco Hamilton, and the effect of lower interest rates on
the discount factors used to determine the Corporation's liabilities under the
pension and other benefit plans.
In 2003, global steelmaking overcapacity exerted downward pressure on
selling prices due to significant and continued import penetration of the
Canadian market by steel products offered, in management's opinion, at
unfairly low prices over the last several years. The appreciation in the value
of the Canadian dollar during 2003 further negatively affected selling prices.
Selling prices strengthened significantly during 2004, due in part to
increased demand, particularly in China. While selling prices remain high by
historical standards and are expected to remain high in the near future, the
Corporation cannot rely on these selling prices being sustainable in the
longer term and believes it cannot compete effectively in the longer term
unless it takes steps to lower its overall costs. In order to help reduce
costs the Corporation requires additional funding to complete strategically
critical capital projects at its Stelco Hamilton and Stelco Lake Erie business
units. The Corporation did not believe it would be able to raise additional
funds to complete these projects without a restructuring.
As a result, on January 29, 2004 (the "Filing Date"), Stelco obtained an
order (the "Initial Order") from the Ontario Superior Court of Justice (the
"Court") granting it creditor protection under the Companies' Creditors
Arrangement Act (the "CCAA"). The Initial Order may be amended throughout the
CCAA proceedings on motions from Stelco, its creditors, and other interested
stakeholders. On the same date, Stelco made a concurrent petition for
recognition of the Initial Order and ancillary relief under Section 304 of the
U.S. Bankruptcy Code. The Canadian proceedings include Stelco and its wholly
owned subsidiaries, Stelwire Ltd. ("Stelwire"), Stelpipe Ltd. ("Stelpipe"),
CHT Steel Company Inc. ("CHT Steel"), and Welland Pipe Ltd. ("Welland Pipe"),
which are collectively referred to as the "Applicants." The U.S. proceedings
include Stelco, Stelwire, and Stelpipe. Welland Pipe was closed on March 7,
2003 (see Note 9 to the Consolidated Financial Statements). The Corporation's
other subsidiaries and joint ventures are not included in the proceedings.
During the stay period, the Applicants are authorized to continue operations.
Ernst & Young Inc. was appointed by the Court as monitor (the "Monitor") in
the Canadian proceedings and has been reporting to the Court from time to time
on the Applicants' cash flow and other developments during the proceedings.
The Initial Order and the U.S. proceedings provided for an initial stay
period of 30 days, which has subsequently been extended to July 8, 2005, and
potentially to such later dates as the Court may order. The purpose of the
Initial Order and stay of proceedings is to provide the Applicants with relief
designed to stabilize their operations and business relationships with their
customers, suppliers, employees, and creditors.
During the proceedings, the Corporation has sought and will continue to
seek input from its stakeholders, with a view to developing a comprehensive
restructuring plan to allow the Corporation to exit CCAA in an orderly
fashion. The restructuring plan will likely include reorganizing the
Corporation's capital structure. As part of the restructuring plan, it is
expected that a formal CCAA plan of arrangement (the "Plan") will be prepared
and submitted to affected creditors, who will vote on the Plan, and to the
Court for approval. Under the Plan, claims against the Applicants will be
divided into classes, and each class will vote on the Plan as it pertains to
that class. No determinations or rulings have been made to date as to the
classification of affected creditors.
The CCAA proceedings have triggered defaults under substantially all debt
obligations of the Applicants (see Notes 7 and 12 to the Consolidated
Financial Statements). The Initial Order generally stays actions against the
Applicants including steps to collect indebtedness incurred by the Applicants
prior to the Filing Date and actions to exercise control over the Applicants'
property. The Initial Order grants the Applicants the authority to pay
outstanding and future wages, salaries, employee pension contributions and
benefit payments, and other obligations to employees; the costs of goods and
services, both operating and of a capital nature, provided or supplied after
the date of the Initial Order; rent under existing arrangements payable after
the date of the filing; and principal, interest, and other payments to holders
of security in respect of the property of the Applicants if the amount secured
by such security is, in the reasonable opinion of the applicable Applicant,
with the concurrence of the Monitor, less than or equal to the fair value of
such security, having regard to, among other things, the priority of such
security.
Credit Facilities
The accommodation agreement (the "Accommodation Agreement"), which
provides for the continued access to the Applicants $350 million credit
facility (the "$350 Million Credit Facility"), and the $75 million Debtor-In-
Possession Credit Agreement (the "DIP Credit Agreement") were amended on
December 22, 2004, resulting in the extension of the credit facilities under
the $350 Million Credit Facility and the DIP Credit Agreement to the earlier
of November 20, 2005 and the effective date of a Plan, subject to termination
of the credit facilities as a result of the occurrence of an event of default.
Further information regarding terms of these agreements is contained in Note 1
to the Consolidated Financial Statements.
Claims Process Order
On December 17, 2004 (the "Claims Procedure Date"), the Court made an
order (the "Claims Process Order") establishing a process by which certain
creditors of the Applicants must prove their claims. The purpose of commencing
the claims process was to enable the Applicants and the Monitor to review and
process potential claims including supplier, contingent, damage, litigation
and other claims so that the Applicants will be in a position to hold meetings
of affected creditors in a timely manner to vote on a proposed Plan. In that
regard, the claims process set out in the Claims Process Order establishes the
amount of certain claims against each Applicant in existence as at the date of
the Initial Order (the "Pre-Filing Claims") and claims arising against each
Applicant since the date of the Initial Order arising out of the
restructuring, repudiation or termination of any contract, lease or other
agreement (the "Restructuring Claims").
Any creditor asserting a Pre-Filing Claim or a Restructuring Claim that
arose before the Claims Procedure Date (collectively the "Claims") was
required to file a Proof of Claim ("Proof of Claim") with the Monitor prior to
5:00 p.m. on January 31, 2005 (the "Claims Bar Date"). A bar date for
Restructuring Claims arising on or after the Claims Procedure Date will be
established by future order of the Court (the "Restructuring Claims Bar
Date"). Creditors were asked to submit their Proofs of Claim to the Monitor.
Under the Claims Process Order, if the Monitor in conjunction with the
Applicants disagrees with the amount of a creditor's claim, the Monitor may
send a notice of disallowance or revision to the creditor within a prescribed
time period. If the creditor disagrees with the amount set out in a notice of
disallowance or revision, the creditor may dispute the amount and, if the
matter is not consensually resolved, a claims officer appointed by the Court
will determine the claim amount.
On or before the Claims Bar Date, the Monitor received 1,330 Proofs of
Claim. The total of Claims received, prior to any disallowances or revisions,
was approximately $3.655 billion. The Monitor and the Applicants have reviewed
each Proof of Claim filed in accordance with the Claims Procedure Order and
expect that the value of the Claims allowed upon completion of the claims
process and the resolution of all disputed Claims will be significantly lower
than the amount of the Claims filed (see Note 7 to the Consolidated Financial
Statements for further details).
Creditors that did not file a Proof of Claim with the Monitor on or
before the Claims Bar Date or that do not file a Proof of Claim relating to
Restructuring Claims on or before the Restructuring Claims Bar Date, as
applicable, or such later date as the Monitor and the Applicants may agree to,
in writing, or the Court may otherwise order will:
- be forever barred from making or enforcing any Claim against the
Applicant and that Claim will be forever extinguished;
- not be entitled to any further notice with respect to the CCAA
proceeding; and
- not be entitled to participate as a creditor in the CCAA proceeding.
Capital Process Order
By order of the Court dated October 19, 2004 as amended (the "Capital
Process Order"), the Applicants received Court approval for a process designed
to raise capital and to pursue the sale of non-core assets (the "Capital
Raising Process"). The Capital Raising Process contemplated, among others, the
following possible transactions:
- the raising of a minimum of $200 million of new capital in the
restructured Stelco in the form of equity, debt and/or other
securities;
- a sale of Stelco or its core business; or
- the sale of non-core subsidiaries including Stelpipe, Stelwire,
Stelfil, AltaSteel, Norambar and the Corporation's 40% interest in
Camrose Pipe Company ("Camrose Pipe"); or
- a combination of the above.
The Capital Raising Process was conducted in two stages. The first stage
was the solicitation of preliminary expressions of interest from potential
investors while the second stage entailed the completion of due diligence
followed by the submission of offers. In the case of the Capital Raising
Process for Stelco, its existing bondholders were given the opportunity to
present a financing proposal by November 8, 2004, which would have provided at
least $200 million to Stelco. In granting the Capital Process Order, the Court
stated that Stelco was not prohibited from receiving other unsolicited offers
from any party during this initial period. After November 8, 2004, Stelco was
able to solicit other proposals for raising capital.
Deutsche Bank AG ("DB"), a significant bondholder, approached Stelco to
conduct the necessary due diligence within the period prior to November 8,
2004, to assess whether it was prepared to present a term sheet to Stelco with
respect to a rights offering to creditors supported by DB or another form of
financing. It did present a commitment letter to Stelco and on November 12,
2004, Stelco's Restructuring Committee and its Board of Directors approved
DB's commitment letter, subject to the approval of the Court. On November 29,
2004 the Court approved DB's commitment as the "stalking horse" for the
Capital Raising Process.
On or before the December 31, 2004 deadline under the Capital Process
Order, six parties submitted detailed proposals with respect to the Integrated
Steel business with certain parties indicating a desire for the entire
Company. All six parties were selected to advance to Phase II of the Capital
Raising Process by UBS Securities Canada Inc. and UBS Securities LLC
(together, "UBS") the Corporation's financial advisors, the Chief
Restructuring Officer (the "CRO"), Stelco and the Monitor. The Monitor
received comments from certain bidders that the deadline of January 31, 2005
for filing binding offers did not provide enough time for them to complete
their due diligence. As a result, the Monitor and the Applicants agreed that
it was appropriate in the circumstances to seek an order extending the
deadline for filing binding offers for the Integrated Steel business and the
Non-Core Subsidiaries from January 31, 2005 to February 14, 2005. On January
17, 2005, the Court amended the Capital Process Order to grant the extension
request. Offers were subsequently submitted from three of these parties and
were considered together with the DB's previously approved "stalking horse"
commitment.
The Corporation, together with its advisors, examined the offers in
respect of the Integrated Steel business submitted by the bid submission
deadline of February 14, 2005. The Monitor also reviewed the offers. In
reviewing the offers, the Corporation and its advisors were guided by the
principle that the overall objective is to pursue an outcome that will
strengthen the Corporation on its emergence from protection under the CCAA.
On March 1, 2005, Stelco announced that since none of the offers received
in respect of the Integrated Steel business satisfied its requirements for
being designated as a prevailing offer under the Capital Process Order, the
Corporation decided to pursue a Stelco-driven recapitalization for the
Corporation while continuing with the sale of non-core subsidiaries. As a
result, DB became entitled to a break fee of $11 million as a trigger event
had occurred. The break fee has been paid and expensed in the first quarter
2005. The Corporation believes that further capital raising activity will
require it to pursue financing options directly, working closely with various
sources of capital, to develop an alternative that will substantially
strengthen the Corporation.
By Court Order dated March 30, 2005, the Capital Raising Process was
discontinued as it related to the Integrated Steel business and Stelco was
authorized to raise new capital by way of equity financing or debt and equity
financing and to enter into such arrangements as are necessary to raise such
new capital. In this regard, Stelco is required to file with the Court an
outline of the proposed terms of the new equity or debt and equity financing
and the proposed treatment of stakeholders at least five business days prior
to committing to an equity financing or debt and equity financing.
On April 21, 2005, Stelco reached an agreement with the United
Steelworkers of America ("USWA") on their participation in the Corporation's
Capital Raising Process, which was then approved by the Court. The Court Order
states that Stelco shall not file a CCAA plan outline before May 12, 2005 and
that Stelco shall provide and discuss the CCAA plan outline with the USWA
prior to its filing and that Stelco shall not seek Court approval of a sale of
any of the non-core subsidiaries where the USWA represents employees before
May 12, 2005. As part of the agreements, the USWA has added Tricap Management
Limited ("Tricap") as a financial advisor under the USWA Non-disclosure
Agreement dated September 21, 2004 and Tricap will be allowed to have access
to all information received to date by the other USWA financial advisors. The
Court Order precludes Tricap from being a financial sponsor of a Plan without
the consent of the Corporation or the Court.
Non-Core Businesses
The Corporation's strategic review has determined that all of the
businesses of the Mini-mill and Manufactured Products segments are non-core.
The Capital Process Order included a process to seek purchasers of these
businesses as part of the broader Capital Raising Process.
Included in the Consolidated Statement of Financial Position are the
following amounts related to the businesses, excluding Camrose Pipe which is
included in discontinued operations (see below):
<<
Manufactured
At March 31 (in millions) Mini-mill Segment Products Segment
(unaudited) 2005 2004 2005 2004
-------------------------------------------------------------------------
Current assets $ 143 $ 118 $ 186 $ 131
Current liabilities 63 67 53 44
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Working capital 80 51 133 87
-------------------------------------------------------------------------
Property, plant, and equipment 92 91 9 30
Deferred pension cost 8 9 62 54
Future income taxes 11 9 7 4
-------------------------------------------------------------------------
Other assets 111 109 78 88
-------------------------------------------------------------------------
Employee future benefits 49 45 86 82
Long-term debt 15 20 - -
Future income taxes 7 8 - -
-------------------------------------------------------------------------
Other liabilities 71 73 86 82
-------------------------------------------------------------------------
Investment in Non-Core
Businesses $ 120 $ 87 $ 125 $ 93
-------------------------------------------------------------------------
Pursuant to the Capital Process Order, the Applicants received non-
binding expressions of interest for the Non-Core Subsidiaries up to and
including December 1, 2004. UBS and the CRO, with input from the Monitor,
received the proposals and contacted parties to participate in Phase II of the
process, which included completion of detailed due diligence. A total of 23
parties conducted due diligence in Phase II with some of those parties doing
so with respect to more than one Non-Core Subsidiary. The Corporation,
together with its advisors, undertook a preliminary evaluation of all of the
proposals received for each of the Non-Core Subsidiaries. The Monitor also
reviewed these proposals.
The Corporation's $245 million net investment in these businesses is
funded through share capital and intercompany loans and advances. An
impairment charge of $18 million was recorded in fourth quarter 2004 to reduce
the carrying value of property, plant, and equipment of Stelwire and Stelpipe
to nil. Stelwire and Stelpipe are part of the Manufacturing Products segment.
The Corporation continues to pursue offers for a number of the businesses
discussed above. Under GAAP, losses resulting from the disposition of an asset
group are recorded only when specific criteria have been met including when
the disposition is probable. The Corporation has determined that the criteria
for accounting for assets held for sale have not been met with respect to the
above noted businesses, with the exception of Camrose Pipe (see below). Should
the disposition of certain other non-core businesses discussed above meet the
criteria of assets held for sale, future losses recorded related to the
Corporation's net investment in these businesses would likely be material and
are dependent on, among other items, the purchase price, the assets sold, and
liabilities and obligations assumed by the prospective purchasers.
Camrose Pipe
On March 30, 2005 the Court approved the sale of the Corporation's 40%
partnership interest in Camrose Pipe to Canadian National Steel Corporation.
Proceeds on the sale of $22.5 million were held in escrow pending expiry of
the appeal period applicable to the approval order. The appeal period expired
on April 20, 2005 without objection thus permitting completion of the sale in
second quarter 2005. Accordingly, the assets and liabilities of the
Corporation's 40% partnership interest in Camrose Pipe are accounted for as
assets held for sale and disclosed separately in the Consolidated Statement of
Financial position. In addition, the accounting criteria have been met for
discontinued operations. Therefore the Consolidated Financial Statements have
been retroactively restated to separately disclose partnership earnings and
cash flows as part of discontinued operations.
Idled or Closed Facilities
Stelco Hamilton Plate Mill
An agreement for the purchase and sale of the Stelco Hamilton plate mill
assets was signed in February 2005, but to date efforts to complete the
transaction have been unsuccessful. Efforts to complete a sale of the plate
mill assets are continuing.
Welland Pipe
In March 2005, the property and plant of Welland Pipe were listed for
sale with an asking price of $4 million. The net book value of these assets is
immaterial.
