HAMILTON, ON, Aug. 4 /CNW/ - Stelco Inc. (TSX:STE) today reported net
earnings of $40 million ($0.39 per common share) for the quarter ended
June 30, 2005 compared to net earnings of $42 million ($0.41 per common share)
for the second quarter of 2004. Six month net earnings were $89 million ($0.87
per common share) compared to net earnings of $5 million ($0.05 per common
share) for the same period in 2004.
Second quarter 2005 net earnings would have been lower than reported but
for four non-recurring items, which had a positive impact on net earnings for
the period. These items were (in pre-tax figures) a $20 million gain on the
sale of the plate mill assets, $14 million for the balance of an insurance
claim recovery related to a June 2004 blast furnace outage, a $4 million gain
on the sale of the Company's interest in Camrose Pipe, and a $4 million gain
on the sale of the Welland Pipe U and O pipe mill. Compared to second quarter
2004, second quarter 2005 earnings were negatively affected by decreased
shipments and higher costs, particularly at Norambar and the Manufactured
Products segment, and reduced Integrated Steel finishing mills production,
partly offset by higher selling prices.
Net sales revenue in the second quarter was $888 million compared to
$881 million for the same period last year. In the first half of 2005, sales
amounted to $1,856 million, a 12% increase over the $1,650 million recorded
for the first six months of 2004. This increase was attributable to such
factors as the renewal of customer contracts at substantially higher prices,
improved market demand which had the effect of raising spot prices in the
first quarter, and selling price surcharges implemented to cover high raw
material and energy costs in the first quarter.
Costs for the second quarter of 2005 were $799 million compared to
$779 million for the same quarter in 2004. Costs for the first six months of
2005 stood at $1,620 million compared to $1,514 million for the first half of
2004. The increase in costs was attributable to such factors as higher raw
material and energy costs, particularly for scrap, coal, iron ore, natural gas
and electricity; higher spending for repairs and maintenance and supplies;
reduced output required to control steel inventories; and the increased cost
of hot roll as raw materials for the Manufactured Products segment of the
business.
Production in the second quarter of 2005 was 1,297,000 semi-finished tons
compared to 1,327,000 semi-finished tons produced during the same period in
2004. Production for the first six months of 2005 was 2,553,000 semi-finished
tons compared to 2,693,000 semi-finished tons produced during the first half
of 2004.
Shipments in the second quarter of 2005 totalled 1,125,000 net tons
compared to 1,249,000 net tons during the same period in 2004. Shipments in
the first six months of 2005 totalled 2,325,000 net tons, compared to
2,515,000 net tons during the first half of 2004.
As at June 30, 2005, the Corporation's net liquidity position was
$407 million, consisting of $26 million of cash and cash equivalents,
including restricted cash, plus $472 million of available lines of credit,
less $91 million of drawings on lines of credit. At December 31, 2004, net
liquidity was $284 million, consisting of $43 million of cash and cash
equivalents, including restricted cash, plus $456 million of available lines
of credit less $215 million of drawings on lines of credit.
During the quarter the Corporation generated $43 million of cash
primarily due to cash earnings before working capital and proceeds from the
sale of its 40% interest in Camrose pipe, partly offset by expenditures for
capital assets, primarily consisting of $30 million related to the Lake Erie
Phase II hot strip mill upgrade, and working capital changes. In the year
earlier period $2 million of cash was generated.
The Corporation noted that steel market selling prices have been very
volatile and are highly dependent on North American and worldwide steel demand
and other factors beyond Stelco's control. For example, the current spot price
for hot roll coils, Stelco's largest product category, has declined
approximately 26% since April 2005. Stelco also indicated that future
financial results will be highly dependent on the strength of North American
steel markets and on the direction of commodity raw material and energy input
costs.
North American steel producers have reduced production levels in the
second quarter of 2005, attempting to better balance supply with demand, which
ultimately may stabilize steel pricing. Following the seasonal shutdowns,
automotive demand is forecast to remain constant through the balance of the
third quarter of 2005. Spot market prices appear to be stabilizing due to
lower steel production, and reduced customer inventory levels.
The Corporation expects that third quarter 2005 results will be
significantly lower than second quarter and that there will be increased
drawings on the Stelco Inc. credit facility. In the fourth quarter, as a
result of a planned shutdown of the Lake Erie hot strip mill to install
components related to the Phase II upgrade, significant shipments of slabs are
planned. There is a risk that market demand may not support the projected
level of slab sales. While there is currently a court order outstanding that
prevents a strike by Local 8782, there is a risk that delivery of the 90-day
notice from Local 8782 could result in disruptions to the Corporation's
business.
Courtney Pratt, Stelco President and Chief Executive Officer, said, "Our
results reflect the softening in North American demand and pricing that began
in the third quarter of last year and that has continued well into 2005.
"We've said that Stelco could not base its future upon steel prices
remaining at historically high levels. We've believed from the outset of our
restructuring process that the only way to ensure a positive long-term future
for the Company is to make it competitive through all stages of the market
cycle.
"That's what the four-point strategy announced one year ago and the
restructuring plan outline filed last month are designed to achieve. I urge
all stakeholders to work together at this crucial stage of the restructuring
process to ensure that our shared goal of a viable, competitive and successful
Stelco can be realized."
With respect to the Corporation's recently released restructuring plan
outline, Mr. Pratt noted that to date the plan outline has not yet been
endorsed by any stakeholder group.
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 2, 2005
REPORT TO THE SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") is dated August 4,
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 is
Stelco's core business. The other two segments are considered 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, and with the
Interim Financial Statements and Notes contained in this report and the
Quarter 1, 2005 report. These reports and information together with additional
information about Stelco including information found in the Corporation's 2004
Annual Information Form, 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. Forward looking statements typically include words as
"may," "will," "expect," "believe," "plan," "intend" or 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 risk factors discussed in the Corporation's 2004 Annual
MD&A, and in the Corporation's Quarter 1, 2005 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. Forward-looking statements contained in this Q2, 2005 report 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
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 on 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 September 9, 2005,
and may potentially be extended to such later dates as the Court may order.
The purpose of the Initial Order and stay of proceedings was to provide the
Applicants with relief designed to stabilize their operations and business
relationships with their customers, suppliers, employees, and 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.
Restructuring Plan Outline
During the proceedings, the Corporation has sought input from its
stakeholders, with a view to developing a comprehensive restructuring plan to
allow the Corporation to exit CCAA in an orderly fashion. On July 15, 2005,
Stelco filed with the Court a plan outline describing a proposed restructuring
that it believes will ensure a viable company over the long term and fairly
balance the interests of stakeholders.
On July 18, 2005, the Court granted an order in Stelco's CCAA proceedings
extending the stay of proceedings until September 9, 2005. The USW has brought
a motion seeking to remove Stelco's exclusive authority to prepare and file a
restructuring plan in its CCAA proceedings. The motion has been adjourned
until August 16, 2005. Stelco intends to return to Court on or prior to
September 9, 2005 to file a formal CCAA plan, to seek a further extension of
the stay period, and to seek a meeting order (the "Meeting Order"). The
Meeting Order, if granted, will approve the procedures with respect to the
calling and conduct of a meeting of affected creditors to consider and vote
upon the Company's restructuring plan, as well as the manner in which the
materials for such meeting will be distributed.
Highlights of the proposed restructuring plan filed with the Court on
July 15, 2005 include:
- A plan to retire the Corporation's four principal core business
pension plan solvency deficiencies of about $1.3 billion by 2015. It
is intended that the pension plans will receive approximately
$200 million in upfront contributions and $98 million in cash
payments annually thereafter.
- Secured operating lenders are proposed to be refinanced at the time
of plan implementation.
- Unsecured creditors are proposed to receive full recovery on
approximately $666 million owed to them by receiving securities
including a pro rata share of secured and unsecured convertible notes
and new common shares.
- Equity holders at the time of emergence from Court protection will
receive less than 2% of the fully diluted shares outstanding unless
they exercise the right to purchase common shares through a
$100 million rights offering to be available to such equity holders
and/or exercise warrants to purchase 10% of the Corporation on a
fully diluted basis. If all rights and warrants were exercised, the
Corporation would receive proceeds of $190 million and the percentage
holdings of such equity participants would rise to approximately 37%
fully diluted. The warrants would have a ten-year term.
The proposed restructuring plan outline has two phases:
Phase One: Immediately upon the Corporation's exit from CCAA, the
issuance to unsecured creditors of $566 million of new debt
and $100 million of new equity. This phase will also provide
for the contribution into the Company's four main pension
plans of $100 million in senior secured floating rate notes
and up to $100 million in cash from proceeds of the sale of
the non-core assets, subject to a pension funding agreement
having been reached with the Government of Ontario.
Phase Two: On the condition of a pension funding agreement with the
Government of Ontario and the renewal of collective
bargaining agreements at Stelco Lake Erie and Stelco
Hamilton, $200 million of debt issued in phase one will be
converted to equity and the $100 million rights offering is
expected to be completed.
The delivery of the restructuring plan outline followed a failed
mediation process during the quarter. After two periods of mediation under the
direction of the Honourable George Adams, the mediation was terminated by the
mediator. The mediator concluded he was not able to usefully add to the
discussions among the stakeholders.
To date the proposed plan outline has not been finalized and has not yet
been endorsed by any stakeholder group, therefore there is no assurance that
the Plan will be accepted or will be the same as this proposal. The
Consolidated Financial Statements do not reflect any accounting adjustments
related to the transactions in the restructuring plan outline.
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 these credit
facilities 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.
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 proof 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 are
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 are reviewed and ruled on by the claims officer.
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 are final for the purposes of recording claims. See Note 7 to
the Consolidated Financial Statements for the Claim Summary as at June 30,
2005.