A purchase and sale agreement was signed for the U and O pipe mill in
April 2005 and was subsequently approved by the Court on May 4, 2005. A
deposit has been received with the balance of proceeds to be received by way
of scheduled payments while the equipment is being dismantled. It is
anticipated that the sale will be recorded in third quarter 2005 when title is
expected to pass to the purchaser. Funds received to date are held in trust
with the Monitor (see Note 6 to the Consolidated Financial Statements). The
net book value of these assets is nil.
Pension Plans
On February 10, 2005, Stelco received a letter from the Special Advisor
on the Steel Industry to the Government of Ontario, regarding the funding of
the Company's four principal pension plans. Stelco has been advised that upon
emergence from CCAA protection, it will not be entitled to the benefit of
Section 5.1 of the Regulations under the Pension Benefits Act (Ontario) (the
"Regulation"). Pension plans that have taken the Section 5.1 election are
exempt under the Regulation from making additional payments to fund solvency
deficiencies but are required to make additional Pension Benefit Guarantee
Fund ("PBGF") payments. Stelco's additional payments to the PBGF were
approximately $13 million for the year ended December 31, 2004. Normally,
solvency deficiencies are required to be funded over a five-year period.
However, the letter from the Special Advisor stated that the Ontario
Government is prepared to be flexible in discussing a fair and reasonable plan
for the consequent funding of Stelco's $1.3 billion solvency deficiency.
There can be no assurance that the loss of the exemption under Section
5.1 of the Regulation will not have a material adverse effect on the business,
the financial condition, results of operations of the Corporation or the
Corporation's ability to restructure. The Corporation does not believe it will
have the financial resources to fund solvency deficiency payments in the
normal manner.
Liens and Construction Matters
Since the date of the Initial Order, 23 construction lien claimants have
filed 31 Proofs of Claim for liens aggregating approximately $13 million
against the various properties of the Applicants. The Applicants, with the
assistance of the Monitor, are in the process of reviewing the nature and
details of the construction lien claims and have established a procedure to
address them within the CCAA proceedings. To date, 18 Claims ($3 million) have
been settled and 13 Claims ($10 million) remain open.
Other Matters
The Corporation has obtained an order from the Court permitting it to
defer its annual meeting of shareholders until a date not later than three
months after its emergence from CCAA protection.
As a result of the CCAA filing, the Corporation has followed accounting
policies applicable to an entity under creditor protection. As described in
Notes 1 and 2 to the Consolidated Financial Statements, revenues, expenses,
gains and losses, and provisions for losses that can be directly associated
with the reorganization and restructuring process have been reported on the
Consolidated Statement of Earnings (Loss) as Reorganization items.
Financial and Operational Summary
Stelco Inc.
(Under Creditor Protection as of
January 29, 2004 - Note 1 to the
Consolidated Financial Statements) Three months ended March 31
Favourable
($ in millions, except as (Unfavour-
indicated(x))(unaudited) 2005 2004(xx) able)
-------------------------------------------------------------------------
Net sales $ 968 $ 769 $ 199
Costs 821 735 (86)
Amortization of property, plant,
and equipment 28 31 3
Amortization of intangible assets 1 - (1)
-------------------------------------------------------------------------
Operating earnings(xxx) 118 3 115
Reorganization items (Note 4) (21) (23) 2
-------------------------------------------------------------------------
97 (20) 117
-------------------------------------------------------------------------
Financial expense
Interest on long-term debt and
debt subject to compromise (10) (12) 2
Other interest - net (4) (5) 1
-------------------------------------------------------------------------
Earnings (loss) before income tax
from continuing operations 83 (37) 120
Income tax expense (recovery) (Note 10)
Current 20 1 (19)
Future 6 (8) (14)
Future income tax asset valuation
allowance 9 6 (3)
-------------------------------------------------------------------------
Net earnings (loss) from continuing
operations 48 (36) 84
Net earnings (loss) from discontinued
operations (Note 9) 1 (1) 2
-------------------------------------------------------------------------
Net earnings (loss) $ 49 $ (37) $ 86
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per common share from
continuing operations (Note 17) (x)$0.47 (x)$(0.35) (x)$0.82
Earnings (loss) per
common share (Note 17) (x)$0.48 (x)$(0.36) (x)$0.84
Average revenue per ton (x)$ 807 (x)$ 607 (x)$ 200
Cost per ton (x)$ 684 (x)$ 581 (x)$(103)
Semi-finished steel production
(thousands of net tons) 1,256 1,366 (110)
Shipments (thousands of net tons) 1,200 1,266 (66)
(xx) Restated - see Notes 3 and 9 to the Consolidated Financial
Statements.
(xxx) "Operating earnings (loss)" is a non-GAAP financial measure used
by management to assess the performance of the Corporation and its
business segments. The Corporation's use of this measure may not
be comparable to measures used by other companies. In accordance
with GAAP, a reconciliation of operating earnings to net earnings
(loss) is presented above.
All note references in this document are to the Corporation's March 31,
2005 Consolidated Financial Statements.
Overview
Net earnings in first quarter 2005 increased by $86 million compared to
the same period last year largely due to the renewal of customer contracts at
substantially higher prices and increased spot market prices. The Corporation
achieved the highest first quarter net earnings and its highest-ever operating
earnings in its history.
Net Sales and Costs
Net sales of $968 million for the quarter ended March 31, 2005 were 26%
higher than in the same quarter of 2004. Steel shipments of 1,200,000 tons
were 5% lower than for the same quarter in 2004, while average revenue per ton
of $807 was up 33%. Camrose Pipe revenue and shipments were not included in
first quarter 2005 (12,000 tons) or 2004 (5,000 tons) results as they were
presented under discontinued operations (see Creditor Protection and
Restructuring - Non-Core Businesses for further details). The first quarter
2005 increase in average revenue per ton was primarily due to:
- renewal of customer contracts at substantially higher prices;
- improved market demand which had the effect of raising spot prices;
and
- selling price surcharges implemented to cover high raw material and
energy costs.
Costs in first quarter 2005 of $821 million were up 12% compared with the
same quarter 2004 and average cost per ton of $684 was up 18% primarily due
to:
- a rise in raw material and energy costs, particularly scrap, coal,
coke, iron ore, natural gas, reagents, and fluxes;
- increased cost of hot roll and rod as raw materials for the
Manufactured Products segment;
- higher employment costs, particularly pension and health care
expenses;
- higher spending for repairs and maintenance and supplies at
Integrated Steel due in part to a planned blast furnace outage at
Stelco Lake Erie in March and Norambar; and
- reduced semi-finished steel production at Stelco Hamilton due to
reduced output at the blast furnace operations.
The above cost increases were partially offset by the impact of a
stronger Canadian dollar on U.S. dollar denominated purchases.
Amortization of property, plant, and equipment in first quarter 2005 was
$3 million less than the same quarter of 2004 as certain assets became fully
amortized in 2004.
Operating earnings were $118 million in first quarter 2005 compared with
Operating earnings of $3 million in the same quarter 2004.
In first quarter 2005, Net earnings were $49 million compared to a Net
loss of $37 million during the same period in 2004.
Reorganization items
In first quarter 2005 reorganization expenses of $21 million were
incurred, of which $11 million pertained to the DB break fee (see Creditor
Protection and Restructuring - Capital Process Order). The remainder relates
to professional fees.
In comparison, first quarter 2004 reorganization expenses were
$23 million. The non-cash adjustment to the carrying value of the convertible
debentures ($15 million) accounted for the majority of this expense. The
balance pertained to professional fees and the amortization and write-offs of
deferred financing and debt issue fees.
Professional fees will continue to be incurred in the near term as the
Corporation analyzes alternatives under the court approved Capital Raising
Process, completes the Claims Process that was initiated in December 2004, and
develops a Plan. Other material expenses or gains may be recorded dependent
upon results from the Claims Process, sale of non-core subsidiaries, or other
capital raising events that may transpire during the final phase of the
Corporation's restructuring.
Further information regarding the nature and composition of
reorganization items are outlined in Note 4 to the Consolidated Financial
Statements.
Financial expense
Interest continues to be recorded on long-term debt subject to compromise
under GAAP. No interest has been paid on the stayed portion of long-term debt,
since the date of the Filing.
Interest on long-term debt and debt subject to compromise was $2 million
lower in first quarter 2005 as compared to first quarter 2004 due to regularly
scheduled repayments of non-Applicant debt and the conversion of two existing
loans to lower, variable interest rates in fourth quarter 2004.
Other interest in first quarter 2005 was $1 million lower than first
quarter 2004 due to lower interim borrowings.
Income Tax expense
Future income tax assets are recognized to the extent that realization is
considered more likely than not. The assessment as to the future realization
of future income tax assets, including loss carry-forwards, is conducted on a
company-by-company basis for the Stelco group of businesses. Realization of
future income tax assets is dependent upon the availability of sufficient
taxable income within the carry-forward periods. The assessment of realization
is based upon the weight of evidence at the respective balance sheet date.
While the Corporation's subsidiaries recognize future income tax assets
where applicable, a $9 million future income tax asset valuation allowance was
recorded in the first quarter 2005 to reduce the consolidated net future
income tax asset.
Quarter-to-Quarter Comparison
Stelco Inc.
(Under Creditor Protection as of January 29, 2004 -
See Note 1 to the Consolidated Financial Statements)
Quarter Quarter Favourable
($ in millions, except as 1 4 (Unfavour-
indicated(x))(unaudited) 2005 2004(xx) able)
-------------------------------------------------------------------------
Net sales $ 968 $ 898 $ 70
Costs 821 826 5
Write-down of property, plant and equipment
(Note 5) - 18 18
Amortization of property, plant,
and equipment 28 27 (1)
Amortization of intangible assets 1 1 -
-------------------------------------------------------------------------
Operating earnings 118 26 92
Reorganization items (Note 4) (21) (14) (7)
-------------------------------------------------------------------------
97 12 85
-------------------------------------------------------------------------
Financial expense
Interest on long-term debt and debt
subject to compromise (10) (10) -
Other interest - net (4) (6) 2
-------------------------------------------------------------------------
Earnings (loss) before income tax
from continuing operations 83 (4) 87
Income tax expense (recovery) (Note 10)
Current 20 (1) (21)
Future 6 (5) (11)
Future income tax asset valuation
allowance 9 10 1
-------------------------------------------------------------------------
Net earnings (loss) from continuing
operations 48 (8) 56
Net earnings from discontinued
operations (Note 9) 1 9 (8)
-------------------------------------------------------------------------
Net earnings $ 49 $ 1 $ 48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per common share from
continuing operations (Note 17) (x)$0.47 (x)$(0.08) (x)$0.55
Earnings per common share (Note 17) (x)$0.48 (x)$0.01 (x)$0.47
Average revenue per ton (x)$ 807 (x)$ 784 (x)$ 23
Cost per ton (x)$ 684 (x)$ 721 (x)$ 37
Semi-finished steel production
(thousands of net tons) 1,256 1,329 (73)
Shipments (thousands of net tons) 1,200 1,145 55
(xx) Restated - see Note 9 to the Consolidated Financial Statements.
Overview
Operating earnings of $118 million in first quarter 2005 compared with
Operating earnings of $26 million in fourth quarter 2004. Operating earnings
increased by $56 million in the Integrated Steel segment, $8 million in the
Mini-mill segment and $28 million in the Manufactured Products segment (fourth
quarter 2004 included a pre-tax writedown of $18 million to reduce the
carrying value of property, plant, and equipment of Stelwire and Stelpipe to
nil).
Net earnings in first quarter 2005 increased by $48 million compared to
fourth quarter 2004 mainly due to the renewal of customer contracts at
substantially higher prices, partially offset by a softening in the spot
market. As well, there was a significant reduction in repairs and maintenance
spending at Stelco Hamilton, Stelco Lake Erie, Norambar, and AltaSteel due to
planned shutdowns in fourth quarter 2004.
In first quarter 2005, the net short-term debt position improved by
$65 million from the previous quarter. The major element of the improvement in
the net short-term debt position was cash from operations before working
capital of $130 million, partly offset by working capital changes and capital
spending.
Net sales and costs
Net sales of $968 million for the first quarter of 2005 were 8% higher
than fourth quarter of 2004 net sales of $898 million. Steel shipments of
1,200,000 tons were 5% higher than fourth quarter 2004 while average revenue
per ton of $807 was up 3% from $784. The first quarter increase in average
revenue per ton was primarily due to an increase in revenue per ton on
contract sales, partially offset by a decrease in spot market revenue per ton.
Cost per ton in first quarter 2005 of $684 was down 5% compared with
fourth quarter 2004 cost per ton of $721 primarily due to:
- reduced repairs and maintenance spending at Stelco Hamilton, Stelco
Lake Erie, Norambar, and AltaSteel;
- lower raw material costs, particularly scrap at Stelco Lake Erie,
Norambar, and AltaSteel, and coke at Stelco Lake Erie;
- lower cost of hot roll and rod as raw materials for the Manufactured
Products segment.
The above cost decreases were partially offset by:
- a $10 million partial recovery from an insurance claim related to the
June 2004 Stelco Lake Erie blast furnace outage which was recorded in
fourth quarter 2004;
- higher coal and natural gas prices;
- higher employment costs, particularly pensions and health care
expenses.
Summary of Quarterly Results
The following table shows the Corporation's quarterly financial
performance over the last eight quarters. The Corporation does not experience
significant seasonal fluctuations in revenues.
Stelco Inc.
(Under Creditor Protection as of January 29, 2004 -
see Note 1 to the Consolidated Financial Statements)
(in millions except as
indicated(x))(unaudited) 2005 2004(xx) 2004(xx) 2004(xx)
-------------------------------------------------------------------------
Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Net sales $ 968 898 941 881
Operating earnings (loss) $ 118 26 101 72
Net earnings (loss) from
continuing operations $ 48 (8) 58 42
Net earnings (loss) $ 49 1 58 42
Earnings (loss) from continuing
operations per common share +
Basic (x)$0.47 (0.08) 0.57 0.41
Fully diluted (x)$0.40 (0.08) 0.49 0.36
Net earnings (loss) per common
share +
Basic (x)$0.48 0.01 0.57 0.41
Fully diluted (x)$0.41 0.01 0.49 0.36
-------------------------------------------------------------------------
(in millions except as
indicated(x))(unaudited) 2004(xx) 2003(xx) 2003(xx) 2003(xx)
-------------------------------------------------------------------------
Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Net sales $ 769 688 645 699
Operating earnings (loss) $ 3 (139) (48) (92)
Net earnings (loss) from
continuing operations $ (36) (398) (45) (84)
Net earnings (loss) $ (37) (398) (45) (85)
Earnings (loss) from continuing
operations per common share(+)
Basic (0.35) (3.89) (0.44) (0.82)
Fully diluted (0.35) (3.89) (0.44) (0.82)
Net earnings (loss) per common
share(+)
Basic (0.36) (3.89) (0.44) (0.83)
Fully diluted (0.36) (3.89) (0.44) (0.83)
-------------------------------------------------------------------------
(xx) Restated - see Notes 3 and 9 to the Consolidated Financial
Statements
(+) Earnings (loss) per common share is calculated using the weighted
average number of common shares outstanding during the quarter
Segmented Information
In the following segment narratives, net sales, shipments, and average
revenue per ton data include intersegment sales.
The Corporation has three primary business segments: Integrated Steel,
Mini-mill and Manufactured Products. The Integrated Steel segment has been
identified as the core business. The other two segments have been identified
as non-core. See Creditor Protection and Restructuring - Non-core Businesses
for additional comments.
Integrated Steel segment
The Integrated Steel segment of the Corporation comprises those business
units that include and are primarily associated with the Stelco Hamilton and
Stelco Lake Erie Integrated Steel plants and their raw materials properties.
The primary markets served by this segment are automotive, transportation,
construction, manufacturing, pipe and tubular manufacturers, steel service
centres, and steel fabricators. In the past this segment provided a
significant quantity of steel required by Stelco's Manufactured Products
segment.
Integrated Steel
Three months ended March 31
Favourable
($ in millions, except as (Unfavour-
indicated(x))(unaudited) 2005 2004 able)
-------------------------------------------------------------------------
Net sales $ 780 $ 613 $ 167
Costs 642 592 (50)
Amortization of property, plant,
and equipment 27 28 1
-------------------------------------------------------------------------
Operating earnings (loss) $ 111 $ (7) $ 118
-------------------------------------------------------------------------
Shipments (thousands of net tons) 973 1,052 (79)
Average revenue per ton (x)$802 (x)$583 (x)$219
Cost per ton (x)$660 (x)$563 (x)$(97)
Semi-finished steel production
(thousands of net tons) 1,020 1,133 (113)
-------------------------------------------------------------------------
Overview
Operating earnings of $111 million for this segment improved by
$56 million compared with the previous quarter and $118 million compared with
the same period last year.
Customer inventory levels remained high at the end of first quarter 2005,
contributing to softness in the market in the second quarter. As well, some
customers in the automotive sector have planned production cuts in the second
quarter. While spot pricing remains under pressure, lower levels of offshore
imports into North America, partially due to higher ocean freight rates, and
the eventual reduction of customer inventory levels may assist in stabilizing
market pricing and demand for the balance of 2005.
Contract business is expected to represent approximately 53% of shipments
for 2005 (58% in 2004), the decrease primarily due to the loss of the General
Motors business.
Net Sales, Costs and Production
Net sales for the Integrated Steel segment in first quarter 2005 were
$780 million compared with $613 million in first quarter 2004. The 27%
increase in net sales and the average revenue per ton increase of $219 was
primarily due to:
- renewal of customer contracts at substantially higher prices;
- improved market demand, which had the effect of raising spot prices;
and
- selling price surcharges implemented to cover high raw material and
energy costs.
Cost per ton increased $97 in the first quarter compared with the same
quarter of 2004. The increase was primarily due to:
- a rise in raw material and energy costs, particularly scrap, coal,
coke, iron ore, natural gas, reagents, and fluxes;
- higher employment costs, particularly pensions and health care
expenses;
- higher spending for materials, repairs and maintenance and supplies
due in part to a planned blast furnace maintenance outage at Stelco
Lake Erie in March; and
- reduced semi-finished steel production at Stelco Hamilton due to
reduced output at the blast furnace operations.
The foregoing cost increases were partially offset by the impact of a
strengthening Canadian dollar on U.S. dollar denominated purchases.
Equipment issues
The Stelco Lake Erie hot strip mill rougher motors are scheduled for
replacement in November 2005. A motor failure was experienced in 2002 and the
motor was repaired. Although a similar failure is possible, the equipment is
being monitored regularly and there are no signs of deterioration.
Furthermore, the Corporation has invested in spare components for the rougher
motor. If a failure were to occur, the maximum outage required to change the
components is estimated to be 72 hours.
Facilities/competitiveness
The Stelco Hamilton plant is not competitive as measured by cost per ton
of hot rolled steel with either reorganized U.S. integrated mills, Canadian
integrated mills, or U.S. mini-mills. The Stelco Hamilton 56-inch mill is
uncompetitive as a result of its high conversion cost and its width, coil
weight, and quality limitations. The historic competitive advantages of the
Stelco Lake Erie plant in hot rolled cost per ton have been reduced because of
the cost savings achieved by reorganized U.S. integrated steel mills and the
appreciation of the Canadian dollar. Work is currently progressing on the
Phase II upgrade of the Stelco Lake Erie hot strip mill in order to meet
shutdowns to install components in November this year and June 2006. Following
completion of the Phase II upgrade of the Stelco Lake Erie hot strip mill the
56-inch mill will be closed. Two pickle lines operate in Hamilton to supply
the cold rolling and coating operations. In addition, approximately 270,000
tons per year of Stelco Hamilton's steel requirements are pickled externally.
The Hamilton pickle lines have significant operational issues related to
reliability, conversion cost, and product quality. The cost of external
pickling, however, is relatively expensive. Ultimately, Stelco will need to
replace the Hamilton pickle lines or outsource all pickling. A new pickle line
is included as part of the Corporation's strategic capital requirements. The
Stelco Hamilton rod mill ceased operations on September 23, 2004. Options
involving the sale of the rod mill's property, plant, and equipment are
currently under review.
Stelco continues to benefit from a strong raw materials base through its
ownership interests in iron ore mining properties and related supply
agreements. As a result, approximately 90% of Stelco's iron ore requirements
are obtained at its production cost. Stelco also produces approximately 85% of
its own coke, another positive factor. Stelco purchases coal at market prices,
and has secured 100% of its 2005 requirements under purchase contracts.
An agreement for the purchase and sale of the Stelco Hamilton plate mill
assets was signed in February 2005, but to date efforts to complete the
transaction have been unsuccessful. Efforts to complete a sale of the plate
mill assets are continuing.
The Stelco Hamilton 4-stand cold mill established a quarterly production
record.
Labour Matters
The Stelco Lake Erie labour contract with Local 8782 of the USWA expired
on July 31, 2004. The local union and the Corporation have agreed to provide
90 days notice prior to the commencement of a strike or lockout. Negotiations
continue between Stelco and Local 8782.
There can be no assurance that labour difficulties at any of the
Corporation's business units will not result in a significant loss of
production and revenue and have a material adverse effect on the business,
financial condition, results of operations of the Corporation, or the ability
of the Corporation to restructure.
Trade
On March 21, 2005 the U.S. Department of Commerce announced the final
dumping margins in its 10th annual administrative review of imports of
galvanized steel sheet from Canada. Stelco's margin was 0.02% which is 'de
minimis' and means shipments to the U.S. for the next year will not require a
duty deposit.
Mini-mill segment
The Mini-mill segment of the Corporation includes Norambar and AltaSteel
located in Contrecoeur, Quebec, and Edmonton, Alberta, respectively. These
wholly owned subsidiaries comprise electric arc steelmaking, billet casting,
and bar rolling facilities, and have combined annual steelmaking capacity of
approximately 1,000,000 tons. This segment also includes the mini-mills'
respective metal recyclers, wholly-owned Fers et MDetaux RecyclDes LtDee and
50%-owned GenAlta Recycling Inc. The primary markets served by this segment
are automotive, construction, oil and gas, mining, manufacturing, and steel
service centres.
The Corporation's strategic review concluded that Norambar and AltaSteel
are not core to the Corporation's operations and as a result may not form part
of the Corporation's post-restructuring business. The Corporation initiated a
sales process in respect of these business units, which was approved by the
Court on October 19, 2004, and is currently reviewing offers.
Mini-mill
Three months ended March 31
Favourable
($ in millions, except as (Unfavour-
indicated(x))(unaudited) 2005 2004 able)
-------------------------------------------------------------------------
Net sales $ 128 $ 105 $ 23
Costs 117 96 (21)
Amortization of property, plant,
and equipment 2 2 -
-------------------------------------------------------------------------
Operating earnings $ 9 $ 7 $ 2
-------------------------------------------------------------------------
Shipments (thousands of net tons) 215 205 10
Average revenue per ton (x)$595 (x)$512 (x)$83
Cost per ton (x)$544 (x)$468 (x)$(76)
Semi-finished steel production
(thousands of net tons) 236 233 3
-------------------------------------------------------------------------
Net Sales, Costs and Production
Net sales for the Mini-mill segment in first quarter 2005 were
$128 million compared with $105 million in first quarter 2004. Shipments of
215,000 tons in the quarter were 10,000 tons higher that the same quarter of
2004. Average revenue per ton increased to $595 in first quarter 2005 from
$512 per ton in the same quarter of 2004. The increase in sales revenue in
first quarter 2005 was primarily due to:
- improved market demand, which had the effect of raising prices; and
- selling price surcharges implemented to cover high raw material and
energy costs.
Cost per ton increased $76 in the first quarter compared with the same
quarter of 2004. The increase was primarily due to:
- a rise in raw material costs, particularly scrap, fluxes, and
reagents; and
- higher spending for repairs and maintenance and supplies at Norambar.
The Corporation expects that pricing will be lower at Norambar for the
balance of 2005 due to high inventory levels at reinforcing bar ("rebar")
fabricators, the availability of low priced billets and rebar from offshore,
anticipated softening of some prices, and the sustained strength of the
Canadian dollar. Marketplace demand for AltaSteel's products continues to be
strong particularly in the mining sector, which is being driven by high metal
prices.
Over 50% of AltaSteel's production is shipped to customers in the mining
sector, which is subject to cyclical fluctuations.
The scrap market is expected to be stable in the foreseeable future.
Facilities
The bar mill facility at AltaSteel established a quarterly production
record.
On March 29, 2005 AltaSteel announced a $16 million capital project for
the purchase and installation of replacement roughing mill equipment as part
of the continuing upgrade of its Bar Mill operations. The equipment will be
ready for operation in 2006 and adds up to 40,000 tons a year of finished bar
product to the mill's capacity.
Labour matters
The collective bargaining agreement between USWA Local 5220 and AltaSteel
expired on July 31, 2004. On October 8, 2004, the unionized employees at
AltaSteel voted in favour of authorizing their negotiating committee to call a
strike. Under Alberta legislation, 72-hours notice is required before a strike
or lockout can be called. To date, no such notice has been given.
At Norambar a new USWA salaried employees bargaining unit was certified
by the Quebec Ministry of Labour on March 9, 2005. A contract has not yet been
negotiated.
Trade
Imports of rebar from China have become a major concern for both
AltaSteel and Norambar. China now has a surplus of rebar capacity and imports
into Canada from China in the first quarter of the year comprised over 30% of
all imports. More importantly, the value for duty was some 25% below that of
comparable product sourced from the U.S. Both businesses are assessing the
various remedies to such unfair trade with other North American rebar
producers.
Manufactured Products segment
The Manufactured Products segment of the Corporation includes business
units, both wholly and partially owned, involved in the manufacturing of steel
products. Products manufactured by units in this segment include a wide
variety of wire and wire products, small- and large-diameter pipe and tubular
products, and grinding balls.
The Corporation's strategic review concluded that Stelwire, Stelpipe,
Stelfil and the Corporation's 40% interest in Camrose Pipe were not core to
the Corporation's operations and as a result may not form part of the
Corporation's post-restructuring business. The Corporation initiated a sales
process in respect of these business units which was approved by the Court on
October 19, 2004, and is currently reviewing offers.
On March 30, 2005 the Court approved the sale of the Corporation's 40%
partnership interest in Camrose Pipe to Canadian National Steel Corporation.
Proceeds on the sale of $22.5 million were held in escrow pending expiry of
the appeal period applicable to the approval order. The appeal period expired
on April 20, 2005 without objection thus permitting completion of the sale in
second quarter 2005. Accordingly, the assets and liabilities of the
Corporation's 40% partnership interest in Camrose Pipe are accounted for as
assets held for sale and disclosed separately in the Consolidated Statement of
Financial position. In addition, the accounting criteria have been met for
discontinued operations. Therefore, the Consolidated Financial Statements have
been retroactively restated to separately disclose partnership earnings and
cash flows as part of discontinued operations.
Manufactured Products
Three months ended March 31
Favourable
($ in millions, except as (Unfavour-
indicated(x))(unaudited) 2005 2004 able)
-------------------------------------------------------------------------
Net sales $ 123 $ 110 $ 13
Costs 125 106 (19)
Amortization of property, plant,
and equipment - 1 1
-------------------------------------------------------------------------
Operating earnings (loss) $ (2) $ 3 $ (5)
-------------------------------------------------------------------------
Shipments (thousands of net tons) 98 122 (24)
Average revenue per ton (x)$1,255 (x)$902 (x)$353
Cost per ton (x)$1,276 (x)$869 (x)$(407)
-------------------------------------------------------------------------
Operating losses were $2 million for this segment during first quarter
2005 compared with Operating earnings of $3 million for first quarter 2004.
The $5 million change compared to the same quarter 2004 was primarily due to
increased raw material costs.
Net Sales and Costs
The Manufactured Products segment had net sales of $123 million in first
quarter 2005 compared with $110 million in first quarter 2004. This increase
was primarily due to selling price increases, which helped to cover high input
costs. This was partially offset by lower shipments when comparing first
quarter 2005 to first quarter 2004.
Cost per ton increased $407, or 47% in first quarter 2005 to $1,276 when
compared to first quarter 2004 cost per ton of $869 mainly due to the
increased cost of hot roll and rod, as raw materials.
Near term demand for wire and wire products is weakening due to the high
Canadian dollar and the return of imports into the domestic market. The demand
for automotive and specialty tubing remains strong. However, the demand for
construction tubing is soft.
Facilities
In March 2005, the property and plant of Welland Pipe were listed for
sale with an asking price of $4 million. The net book value of these assets is
immaterial.
A purchase and sale agreement was signed for Welland Pipe's U and O pipe
mill in April 2005 and was subsequently approved by the Court on May 4, 2005.
Further details are provided under Creditor Protection and Restructuring -
Idled or Closed Facilities.
Labour Matters
The collective agreement at Stelpipe that was due to expire on
September 30, 2004 was extended on August 18, 2004 for a period of three
months and is subject to automatic 30 day renewal periods unless either party
provides notice to terminate. To date, no termination notice has been provided
by either party and operations are continuing.
The Stelwire Parkdale labour contract with USWA Local 5328 expires on
July 31, 2005.
Trade
On January 20, 2005 the President of the Canada Border Services Agency
concluded that imports of carbon steel welded pipe from South Korea would
likely be dumped if an anti-dumping finding were rescinded. As a result, the
Canadian International Trade Tribunal has conducted an investigation into the
likelihood of resumed injury to the domestic industry including Stelpipe.
Stelpipe participated in an April 12-13 hearing in Ottawa and a ruling is
expected by June 3, 2005.
Risks and Uncertainties
Primary Risk
Creditor Protection and Restructuring
The Corporation has been granted creditor protection under the CCAA. The
Corporation is examining recapitalization options for the Corporation. The
sale of non-core assets is underway. Some recent softening has occurred in the
capital markets and there is also a risk that the sale of non-core assets will
not be successful. There is a risk that failure to implement a Plan and obtain
sufficient exit financing within the time granted by the Court will result in
substantially all debt obligations being due and payable immediately, or
subject to immediate acceleration. The Corporation does not currently have the
financial resources to fund such an event.
Uncertainty and risk remains as to the value of existing common shares
upon implementation of a restructuring plan.
Other Risks and Uncertainties
Labour Matters
The Stelco Lake Erie labour contract with Local 8782 of the USWA expired
on July 31, 2004. The local union and the Corporation have agreed to provide
90 days notice prior to the commencement of a strike or lockout. Negotiations
continue between Stelco and Local 8782.
The collective bargaining agreement between USWA Local 5220 and AltaSteel
expired on July 31, 2004. On October 8, 2004, the unionized employees at
AltaSteel voted in favour of authorizing their negotiating committee to call a
strike. Under Alberta legislation, 72-hours notice is required before a strike
or lockout can be called. To date, no such notice has been given.
The collective agreement at Stelpipe that was due to expire on September
30, 2004 was extended on August 18, 2004 for a period of three months and is
subject to automatic 30-day renewal periods unless either party provides
notice to terminate. To date, no termination notice has been provided by
either party and operations are continuing.
At Norambar a new USWA salaried employees bargaining unit was certified
by the Quebec Ministry of Labour on March 9, 2005. A contract has not yet been
negotiated.
The Stelwire Parkdale labour contract with the USWA Local 5328 expires on
July 31, 2005.
There can be no assurance that labour difficulties at any of the
Corporation's business units will not result in a significant loss of
production and revenue and have a material adverse effect on the business,
financial condition, results of operations of the Corporation, or the ability
of the Corporation to restructure.
Pension Matters
There can be no assurance that the loss of the exemption under Section
5.1 of the Regulation under the Pension Benefit Act (Ontario) will not have a
material adverse effect on the business, the financial condition, results of
operations of the Corporation or the Corporation's ability to restructure. The
Corporation does not believe it will have the financial resources to fund
solvency deficiency payments in the normal manner (see Creditor Protection and
Restructuring - Pension Plans).
Pricing
While selling prices remain high by historical standards and are expected
to remain high in the near future, the Corporation cannot rely on these
selling prices being sustainable in the longer term and believes it cannot
compete effectively in the longer term unless it takes steps to lower its
overall costs.