Non-Core Businesses
The Corporation's 2004 strategic review determined that all of the
businesses of the Mini-mill and Manufactured Products segments are non-core.
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.
Included in the Consolidated Statement of Financial Position are the
following amounts related to the non-core businesses, excluding Camrose Pipe
which has been sold and is included in discontinued operations (see below):
<<
Mini-mill Segment Manufactured Products
At June 30 (in millions) Segment
(unaudited) 2005 2004 2005 2004
-------------------------------------------------------------------------
Current assets $ 153 $ 133 $ 171 $ 153
Current liabilities 73 63 50 49
-------------------------------------------------------------------------
Working capital 80 70 121 104
-------------------------------------------------------------------------
Property, plant, and equipment 96 88 8 30
Deferred pension cost 9 9 65 54
Future income taxes 12 9 2 2
-------------------------------------------------------------------------
Other assets 117 106 75 86
-------------------------------------------------------------------------
Employee future benefits 51 46 87 83
Long-term debt 14 18 - -
Future income taxes 8 8 - -
-------------------------------------------------------------------------
Other liabilities 73 72 87 83
-------------------------------------------------------------------------
Net investment in non-core
businesses $ 124 $ 104 $ 109 $ 107
-------------------------------------------------------------------------
The Corporation's $233 million net investment in these businesses is
funded through share capital and intercompany loans and advances. The sale
process is continuing with respect to the non-core businesses. Completing
transactions may be affected by progress on the Corporation's restructuring.
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 these
businesses. Should the criteria of assets held for sale be met, for some of
these businesses, future losses related to the Corporation's net investment
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.
The transaction closed with proceeds on the sale of $23 million 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. The resulting gain of
$3 million, net of $1 million tax, from the sale was included in discontinued
operations during second quarter 2005. The Consolidated Financial Statements
have been retroactively restated to separately disclose partnership earnings
and cash flows as part of discontinued operations.
Stelpipe Ltd.
A Letter of Intent with respect to the potential sale of the assets of
Stelpipe has been signed with a prospective purchaser. Both parties are
currently in negotiations. If a purchase and sale agreement is agreed upon,
the Corporation will seek Court approval of the sale transaction.
Idled or Closed Facilities
Stelco Hamilton Plate Mill
The sale of the plate mill assets closed on June 9, 2005. The sale price
of $25 million has been secured by irrevocable letters of credit, which will
be drawn down in tandem with progress made on dismantling of the equipment.
The letters of credit which are in favour of the lender will be used to
partially satisfy the $27 million outstanding secured debt associated with the
Stelco Hamilton plate mill (see Note 12 to the Consolidated Financial
Statements). The carrying value of these assets was nil, therefore a gain (net
of fees) of $20 million was recorded during the second quarter 2005.
Rod Mill
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. The net book value of these assets is $4 million.
Welland Pipe
A purchase and sale agreement was signed for the U and O pipe mill for
$4 million in April 2005 and was subsequently approved by the Court on May 4,
2005. The sale closed on June 29, 2005 when title to the assets passed to the
purchaser. Proceeds received to date of $3 million are held in trust with the
Monitor (see Note 6 to the Consolidated Financial Statements). The balance of
the proceeds are due in the third quarter 2005. A gain of $4 million was
recorded in discontinued operations during the second quarter 2005 as the net
book value of the assets was nil.
The property and plant of Welland Pipe are listed for sale. The
Corporation is currently discussing offers with interested parties. The net
book value of these assets is nominal.
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. Without the
benefit of the Section 5.1 election, 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. The July 15, 2005 proposed restructuring plan includes a
plan to retire the Corporation's four principal pension plan solvency
deficiencies of about $1.3 billion by 2015.
The loss of the exemption under Section 5.1 of the Regulation under the
Pension Benefit Act (Ontario) without an acceptable funding alternative would
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 such a precipitous event.
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, 19 Claims ($5 million) have
been settled and 12 Claims ($8 million) remain open.
Financial and Operational Summary
Stelco Inc.
(Unaudited)
(Under Creditor
Protection as of
January 29, 2004
- Note 1 to the
Consolidated
Financial
Statements) Three months ended June 30 Six months ended June 30
($ in millions,
except as Favourable Favourable
indicated(x)) (Unfavour- (Unfavour-
(unaudited) 2005 2004(xx) able) 2005 2004(xx) able)
-------------------------------------------------------------------------
Net sales $ 888 $ 881 $ 7 $1,856 $1,650 $ 206
Costs 799 779 (20) 1,620 1,514 (106)
Gain on sale of
plate mill assets
(Note 5) (20) - 20 (20) - 20
Amortization of
property, plant,
and equipment 30 29 (1) 58 60 2
Amortization of
intangible assets 1 1 - 2 1 (1)
-------------------------------------------------------------------------
Operating earnings
(xxx) 78 72 6 196 75 121
Reorganization
items (Note 4) (13) (7) (6) (34) (30) (4)
-------------------------------------------------------------------------
65 65 - 162 45 117
-------------------------------------------------------------------------
Financial expense
Interest on
long-term debt
and debt subject
to compromise (11) (11) - (21) (23) 2
Other interest
- net (2) (6) 4 (6) (11) 5
-------------------------------------------------------------------------
Earnings before
income tax from
continuing
operations 52 48 4 135 11 124
Income tax expense
(Note 10)
Current 8 4 (4) 28 5 (23)
Future 8 11 3 14 3 (11)
Future income
tax asset
valuation
allowance
(release) 4 (9) (13) 13 (3) (16)
-------------------------------------------------------------------------
Net earnings from
continuing
operations 32 42 (10) 80 6 74
Net earnings
(loss) from
discontinued
operations
(Note 9) 8 - 8 9 (1) 10
-------------------------------------------------------------------------
Net earnings $ 40 $ 42 $ (2) $ 89 $ 5 $ 84
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per
common share
from continuing
operations
(Note 17) (x)$ 0.31 (x)$ 0.41 (x)$(0.10) (x)$0.78 (x)$ 0.06 (x)$ 0.72
Earnings per
common share
(Note 17) (x)$ 0.39 (x)$ 0.41 (x)$(0.02) (x)$0.87 (x)$ 0.05 (x)$ 0.82
Average
revenue
per ton (x)$ 789 (x)$ 705 (x)$ 84 (x)$ 798 (x)$ 656 (x)$ 142
Cost per
ton (x)$ 710 (x)$ 624 (x)$ (86) (x)$ 697 (x)$ 602 (x)$ (95)
Semi-finished
steel production
(thousands of
net tons) 1,297 1,327 (30) 2,553 2,693 (140)
Shipments
(thousands of
net tons) 1,125 1,249 (124) 2,325 2,515 (190)
(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 June 30,
2005 Consolidated Financial Statements.
Overview
Net earnings in second quarter 2005 decreased by $2 million compared to
second quarter 2004. However, second quarter 2005 included four non-recurring
items, which positively impacted net earnings in that period (all figures are
pre-tax):
- $20 million gain on sale of plate mill assets;
- $14 million for the balance of the insurance claim recovery related
to the June 2004 blast furnace outage (bringing the total recovery to
$24 million);
- $4 million gain on the sale of Camrose Pipe;
- $4 million gain on the sale of the Welland Pipe U and O pipe mill.
Without these four items, results in second quarter 2005 would have been
significantly lower than the same period 2004, mainly due to higher costs and
decreased shipments at Norambar and the Manufactured Products segment. Higher
selling prices in the Integrated Steel segment were offset by decreased
shipments, higher costs and reduced Integrated Steel finishing mill
production.
Net Sales and Costs
Net sales of $888 million for the quarter ended June 30, 2005 were 1%
higher than in the same quarter of 2004. Steel shipments of 1,125,000 tons
were 10% lower than the same quarter 2004, while average revenue per ton of
$789 was up 12%. The second quarter 2005 increase in average revenue per ton
was primarily due to the renewal of customer contracts for 2005 at
substantially higher prices. A softer market had a negative impact on
shipments and spot market prices.
For the first six months of 2005, net sales of $1,856 million were 12%
higher than the same period in 2004. Steel shipments of 2,325,000 tons were 8%
lower, while average revenue per ton of $798 was up 22%. The six month
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 in
the first quarter;
- selling price surcharges implemented to cover high raw material and
energy costs in the first quarter.
Production of semi-finished steel for the six month period of 2,553,000
tons was 140,000 tons lower than the same period 2004 mainly due to reduced
output required to achieve planned steel inventory reductions.
Costs in second quarter 2005 of $799 million were up 3% compared with the
same quarter 2004 and average cost per ton of $710 was up 14%. Cost per ton
for the six month period of $697 was up 16% compared with the same period
2004. Costs were higher primarily due to:
- higher raw material and energy costs, particularly scrap, coal, iron
ore, natural gas and electricity;
- higher spending for repairs and maintenance and supplies at
Integrated Steel and Norambar;
- the flow through of high-cost inventories produced in the first
quarter;
- reduced output at the primary operations and Integrated Steel
finishing mills required to control steel inventory levels;
- increased cost of hot roll as raw materials for the Manufactured
Products segment.
The above cost increases were partially offset by:
- $14 million for the balance of the insurance claim recovery related
to the June 2004 Stelco Lake Erie blast furnace outage (bringing the
total recovery to $24 million);
- the impact of a stronger Canadian dollar on U.S. dollar denominated
purchases;
- lower purchased coke prices.
Amortization of property, plant, and equipment in second quarter 2005 was
$1 million higher than the same quarter of 2004 but was $2 million lower for
the first six months versus the comparable period in 2004.
Reorganization items
In second quarter 2005, reorganization expenses of $13 million were
incurred and related entirely to professional fees. For the six months ended
June 30, 2005 reorganization expenses were $34 million consisting of
$23 million of professional fees and the $11 million Deutsche Bank break fee.