Environmental matters
The Corporation's group of businesses is subject to substantial and
evolving environmental laws and regulations concerned with, among other
things, emissions into the air, discharges to water, noise control, and the
generation, handling, storage, transportation, and disposal of toxic and
hazardous substances. These laws and regulations vary depending on the
location of the facility and can fall within federal, provincial, or municipal
jurisdictions.
Stelco's Corporate Health, Safety and Environment Department regularly
reviews and audits the operating practices of each business to monitor
compliance with the Corporation's health and safety, environmental policies
and legal requirements. The Corporation believes that future costs relating to
environmental compliance will not have a material adverse effect on the
Corporation's financial position. There is always the possibility, however,
that unforeseen changes, such as new laws or enforcement policies or
operations, or amendments to existing laws, policies or operations could
result in material adverse costs.
Plant Operations
The Corporation is heavily dependent upon the continuous operation of its
plants and equipment. There can be no assurance that unplanned down time at
any of the Corporation's facilities will not have a material adverse effect on
the Corporation.
Technology
Expenditures in 2005 are expected to include replacement of the Stelco
Lake Erie hot strip mill rougher motors.
A successful Capital Raising Process will ensure that the Corporation is
able to move ahead with identified strategic capital projects: the completion
of the Stelco Lake Erie hot strip mill upgrade; a new pickle line at Stelco
Hamilton; and co-generation facilities at both Hamilton and Lake Erie.
Stelco's Strategic Plan requires continual improvement in both product
and process technologies in order to maintain our competitive position in the
high value-added automotive market. In particular, failure to meet the
automotive industry's ever-more demanding requirements for product quality and
service, and failure to provide the new grades of advanced high-strength
steels will seriously jeopardize Stelco's long-term participation in this
market. Similarly, for Stelco to maintain a competitive cost structure will
require the ongoing selective implementation of new process technologies
throughout the Integrated Steelmaking processes. There is no assurance that
Stelco will be able to improve its product and process technologies in
accordance with its strategic plan or that the improvements, once implemented,
will meet the automotive market's quality and service requirements.
Enterprise Resource Planning System ("ERP")
Implementation of the first phase of the order flow ERP system, which
will reduce the Corporation's dependence on aging legacy systems, was
estimated to occur in the second quarter of 2005. This timeframe will not be
met and a revised date has not yet been established. In the meantime, the
legacy systems remain available for these applications.
Liquidity and Capital Resources
As described in Notes 1 and 7 to the Consolidated Financial Statements,
pursuant to the CCAA Court Order, the Applicants ceased making principal and
interest payments on long-term debt subject to compromise and on prepetition
accounts payable subject to compromise. As a result, liquidity and cash flow
are not directly comparable to periods before the Corporation entered into
CCAA.
With the CCAA filing, the liquidity and capital resources of the
Corporation will be determined by the outcome of the restructuring process and
a number of other factors, including without limitation, market and economic
conditions and the impact of these conditions on the price of steel products,
raw material costs, the ability to raise capital to fund critical capital
projects, pension issues, and labour negotiations or disputes.
The Corporation's liquidity and capital resources position is summarized
as follows:
As at
As at March 31 Dec 31
(in millions) 2005(x) 2004(x) 2004(x)
-------------------------------------------------------------------------
Cash, cash equivalents and
restricted cash $ 49 $ 76 $ 43
Available lines of credit(a) 454 464 456
Lines of Credit drawn down 157 301 215
-------------------------------------------------------------------------
Net liquidity $ 346 $ 239 $ 284
-------------------------------------------------------------------------
(a) After letters of credit usage and including a $75 million DIP Credit
Agreement
(x) Excluding amounts related to Camrose Pipe
The Applicants' liquidity and capital resources position (included in the
above consolidated amounts) is summarized as follows:
As at
As at March 31 Dec 31
(in millions) 2005 2004 2004
-------------------------------------------------------------------------
Cash, cash equivalents and restricted
cash $ 28 $ 55 $ 24
Available lines of credit(a) 397 412 400
Lines of Credit drawn down 128 271 187
-------------------------------------------------------------------------
Net liquidity $ 297 $ 196 $ 237
-------------------------------------------------------------------------
(a) After letters of credit usage and including a $75 million DIP Credit
Agreement
This graph reflects the quarterly net cash deficiency (cash, cash
equivalents, and restricted cash less lines of credit drawn down) of the
Corporation and the Applicants.
To view the graph now please refer to the following:
media.corporate-ir.net/media_files/tor/ste.to/news/StelcoNetCash0505.pdf
For further details, refer to the Consolidated Statement of Cash Flows.
Information regarding the cash flows of the Applicants is contained in Note 8
to the Consolidated Financial Statements.
As a result of the CCAA proceedings, no payments are being made on the
Applicants' unsecured debt and other liabilities as disclosed in Note 7 to the
Consolidated Financial Statements. To date, the Corporation is servicing all
charges under its credit facilities.
Net Cash Flow
Three months ended March 31
Favourable
(in millions) (Unfavour-
Cash provided by (used for) 2005 2004 able)
-------------------------------------------------------------------------
Net earnings from continuing operations
adjusted for items not affecting cash $ 130 $ 49 $ 81
Charges in operating elements of working
capital (38) (30) (8)
Directors and Officers in trust - (10) 10
Expenditure for capital assets (19) (13) (6)
Reduction of long-term debt (Note 12) (7) (23) 16
Other - net (1) (4) 3
-------------------------------------------------------------------------
Change in net cash position $ 65 $ (31) $ 96
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating Activities
Net cash of $65 million was generated during first quarter 2005
representing a $96 million improvement from the $31 million consumed in first
quarter 2004. The strength of operating earnings, driven by high selling
prices, accounted for the majority of the improvement ($81 million) in the net
earnings from continuing operations adjusted for items not affecting cash.
Working capital represented a significant component of operating cash
flows during both first quarter 2005 and 2004 as identified below:
Three months ended March 31
Favourable
(in millions) (Unfavour-
Cash provided by (used for) 2005 2004 able)
-------------------------------------------------------------------------
Accounts receivable $ (100) $ (101) $ 1
Inventories 50 25 25
Accounts payable and accrued (2) 56 (58)
Other 14 (10) 24
-------------------------------------------------------------------------
Total $ (38) $ (30) $ (8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts Receivable
Shipments during the latter half of first quarter 2005 were stronger than
those in the latter half of fourth quarter 2004 resulting in $100 million of
cash required to finance an increase in accounts receivable.
During first quarter 2004, $101 million was required to finance an
increase in accounts receivable due to stronger shipments and pricing in the
latter half of first quarter 2004 compared to the latter half of fourth
quarter 2003.
Inventories
Cash provided by inventories during first quarter 2005 was $50 million.
The most significant source of cash was from the seasonal reduction of
stockpiled coal, coke, and ore that was consumed while the shipping season was
closed. Partially offsetting this was an increase in steel inventories mainly
due to continued high input costs.
First quarter 2004 provided $25 million from inventories. The seasonal
drawdown of stockpiled raw material inventories accounted for much of the
benefit partially offset by an increase in steel inventories due to higher
costs for raw material inputs.
Accounts Payable and Accrued
An increase in accounts payable provided $56 million of cash during first
quarter 2004. The staying of pre-filing trade payables and both pre- and post-
filing interest under the Initial Order provided significant relief to the
Applicants. Partially offsetting this increase was the erosion of credit terms
following the CCAA filing as the majority of suppliers required either cash or
prepayment terms.
Other
$14 million of cash was provided during first quarter 2005 relating
primarily to an increase in income taxes payable as the Corporation has
utilized a majority of its loss carry-forwards and is now taxable in several
jurisdictions on a company by company basis. The current 2005 income tax
liability exceeds required tax installments which are based on the previous
year's estimated income tax liability. The anticipated 2005 income tax
liability will be paid by the end of February 2006.
First quarter 2004 consumed $10 million, much of which pertained to
financing prepaids as many suppliers switched the Company to prepayment terms
in reaction to the CCAA filing and staying of pre-filing trade payables.
Investing Activities
Capital expenditures during first quarter 2005 were $19 million. Spending
was largely directed towards the Stelco Lake Erie hot strip mill upgrade, the
ERP systems and projects at the Company's mining-related interests. First
quarter 2004 capital spending was $13 million attributable mainly to projects
at the various mining interests of the Corporation, completion of the new
Baycoat processing line and the Corporation's ERP systems.
As a result of filing for CCAA, a $10 million contribution to an in-trust
account was made in January 2004 to indemnify the directors and officers of
the Stelco group of companies against claims and liabilities that may arise as
a result of their association with the Stelco group of companies.
Financing activities
Reduction of long-term debt, excluding the $16 million refinancing of
long-term debt with an operating credit facility at Norambar (first quarter
2004), was $7 million in the first quarter of 2005 and 2004 and represents
regularly scheduled repayments of non-Applicant borrowings. The quarterly
installment on the term loan associated with Hamilton plate mill was not made
in first quarter 2004, therefore this debt is in default (see Note 12 to the
Consolidated Financial Statements).
Off-Balance Sheet Arrangements
Other than operating lease obligations, the Corporation had no off-balane
sheet arrangements as at March 31, 2005 or 2004 or December 31, 2004.
Critical Accounting Assumptions and Estimates
The Company's critical accounting assumptions and estimates are described
in the Annual MD&A. The Corporation's Consolidated Financial Statements are
prepared in accordance with Canadian GAAP.
The preparation of these Consolidated Financial Statements requires the
Corporation to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses. Management reviews accounting
assumptions and estimates regularly in light of past experience and current
conditions or changes in Canadian GAAP, and utilizes outside consultants as
necessary to arrive at appropriate assumptions and estimates to be used in the
preparation of Consolidated Financial Statements. During the first three
months of 2005 there were no significant changes in the Corporation's critical
accounting assumptions and estimates.
Changes in Accounting Policy
Financial Instruments
Effective January 1, 2005, the Corporation adopted a change in accounting
policy to conform with amendments to the CICA Handbook Section 3860 -
Financial Instruments - disclosure and presentation. The amendments modify the
presentation and accounting of financial instruments where there is an option
of satisfying the obligation and/or interest payments with the issuance of an
entity's own shares. Such instruments are no longer presented and accounted
for as a component of Shareholders' Equity on the Consolidated Statement of
Financial Position but rather as Long-term Debt. Interest and accretion, net
of tax, applicable to these instruments are no longer charged directly to
retained deficit and are now accounted for separately as interest and tax
expense on the Statement of Earnings (Loss). The amendment applies to the
Corporation's $90 million convertible debentures and has been adopted
retroactively resulting in a restatement of prior periods. Interest expense of
$1 million relating to accretion of the convertible debentures prior to filing
for CCAA has been recorded in the Statement of Earnings (Loss) for first
quarter 2004 offset by a corresponding adjustment to retained deficit. The
presentation and accounting for the convertible debentures that was triggered
by the CCAA filing (see Note 12 to the Consolidated Financial Statements) is
consistent with the amendment and therefore will not result in any additional
adjustments in 2005. There was no impact to the basic or diluted earnings per
share for the prior periods as a result of adopting this change retroactively.
Outlook
Stelco anticipates a good year in 2005. The Corporation achieved the
highest first quarter net earnings and its highest-ever operating earnings in
its history. Although no longer at historical highs, steel prices in the
current range are a positive factor. Spot prices are subject to change in
either direction. Should spot prices decline, the contract customer base,
projected to represent 53% of revenue from the Integrated Steel business for
2005, provides Stelco with significant stability.
Stelco continues to benefit from a strong raw materials base through its
ownership interests in iron ore mining properties and related supply
agreements. As a result, approximately 90% of Stelco's iron ore requirements
are obtained at its production cost. Stelco also produces approximately 85% of
its own coke, another positive factor. Stelco purchases coal at market prices,
and has secured 100% of its 2005 requirements under purchase contracts.
The Company's four point strategy adopted in 2004 calls for significant
capital expenditures over the next three years. The completion of the
upgrading of the hot strip mill at Stelco Lake Erie will provide Stelco's
Integrated Steel business with a focused single-stream product flow through a
modernized, competitive asset base. The replacement of outdated pickle lines
at Stelco Hamilton and the construction of cogeneration facilities at Hamilton
and Lake Erie will provide financial and environmental benefits to the
Company. These capital expenditures are estimated to reduce costs by
$138 million per year when fully operational. As well, the Company has
initiated a maintenance excellence program which is expected to deliver
substantial operating cost savings within the next two years.
It is important to look at these strengths in the context of a dynamic,
competitive industry. While selling prices remain relatively high, customer
inventories have softened demand in the first quarter of 2005. Customer
inventory levels remain high at the end of first quarter 2005 and production
cuts planned during the second quarter by some customers in the automotive
sector contributing to softness in the market in the second quarter. While
spot pricing remains under pressure, lower levels of offshore imports into
North America, partially due to higher ocean freight rates, and the eventual
reduction of customer inventory levels may assist in stabilizing market
pricing and demand for the balance of 2005. The Corporation faces other risks,
including the rejection of a Plan by affected creditors or the Court,
softening capital markets which are critical to the Corporation's exit from
CCAA, a labour disruption, the pension solvency funding requirements and the
related requirements of the Province, growing imports or any loss of the
protection of the stay of proceedings prior to the acceptance of a Plan.
Additional Information
Additional information concerning Stelco, including the Corporation's
2004 Annual Information Form (AIF), may be viewed on the System for Electronic
Document Analysis and Retrieval (SEDAR) at www.sedar.com, and at Stelco's Web
site www.stelco.com.