Comparatively, $7 million of reorganization expenses were incurred in
second quarter 2004 which were mainly for professional fees. For six months
ended June 30, 2004, reorganization expense amounted to $30 million consisting
mainly of a $15 million non-cash adjustment related to the write-up of the
convertible debentures and professional fees.
Professional fees will continue to be incurred in the near term as the
Corporation moves ahead with its plan outline, deals with related issues, and
completes the Claims Process that was initiated in December 2004. Other
material revenues, expenses, gains, or losses may be recorded dependent upon
results from the Claims Process, or other 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 for six months ended June 30, 2005 compared to the same period of 2004
due to regularly scheduled non-Applicant debt repayments, the conversion of
two existing loans to a lower, variable interest rate and the refinancing of
Norambar's long-term debt with a short-term credit facility.
Due to lower interim borrowings, other interest was $4 million lower in
second quarter 2005 compared to the same period in 2004 and $5 million lower
for six months ended June 30, 2005 than the comparable period in 2004.
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 $4 million future income tax asset valuation allowance was
recorded in the second quarter 2005 ($13 million in the first six months of
2005) to reduce the consolidated net future income tax asset.
Quarter-to-Quarter Comparison
Stelco Inc.
(Under Creditor Protection as of January 29, 2004 - See Note 1 to the
Consolidated Financial Statements)
($ in millions, except as Quarter 2 Quarter 1 Favourable
indicated(x)) (unaudited) 2005 2005 (Unfavourable)
-------------------------------------------------------------------------
Net sales $ 888 $ 968 $ (80)
Costs 799 821 22
Gain on sale of plate mill assets (Note 5) (20) - 20
Amortization of property, plant,
and equipment 30 28 (2)
Amortization of intangible assets 1 1 -
-------------------------------------------------------------------------
Operating earnings 78 118 (40)
Reorganization items (Note 4) (13) (21) 8
-------------------------------------------------------------------------
65 97 (32)
-------------------------------------------------------------------------
Financial expense
Interest on long-term debt and debt
subject to compromise (11) (10) (1)
Other interest - net (2) (4) 2
-------------------------------------------------------------------------
Earnings before income tax from continuing
operations 52 83 (31)
Income tax expense (Note 10)
Current 8 20 12
Future 8 6 (2)
Future income tax asset valuation allowance 4 9 5
-------------------------------------------------------------------------
Net earnings from continuing operations 32 48 (16)
Net earnings from discontinued operations
(Note 9) 8 1 7
-------------------------------------------------------------------------
Net earnings $ 40 $ 49 $ (9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share from
continuing operations (Note 17) (x)$ 0.31 (x)$ 0.47 (x)$(0.16)
Earnings per common share (Note 17) (x)$ 0.39 (x)$ 0.48 (x)$(0.09)
Average revenue per ton (x)$ 789 (x)$ 807 (x)$ (18)
Cost per ton (x)$ 710 (x)$ 684 (x)$ (26)
Semi-finished steel production
(thousands of net tons) 1,297 1,256 41
Shipments (thousands of net tons) 1,125 1,200 (75)
Overview
Net earnings in second quarter 2005 decreased by $9 million compared to
first quarter 2005. However, second quarter 2005 included four non-recurring
items, which positively impacted net earnings in that period (all figures are
pre-tax).
- $20 million gain on sale of plate mill assets;
- $14 million for the balance of the insurance claim recovery related
to the June 2004 blast furnace outage (bringing the total recovery to
$24 million);
- $4 million gain on the sale of Camrose Pipe;
- $4 million gain on the sale of the Welland Pipe U and O pipe mill.
Without these four items, results in second quarter 2005 would have been
significantly lower than the first quarter 2005, mainly due to lower spot
market prices, reduced Integrated Steel finishing mill production, decreased
shipments and higher costs, partially offset by lower reorganization costs.
Operating earnings of $78 million in second quarter 2005 compared with
operating earnings of $118 million in first quarter 2005. Operating earnings
decreased by $31 million ($65 million excluding non-recurring items) in the
Integrated Steel segment, $5 million in the Mini-mill segment and $4 million
in the Manufactured Products segment.
In second quarter 2005, the net short-term debt position decreased by
$43 million from the previous quarter. The major element of the improvement
was cash from operations (before working capital) of $78 million and proceeds
of $23 million from the sale of Camrose Pipe, partly offset by capital
spending and working capital changes.
Net sales and costs
Net sales of $888 million for the second quarter of 2005 were 8% lower
than first quarter 2005 net sales of $968 million. Steel shipments of
1,125,000 net tons were 6% lower than first quarter 2005 while average revenue
per ton of $789 was down 2% from $807. The second quarter decrease in average
revenue per ton was primarily due to softening market demand partly due to
excess customer inventories.
Cost per ton in second quarter 2005 of $710 was up 4% compared with first
quarter 2005 cost per ton of $684 primarily due to:
- higher coal, iron ore, and electricity costs;
- the flow through of high cost inventories produced in the first
quarter;
- higher spending for repairs and maintenance and supplies at Stelco
Hamilton and Stelco Lake Erie;
- a higher value-added mix of sales primarily due to increased prepaint
sales and reduced billet sales;
- reduced output at the Integrated Steel finishing mills required to
achieve steel inventory reductions.
The above cost increases were partially offset by:
- $14 million for the balance of the insurance claim recovery related
to the June 2004 Stelco Lake Erie blast furnace outage (bringing the
total recovery to $24 million);
- improved fuel usage and metallic mix;
- lower purchased coke and scrap prices.
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 2005 2004(xx) 2004(xx)
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Net sales $ 888 968 898 941
Operating earnings (loss) $ 78 118 26 101
Net earnings (loss) from
continuing operations $ 32 48 (8) 58
Net earnings (loss) $ 40 49 1 58
Earnings (loss) from
continuing operations
per common share +
Basic (x)$ 0.31 0.47 (0.08) 0.57
Fully diluted (x)$ 0.28 0.40 (0.08) 0.49
Net earnings (loss) per
common share +
Basic (x)$ 0.39 0.48 0.01 0.57
Fully diluted (x)$ 0.34 0.41 0.01 0.49
-------------------------------------------------------------------------
(in millions except as
indicated(x)) (unaudited) 2004(xx) 2004(xx) 2003(xx) 2003(xx)
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Net sales 881 769 688 645
Operating earnings (loss) 72 3 (139) (48)
Net earnings (loss) from
continuing operations 42 (36) (398) (45)
Net earnings (loss) 42 (37) (398) (45)
Earnings (loss) from
continuing operations
per common share +
Basic 0.41 (0.35) (3.89) (0.44)
Fully diluted 0.36 (0.35) (3.89) (0.44)
Net earnings (loss) per
common share +
Basic 0.41 (0.36) (3.89) (0.44)
Fully diluted 0.36 (0.36) (3.89) (0.44)
-------------------------------------------------------------------------
(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 June 30 Six months ended June 30
($ in millions,
except as Favourable Favourable
indicated(x)) (Unfavour- (Unfavour-
(unaudited) 2005 2004 able) 2005 2004 able)
-------------------------------------------------------------------------
Net sales $ 690 $ 688 $ 2 $1,470 $1,301 $ 169
Costs 602 625 23 1,244 1,217 (27)
Gain on sale of
plate mill assets
(Note 5) (20) - 20 (20) - 20
Amortization of
property, plant,
and equipment 28 27 (1) 55 55 -
-------------------------------------------------------------------------
Operating
earnings $ 80 $ 36 $ 44 $ 191 $ 29 $ 162
-------------------------------------------------------------------------
Shipments
(thousands of
net tons) 882 1,018 (136) 1,855 2,070 (215)
Average
revenue
per ton (x)$ 782 (x)$ 676 (x)$ 106 (x)$ 792 (x)$ 629 (x)$ 163
Cost per
ton (x)$ 683 (x)$ 614 (x)$ (69)(x)$ 671 (x)$ 588 (x)$ (83)
Semi-finished
steel production
(thousands of
net tons) 1,054 1,085 (31) 2,074 2,218 (144)
-------------------------------------------------------------------------
Overview
Operating earnings in second quarter 2005 increased by $44 million
compared to second quarter 2004. However, second quarter 2005 included two
significant non-recurring items, which positively impacted operating earnings
in that period:
- $20 million gain on sale of plate mill assets;
- $14 million for the balance of the insurance claim recovery related
to the June 2004 blast furnace outage (bringing the total recovery to
$24 million).
Market demand softened throughout the second quarter of 2005, which
caused a decline in spot market prices. Customer inventory levels remained
high in the quarter, particularly within the steel service centre and tubular
markets. Contract pricing, which is expected to represent approximately 53% of
the Integrated steel business shipments, has remained stable in 2005. North
American steel producers have reduced production levels in the second quarter
of 2005, attempting to better balance supply with demand, which ultimately may
stabilize steel pricing. Following the seasonal shutdowns, automotive demand
is forecast to remain constant through the balance of the third quarter of
2005. Spot market prices appear to be stabilizing due to lower steel
production, and reduced customer inventory levels.
Net Sales, Costs and Production
Net sales for the Integrated Steel segment in second quarter 2005 were
$690 million compared with $688 million in second quarter 2004. Average
revenue per ton of $782 was up 16%. The second quarter 2005 increase in
average revenue per ton was primarily due to the renewal of customer contracts
for 2005 at substantially higher prices. A softer market had a negative impact
on shipments and spot market prices.
For the first six months of 2005, net sales for the Integrated Steel
segment were $1,470 million compared with $1,301 million for the same period
2004. The 13% increase in net sales was primarily due to:
- renewal of customer contracts at substantially higher prices;
- improved market demand which had the effect of raising spot prices in
the first quarter;
- selling price surcharges implemented to cover high raw material and
energy costs in the first quarter.
Cost per ton increased $69 in the second quarter compared with the same
quarter of 2004. Cost per ton increased $83 in the first six months compared
with the same period 2004. These increases were primarily due to:
- a rise in raw material and energy costs, particularly scrap, coal,
iron ore, natural gas and electricity;
- the flow through of high cost inventories produced in the first
quarter;
- higher spending for repairs and maintenance and supplies;
- reduced output at the primary operations and finishing mills required
to achieve steel inventory reductions.
The above cost increases were partially offset by:
- $14 million for the balance of the insurance claim recovery related
to the June 2004 Stelco Lake Erie blast furnace outage (bringing the
total recovery to $24 million);
- the impact of a stronger Canadian dollar on U.S. dollar denominated
purchases;
- lower purchased coke prices.
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 costs 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
scheduled 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 Stelco Hamilton 56-inch mill will be closed.
Currently, 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. New pickle line
facilities are included as part of the Corporation's strategic capital
requirements.
Labour Matters
The Stelco Lake Erie labour contract with Local 8782 of the USW expired
on July 31, 2004. The local union and the Corporation had agreed to provide
90 days notice prior to the commencement of a strike or lockout. On July 25,
2005, Local 8782 held a strike vote of which 98% of attending members voted in
favour, thus authorizing the executive to call a strike. On July 27, 2005,
Local 8782 delivered a 90-day strike notice to Stelco. While the Union has
provided the Corporation with a 90-day strike notice, the parties are subject
to the Order of the Court dated June 14, 2004. That Order specifically states
that the Minister of Labour cannot take any step under the Labour Relations
Act that would put the parties in a legal position to strike or effect a
lockout and as a result the Union may not have that legal right to strike
90 days from July 27, 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.
Trade
The overall year-to-date level of steel imports through the end of April
2005 was approximately 51% of the Canadian apparent steel consumption, about
10% higher than the comparable 2004 figures.
On March 23, 2005, Canada, United States and Mexico set up the Security
and Prosperity Partnership of North America. As part of this initiative, a
North America Steel Strategy is to be developed and put in place by 2006. The
strategy will be implemented by the three levels of government in Canada and
the North American Steel Trade Committee (NASTC) to promote growth,
competitiveness and prosperity in the steel industry. Stelco is a member of
the NASTC committee.
Mini-mill segment
The Mini-mill segment of the Corporation includes Norambar Inc.
("Norambar") and AltaSteel Ltd. ("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 2004 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. The Corporation
has identified potential buyers for these businesses. Completing transactions
may be affected by the progress of the Corporation's restructuring.
Mini-mill
Three months ended June 30 Six months ended June 30
($ in millions,
except as Favourable Favourable
indicated(x)) (Unfavour- (Unfavour-
(unaudited) 2005 2004 able) 2005 2004 able)
-------------------------------------------------------------------------
Net sales $ 123 $ 136 $ (13) $ 251 $ 241 $ 10
Costs 117 110 (7) 234 206 (28)
Amortization of
property, plant,
and equipment 2 2 - 4 4 -
-------------------------------------------------------------------------
Operating
earnings $ 4 $ 24 $ (20) $ 13 $ 31 $ (18)
-------------------------------------------------------------------------
Shipments
(thousands of
net tons) 202 229 (27) 417 434 (17)
Average revenue
per ton (x)$ 609 (x)$ 594 (x)$ 15 (x)$ 602 (x)$ 555 (x)$ 47
Cost per
ton (x)$ 579 (x)$ 480 (x)$ (99)(x)$ 561 (x)$ 475 (x)$ (86)
Semi-finished
steel production
(thousands of
net tons) 243 242 1 479 475 4
-------------------------------------------------------------------------
Overview
AltaSteel's performance was strong in second quarter 2005 and for the
first six months due to strong marketplace demand, record production levels
and continued high shipment levels. The decrease in the Mini-mill segment
performance was due to weaker market demand and higher costs at Norambar.
Net Sales, Costs and Production
Net sales for the Mini-mill segment in second quarter 2005 were
$123 million compared with $136 million in second quarter 2004. Shipments of
202,000 net tons in the quarter were 27,000 net tons lower than the same
quarter of 2004. Average revenue per ton increased to $609 in second quarter
2005 from $594 per ton in the same quarter of 2004. The decrease in sales
revenue and shipments in second quarter 2005 was primarily due to:
- high customer inventory levels, which caused weaker market demand for
Norambar products;
- the sustained strength of the Canadian dollar.
Net sales for the Mini-mill segment for the first six months of 2005 were
$251 million compared with $241 million in the same period 2004. Shipments of
417,000 net tons in the first six months were 17,000 net tons lower than the
same period 2004. The increase in sales revenue was primarily due to:
- improved market demand at AltaSteel, and higher selling prices;
- selling price surcharges implemented to cover high raw material and
energy costs.
Cost per ton increased $99 in the second quarter compared with the same
quarter of 2004. Cost per ton increased $86 in the first six months of 2005,
compared with the same period 2004. The increase was primarily due to:
- a rise in raw material costs, particularly scrap, fluxes, and
reagents;
- higher spending for repairs and maintenance and supplies at Norambar;
- writedown of scrap inventory to current market value at Norambar.
The Corporation expects that selling prices will be lower at Norambar for
the balance of 2005 due to high inventory levels at reinforcing bar ("rebar")
fabricators and the sustained strength of the Canadian dollar. The billet
market was very soft in the second quarter. The Norambar steelmaking operation
was shut down for one week in July to reduce inventories. Marketplace demand
for AltaSteel's products continues to be strong, particularly in the mining
sector, which is being driven by high metal prices.
Facilities
The steelmaking and bar mill facilities at AltaSteel established
quarterly production records.
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 USW 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 USW 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 continue to be a major concern for both
AltaSteel and Norambar since the value for duty is approximately 20% below
comparable product sourced from the U.S. Both businesses continue to assess
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 diameter pipe and tubular products,
and grinding balls.
The Corporation's 2004 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.
On March 30, 2005, the Court approved the sale of the Corporation's 40%
partnership interest in Camrose Pipe to Canadian National Steel Corporation.
The transaction closed with proceeds on the sale of $23 million 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. The resulting gain of
$3 million, net of $1 million tax, from the sale was included in discontinued
operations during second quarter 2005. The Consolidated Financial Statements
have been retroactively restated to separately disclose partnership earnings
and cash flows as part of discontinued operations.
A Letter of Intent with respect to the potential sale of the assets of
Stelpipe has been signed with a prospective purchaser. Both parties are
currently in negotiations. If a purchase and sale agreement is agreed upon,
the Corporation will seek Court approval of the sale transaction.
Manufactured Products
Three months ended June 30 Six months ended June 30
($ in millions,
except as Favourable Favourable
indicated(x)) (Unfavour- (Unfavour-
(unaudited) 2005 2004 able) 2005 2004 able)
-------------------------------------------------------------------------
Net sales $ 118 $ 133 $ (15) $ 241 $ 243 $ (2)
Costs 123 120 (3) 248 226 (22)
Amortization of
property, plant,
and equipment 1 1 - 1 2 1
-------------------------------------------------------------------------
Operating earnings
(loss) $ (6) $ 12 $ (18) $ (8) $ 15 $ (23)
-------------------------------------------------------------------------
Shipments
(thousands of
net tons) 99 120 (21) 197 242 (45)
Average revenue
per ton (x)$1,192 (x)$1,108 (x)$ 84 (x)$1,223 (x)$1,004 (x)$ 219
Cost per
ton (x)$1,242 (x)$1,000 (x)$ (242)(x)$1,259 (x)$ 934 (x)$ (325)
-------------------------------------------------------------------------
Net Sales and Costs
The Manufactured Products segment had net sales of $118 million in second
quarter 2005 compared with $133 million in second quarter 2004. Shipments of
99,000 tons in the second quarter were 21,000 tons lower than the same period
2004. The decrease in sales revenue and shipments was primarily due to:
- weak demand for wire and wire products;
- the negative impact of the high Canadian dollar on U.S. denominated
sales.
Cost per ton increased $242 or 24% in second quarter 2005 to $1,242 when
compared to second quarter 2004 mainly due to the increased cost of hot roll
and rod, as raw materials.
Manufactured Products net sales of $241 million in the first six months
compared with $243 million in the same period 2004. Shipments of 197,000 tons
in the first six months were 45,000 tons lower than the same period 2004 due
to weaker market conditions.
Cost per ton increased $325 or 35% in the first six months of 2005 to
$1,259 when compared to the same period 2004, mainly due to the increased cost
of hot roll and rod, as raw materials.
Near term demand for wire and wire products continues to be weak due to
the high Canadian dollar and the return of imports into the domestic market.
The demand for automotive and specialty tubing remains strong. Wet weather in
western Canada has restricted the drilling season and the demand for
Stelpipe's oil-country tubular goods (OCTG) products.
Facilities
The property and plant of Welland Pipe is listed for sale. The
Corporation is currently discussing offers with interested parties. The net
book value of these assets is nominal.
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.
The sale closed on June 29, 2005 when title to the assets passed to the
purchaser. 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 USW Local 5328 expired on July
31, 2005 and operations are continuing.
Trade
On June 3, 2005, the Canadian International Trade Tribunal (CITT)
rescinded its anti-dumping finding originating in 1983 on carbon steel welded
pipe from South Korea. The CITT ruled that shipments from South Korea are not
likely to cause material injury to the Canadian industry even if priced below
home market.