HAMILTON, ONTARIO
May 10, 2005
Courtney Pratt William E. Vaughan
President and Chief Executive Officer Senior Vice President - Finance
and Chief Financial Officer
CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
(Under Creditor Protection as of January 29, 2004 - Note 1)
Three months ended March 31 Restated
(Notes 3
(in millions - except per share amounts) and 9)
(unaudited) 2005 2004
-------------------------------------------------------------------------
Net sales $ 968 $ 769
Costs 821 735
-------------------------------------------------------------------------
147 34
Amortization of property, plant, and equipment 28 31
Amortization of intangible assets 1 -
-------------------------------------------------------------------------
Operating earnings 118 3
Reorganization items (Note 4) (21) (23)
-------------------------------------------------------------------------
97 (20)
-------------------------------------------------------------------------
Financial expense
Interest on long-term debt and debt subject
to compromise (10) (12)
Other interest - net (4) (5)
-------------------------------------------------------------------------
Earnings (loss) before income taxes from
continuing operations 83 (37)
Income tax expense (recovery) (Note 10)
Current 20 1
Future 6 (8)
Future income tax asset valuation allowance 9 6
-------------------------------------------------------------------------
Net earnings (loss) from continuing operations 48 (36)
Net earnings (loss) from discontinued operations
(Note 9) 1 (1)
-------------------------------------------------------------------------
Net earnings (loss) $ 49 $ (37)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per common share (Note 17)
Basic
Continuing operations $ 0.47 $ (0.35)
Net earnings (loss) $ 0.48 $ (0.36)
Fully Diluted
Continuing operations $ 0.40 $ (0.35)
Net earnings (loss) $ 0.41 $ (0.36)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average common shares outstanding -
millions 102.2 102.2
See Notes to Consolidated Financial Statements
OPERATIONS (thousands of net tons) (Unaudited)
Production of semi-finished steel 1,256 1,366
Shipments 1,200 1,266
CONSOLIDATED STATEMENT OF RETAINED DEFICIT
(Under Creditor Protection as of January 29,
2004 - Note 1)
Restated
Three months ended March 31 (in millions) (Note 3)
(unaudited) 2005 2004
-------------------------------------------------------------------------
Balance at beginning of year $ (388) $ (452)
Net earnings (loss) 49 (37)
-------------------------------------------------------------------------
Balance at end of period $ (339) $ (489)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Under Creditor Protection as of January 29, 2004 - Note 1)
At
At March 31 December 31
(in millions) (unaudited) 2005 2004 2004
-------------------------------------------------------------------------
Current assets
Cash and cash equivalents $ 38 $ 78 $ 32
Restricted cash (Note 6) 11 - 11
Accounts receivable 569 480 470
Inventories 785 552 844
Prepaid expenses 43 38 38
Future income taxes 14 - 15
Assets held for sale (Note 9) 52 - -
-------------------------------------------------------------------------
1,512 1,148 1,410
-------------------------------------------------------------------------
Current liabilities
Current liabilities not subject
to compromise
Bank and other short-term
indebtedness (Note 11) 157 301 216
Accounts payable and accrued 283 213 283
Employee future benefits 62 49 62
Income and other taxes 29 17 10
Long-term debt due within one year
(Note 12) 45 44 44
Liabilities held for sale (Note 9) 34 - -
-------------------------------------------------------------------------
610 624 615
-------------------------------------------------------------------------
Working capital 902 524 795
-------------------------------------------------------------------------
Other assets
Property, plant, and equipment 987 1,070 999
Intangible assets 68 64 66
Deferred pension cost 191 253 213
Future income taxes 4 2 6
Assets held for sale (Note 9) - 3 -
Other 22 27 24
-------------------------------------------------------------------------
1,272 1,419 1,308
-------------------------------------------------------------------------
Total investment 2,174 1,943 2,103
-------------------------------------------------------------------------
Other liabilities
Other liabilities not subject to
compromise
Employee future benefits 918 888 907
Long-term debt (Note 12) 41 59 49
Future income taxes 133 77 120
Asset retirement obligations 13 11 12
-------------------------------------------------------------------------
1,105 1,035 1,088
-------------------------------------------------------------------------
Liabilities subject to compromise
(Note 7) 588 578 583
-------------------------------------------------------------------------
Shareholders' equity $ 481 $ 330 $ 432
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Derived from:
Convertible debentures conversion
option (Note 12) $ 23 $ 23 $ 23
Capital stock (Note 14) 781 781 781
Contributed surplus 16 15 16
Retained deficit (339) (489) (388)
-------------------------------------------------------------------------
$ 481 $ 330 $ 432
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingencies (Notes 7 and 13)
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
(Under Creditor Protection as of January 29, 2004 - Note 1)
CASH PROVIDED BY (USED FOR)
Restated
(Notes 3
Three months ended March 31 (in millions) and 9)
(unaudited) 2005 2004
-------------------------------------------------------------------------
Operating activities
Net earnings (loss) from continuing operations $ 48 $ (36)
Adjustments for items not affecting cash
Reorganization items (Note 4) - 17
Amortization of property, plant, and equipment 28 31
Amortization of intangible assets 1 -
Future income taxes 6 (7)
Future income tax asset valuation allowance 9 6
Employee pension and other future benefits 37 38
Other 1 -
-------------------------------------------------------------------------
130 49
Changes in operating elements of working capital
(see below) (38) (30)
Other - net - (3)
Discontinued operations (Note 9) (7) (1)
-------------------------------------------------------------------------
85 15
-------------------------------------------------------------------------
Investing activities
Directors' and officers' trust (Note 1) - (10)
Expenditures for capital assets (19) (13)
Discontinued operations (Note 9) (1) -
-------------------------------------------------------------------------
(20) (23)
-------------------------------------------------------------------------
Financing activities
Increase (decrease) in bank indebtedness (59) 86
Reduction of long-term debt (Note 12) (7) (23)
Discontinued operations (Note 9) 7 -
-------------------------------------------------------------------------
(59) 63
-------------------------------------------------------------------------
Cash, cash equivalents and restricted cash
Net increase 6 55
Balance at beginning of period 43 23
-------------------------------------------------------------------------
Balance at end of period $ 49 $ 78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consists of:
Cash and cash equivalents $ 38 $ 78
Restricted cash (Note 6) 11 -
-------------------------------------------------------------------------
$ 49 $ 78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes in operating elements of working capital
Accounts receivable $ (100) $ (101)
Inventories 50 25
Prepaid expenses (5) (15)
Accounts payable and accrued (2) 56
Income and other taxes 19 5
-------------------------------------------------------------------------
$ (38) $ (30)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. CREDITOR PROTECTION AND RESTRUCTURING
On January 29, 2004 (the "Filing Date"), Stelco obtained an order
(the "Initial Order") from the Ontario Superior Court of Justice (the
"Court") granting it creditor protection under the Companies'
Creditors Arrangement Act (the "CCAA"). The Initial Order may be
amended throughout the CCAA proceedings on motions from Stelco, its
creditors, and other interested stakeholders. On the same date,
Stelco made a concurrent petition for recognition of the Initial
Order and ancillary relief under Section 304 of the U.S. Bankruptcy
Code. The Canadian proceedings include Stelco and its wholly owned
subsidiaries, Stelwire Ltd. ("Stelwire"), Stelpipe Ltd. ("Stelpipe"),
CHT Steel Company Inc. ("CHT Steel"), and Welland Pipe Ltd. ("Welland
Pipe"), which are collectively referred to as the "Applicants". The
U.S. proceedings include Stelco, Stelwire, and Stelpipe. Welland Pipe
was closed on March 7, 2003 (see Note 9). The Corporation's other
subsidiaries and joint ventures are not included in the proceedings.
During the stay period, the Applicants are authorized to continue
operations. Ernst & Young Inc. was appointed by the Court as monitor
(the "Monitor") in the Canadian proceedings and has been reporting to
the Court from time to time on the Applicants' cash flow and other
developments during the proceedings.
The Initial Order and the U.S. proceedings provided for an initial
stay period of 30 days, which has subsequently been extended to
July 8, 2005, and potentially to such later dates as the Court may
order. The purpose of the Initial Order and stay of proceedings is to
provide the Applicants with relief designed to stabilize their
operations and business relationships with their customers,
suppliers, employees, and creditors.
During the proceedings, the Corporation has sought and will continue
to seek input from its stakeholders, with a view to developing a
comprehensive restructuring plan to allow the Corporation to exit
CCAA in an orderly fashion. The restructuring plan will likely
include reorganizing the Corporation's capital structure. As part of
the restructuring plan, it is expected that a formal CCAA plan of
arrangement (the "Plan") will be prepared and submitted to affected
creditors, who will vote on the Plan, and to the Court for approval.
Under the Plan, claims against the Applicants will be divided into
classes, and each class will vote on the Plan as it pertains to that
class. No determinations or rulings have been made to date as to the
classification of affected creditors.
The CCAA proceedings have triggered defaults under substantially all
debt obligations of the Applicants (see Notes 7 and 12). The Initial
Order generally stays actions against the Applicants including steps
to collect indebtedness incurred by the Applicants prior to the
Filing Date and actions to exercise control over the Applicants'
property. The Initial Order grants the Applicants the authority to
pay outstanding and future wages, salaries, employee pension
contributions and benefit payments, and other obligations to
employees; the costs of goods and services, both operating and of a
capital nature, provided or supplied after the date of the Initial
Order; rent under existing arrangements payable after the date of the
filing; and principal, interest, and other payments to holders of
security in respect of the property of the Applicants if the amount
secured by such security is, in the reasonable opinion of the
applicable Applicant, with the concurrence of the Monitor, less than
or equal to the fair value of such security, having regard to, among
other things, the priority of such security.
The Corporation may apply to the Court to extend the stay period
beyond July 8, 2005, in the event further time is required to consult
with stakeholders and develop the Plan. Should the stay period and
any subsequent extensions, if granted, not be sufficient to develop
and present its Plan, or should the Plan not be accepted by the
affected creditors or the Court, or if the Applicants otherwise lose
the protection of the stay of proceedings, substantially all debt
obligations will then be due and payable immediately, or subject to
immediate acceleration. The Corporation does not currently have the
financial resources to fund such an event.
On January 27, 2004, to indemnify the directors and officers of the
Stelco Group against claims and liabilities that may arise as a
result of their association with the Stelco Group, the Corporation
transferred $10 million to an in-trust account. The amount has been
excluded from Cash and cash equivalents and is included in Other
assets on the Consolidated Statement of Financial Position.
An administrative charge was created as a first priority lien to the
extent of $5 million on the Applicants' assets pursuant to the
Initial CCAA order. This is intended to secure the payment of the
fees and disbursements for the Monitor, the Chief Restructuring
Officer, counsel to the Monitor, independent counsel to the Board of
Directors of Stelco, and the Applicants' legal counsel.
Contributing factors
In early 2004, after a thorough financial and strategy review, Stelco
concluded that it faced a serious viability issue. The Corporation
incurred significant operating and cash losses in 2003 and believed
that it would have exhausted available sources of liquidity before
the end of 2004 if it did not obtain legal protection and other
benefits provided by a Court-supervised restructuring process.
Costs had risen dramatically for inputs such as natural gas,
electricity and raw materials, such as coal, coke, and scrap. The
cost of employee future benefits - pensions and health care - were
also increasing due to improved pension benefits negotiated in
contracts with unionized employees, increasing health care costs,
lower returns on pension plan assets, lower average retirement age at
Stelco Hamilton, and the effect of lower interest rates on the
discount factors used to determine the Corporation's liabilities
under the pension and other benefit plans.
In 2003, global steel making overcapacity exerted downward pressure
on selling prices due to significant and continued import penetration
of the Canadian market by steel products offered, in management's
opinion, at unfairly low prices over the last several years. The
appreciation in the value of the Canadian dollar during 2003 further
negatively affected selling prices. Selling prices strengthened
significantly during 2004, due in part to increased demand,
particularly in China. While selling prices remain high by historical
standards and are expected to remain high in the near future, the
Corporation cannot rely on these selling prices being sustainable in
the longer term and believes it cannot compete effectively in the
longer term unless it takes steps to lower its overall costs. In
order to help reduce costs the Corporation requires additional
funding to complete strategically critical capital projects at its
Stelco Hamilton and Stelco Lake Erie business units. The Corporation
did not believe it would be able to raise additional funds to
complete these projects without a restructuring.
There is a risk that failure to implement a Plan and obtain
sufficient exit financing within the time granted by the Court will
result in substantially all debt obligations being due and payable
immediately, or subject to immediate acceleration. The Corporation
does not currently have the financial resources to fund such an
event.
Capital Process Order
By order of the Court dated October 19, 2004 as amended (the "Capital
Process Order"), the Applicants received Court approval for a process
designed to raise capital and to pursue the sale of non-core assets
(the "Capital Raising Process"). The Capital Raising Process
contemplated, among others, the following possible transactions:
- the raising of a minimum of $200 million of new capital in the
restructured Stelco in the form of equity, debt and/or other
securities;
- a sale of Stelco or its core business ("Core Business" being
principally Integrated Steel);
- the sale of non-core subsidiaries ("Non-Core Subsidiaries" being
Stelpipe, Stelwire, Stelfil LtDee ("Stelfil"), AltaSteel Ltd.
("AltaSteel"), Norambar Inc. ("Norambar") and the Corporation's
40% interest in Camrose Pipe Company ("Camrose Pipe")) or
- a combination of the above.
The Capital Raising Process was conducted in two stages. The first
stage was the solicitation of preliminary expressions of interest
from potential investors while the second stage entailed the
completion of due diligence followed by the submission of offers.
In the case of the Capital Raising Process for Stelco, its existing
bondholders were given the opportunity to present a financing
proposal by November 8, 2004, which would have provided at least
$200 million to Stelco. In granting the Capital Process Order, the
Court stated that Stelco was not prohibited from receiving other
unsolicited offers from any party during this initial period. After
November 8, 2004, Stelco was able to solicit other proposals for
raising capital.
Deutsche Bank AG ("DB"), a significant bondholder, approached Stelco
to conduct the necessary due diligence within the period prior to
November 8, 2004, to assess whether it was prepared to present a term
sheet to Stelco with respect to a rights offering to creditors
supported by DB or another form of financing. It did present a
commitment letter to Stelco and on November 12, 2004, Stelco's
Restructuring Committee and its Board of Directors approved DB's
commitment letter, subject to the approval of the Court. On
November 29, 2004 the Court approved DB's commitment as the "stalking
horse" for the Capital Raising Process.
As approved by the Court on October 19, 2004, the Applicants
commenced the sale processes for the non-core businesses. The
conclusion of any sale of a non-core business would require the
Corporation to complete a number of steps before the Corporation
could commit to a sale. Accordingly, for accounting purposes, the
non-core businesses have not been presented as assets held for sale,
with the exception of Camrose Pipe (see Note 9).
Pursuant to the Capital Process Order, the Applicants received
non-binding expressions of interest ("Proposals") for the Non-Core
Subsidiaries up to and including December 1, 2004. The Applicants,
UBS and the Chief Restructuring Officer ("CRO"), in consultation with
the Monitor, undertook a preliminary evaluation of all of the
Proposals received for each of the Non-Core Subsidiaries. UBS and the
CRO, with input from the Monitor, received the Proposals and
contacted parties to participate in Phase II of the process, which
included completion of detailed due diligence. A total of 23 parties
conducted due diligence in Phase II with some of those parties doing
so with respect to more than one Non-Core Subsidiary.
On or before the December 31, 2004 deadline under the Capital Process
Order, six parties submitted detailed proposals with respect to the
Integrated Steel business with certain parties indicating a desire
for the entire company. All six parties were selected to advance to
Phase II of the Capital Raising Process by UBS Securities Canada Inc.
and UBS Securities LLC (together, "UBS") the Corporation's financial
advisors, the Chief Restructuring Officer (the "CRO"), Stelco and the
Monitor. The Monitor received comments from certain bidders that the
deadline of January 31, 2005 for filing offers did not provide enough
time for them to complete their due diligence. As a result, the
Monitor and the Applicants agreed that it was appropriate in the
circumstances to seek an order extending the deadline for filing
binding offers for the Integrated Steel business and the Non-Core
Subsidiaries from January 31, 2005 to February 14, 2005. On
January 17, 2005, the Court amended the Capital Process Order to
grant the extension request. Offers were subsequently submitted from
three of these parties and were considered together with the DB's
previously approved "stalking horse" commitment.
The Corporation, together with its advisors, examined the offers in
respect of the Integrated Steel business submitted by the bid
submission deadline of February 14, 2005. The Monitor also reviewed
the offers. In reviewing the offers, the Corporation and its advisors
were guided by the principle that the overall objective is to pursue
an outcome that will strengthen the Corporation on its emergence from
protection under the CCAA.
On March 1, 2005, Stelco announced that since none of the offers
received in respect of the Integrated Steel business satisfied its
requirements for being designated as a prevailing offer under the
Capital Process Order, the Corporation decided to pursue a
Stelco-driven recapitalization for the Corporation while continuing
with the sale of non-core subsidiaries. As a result, DB became
entitled to a break fee of $11 million as a trigger event had
occurred. The break fee was paid and expensed in the first quarter
2005 and is included under reorganization items. The Corporation
believes that further capital raising activity will require it to
pursue financing options directly, working closely with various
sources of capital, to develop an alternative that will substantially
strengthen the Corporation.
Stelco is continuing its review of the offers in respect of the
Non-Core Subsidiaries in accordance with the Capital Process Order.
By Court Order dated March 30, 2005, the Capital Raising Process was
discontinued as it related to the Integrated Steel business and
Stelco was authorized to raise new capital by way of equity financing
or debt and equity financing and to enter into such arrangements as
are necessary to raise such new capital. In this regard, Stelco is
required to file with the Court an outline of the proposed terms of
the new equity or debt and equity financing and the proposed
treatment of stakeholders at least five business days prior to
committing to an equity financing or debt and equity financing.
On April 21, 2005, Stelco reached an agreement with the United
Steelworkers of America ("USWA") on their participation in the
Corporation's Capital Raising Process, which was then approved by the
Court. The Court Order states that Stelco shall not file a CCAA plan
outline before May 12, 2005 and that Stelco shall provide and discuss
the CCAA plan outline with the USWA prior to its filing and that
Stelco shall not seek Court approval of a sale of any of the non-core
subsidiaries where the USWA represents employees before May 12, 2005.
As part of the agreements, the USWA has added Tricap Management
Limited ("Tricap") as a financial advisor under the USWA
Non-disclosure Agreement dated September 21, 2004 and Tricap will be
allowed to have access to all information received to date by the
other USWA financial advisors. The Court Order precludes Tricap from
being a financial sponsor of a Plan without the consent of the
Corporation or the Court.