Imports of standard pipe and OCTG from China are a major concern for
Stelpipe. The value for duty of Chinese standard pipe is about 48% below that
of comparable product sourced from the U.S.A.; while the value for Chinese
OCTG is about 35% below that of comparable product sourced from the U.S.A.
Stelpipe is assessing various remedies to such unfair trade with other North
American pipe producers for these Chinese imports.
Risks and Uncertainties
Primary Risk
Creditor Protection and Restructuring
The Corporation has been granted creditor protection under the CCAA.
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 acceleration, creating
an immediate liquidity crisis which in all likelihood would lead to the
liquidization of the Applicants' assets.
On July 15, 2005, Stelco filed with the Court a restructuring plan
outline describing a proposed restructuring that it believes will ensure a
viable company over the long term and fairly balance the interest of
stakeholders. Stelco intends to return to Court on or prior to September 9,
2005 to file a formal CCAA plan, to seek a further extension of the stay
period, and to seek a Meeting Order.
The Corporation's plan outline (see Creditor Protection - Restructuring
Plan Outline) details the treatment of existing equity holders. There can be
no assurance this plan will ultimately be approved. Uncertainty and risk
remains as to the value of existing common shares upon implementation of a
restructuring plan.
To date the proposed plan outline has not been finalized and has not yet
been endorsed by any stakeholder group, therefore there is no assurance that
the Plan will be accepted or will be the same as this proposal. The
Consolidated Financial Statements do not reflect any accounting adjustments
related to the transactions in the restructuring plan outline.
Other Risks and Uncertainties
Labour Matters
The Stelco Lake Erie labour contract with Local 8782 of the USW expired
on July 31, 2004. The local union and the Corporation had agreed to provide
90 days notice prior to the commencement of a strike or lockout. On July 25,
2005, Local 8782 held a strike vote of which 98% of attending members voted in
favour, thus authorizing the executive to call a strike. On July 27, 2005,
Local 8782 delivered a 90-day strike notice to Stelco. While the Union has
provided the Corporation with a 90-day strike notice, the parties are subject
to the Order dated June 14, 2004. That Order specifically states that the
Minister of Labour cannot take any step under the Labour Relations Act that
would put the parties in a legal position to strike or effect a lockout and as
a result the Union may not have that legal right to strike 90 days from July
27, 2005.
The collective bargaining agreement between USW 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 USW 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 USW Local 5328 expired on
July 31, 2005 and operations are continuing.
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
The loss of the exemption under Section 5.1 of the Regulation under the
Pension Benefit Act (Ontario) without an acceptable funding alternative would
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 such a precipitous event (see Creditor Protection and
Restructuring - Pension Plans).
Pricing
Selling prices have softened in the second quarter of 2005. North
American steel producers have reduced production levels in the second quarter
of 2005, attempting to better balance supply with demand, which ultimately may
stabilize steel pricing. Following the seasonal shutdowns, automotive demand
is forecast to remain constant through the balance of the third quarter of
2005. Spot market prices appear to be stabilizing due to lower steel
production and reduced inventory levels.
Costs
The Corporation must continue with its efforts to lower costs in order to
ensure its long-term viability. The Corporation's strategic capital spending
program and other cost reduction initiatives (e.g. managed attrition; reduced
repairs and maintenance) are key to achieving this objective.
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 into 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 restructuring 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. A significant
delay or failure to complete a restructuring could affect the ability of the
Corporation to move ahead with some of the capital projects.
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 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, maintenance of 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, is now
planned for the second quarter of 2006. 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 pre-filing
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 implement critical capital projects, and
resolve pension issues, and labour negotiations or disputes.
The Corporation's liquidity and capital resources position is summarized
as follows:
As at June 30 As at Dec 31
(in millions) 2005 2004(x) 2004(x)
-------------------------------------------------------------------------
Cash, cash equivalents and restricted
cash $ 26 $ 38 $ 43
Available lines of credit(a) 472 459 456
Less: Lines of Credit drawn down (91) (259) (215)
-------------------------------------------------------------------------
Net liquidity $ 407 $ 238 $ 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 June 30 As at Dec 31
(in millions) 2005 2004 2004
-------------------------------------------------------------------------
Cash, cash equivalents and restricted
cash $ 10 $ 20 $ 24
Available lines of credit(a) 405 407 400
Less: Lines of Credit drawn down (52) (238) (187)
-------------------------------------------------------------------------
Net liquidity $ 363 $ 189 $ 237
-------------------------------------------------------------------------
(a) After letters of credit usage and including a $75 million DIP Credit
Agreement
On June 27, 2005, Norambar amended its operating credit facility from
$30 million to $40 million. The amended facility is available until January
28, 2007 with borrowings subject to an interest rate of Canadian prime rate
plus 1%. Accounts receivable, inventory, and other assets of Norambar and its
wholly owned subsidiary collateralize the facility. Norambar is required to
maintain a minimum of $5 million of excess eligible collateral over its
borrowings and letters of credit.
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/reports/LiquidityChart0805.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
(in millions) Three months ended June 30 Six months ended June 30
Favourable Favourable
Cash provided by (Unfavour- (Unfavour-
(used for) 2005 2004 able) 2005 2004 able)
-------------------------------------------------------------------------
Net earnings from
continuing
operations
adjusted for
items not
affecting cash $ 78 $ 114 $ (36) $ 208 $ 163 $ 45
Changes in
operating
elements of
working capital (9) (102) 93 (47) (132) 85
Directors and
Officers in trust - - - - (10) 10
Proceeds on sale
of Camrose Pipe
(Note 5) 23 - 23 23 - 23
Expenditure for
capital assets (52) (6) (46) (71) (19) (52)
Reduction of
long-term debt
(Note 12) (2) (1) (1) (9) (24) 15
Other - net 5 (3) 8 4 (7) 11
-------------------------------------------------------------------------
Change in net
cash position $ 43 $ 2 $ 41 $ 108 $ (29) $ 137
-------------------------------------------------------------------------
Operating Activities
A $41 million improvement in net cash was realized during second quarter
2005 when compared to the corresponding period in 2004. A reduction of working
capital investment ($93 million) partially offset by increased capital
expenditures ($46 million) accounted for the majority of the improvement.
Net cash generated during the six months ended June 30, 2005 was
$108 million compared to $29 million consumed during the same period in 2004.
Much of the $137 million improvement pertained to a reduction of working
capital investment ($85 million) and strength in operating earnings adjusted
for items not affecting cash ($45 million).
Working capital represented a significant component of operating cash
flows during both second quarter and six months ended June 30, 2005 and 2004
as identified below:
(in millions) Three months ended June 30 Six months ended June 30
Favourable Favourable
Cash provided by (Unfavour- (Unfavour-
(used for) 2005 2004 able) 2005 2004 able)
-------------------------------------------------------------------------
Accounts
Receivable $ 88 $ (39) $ 127 $ (12) $ (140) $ 128
Inventories (104) (60) (44) (54) (35) (19)
Accounts Payable
and accrued 9 25 (16) 7 81 (74)
Other (2) (28) 26 12 (38) 50
-------------------------------------------------------------------------
Total $ (9) $ (102) $ 93 $ (47) $ (132) $ 85
-------------------------------------------------------------------------
Accounts Receivable
$88 million was provided during second quarter 2005 due to reduced
accounts receivable largely resulting from weaker shipments during the latter
half of second quarter 2005 compared to those in the latter half of first
quarter 2005.
$39 million was consumed to finance an increase in receivables during
second quarter 2004 pertaining to dramatically higher pricing offset partially
by lower shipments during the latter half of second quarter 2004 compared to
the latter half of first quarter 2004.
For the six months ended June 30, 2005, $12 million was required to
finance an increase in receivables. Cash required to finance strong shipments
in first quarter 2005 was largely recovered during second quarter 2005 due to
weaker shipments.
$140 million was required to finance an increase in receivables for the
first six months of 2004 due to significantly higher selling prices and
stronger shipments than those experienced in the latter half of fourth quarter
2003.
Inventories
During second quarter 2005, $104 million was consumed to finance the
seasonal replenishment of raw material volumes to required operating levels as
the shipping season opened. As well, steel inventory levels increased due to
weaker market demand which resulted in reduced shipments.
$60 million was required for inventories during second quarter 2004 due
to the seasonal replenishment and higher cost of raw materials principally
coke and scrap, and their effect on the cost of steel.
For the first six months of 2005, $54 million was required for
inventories mainly due to the higher costs of raw material inputs; in addition
steel inventory levels increased to higher than required levels due to weaker
market demand and the resulting reduced shipments.
$35 million was required to finance inventories for the six months ended
June 30, 2004 mainly due to higher raw material input costs, principally coke
and scrap.
Accounts Payable and Accrued
During second quarter 2004, $25 million was sourced from accounts
payables and accrued liabilities largely due to the staying of post-filing
interest under the Initial Order, in addition to increasing surcharge
reserves, in accordance with GAAP, relating to contract business.
$81 million was provided from accounts payables and accrued liabilities
during the first six months of 2004. The majority related to the staying of
pre-filing trade payables and both pre- and post-filing interest under the
Initial Order and surcharge reserves partially offset by the erosion of credit
terms following the CCAA filing as the majority of suppliers required either
cash or prepayment terms.
Other
Prepaids consumed the majority of the $28 million required during second
quarter 2004 largely due to suppliers switching the Corporation to prepayment
terms in reaction to the CCAA filing and staying of pre-filing trade payables.
For the six months ended June 30, 2005, $12 million of cash was provided
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.
$38 million was required during the first six months of 2004, 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
During second quarter 2005, $52 million of capital expenditures were
incurred, largely due to the ramp up of the Stelco Lake Erie hot strip mill
upgrade, the roughing mill equipment upgrade at AltaSteel, and various
projects at the Corporation's mining interests. This was partially offset by
proceeds on the sale of Camrose Pipe of $23 million.