Claims process order
On December 17, 2004, the Court made an order establishing a process
by which certain creditors of the Applicants must prove their claims.
The purpose of commencing the claims process was to enable the
Applicants and the Monitor to review and process potential claims
including supplier, contingent, damage, litigation and other claims
so that the Applicants will be in a position to hold meetings of
affected creditors in a timely manner to vote on a proposed Plan.
Further details are outlined in Note 7.
Financing during CCAA proceedings
To ensure the Corporation has sufficient liquidity to fund the
ordinary course of operations for the duration of the CCAA process,
Debtor-in-Possession (DIP) financing has been secured. In addition,
an accommodation agreement to the Corporation's $350 million
revolving operating credit facility was negotiated as the CCAA filing
was an event of default under its terms and conditions.
DIP Financing
This financing is with CIT Business Credit Canada Inc., General
Electric Capital Canada Inc., and Fleet Capital Canada Corporation
(the "Lenders"), participating in the same percentages, as in the
$350 million revolving credit facility.
The Agreement includes Stelco Inc., (the "Borrower"), Stelwire,
Stelpipe, Welland Pipe, and CHT Steel ("Subsidiary Companies") and is
for $75 million as a revolving line of credit. The DIP is secured by
a second charge on the receivables, inventory and general intangibles
and a first charge on property, plant, and equipment. Additionally,
the DIP is secured by a first pledge of the shares of certain
subsidiaries of Stelco Inc. Each of the Applicant Subsidiary
Companies has guaranteed payment of the Borrower's obligations and
provided Lenders' liens on all their assets as security.
An amendment to the DIP agreement was negotiated on December 22, 2004
extending the maturity date to the earliest of (i) November 20, 2005;
(ii) the effective date of a Plan; and iii) termination of the $350
million revolving credit facility.
Interest rates are Canadian prime rate plus 4%, U.S. base rate plus
4%, or unused facility fee margin of 0.5%. A commitment fee of 0.5%
remains from the initial revolving line of credit dated March 8, 2004
and is to be paid at the time of the first drawing on this loan. A
DIP credit agreement extension fee of $0.9 million is payable in
monthly installments. In the event the maturity period occurs prior
to November 20, 2005 as a result of the implementation of a Plan,
half the outstanding fee is due.
Accommodation Agreement
Under the Accommodation Agreement dated January 29, 2004, the Lenders
have agreed (i) to continue to make the credit facilities available;
(ii) to make certain amendments to the revolving operating credit
facility; and (iii) to forbear exercising remedies under the
revolving operating credit facility as a result of the CCAA filing
event of default.
Based on an extension granted December 22, 2004, this Accommodation
Agreement (and the term of the $350 million revolving operating
credit facility) will expire at the earliest of (i) November 20,
2005; (ii) the effective date of a Plan; (iii) termination of the DIP
facility; and (iv) the date at which the Lenders shall have
terminated the forbearance under the terms of the Accommodation
Agreement due to a further event of default.
Interest rates under the Accommodation Agreement are (i) prime rate
loans - prime rate plus 2.50%; (ii) U.S. base rate loans - U.S. base
rate plus 2.50%; (iii) LIBOR loans - LIBOR plus 4%; (iv) Banker's
acceptance drawing fee - 4%; (v) issuance of any letter of credit -
4%. A forbearance extension fee of $1.5 million is payable in monthly
installments. In the event the forbearance period expires prior to
November 20, 2005 as a result of the implementation of a Plan, half
the outstanding fee is due.
Basis of presentation and going concern issues
These consolidated financial statements have been prepared using the
same Canadian generally accepted accounting principles ("GAAP") as
applied by the Corporation prior to the filing for CCAA. While the
Corporation and certain of its subsidiaries have filed for and been
granted creditor protection, these consolidated financial statements
continue to be prepared using the going concern concept, which
assumes that the Corporation will be able to realize its assets and
discharge its liabilities in the normal course of business for the
foreseeable future. The creditor protection proceedings provide the
Corporation with a period of time to stabilize its operations and
financial condition and develop a Plan. Debtor-In-Possession
financing, as described above, has been approved by the Court and is
available if required, subject to borrowing conditions. Management
believes that these actions make the going concern basis appropriate.
However, it is not possible to predict the outcome of these
proceedings and accordingly substantial doubt exists as to whether
the Corporation will be able to continue as a going concern. Further,
it is not possible to predict whether the actions taken in any
restructuring will result in improvements to the financial condition
of the Corporation sufficient to allow it to continue as a going
concern. If the going concern basis is not appropriate, adjustments
may be necessary to the carrying amounts and/or classification of
assets and liabilities, and expenses in these consolidated financial
statements.
While the Corporation is under creditor protection, the Corporation
will make adjustments to the consolidated financial statements to
isolate assets, liabilities, revenues, and expenses related to the
reorganization and restructuring activities so as to distinguish
these events and transactions from those associated with the ongoing
operation of the business (see Note 2 - Summary of Significant
Accounting Policies). Further, allowed claims arising under the CCAA
proceedings may be recorded as liabilities subject to compromise and
presented separately on the Consolidated Statement of Financial
Position. If a restructuring occurs and there is substantial
realignment of the equity and non-equity interests in the
Corporation, the Corporation will be required, under Canadian GAAP,
to adopt "fresh start" reporting. Upon emergence from CCAA, the
accounting will be dependent upon the terms of the Plan and whether
there is a substantial realignment of equity and non-equity
interests. Under fresh start reporting, the Corporation would
undertake a comprehensive revaluation of its assets and liabilities
based on the reorganization value as established and confirmed in the
Plan. The consolidated financial statements do not present any
adjustments that may be required under fresh start reporting.
In accordance with Canadian GAAP appropriate for a going concern,
property, plant, and equipment is carried at cost less accumulated
amortization. This carrying amount is reviewed for impairment
whenever events or circumstances indicate that the carrying amount
may not be recoverable. The carrying value is considered recoverable
if the sum of undiscounted cash flows from operations and cash flow
from disposal of the property, plant, and equipment exceeds the
carrying amount. The Corporation's filing for creditor protection
under CCAA triggered an impairment review. In estimating future cash
flows from operations of the Corporation's property, plant, and
equipment, the Corporation made certain assumptions about revenue,
reductions in operating costs and its liabilities that could be
achieved in the restructuring of its operations. The Corporation
believes that these assumptions are consistent with use of the going
concern assumption in the preparation of these consolidated financial
statements. In connection with the CCAA proceedings, any compromise
of liabilities will require the approval of affected creditors and
any changes to collective agreements agreed to with labour unions
will require the approval of the applicable employees. There can be
no assurance that such agreement or cost reductions will be reached
and that future cash flows will be sufficient to recover the carrying
amount of property, plant, and equipment.
Pensions
On February 10, 2005, Stelco received a letter from the Special
Advisor on the Steel Industry to the Government of Ontario, regarding
the funding of the Company's four principal pension plans. Stelco has
been advised that upon emergence from CCAA protection, it will not be
entitled to the benefit of Section 5.1 of the Regulations under the
Pension Benefits Act (Ontario) (the "Regulation"). Pension plans that
have taken the Section 5.1 election are exempt under the Regulation
from making additional payments to fund solvency deficiencies but are
required to make additional Pension Benefit Guarantee Fund ("PBGF")
payments. Stelco's additional payments to the PBGF were approximately
$13 million for the year ended December 31, 2004. Normally, solvency
deficiencies are required to be funded over a five-year period.
However, the letter from the Special Advisor stated that the Ontario
Government is prepared to be flexible in discussing a fair and
reasonable plan for the consequent funding of Stelco's $1.3 billion
solvency deficiency.
There can be no assurance that the loss of the exemption under
Section 5.1 of the Regulation will not have a material adverse effect
on the business, the financial condition, results of operations of
the Corporation or the Corporation's ability to restructure. The
Corporation does not believe it will have the financial resources to
fund solvency deficiency payments in the normal manner.
Labour related restructuring matters
The Stelco Lake Erie labour contract with Local 8782 of the USWA
expired on July 31, 2004. The local union and the Corporation have
agreed to provide 90 days notice prior to the commencement of a
strike or lockout. Negotiations continue between Stelco and Local
8782.
The collective bargaining agreement between USWA Local 5220 and
AltaSteel expired on July 31, 2004. On October 8, 2004, the unionized
employees at AltaSteel voted in favour of authorizing their
negotiating committee to call a strike. Under Alberta legislation, 72-
hours notice is required before a strike or lockout can be called. To
date, no such notice has been given.
The collective agreement at Stelpipe that was due to expire on
September 30, 2004 was extended on August 18, 2004 for a period of
three months and is subject to automatic 30-day renewal periods
unless either party provides notice to terminate. To date, no
termination notice has been provided by either party and operations
are continuing.
At Norambar a new USWA salaried employees bargaining unit was
certified by the Quebec Ministry of Labour on March 9, 2005. A
contract has not yet been negotiated.
The Stelwire Parkdale labour contract with the USWA Local 5328
expires on July 31, 2005.
There can be no assurance that labour difficulties at any of the
Corporation's business units will not result in a significant loss of
production and revenue and have a material adverse effect on the
business, financial condition, results of operations of the
Corporation, or the ability of the Corporation to restructure.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared using the
same generally accepted accounting principles as applied to the
Corporation prior to certain entities of the Corporation filing for
creditor protection, except as described below under the heading
Accounting policies applicable to an entity under Creditor
Protection. Interim consolidated financial statements have been
prepared in accordance with the accounting policies and methods used
in the consolidated financial statements for the year ended December
31, 2004, except for the prescribed change in accounting for certain
financial instruments as described in Note 3. The Consolidated
Financial Statements and notes presented in this interim report
should be read in conjunction with the most recent annual
Consolidated Financial Statements.
Uncertainties arose upon the filing under CCAA on January 29, 2004,
which are described in Note 1 - Creditor Protection and
Restructuring - Basis of presentation and going concern issues. As
stated in Note 1, these Consolidated Financial Statements are
prepared using the going concern concept.
Accounting policies applicable to an entity under Creditor Protection
As a result of the filings as described in Note 1, the Corporation
will follow accounting policies, including disclosure items,
applicable to entities that are under creditor protection. In
addition to Canadian GAAP, the Corporation is applying the guidance
in the American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" (SOP 90-7). While SOP 90-7 refers
specifically to Chapter 11 in the U.S., its guidance, in management's
view, is also applicable to an entity restructuring under CCAA, where
it does not conflict with Canadian GAAP.
Consistent with Canadian GAAP, SOP 90-7 does not change the manner in
which financial statements are prepared. However, SOP 90-7 does
require that the financial statements for periods subsequent to the
filing distinguish transactions and events that are directly
associated with the reorganization from the ongoing operations of the
business. Revenues, expenses, gains and losses, and provisions for
losses that can be directly associated with the reorganization and
restructuring of the business are reported separately as
Reorganization items (see Note 4). The timing of the recognition of
Reorganization items is consistent with GAAP. Cash flows related to
Reorganization items have been disclosed separately in Note 4.
While payments may not be made on liabilities subject to compromise,
including long-term debt, interest on debt obligations will continue
to be recognized under Canadian GAAP, consistent with Canadian legal
requirements. Interest is not a Reorganization item. The Consolidated
Statement of Financial Position distinguishes pre-filing liabilities
subject to compromise from both those pre-filing liabilities that are
not subject to compromise and from post-filing liabilities (see Note
7). Liabilities that may be affected by the Plan have been reported
at the amounts estimated to be allowed, even if they may be settled
for lesser amounts. A claims procedure was established on December
17, 2004 for which a claims bar date of January 31, 2005 was set.
However, at this point in time, a Plan has not been proposed.
Resulting adjustments to the estimated allowed claims may be material
and may be recorded as a reorganization adjustment. Consolidated
Financial Statements that include one or more entities in
reorganization proceedings and one or more entities not in
reorganization proceedings are required to include disclosure of
Condensed Combined Financial Statements of the entities in
reorganization proceedings, including disclosure of the amount of
intercompany receivables and payables therein between Applicants and
non-Applicants (see Note 8).
SOP 90-7 has been applied effective January 29, 2004, and for
subsequent reporting periods while the Corporation continues to
operate under creditor protection.
The resulting changes in reporting are described in Note 4
(Reorganization items), and Note 7 (Liabilities subject to
compromise), and Note 8 (Condensed Combined Financial Statements).
3. CHANGES IN ACCOUNTING POLICY
Financial Instruments
Effective January 1, 2005, the Corporation adopted a change in
accounting policy to conform with amendments to the CICA Handbook
Section 3860 - Financial Instruments - disclosure and presentation.
The amendments modify the presentation and accounting of financial
instruments where there is an option of satisfying the obligation
and/or interest payments with the issuance of an entity's own shares.
Such instruments are no longer presented and accounted for as a
component of Shareholders' Equity on the Consolidated Statement of
Financial Position but rather as Long-term Debt. Interest and
accretion, net of tax, applicable to these instruments are no longer
charged directly to retained deficit and are now accounted for
separately as interest and tax expense on the Statement of Earnings
(Loss). The amendment applies to the Corporation's $90 million
convertible debentures and has been adopted retroactively resulting
in a restatement of prior periods. Interest expense of $1 million
relating to accretion of the convertible debentures prior to filing
for CCAA has been recorded in the Statement of Earnings (Loss) for
first quarter 2004 offset by a corresponding adjustment to retained
deficit. The presentation and accounting for the convertible
debentures that was triggered by the CCAA filing (see Note 12) is
consistent with the amendment and therefore will not result in any
additional adjustments in 2005. There was no impact to the basic or
diluted earnings per share for prior periods as a result of adopting
this change retroactively.
4. REORGANIZATION ITEMS
Reorganization items represent post-filing revenues, expenses, gains
and losses, and provisions for losses that can be directly associated
with the reorganization and restructuring of the Applicants. The cash
flow usage related to reorganization and restructuring items amounted
to $21 million in first quarter 2005 ($6 million in first quarter
2004).
Three months ended March 31 (in millions) 2005 2004
---------------------------------------------------------------------
Professional fees $ 10 $ 6
Capital raising process break fee (i) 11 -
Amortization of Accommodation and DIP
financing fees and write-off of deferred
financing costs on compromised debt - 2
Adjustment of convertible debenture balance
to anticipated claim amount (ii) - 15
---------------------------------------------------------------------
Total reorganization items $ 21 $ 23
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) Stelco decided to pursue a recapitalization for the Corporation
as none of the offers received for the Integrated Steel business
satisfied its requirements for being designated a prevailing
offer under the Capital Process Order. As a result Deutsche Bank
became entitled to a break fee of approximately $11 million as a
trigger event had occurred.
(ii) To adjust principal element of convertible debentures from $75
million to $90 million (see Note 12).
5. NON-CORE ASSET SALES PROCESS AND ASSET SALES FROM RESTRUCTURING
Non-core Asset Sales Process
As part of the Corporation's strategic review concluded in 2004, a
number of its operating wholly owned subsidiaries, joint ventures and
partnerships were no longer deemed core assets.
Stelco obtained Court approval on October 19, 2004 to proceed with
the sale process for entities within the following business segments:
- Mini-mills - AltaSteel and its 50% interest in GenAlta Recycling
Inc., Norambar and its wholly owned subsidiary Fers et MDetaux
RecyclDes LtDee.
- Manufactured Products - Stelwire, Stelpipe, Stelfil, Stelco's 40%
interest in Camrose Pipe Company, and AltaSteel's 50% ownership
of MOLY-COP Canada
With the exception of Camrose Pipe, referred to below, offers
received under the capital raising process are currently under review
by the Corporation, the Monitor, and its advisors with the intention
to consider the divestiture of its interests in these assets, forming
one component of the broader capital raising process (see Note 1).