During second quarter 2004 capital spending amounted to $6 million and
related mainly to the Corporation's ERP systems and the move of the Corporate
Offices to the Stelco Hamilton Plant.
For six months ended June 30, 2005, capital expenditures amounted to
$71 million pertaining to the Stelco Lake Erie hot strip mill upgrade, the
AltaSteel roughing mill equipment upgrade, and various projects at the mining
interests of the Corporation.
Capital expenditures for first six months of 2004 were $19 million
consisting of spending on various projects at the mining interests of the
Corporation, a new processing line at Baycoat, and the Corporation's ERP
systems.
Financing activities
Reduction of long-term debt during second quarter 2005 ($2 million) and
2004 ($1 million) pertained to regularly scheduled repayments of non-Applicant
Debt.
During the six months ended June 30, 2005, reduction of long-term debt of
$9 million and $8 million during the comparable period of 2004 (excluding the
$16 million refinancing of long-term debt with an operating credit facility at
Norambar) represented regularly scheduled repayments of non-Applicants. The
quarterly installment on the term loan associated with the Stelco Hamilton
plate mill was not made during first quarter 2004 resulting in the default of
this debt (see Note 12 to the Consolidated Financial Statements).
Off-Balance Sheet Arrangements
Other than operating lease obligations, the Corporation had no off-
balance sheet arrangements as at June 30, 2005 or 2004 or December 31, 2004.
Critical Accounting Assumptions and Estimates
The Corporation'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 six 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 as outlined in Note 3 to
the Consolidated Financial Statements.
Outlook
The North American steel industry has experienced a softening in both
demand and pricing since the third quarter of 2004 as a result of increased
import activity and excessive customer inventories. The softening in the
market has continued through 2005 especially in the service center, tubular
and construction sectors, and to a lesser extent, the automotive sector. The
current spot market pricing for hot roll coils, Stelco's largest product
category, has declined approximately 26% since April 2005.
The North American steel market selling prices have been very volatile
over the past year and are highly dependent on North American and worldwide
steel demand and supply variables, which are not within Stelco's control. In
addition, commodity raw material and energy input costs such as scrap, coke,
coal, iron ore, electricity and natural gas have also been volatile. Much
uncertainty continues to exist with respect to these variables. Stelco's
future financial results are highly dependent on the direction of these
variables, which at the present time are difficult to project.
North American steel producers have reduced production levels in the
second quarter of 2005, attempting to better balance supply with demand, which
ultimately may stabilize steel pricing. Following the seasonal shutdowns,
automotive demand is forecast to remain constant through the balance of the
third quarter of 2005. Spot market prices appear to be stabilizing due to
lower steel production, and reduced customer inventory levels.
The Corporation expects that third quarter 2005 results will be
significantly lower than second quarter and that there will be increased
drawings on the Stelco Inc. credit facility. In the fourth quarter, as a
result of a planned shutdown of the Lake Erie hot strip mill to install
components related to the Phase II upgrade, significant shipments of semi-
finished steel are planned. There is a risk that market demand may not support
the projected level of slab sales. While there is currently a Court order
outstanding that prevents a strike by Local 8782, there is a risk that the
delivery of the 90-day strike notice from Local 8782 could result in
disruptions to the Corporation's business.
On July 15, 2005, Stelco filed with the Court a restructuring plan
outline describing a proposed restructuring that it believes will ensure a
viable company over the long term and fairly balance the interest of the
stakeholders. Stelco intends to return to Court on or prior to September 9,
2005 to file a formal CCAA plan, to seek a further extension of the stay
period, and to seek a meeting order.
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
August 4, 2005
Courtney Pratt William E. Vaughan
President and Chief Executive Officer Senior Vice President - Finance
and Chief Financial Officer
CONSOLIDATED STATEMENT OF EARNINGS
(Under Creditor Protection as of
January 29, 2004 - Note 1)
(in millions - except per Three months ended Six months ended
share amounts) (unaudited) June 30 June 30
Restated Restated
(Notes 3 and 9) (Notes 3 and 9)
2005 2004 2005 2004
-------------------------------------------------------------------------
Net sales $ 888 $ 881 $1,856 $1,650
Costs 799 779 1,620 1,514
-------------------------------------------------------------------------
89 102 236 136
Gain on sale of plate mill
assets (Note 5) (20) - (20) -
Amortization of property,
plant, and equipment 30 29 58 60
Amortization of intangible
assets 1 1 2 1
-------------------------------------------------------------------------
Operating earnings 78 72 196 75
Reorganization items (Note 4) (13) (7) (34) (30)
-------------------------------------------------------------------------
65 65 162 45
-------------------------------------------------------------------------
Financial expense
Interest on long-term debt and
debt subject to compromise (11) (11) (21) (23)
Other interest - net (2) (6) (6) (11)
-------------------------------------------------------------------------
Earnings before income taxes
from continuing operations 52 48 135 11
Income tax expense (recovery)
(Note 10)
Current 8 4 28 5
Future 8 11 14 3
Future income tax asset
valuation allowance (release) 4 (9) 13 (3)
-------------------------------------------------------------------------
Net earnings from continuing
operations 32 42 80 6
Net earnings (loss) from
discontinued operations
(Note 9) 8 - 9 (1)
-------------------------------------------------------------------------
Net earnings $ 40 $ 42 $ 89 $ 5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per common share
(Note 17)
Basic
Continuing operations $ 0.31 $ 0.41 $ 0.78 $ 0.06
Net earnings $ 0.39 $ 0.41 $ 0.87 $ 0.05
Fully Diluted
Continuing operations $ 0.28 $ 0.36 $ 0.68 $ 0.06
Net earnings $ 0.34 $ 0.36 $ 0.75 $ 0.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average common
shares outstanding - millions 102.2 102.2 102.2 102.2
See Notes to Consolidated Financial Statements
OPERATIONS (thousands of net tons) (Unaudited)
Production of semi-finished
steel 1,297 1,327 2,553 2,693
Shipments 1,125 1,249 2,325 2,515
CONSOLIDATED STATEMENT OF RETAINED DEFICIT
(Under Creditor Protection as of
January 29, 2004 - Note 1)
Six months ended June 30
(in millions) (unaudited) Restated
(Note 3)
2005 2004
-------------------------------------------------------------------------
Balance at beginning of year $ (388) $ (452)
Net earnings 89 5
-------------------------------------------------------------------------
Balance at end of period $ (299) $ (447)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Under Creditor Protection as of
January 29, 2004 - Note 1)
At June 30 At December 31
(in millions) (unaudited) 2005 2004 2004
-------------------------------------------------------------------------
Current assets
Cash and cash equivalents $ 12 $ 38 $ 32
Restricted cash (Note 6) 14 - 11
Accounts receivable 504 524 470
Inventories 889 613 844
Prepaid expenses 45 67 38
Future income taxes 16 - 15
-------------------------------------------------------------------------
1,480 1,242 1,410
-------------------------------------------------------------------------
Current liabilities
Current liabilities not subject to
compromise
Bank and other short-term indebtedness
(Note 11) 91 259 216
Accounts payable and accrued 276 254 283
Employee future benefits 62 49 62
Income and other taxes 29 18 10
Long-term debt due within one year
(Note 12) 44 44 44
-------------------------------------------------------------------------
502 624 615
-------------------------------------------------------------------------
Working capital 978 618 795
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other assets
Property, plant, and equipment 1,002 1,043 999
Intangible assets 69 65 66
Deferred pension cost 175 229 213
Future income taxes 7 1 6
Assets held for sale (Note 9) - 3 -
Other 22 27 24
-------------------------------------------------------------------------
1,275 1,368 1,308
-------------------------------------------------------------------------
Total investment 2,253 1,986 2,103
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other liabilities
Other liabilities not subject to
compromise
Employee future benefits 929 902 907
Long-term debt (Note 12) 40 57 49
Future income taxes 148 78 120
Asset retirement obligations 14 12 12
-------------------------------------------------------------------------
1,131 1,049 1,088
-------------------------------------------------------------------------
Liabilities subject to compromise
(Note 7) 601 565 583
-------------------------------------------------------------------------
Shareholders' equity $ 521 $ 372 $ 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 (299) (447) (388)
-------------------------------------------------------------------------
$ 521 $ 372 $ 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)
Three months ended Six months ended
CASH PROVIDED BY (USED FOR) June 30 June 30
Restated Restated
(Notes 3 and 9) (Notes 3 and 9)
2005 2004 2005 2004
-------------------------------------------------------------------------
Operating activities
Net earnings from continuing
operations $ 32 $ 42 $ 80 $ 6
Adjustments for items not
affecting cash
Reorganization items (Note 4) - - - 17
Amortization of property,
plant, and equipment 30 29 58 60
Amortization of intangible
assets 1 1 2 1
Future income taxes 8 11 14 3
Future income tax asset
valuation allowance 4 (9) 13 (3)
Employee pension and other
future benefits 27 38 64 76
Gain on sale of plate mill
assets (Note 5) (20) - (20) -
Gain on sale of Camrose Pipe
(Note 5) (4) - (4) -
Other - 2 1 3
-------------------------------------------------------------------------
78 114 208 163
Changes in operating elements
of working capital (see below) (9) (102) (47) (132)
Other - net 3 1 3 (2)
Discontinued operations (Note 9) 2 (4) (5) (5)
-------------------------------------------------------------------------
74 9 159 24
-------------------------------------------------------------------------
Investing activities
Directors' and officers' trust
(Note 1) - - - (10)
Proceeds on sale of Camrose Pipe
(Note 5) 23 - 23 -
Expenditures for capital assets (52) (6) (71) (19)
Discontinued operations (Note 9) - - (1) -
-------------------------------------------------------------------------
(29) (6) (49) (29)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing activities
Increase (decrease) in bank
indebtedness (66) (42) (125) 44
Reduction of long-term debt
(Note 12) (2) (1) (9) (24)
Discontinued operations (Note 9) - - 7 -
-------------------------------------------------------------------------
(68) (43) (127) 20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash, cash equivalents and
restricted cash
Net increase (decrease) (23) (40) (17) 15
Balance at beginning of period 49 78 43 23
-------------------------------------------------------------------------
Balance at end of period $ 26 $ 38 $ 26 $ 38
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consists of:
Cash and cash equivalents 12 38 12 38
Restricted cash (Note 6) 14 - 14 -
-------------------------------------------------------------------------
26 38 26 38
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes in operating elements of
working capital
Accounts receivable $ 88 $ (39) $ (12) $ (140)
Inventories (104) (60) (54) (35)
Prepaid expenses (2) (29) (7) (44)
Accounts payable and accrued 9 25 7 81
Income and other taxes - 1 19 6
-------------------------------------------------------------------------
$ (9) $ (102) $ (47) $ (132)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
September 9, 2005, and may potentially be extended to such later
dates as the Court may order. The purpose of the Initial Order and
stay of proceedings was to provide the Applicants with relief
designed to stabilize their operations and business relationships
with their customers, suppliers, employees, and 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.