Included in the Consolidated Statement of Financial Position are the
following amounts related to these businesses excluding Camrose Pipe
which is included in discontinued operations (see Note 9):
Mini-mill Manufactured
Segment Products Segment
At March 31 (in millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Current assets $ 143 $ 118 $ 186 $ 131
Current liabilities 63 67 53 44
---------------------------------------------------------------------
Working capital 80 51 133 87
---------------------------------------------------------------------
Property, plant, and equipment 92 91 9 30
Deferred pension cost 8 9 62 54
Future income taxes 11 9 7 4
---------------------------------------------------------------------
Other assets 111 109 78 88
---------------------------------------------------------------------
Employee future benefits 49 45 86 82
Long-term debt 15 20 - -
Future income taxes 7 8 - -
---------------------------------------------------------------------
Other liabilities 71 73 86 82
---------------------------------------------------------------------
Investment in Non-Core
Businesses $ 120 $ 87 $ 125 $ 93
---------------------------------------------------------------------
Further information regarding these business segments is contained in
Note 18.
The Corporation's $245 million net investment in these entities is
funded through share capital and intercompany loans and advances. An
impairment charge of $18 million was recorded in fourth quarter 2004
to reduce the carrying value of property, plant, and equipment of
Stelwire and Stelpipe to nil. Stelwire and Stelpipe are part of the
Manufacturing Products Segment. The Corporation continues to pursue
offers for a number of the entities discussed above. Under GAAP,
losses resulting from the disposition of an asset group are recorded
only when specific criteria have been met including when the
disposition is probable. The Corporation has determined that the
criteria for accounting for assets held for sale have not been met
with respect to the above noted businesses with the exception of
Camrose Pipe (see below). Should the disposition of certain other
non-core entities discussed above meet the criteria of assets held
for sale, future losses recorded related to the Corporation's net
investment in these entities would likely be material and are
dependent on, among other items, the purchase price, the assets sold,
and liabilities and obligations assumed by the prospective
purchasers.
Asset Sales from Restructuring
As part of the Corporation's overall effort to restructure
operations, simplify processes, and rationalize non-core resources
during 2004, a number of assets were sold.
The proceeds received from asset sales of the Applicants are held in
trust with the Monitor and are therefore included in restricted cash
(Note 6) on the Consolidated Statement of Financial Position.
The following asset sales activity occurred during 2005:
Camrose Pipe
On March 30, 2005, the Court approved the sale of the Corporation's
40% partnership interest in Camrose Pipe. Proceeds on the sale of
$22.5 million were held in escrow until the expiry of the appeal
period applicable on April 20, 2005 (see Note 9).
Stelco Hamilton Plate Mill
The plate mill at Stelco Hamilton was temporarily idled in
April 2003. In fourth quarter 2003, as part of the strategic business
review, the Corporation concluded that the plate mill did not fit
within its long-term strategic direction resulting in a non-cash
write-down of $87 million to reduce the plant, and equipment to nil.
An agreement for the purchase and sale of the assets was signed in
February 2005. However, to date efforts to complete the transaction
have been unsuccessful. Efforts to complete a sale of the plate mill
assets are continuing.
Welland Pipe
Progress was made with respect to the sale of the U and O pipe mill
and property and plant (see Note 9).
6. RESTRICTED CASH
The Corporation has recorded $11 million in restricted cash as at
March 31, 2005 (nil as at March 31, 2004; $11 million as at
December 31, 2004) representing funds being held in trust with the
Monitor pending direction from the Court for its use. The composition
of these funds is derived from proceeds received from the sale of
inactive non-core assets pertaining to Stelpipe, CHT Steel and
Welland Pipe.
7. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise refers to liabilities incurred
prior to the filing date that may be dealt with as affected claims
under a Plan in the CCAA proceedings, as well as claims arising out
of any repudiated leases, contracts, and other arrangements. It is
possible that consolidated financial statement items not currently
included below as liabilities subject to compromise will be added to
this category of liabilities at a later date. The amounts below are
the Corporation's estimate of known and expected claims in this
category and are subject to future adjustment as a result of
negotiations, Court orders, proofs of claim, and other events. Any
additions to this category of liabilities and any adjustments may be
material and, depending on their nature, may be recorded as a
reorganization adjustment. The Plan will determine how a particular
class of affected claims will be settled, including payment terms, if
applicable.
The Corporation continues to accrue for interest on unsecured debt
that is subject to compromise. No interest has been paid on unsecured
debt of the Applicants subsequent to January 29, 2004, the date of
the CCAA filing.
Claims procedure
As established by Court order on December 17, 2004, the Applicants
initiated a process for certain creditors to file claims against the
Applicants for liabilities incurred prior to January 29, 2004 and
those arising between January 29, 2004 and December 17, 2004 as a
result of the restructuring, repudiation or termination of any
contract, lease or other agreement. The claims bar date for filing of
proofs of claim was set at January 31, 2005, unless the claim relates
to the restructuring, repudiation or termination of any contract,
lease or other agreement on or after December 17, 2004, in which case
a bar date for these types of claims will be established by a future
order of the Court.
A dispute mechanism is in place for those claims that cannot be
resolved by way of negotiation with the Corporation and/or Monitor.
These claims were forwarded to a claims officer providing the
claimant filed a dispute notice by the earlier of eight business days
following receipt of a dispute package or March 7, 2005. These claims
will be reviewed and ruled on by the claims officer as soon as
practicable. Both the Corporation and the claimant have the right to
appeal the decision of the claims officer to the Court within five
business days of notification of the claims officer's decision. All
determinations from the Court regarding appealed claims will be the
final claim that is recorded.
Claims Summary
At
March 31, Subject Under Adjust-
2005 (in Excepted to Review ments
millions) Filed (c) Review (d) (e) Recorded
---------------------------------------------------------------------
Accounts
payable
and
accrued
liabil-
ities $ 128 - 128 (2) (6) $ 120
Employee
related 107 (82) 25 (2) (23) -
Long-term
debt
(Note 12) 428 - 428 (16) - 412
Related
party
claims (a) 245 (216) 29 (29) - -
Litigation
and
contin-
gencies 2,747 - 2,747 (2,130) (617) -
---------------------------------------------------------------------
Total
Claims $ 3,655 (298) 3,357 (2,179) (646) $ 532
---------------------------------------------------------------------
Liabilities for which no proof of claim was filed:
Post-filing interest (b) 44
Accounts payable and accrued liabilities 12
--------
Liabilities subject to compromise $ 588
--------
--------
(a) Included is a $29 million claim relating to a non-Applicant
subsidiary company that defaulted on debt associated with the
Stelco Hamilton plate mill (see Note 12). The lender has filed
an unsecured claim against the Corporation under the terms of
the tolling arrangement between the non-Applicant and the
Corporation for the remaining balance of the loan ($27 million)
and accrued interest and costs ($2 million) from March 10, 2004
(the date of default). Any proceeds from a sale of the plate
mill assets will be applied against settlement of this claim.
(b) The Corporation continues to accrue for interest on long-term
debt that is subject to compromise. No interest has been paid on
long-term debt of the Applicants subsequent to January 29, 2004,
the date of the CCAA filing. The holders of long-term debt
subject to compromise (Note 12) have reserved their right to
file a claim for post-filing interest.
(c) Certain claims have been excepted from the process and will not
have to be proven at this stage of the CCAA proceedings
including:
- claims pursuant to existing financing and DIP documents;
- claims secured by CCAA charges and any further charge ordered
by the Court;
- claims of any non-Applicant wholly owned subsidiary for which
a claim is not subject to security interest in favour of a
secured creditor;
- employment, compensation, group benefit and pension claims;
- certain claims arising from a cause of action for which the
Applicants are fully insured.
(d) Represents amounts that are under review by the Company and the
claimants. Of the litigation and contingent claims, the majority
relates to two claims filed by non-Stelco joint ventures in
which they have claimed, in aggregate $2.1 billion against
Stelco. These claims have been filed in the event Stelco cannot
honor its obligations under the joint venture agreements.
Management and the Monitor do not believe this is a valid claim
as no breach of contracts have occurred.
(e) Represents amounts that have been disallowed from the original
claim. Included are revisions from the original claim for which
the Corporation and the claimant have agreed upon or for which
the claimant has not filed a dispute notice within the timeframe
outlined in the claims procedure.
8. CONDENSED COMBINED FINANCIAL STATEMENTS
As stated in Note 2, consolidated financial statements should provide
disclosure of Condensed Combined Financial Statements of the entities
in reorganization proceedings (Applicants), including disclosure of
the amount of intercompany receivables and payables between
Applicants and non-Applicants. Following are the Condensed Combined
Financial Statements of the Applicants and non-Applicants.
Intercompany receivables and payables are disclosed on a net basis.
Claims of Applicants and non-Applicant joint ventures and
partnerships are subject to the claims process as established by the
Court on December 17, 2004 (see Note 7). Resulting adjustments may be
material. Claims of non-Applicant wholly owned subsidiaries have
generally been excepted from the claims process and did not have to
be proven by the claims bar date of January 31, 2005.
Entities not in reorganization proceedings include AltaSteel,
Norambar, Stelfil, Stelco Holding Company, and their wholly owned
subsidiaries and joint ventures.
Condensed Combined Statement of Earnings
Entities Entities
in not in
Reorgan- Reorgan-
ization ization Consoli-
Three months ended March 31, Proceed- Proceed- Elimina- dated
2005 (in millions) ings ings tions Totals
---------------------------------------------------------------------
Net sales $ 830 187 (49)(1) $ 968
Costs 705 165 (49)(1) 821
---------------------------------------------------------------------
125 22 - 147
Amortization 21 8 - 29
---------------------------------------------------------------------
Operating earnings 104 14 - 118
---------------------------------------------------------------------
Reorganization items (Note 4) (21) - - (21)
---------------------------------------------------------------------
83 14 - 97
---------------------------------------------------------------------
Financial expense (13) (1) - (14)
---------------------------------------------------------------------
Net earnings from continuing
operations before income taxes 70 13 - 83
Income tax expense (recovery)
(Note 10) 36 (1) - 35
---------------------------------------------------------------------
Net earnings from continuing
operations 34 14 - 48
Net earnings from discontinued
operations (Note 9) - 1 - 1
---------------------------------------------------------------------
Net earnings $ 34 15 - $ 49
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Intercompany sales elimination
Condensed Combined Statement of Cash Flows
Entities Entities
in not in
Reorgan- Reorgan-
ization ization Consoli-
Three months ended March 31, Proceed- Proceed- dated
2005 (in millions) ings ings Totals
---------------------------------------------------------------------
Net cash provided by operating
activities (x) $ 58 27 $ 85
---------------------------------------------------------------------
Investing activities
Expenditures for capital assets (14) (6) (20)
---------------------------------------------------------------------
(14) (6) (20)
---------------------------------------------------------------------
Financing activities
Dividends 18 (18) -
Increase (decrease) indebtedness (58) 6 (52)
Reduction of long-term debt (Note 12) - (7) (7)
---------------------------------------------------------------------
(40) (19) (59)
---------------------------------------------------------------------
Cash, cash equivalents and restricted
cash
Net increase 4 2 6
Balance at beginning of period 24 19 43
---------------------------------------------------------------------
Balance at end of period $ 28 21 $ 49
---------------------------------------------------------------------
---------------------------------------------------------------------
Consists of:
Cash and cash equivalents $ 17 21 $ 38
Restricted cash (Note 6) 11 - 11
---------------------------------------------------------------------
$ 28 21 $ 49
---------------------------------------------------------------------
---------------------------------------------------------------------
(x) Includes intercompany receivables and payables
Condensed Combined Statement of Financial Position
Entities Entities
in not in
Reorgan- Reorgan-
ization ization Consoli-
At March 31, 2005 Proceed- Proceed- Elimina- dated
(in millions) ings ings tions Totals
---------------------------------------------------------------------
Current assets $ 1,189 271 - $ 1,460
Intercompany receivables 18 327 (345)(1) -
Assets held for sale (Note 9) - 52 - 52
---------------------------------------------------------------------
Current assets 1,207 650 (345) 1,512
---------------------------------------------------------------------
Current liabilities 377 199 - 576
Intercompany payables 12 18 (30)(1) -
Liabilities held for sale
(Note 9) - 34 - 34
---------------------------------------------------------------------
Current liabilities 389 251 (30) 610
---------------------------------------------------------------------
Working capital 818 399 (315) 902
---------------------------------------------------------------------
Other assets
Property, plant, and equipment 695 292 - 987
Intangible assets 68 - - 68
Deferred pension cost 172 19 - 191
Future income taxes - 4 - 4
Intercompany investments and
loans 286 (83) (203)(2) -
Other 12 10 - 22
---------------------------------------------------------------------
1,233 242 (203) 1,272
---------------------------------------------------------------------
Total investment 2,051 641 (518) 2,174
---------------------------------------------------------------------
Other liabilities
Employee future benefits 777 141 - 918
Other liabilities not subject
to compromise 77 110 - 187
---------------------------------------------------------------------
854 251 - 1,105
---------------------------------------------------------------------
Liabilities subject to
compromise (Note 7) 903 - (315)(1) 588
---------------------------------------------------------------------
Shareholders' equity $ 294 390 (203) $ 481
---------------------------------------------------------------------
---------------------------------------------------------------------
Derived from:
Convertible debentures
conversion option (Note 12) 23 - - 23
Capital stock (Note 14) 781 203 (203)(2) 781
Contributed surplus (Note 15) 16 - - 16
Retained earnings (deficit) (526) 187 - (339)
---------------------------------------------------------------------
$ 294 390 (203) $ 481
---------------------------------------------------------------------
---------------------------------------------------------------------
Commitments and contingencies (Notes 7 and 13)
(1) Intercompany receivables and payables
(2) Intercompany investment at cost
9. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Manufactured Products Segment
Welland Pipe
On March 7, 2003, the Corporation permanently closed its wholly owned
subsidiary, Welland Pipe, a manufacturer of large-diameter pipe
located in Welland, Ontario. The primary assets of the company were
two pipe mills (spiral weld and U and O). The decision to
permanently close the facility was based on a lack of order
prospects. In first quarter 2005, Welland Pipe made a required
wind-up payment of $1 million ($3 million in first quarter 2004) to
the pension plan covering its hourly employees, increasing deferred
pension cost on the Consolidated Statement of Financial Position.
Welland Pipe is an Applicant under the CCAA proceedings described in
Note 1.
In March 2005, the property and plant were listed for sale with an
asking price of $4 million. The net book value of these assets is
immaterial.
A purchase and sale agreement was signed for the U and O pipe mill
(see Note 19). The net book value of these assets is nil.
Camrose Pipe
Camrose Pipe is a manufacturer of small and large diameter pipe
situated in Camrose, Alberta. The Corporation held a 40% interest in
this partnership. The decision to sell the business was based on the
Corporation's strategic analysis in 2004 that concluded this and
other businesses were non-core assets. On March 30, 2005 the Court
approved the sale of Camrose Pipe under the Capital Raising Process
(see Note 1) subject to the expiry of the applicable appeal period,
which subsequently expired on April 20, 2005 without objection from
any stakeholders. The sale was recorded in the second quarter 2005,
when the appeal period expired. The consolidated financial statements
have been restated to reflect the earnings and cash flows of Camrose
Pipe as part of discontinued operations.
The following outlines the revenues, pre-tax earnings, and net
earnings applicable to these discontinued operations:
Three months ended March 31 (in millions) 2005 2004
---------------------------------------------------------------------
Net sales $ 19 $ 5
Earnings before income taxes 2 (1)
Net earnings $ 1 $ (1)
---------------------------------------------------------------------
The assets and liabilities of these discontinued operations are as
follows:
At March 31 (in millions) 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Other Other
Assets assets Assets assets
held and held and
for liabil- for liabil-
sale(1) ities(2) sale(1) ities(2)
---------------------------------------------------------------------
Current assets $ 45 $ 7 $ - $ 1
Property, plant, and equipment 6 - 3 -
Deferred pension cost 1 10 - 9
---------------------------------------------------------------------
Total assets 52 17 3 10
---------------------------------------------------------------------
Current liabilities 31 2 - 2
Employee future benefits 3 17 - 17
---------------------------------------------------------------------
Total liabilities 34 19 - 19
---------------------------------------------------------------------
Net investment $ 18 $ (2) $ 3 $ (9)
---------------------------------------------------------------------
(1) The balances represents Camrose Pipe (2005) and CHT Steel
(2004). As the sale of Camrose Pipe was signed prior to the date
of the consolidated financial statements and the proceeds are to
be received within one year, the assets and liabilities of
Camrose Pipe have been presented as current on the Consolidated
Statement of Financial Position, in accordance with GAAP.