Restructuring Plan Outline
During the proceedings, the Corporation has sought input from its
stakeholders with a view to developing a comprehensive restructuring
plan to allow the Corporation to exit CCAA in an orderly fashion. On
July 15, 2005, Stelco filed with the Court a plan outline describing
a proposed restructuring that it believes will ensure a viable
company over the long term and fairly balance the interests of
stakeholders.
On July 18, 2005, the Court granted an order in Stelco's CCAA
proceedings extending the stay of proceedings until September 9,
2005. The USW has brought a motion seeking to remove Stelco's
exclusive authority to prepare and file a restructuring plan in its
CCAA proceedings. The motion has been adjourned until August 16,
2005. Stelco intends to return to Court on or prior to September 9,
2005 to file a formal CCAA plan, to seek a further extension of the
stay period, and to seek a meeting order (the "Meeting Order"). The
Meeting Order, if granted, will approve the procedures with respect
to the calling and conduct of a meeting of affected creditors to
consider and vote upon the Company's restructuring plan, as well as
the manner in which the materials for such meeting will be
distributed.
Highlights of the proposed restructuring plan, filed with the Court
on July 15, 2005, include:
- A plan to retire the Corporation's four principal core business
pension plan solvency deficiencies of about $1.3 billion by 2015.
It is intended that the pension plans will receive approximately
$200 million in upfront contributions and $98 million in cash
payments annually thereafter.
- Secured operating lenders (Note 11) are proposed to be refinanced
at the time of plan implementation.
- Unsecured creditors (Note 7) are proposed to receive full recovery
on approximately $666 million owed to them by receiving securities
including a pro rata share of secured and unsecured convertible
notes and new common shares.
Equity holders (Note 14) at the time of emergence from Court
protection will receive less than 2% of the fully diluted shares
outstanding unless they exercise the right to purchase common
shares through a $100 million rights offering to be available to
such equity holders and/or exercise warrants to purchase 10% of the
Corporation on a fully-diluted basis. If all rights and warrants
were exercised, the Corporation would receive proceeds of
$190 million and the percentage holdings of such equity
participants would rise to approximately 37% fully diluted. The
warrants would have a ten year term.
The proposed restructuring plan outline has two phases:
Phase One: Immediately upon the Corporation's exit from CCAA, the
issuance to unsecured creditors of $566 million of new
debt and $100 million of new equity. This phase will
also provide for the contribution into the Company's
four main pension plans of $100 million in secured
floating rate notes and up to $100 million in cash
from proceeds of the sale of the non-core assets,
subject to a pension funding agreement having been
reached with the Government of Ontario.
Phase Two: On the condition of a pension funding agreement with
the Government of Ontario and the renewal of
collective bargaining agreements at Lake Erie and
Hamilton, $200 million of debt issued in phase one
will be converted to equity and the $100 million
rights offering is expected to be completed.
The sale process is continuing with respect to the Non-Core
Subsidiaries (Note 5).
To date the proposed plan outline has not been finalized and has not
yet been endorsed by any stakeholder group, therefore there is no
assurance that the Plan will be accepted or will be the same as this
proposal. These consolidated financial statements do not reflect any
accounting adjustments related to the transactions in the
restructuring plan outline.
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 should the
Province of Ontario remove the 5.1 election on pension funding
without amending the Corporation's pension funding requirements, 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 acceleration, creating an
immediate liquidity crisis which in all likelihood would lead to the
liquidization of the Applicants' assets.
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. Based
on the proposed plan outline, fresh start accounting will be
required.
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. Without the benefit
of the Section 5.1 election, 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. The July 15, 2005
proposed restructuring plan includes a plan to retire the
Corporation's four principal pension plan solvency deficiencies of
about $1.3 billion by 2015.
The loss of the exemption under Section 5.1 of the Regulation under
the Pension Benefit Act (Ontario) without an acceptable funding
alternative would 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 such a
precipitous event.
Labour related restructuring matters
The Stelco Lake Erie labour contract with Local 8782 of the USW
expired on July 31, 2004. The local union and the Corporation had
agreed to provide 90 days notice prior to the commencement of a
strike or lockout. On July 25, 2005, Local 8782 held a strike vote of
which 98% of attending members voted in favour, thus authorizing the
executive to call a strike. On July 27, 2005, Local 8782 delivered a
90-day strike notice to Stelco. While the Union has provided the
Corporation with a 90-day strike notice, the parties are subject to
the Court Order dated June 14, 2004. That Order specifically states
that the Minister of Labour cannot take any step under the Labour
Relations Act that would put the parties in a legal position to
strike or effect a lockout and as a result the Union may not have
that legal right to strike 90 days from July 27, 2005.
The collective bargaining agreement between USW 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 USW 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 USW Local 5328 expired
on July 31, 2005 and operations are continuing.
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 where it does not conflict with Canadian GAAP. 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.
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
following table summarizes the reorganization items incurred:
(in millions) Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
---------------------------------------------------------------------
Professional fees $ 13 $ 6 $ 23 $ 12
Capital raising process
break fee(i) - - 11 -
Amortization of
Accommodation and DIP
financing fees and
write-off of deferred
financing costs on
compromised debt - 1 - 3
Adjustment of convertible
debenture balance to
anticipated claim
amount(ii) - - - 15
---------------------------------------------------------------------
Total reorganization
items $ 13 $ 7 $ 34 $ 30
---------------------------------------------------------------------
---------------------------------------------------------------------
(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 approved by the Court
October 19, 2004. 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).
The cash flow associated with reorganization and restructuring items
is summarized as follows:
(in millions) Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
---------------------------------------------------------------------
Professional fees $ 13 $ 7 $ 23 $ 10
Capital raising process
break fee (see i above) - - 11 -
Accommodation and DIP
financing fees - - - 3
---------------------------------------------------------------------
Total cash usage
(provided) $ 13 $ 7 $ 34 $ 13
---------------------------------------------------------------------
---------------------------------------------------------------------
5. NON-CORE ASSET SALES PROCESS AND ASSET SALES
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, which has been sold, offers
received for the non-core businesses are currently under review by
the Corporation, its advisors, and the Monitor with the intention to
consider the sale of its interests in these non-core businesses.
Included in the Consolidated Statement of Financial Position are the
following amounts related to these non-core businesses excluding
Camrose Pipe which is included in discontinued operations
(see Note 9):
Manufactured
Mini-mill Segment Products Segment
At June 30 (in millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Current assets $ 153 $ 133 $ 171 $ 153
Current liabilities 73 63 50 49
---------------------------------------------------------------------
Working capital 80 70 121 104
---------------------------------------------------------------------
Property, plant, and
equipment 96 88 8 30
Deferred pension cost 9 9 65 54
Future income taxes 12 9 2 2
---------------------------------------------------------------------
Other assets 117 106 75 86
---------------------------------------------------------------------
Employee future benefits 51 46 87 83
Long-term debt 14 18 - -
Future income taxes 8 8 - -
---------------------------------------------------------------------
Other liabilities 73 72 87 83
---------------------------------------------------------------------
Net Investment in
Non-Core Businesses $ 124 $ 104 $ 109 $ 107
---------------------------------------------------------------------
Further information regarding these business segments is contained in
Note 18.
The Corporation's $233 million net investment in these businesses is
funded through share capital and intercompany loans and advances. The
sale process is continuing with respect to the non-core businesses.
Completing transactions may be affected by progress on the
Corporation's restructuring. 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 these
businesses. Should the criteria of assets held for sale be met, for
some of these businesses, future losses related to the Corporation's
net investment 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
As part of the Corporation's overall effort to restructure
operations, simplify processes, and rationalize non-core resources, a
number of assets have been sold. The proceeds received from certain
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. The transaction closed with
proceeds on the sale of $23 million which were held in escrow until
the expiry of the appeal period applicable on April 20, 2005 (see
Note 9).
Stelco Hamilton Plate Mill
The sale of the plate mill assets closed on June 9, 2005. The sale
price of $25 million has been secured by irrevocable letters of
credit, which will be drawn down in tandem with progress made on
dismantling of the equipment. The letters of credit which are in
favour of the lender will be used to partially satisfy the
$27 million outstanding secured debt associated with the Stelco
Hamilton plate mill (see Note 12). The carrying value of these assets
was nil, therefore a gain (net of fees) of $20 million was recorded
during the second quarter 2005.