(2) Pertains to the assets and liabilities of the discontinued
operations of Welland Pipe that are not for sale and are
therefore included within the balances on the Consolidated
Statement of Financial Position.
Other Entities
While the Company continues to pursue the sale of non-core
subsidiaries, joint-ventures and partnerships (see Note 5) in both
the Manufactured and Mini- mill segments, the criteria necessary to
account for these other entities as discontinued operations or assets
held for sale under GAAP has not been met as of March 31, 2005.
10. COMPONENTS OF CONSOLIDATED INCOME TAXES
The income tax expense differs from the amount calculated by applying
Canadian income tax rates (Federal and Provincial) to the loss before
income taxes, as follows:
2005 2004
-------------------------- -------
Entities Entities
in not in
Reorgan- Reorgan-
ization ization Consol- Consol-
Three Months ended March 31 Proceed- Proceed- idated idated
(in millions) ings ings Totals Totals
---------------------------------------------------------- -------
Earnings (loss) from continuing
operations before income taxes $ 70 13 $ 83 $ (36)
---------------------------------------------------------- -------
Income tax expense (recovery)
computed using statutory
income tax rates (2005 - 43%;
2004 - 43%) 30 6 36 (15)
---------------------------------------------------------- -------
Add (deduct):
Manufacturing and processing
credit (7) (1) (8) 3
Resource allowance/depletion - (1) (1) -
Valuation allowance 9 - 9 6
Impact of intercompany dividends 4 (4) - -
Impact of reclassification of
convertible debentures (Note 14) - - - 5
Impact of intercompany foreign
exchange - (1) (1) -
---------------------------------------------------------- -------
6 (7) (1) 14
---------------------------------------------------------- -------
Income tax expense $ 36 (1) $ 35 $ (1)
---------------------------------------------------------- -------
---------------------------------------------------------- -------
11. BANK AND OTHER SHORT-TERM INDEBTEDNESS
At
At March 31 December 31
(in millions) 2005 2004 2004
---------------------------------------------------------------------
Applicants $ 128 $ 271 $ 187
Non-Applicants 29 30 29
---------------------------------------------------------------------
Total bank and other short-term
indebtedness $ 157 $ 301 $ 216
---------------------------------------------------------------------
---------------------------------------------------------------------
12. LONG-TERM DEBT
At
At March 31 December 31
Rest- Rest-
ated ated
(Note 3) (Note 3)
(in millions) 2005 2004 2004
---------------------------------------------------------------------
10.4% retractable unsecured debentures due
November 30, 2009 $ 125 $ 125 $ 125
8% retractable unsecured debentures due
February 15, 2006 150 150 150
9.5% convertible unsecured subordinated
debentures due February 1, 2007 90 90 90
Computer system financing 47 47 47
---------------------------------------------------------------------
Long-term debt of Applicants subject to
compromise (Note 7) $ 412 $ 412 $ 412
---------------------------------------------------------------------
---------------------------------------------------------------------
Long-term debt of non-Applicants $ 86 $ 103 $ 93
---------------------------------------------------------------------
Less amount due within one year 45 44 44
---------------------------------------------------------------------
Total Long-term debt (non-Applicants) $ 41 $ 59 $ 49
---------------------------------------------------------------------
---------------------------------------------------------------------
On March 10, 2004, the Corporation did not make the quarterly
installment on the term loan associated with the Stelco Hamilton
plate mill which resulted in a default of the debt. This debt is a
liability of a wholly owned subsidiary of Stelco Inc. which is not an
Applicant under the CCAA filing described in Note 1. On October 13,
2004, the agent for the lenders of the term loan notified Stelco Inc.
that, as a result of the default in payment, Stelco Inc. is obligated
to pay under a tolling agreement between Stelco Inc. and the
subsidiary an amount equal to the amount owing under the term loan.
This is being reviewed by the Corporation. The total debt before
accrued interest is $27 million at March 31, 2005. Upon default, the
long-term portion of the debt ($9 million) was reclassified to
long-term debt due within one year on the Consolidated Statement of
Financial Position. Interest is being calculated in accordance with
the terms of the credit agreement.
Convertible Debentures
The effective interest rate on these debentures is 16.65%. As a
result of the change in accounting referred to in Note 3, a portion
of the Debentures have been reclassified as a component of long-term
debt with an initial allocation of $67 million to the principal
element. The balance, $23 million, remains in equity and is allocated
to the value of the debenture holders' conversion option at the date
of issue.
As a result of the filings described in Note 1, the Corporation
recorded in first quarter 2004 a reorganization charge of $15 million
(see Note 4) in order to reflect the convertible debenture balance at
the principal amount of $90 million and the convertible debentures
have been classified as liabilities subject to compromise (see
Note 7).
At
December
At March 31 31
(in millions) 2005 2004 2004
---------------------------------------------------------------------
Balance at beginning of period $ 90 $ 74 $ 90
Accretion - 1 -
---------------------------------------------------------------------
Adjustment to anticipated claim amount 90 75 90
Write off unamortized issue expense (net
of tax) - 1 -
Write up debenture to face value - 14 -
---------------------------------------------------------------------
Convertible debentures $ 90 $ 90 $ 90
---------------------------------------------------------------------
---------------------------------------------------------------------
Convertible debentures conversion options $ 23 $ 23 $ 23
---------------------------------------------------------------------
---------------------------------------------------------------------
13. COMMITMENTS AND CONTINGENCIES
Capital programs
In addition to the $221 million of commitments outlined in the 2004
consolidated financial statements, $16 million was committed during
first quarter 2005 to purchase and install replacement roughing mill
equipment at the AltaSteel bar mill.
Contingencies
Various lawsuits and claims, other than matters arising out of the
filings as described in Note 1 and the claims process as described in
Note 7, are pending by and against the Corporation and provisions
have been recorded where appropriate under liabilities subject to
compromise. In addition, as a result of the filings as described in
Note 1, proceedings related to matters arising prior to January 29,
2004 are stayed and suspended and are subject to compromise under the
CCAA process.
14. CAPITAL STOCK
Convertible Common Shares
March 31, March 31, December 31,
2005 2004 2004
---------------------------------------------------------------------
Series A 101,778,203 101,490,302 101,783,542
Series B 470,996 758,898 465,658
---------------------------------------------------------------------
Total number of shares 102,249,199 102,249,200 102,249,200
---------------------------------------------------------------------
Total (in millions) $ 781 $ 781 $ 781
---------------------------------------------------------------------
---------------------------------------------------------------------
The Corporation has been granted creditor protection under the CCAA.
Uncertainty and risk remains as to the value of existing common
shares upon implementation of a restructuring plan.
15. STOCK-BASED COMPENSATION
Key Employee Stock Option Plan (KESOP)
Under the Corporation's KESOP at March 31, the following options were
outstanding:
March 31, March 31, Dec. 31,
2005 2004 2004
----------- ----------- ------------
Exercisable................. 4,153,033 3,882,383 3,643,711
Unexercisable............... 948,318 1,901,966 1,487,641
----------- ----------- ------------
Total..................... 5,101,351 5,784,349 5,131,352
----------- ----------- ------------
----------- ----------- ------------
Compensation cost of $0.1 million has been included in Costs for
first quarter 2005 ($0.3 million for first quarter 2004).
The compensation cost for the grants made under the KESOP was
determined at the grant dates using the fair value method by applying
the Black-Scholes option-pricing model using the following
assumptions:
Grant date
Jan. 5, Nov. 25, Feb. 5,
2004 2003 2003
----------- ----------- ------------
Expected volatility 30% 30% 23%
Risk-free interest rate 3.60% 3.75% 4.0%
Expected life 4-6 years 4-6 years 4-6 years
Expected dividends Nil Nil Nil
Deferred Share Unit Plan (DSUP)
Three months ended
March 31 2005 2004
---------------------------------------------------------------------
Weighted Weighted
average average
DSUs price DSUs price
---------------------------------------------------------------------
Outstanding at beginning
of period 362,030 $ 2.031 429,740 $ 2.182
Granted - - 3,153 0.773
Exercised - - (70,863) 2.279
---------------------------------------------------------------------
Balance at end of period 362,030 $ 3.428 362,030 $ 0.773
---------------------------------------------------------------------
---------------------------------------------------------------------
Compensation cost (gain)
loss ($ in millions) $ 0.5 $ (0.5)
---------------------------------------------------------------------
---------------------------------------------------------------------
The Corporation has been granted creditor protection under the CCAA.
Uncertainty remains as to the value of existing options and DSU's of
the Company upon implementation of a restructuring plan.
16. EMPLOYEE FUTURE BENEFITS
An expense was recorded pertaining to defined benefit pension and
other future benefit plans of the Corporation as follows:
(in millions)
Three months ended March 31 2005 2004
---------------------------------------------------------------------
Pension benefit plans $ 44 $ 39
Other benefit plans 31 27
---------------------------------------------------------------------
$ 75 $ 66
---------------------------------------------------------------------
---------------------------------------------------------------------
On February 10, 2005, Stelco received a letter from the Special
Advisor on the Steel Industry to the Government of Ontario, regarding
the funding of the Company's four principal pension plans. Stelco has
been advised that upon emergence from CCAA protection, it will not be
entitled to the benefit of Section 5.1 of the Regulations under the
Pension Benefits Act (Ontario) (the "Regulation"). Pension plans that
have taken the Section 5.1 election are exempt under the Regulation
from making additional payments to fund solvency deficiencies but are
required to make additional Pension Benefit Guarantee Fund ("PBGF")
payments. Stelco's additional payments to the PBGF were approximately
$13 million for the year ended December 31, 2004. Normally, solvency
deficiencies are required to be funded over a five-year period.
However, the letter from the Special Advisor stated that the Ontario
Government is prepared to be flexible in discussing a fair and
reasonable plan for the consequent funding of Stelco's $1.3 billion
solvency deficiency.
There can be no assurance that the loss of the exemption under
Section 5.1 of the Regulation will not have a material adverse effect
on the business, the financial condition, results of operations of
the Corporation or the Corporation's ability to restructure. The
Corporation does not believe it will have the financial resources to
fund solvency deficiency payments in the normal manner.
17. EARNINGS (LOSS) PER COMMON SHARE
Interest and accretion on the convertible debentures is recorded on
the Consolidated Statement of Earnings (Loss) as interest on
long-term debt and debt subject to compromise. This amount, net of
tax, is added back to net earnings (loss) from continuing operations
and net earnings (loss) in order to calculate fully diluted earnings
(loss) from continuing operations and fully diluted earnings (loss)
per common share. Fully diluted earnings (loss) per common share is
calculated by applying the treasury stock method for the potential
exercise of stock options, and assuming the dilutive effect of the
conversion of all outstanding convertible debentures at the $4.50 per
share conversion price applicable to these debentures.
Restated
(Notes 3
Three months ended March 31 and 9)
($ in millions) 2005 2004
---------------------------------------------------------------------
Basic net earnings (loss) from continuing
operations $ 48 $ (36)
Convertible debentures - interest
expense net of tax 1 2
---------------------------------------------------------------------
Fully diluted net earnings (loss) from
continuing operations 49 (34)
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic net earnings (loss) $ 49 $ (37)
Convertible debentures - interest
expense net of tax 1 2
---------------------------------------------------------------------
Fully diluted net earnings (loss) $ 50 $ (35)
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average number of common shares
outstanding - basic 102,249,200 102,249,200
Incremental number of common shares
assumed to be issued on the exercise
of stock options 281,250 -
Common shares issued on the assumed
conversion of convertible debentures 20,000,000 20,000,000
---------------------------------------------------------------------
Weighted average number of common shares
outstanding - fully diluted 122,530,450 122,249,200
---------------------------------------------------------------------
---------------------------------------------------------------------
Options to purchase common shares not
included in the above calculation (x) 3,851,351 5,784,349
---------------------------------------------------------------------
---------------------------------------------------------------------
(x) exercise prices were greater than the average market price of
the common shares during the period
For the three months ended March 31, 2004, options and convertible
debentures are anti-dilutive and accordingly, have not been included
in the calculation of fully diluted earnings per share.
18. SEGMENTED INFORMATION
Financial information for Welland Pipe and Camrose Pipe has been
excluded from the Manufactured Products reportable segment for 2005
and 2004.
Restated
Three months ended March 31 (Note 9)
($ in millions) 2005 2004
---------------------------------------------------------------------
Net sales - trade
Integrated Steel $ 780 $ 613
Mini-mill 128 105
Manufactured Products 123 110
Intersegment sales
Integrated Steel (52) (50)
Mini-mill (11) (9)
Manufactured Products - -
---------------------------------------------------------------------
$ 968 $ 769
---------------------------------------------------------------------
---------------------------------------------------------------------
Shipments - trade (thousands of net tons)
Integrated Steel 973 1,052
Mini-mill 215 205
Manufactured Products 98 122
Intersegment shipments
Integrated Steel (66) (95)
Mini-mill (20) (18)
Manufactured Products - -
---------------------------------------------------------------------
1,200 1,266
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating earnings (loss)
Integrated Steel $ 111 $ (7)
Mini-mill 9 7
Manufactured Products (2) 3
---------------------------------------------------------------------
$ 118 $ 3
---------------------------------------------------------------------
---------------------------------------------------------------------
Assets
Integrated Steel $ 2,196 $ 2,096
Mini-mill 254 227
Manufactured Products 264 220
---------------------------------------------------------------------
$ 2,714 $ 2,543
---------------------------------------------------------------------
---------------------------------------------------------------------
Amortization of capital assets
Integrated Steel $ 27 $ 28
Mini-mill 2 2
Manufactured Products - 1
---------------------------------------------------------------------
$ 29 $ 31
---------------------------------------------------------------------
---------------------------------------------------------------------
Expenditures for capital assets
Integrated Steel $ 17 $ 12
Mini-mill 2 1
Manufactured Products - -
---------------------------------------------------------------------
$ 19 $ 13
---------------------------------------------------------------------
---------------------------------------------------------------------
Geographic segments
Net sales
Canada $ 783 $ 638
United States 142 115
Other 43 16
---------------------------------------------------------------------
$ 968 $ 769
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital assets - net
Canada $ 997 $ 1,072
United States 58 56
---------------------------------------------------------------------
$ 1,055 $ 1,128
---------------------------------------------------------------------
---------------------------------------------------------------------
19. SUBSEQUENT EVENT
Welland Pipe
A purchase and sale agreement was signed for the U and O pipe mill in
April 2005 and was subsequently approved by the Court on May 4, 2005.
A deposit has been received with the balance of proceeds to be
received by way of scheduled payments while the equipment is being
dismantled. It is anticipated that the sale will be recorded in
third quarter 2005 when title is expected to pass to the purchaser.
Funds received to date are held in trust with the Monitor (Note 6).
The net book value of these assets is nil.
INVESTOR INFORMATION
Questions and comments regarding Stelco Inc. or any information appearing
in the quarterly reports or any other corporate publication may be directed
to:
Stelco Inc.
Office of the Secretary
P.O. Box 2030
Hamilton, Ontario L8N 3T1
Telephone: 905 528-2511 Ext. 2618
Fax: 905 308-7002
E-mail: info(at)stelco.ca
The Corporation's annual and quarterly reports, media releases, and other
investor information may be found at Stelco's Web site: www.stelco.com
Inquiries regarding change of address or other share administration
matters should be directed to:
CIBC Mellon Trust Company
P.O. Box 7010
Adelaide Street Postal Station
Toronto, Ontario M5C 2W9
Telephone: 416 643-5500
Toll free: 1 800 387-0825
Fax: 416 643-5660
www.cibcmellon.com
E-mail at: inquiries(at)cibcmellon.com
Restructuring Information
For restructuring information, including all court documents, news
releases, etc., please refer to our web site: www.stelco.com
Information contained in or otherwise accessible through our web site or
any other web site referred to herein does not form part of this Report.
>>
%SEDAR: 00001549E
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