Welland Pipe
The sale of the U and O pipe mill closed on June 29, 2005 for
$4 million (see Note 9).
6. RESTRICTED CASH
The Corporation has recorded $14 million in restricted cash as at
June 30, 2005 (nil as at June 30, 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 the affected
claims will be settled, including payment terms, if applicable.
The Corporation continues to accrue for interest on long-term 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 are 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
are reviewed and ruled on by the claims officer. 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 are final for the purposes of recording
claims.
Claims Summary
Subject Under Adjust-
At June 30, 2005 Excepted to Review ments
(in millions) Filed (c) Review (d) (e) Recorded
---------------------------------------------------------------------
Accounts payable
and accrued
liabilities $ 128 - 128 (1) (6) $ 121
Employee related 107 (84) 23 - (22) 1
Long-term debt
(Note 12) 428 - 428 (16) - 412
Related party
claims (a) 245 (216) 29 (29) - -
Litigation and
contingencies 2,747 (5) 2,742 (2,115) (626) 1
---------------------------------------------------------------------
Total Claims $ 3,655 (305) 3,350 (2,161) (654) $ 535
---------------------------------------------------------------------
Liabilities for which no proof of claim was filed:
Post-filing interest (b) 54
Accounts payable and accrued liabilities 12
--------
Liabilities subject to compromise $ 601
--------
--------
(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). Net proceeds from the sale of the plate
mill assets will be applied against settlement of this claim (see
Note 5).
(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 venturers in
which they have claimed, in aggregate $2.1 billion against
Stelco. These claims have been filed in the event Stelco cannot
honour its obligations under the joint venture agreements.
Management and the Monitor do not believe this is a valid claim
as no breach of contracts has 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
Three months ended Reorgan- Reorgan- Consoli-
June 30, 2005 ization ization dated
(in millions) Proceedings Proceedings Eliminations Totals
---------------------------------------------------------------------
Net sales $ 741 185 (38)(1) $ 888
Costs 689 148 (38)(1) 799
---------------------------------------------------------------------
52 37 - 89
---------------------------------------------------------------------
Gain on sale of plate
mill (Note 5) - (20) - (20)
Amortization 22 9 - 31
---------------------------------------------------------------------
Operating earnings 30 48 - 78
---------------------------------------------------------------------
Intercompany income
expense(2) (2) 2 - -
Reorganization items
(Note 4) (13) - - (13)
---------------------------------------------------------------------
15 50 - 65
---------------------------------------------------------------------
Financial expense (11) (2) - (13)
---------------------------------------------------------------------
Net earnings from
continuing operations
before income taxes 4 48 - 52
Income tax expense
(recovery) (Note 10) 16 4 - 20
---------------------------------------------------------------------
Net earnings from
continuing operations (12) 44 - 32
Net earnings from
discontinued operations
(Note 9) 5 3 - 8
---------------------------------------------------------------------
Net earnings $ (7) 47 - $ 40
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Intercompany sales elimination
(2) Intercompany interest, foreign exchange and management fees
Condensed Combined Statement of Cash Flows
Entities
Entities in not in
Three months ended Reorgan- Reorgan- Consoli-
June 30, 2005 ization ization dated
(in millions) Proceedings Proceedings Totals
---------------------------------------------------------------------
Net cash provided by operating
activities(x) $ 82 (8) $ 74
---------------------------------------------------------------------
Investing activities
Proceeds on sale of Camrose Pipe
(Note 5) - 23 23
Expenditures for capital assets (40) (12) (52)
---------------------------------------------------------------------
(40) 11 (29)
---------------------------------------------------------------------
Financing activities
Dividends 16 (16) -
Increase (decrease) indebtedness (76) 10 (66)
Reduction of long-term debt (Note 12) - (2) (2)
---------------------------------------------------------------------
(60) (8) (68)
---------------------------------------------------------------------
Cash, cash equivalents and
restricted cash
Net decrease (18) (5) (23)
Balance at beginning of period 28 21 49
---------------------------------------------------------------------
Balance at end of period $ 10 16 $ 26
---------------------------------------------------------------------
---------------------------------------------------------------------
Consists of:
Cash and cash equivalents $ (4) 16 $ 12
Restricted cash (Note 6) 14 - 14
---------------------------------------------------------------------
$ 10 16 $ 26
---------------------------------------------------------------------
---------------------------------------------------------------------
(x) Includes intercompany receivables and payables
Condensed Combined Statement of Earnings
Entities
Entities in not in
Six months ended Reorgan- Reorgan- Consoli-
June 30, 2005 ization ization dated
(in millions) Proceedings Proceedings Eliminations Totals
---------------------------------------------------------------------
Net sales $ 1,571 372 (87)(1) $ 1,856
Costs 1,394 313 (87)(1) 1,620
---------------------------------------------------------------------
177 59 - 236
Gain on sale of plate
mill assets (Note 5) - (20) - (20)
Amortization 43 17 - 60
---------------------------------------------------------------------
Operating earnings 134 62 - 196
---------------------------------------------------------------------
Intercompany income
(expense)(2) (2) 2 - -
Reorganization items
(Note 4) (34) - - (34)
---------------------------------------------------------------------
98 64 - 162
---------------------------------------------------------------------
Financial expense (24) (3) - (27)
---------------------------------------------------------------------
Net earnings from
continuing operations
before income taxes 74 61 - 135
Income tax expense
(recovery) (Note 10) 52 3 - 55
---------------------------------------------------------------------
Net earnings from
continuing operations 22 58 - 80
Net earnings from
discontinued operations
(Note 9) 5 4 - 9
---------------------------------------------------------------------
Net earnings $ 27 62 - $ 89
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Intercompany sales elimination
(2) Intercompany interest, foreign exchange and management fees
Condensed Combined Statement of Cash Flows
Entities
Entities in not in
Six months ended Reorgan- Reorgan- Consoli-
June 30, 2005 ization ization dated
(in millions) Proceedings Proceedings Totals
---------------------------------------------------------------------
Net cash provided by operating
activities(x) $ 140 19 $ 159
---------------------------------------------------------------------
Investing activities
Proceeds from sale of Camrose Pipe
(Note 5) - 23 23
Expenditures for capital assets (54) (18) (72)
---------------------------------------------------------------------
(54) 5 (49)
---------------------------------------------------------------------
Financing activities
Dividends 34 (34) -
Increase (decrease) indebtedness (134) 16 (118)
Reduction of long-term debt (Note 12) - (9) (9)
---------------------------------------------------------------------
(100) (27) (127)
---------------------------------------------------------------------
Cash, cash equivalents and
restricted cash
Net increase (14) (3) (17)
Balance at beginning of period 24 19 43
---------------------------------------------------------------------
Balance at end of period $ 10 16 $ 26
---------------------------------------------------------------------
---------------------------------------------------------------------
Consists of:
Cash and cash equivalents (4) 16 $ 12
Restricted cash (Note 6) 14 - 14
---------------------------------------------------------------------
$ 10 16 $ 26
---------------------------------------------------------------------
---------------------------------------------------------------------
(x) Includes intercompany receivables and payables
Condensed Combined Statement of Financial Position
Entities
Entities in not in
Reorgan- Reorgan- Consoli-
At June 30, 2005 ization ization dated
(in millions) Proceedings Proceedings Eliminations Totals
---------------------------------------------------------------------
Current assets $ 1,182 298 - $ 1,480
Intercompany receivables 20 359 (379)(1) -
---------------------------------------------------------------------
Current assets 1,202 657 (379) 1,480
---------------------------------------------------------------------
Current liabilities $ 290 212 - 502
Intercompany payables 44 20 (64)(1) -
---------------------------------------------------------------------
Current liabilities 334 232 (64) 502
---------------------------------------------------------------------
Working capital 868 425 (315) 978
---------------------------------------------------------------------
Other assets
Property, plant, and
equipment 707 295 - 1,002
Intangible assets 69 - - 69
Deferred pension cost 155 20 - 175
Future income taxes - 7 - 7
Intercompany investments
and loans 274 (71) (203)(2) -
Other 12 10 - 22
---------------------------------------------------------------------
1,217 261 (203) 1,275
---------------------------------------------------------------------
Total investment 2,085 686 (518) 2,253
---------------------------------------------------------------------
Other liabilities
Employee future benefits 787 142 - 929
Other liabilities not
subject to compromise 83 119 - 202
---------------------------------------------------------------------
870 261 - 1,131
---------------------------------------------------------------------
Liabilities subject to
compromise (Note 7) 916 - (315)(1) 601
---------------------------------------------------------------------
Shareholders' equity $ 299 425 (203) $ 521
---------------------------------------------------------------------
---------------------------------------------------------------------
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) (521) 222 - (299)
---------------------------------------------------------------------
$ 299 425 (203) $ 521
---------------------------------------------------------------------
---------------------------------------------------------------------
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 mill). The decision to
permanently close the facility was based on a lack of order
prospects. The spiral weld mill was sold in the fourth quarter 2004.
Welland Pipe is an Applicant under the CCAA proceedings described in
Note 1.
A purchase and sale agreement was signed for the U and O pipe mill
for $4 million in April 2005 and was subsequently approved by the
Court on May 4, 2005. The sale closed on June 29, 2005 when title to
the assets passed to the purchaser. Proceeds received to date of
$3 million are held in trust with the Monitor (see Note 6). The
balance of the proceeds are due during third quarter 2005. A gain of
$4 million was recorded in discontinued operations during the second
quarter 2005 as the net book value of the assets was nil.
The property and plant of Welland Pipe are listed for sale. The
Corporation is currently discussing offers with interested parties.
The net book value of these assets is nominal.
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 for proceeds of $23 million 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 resulting gain of $3 million, net of $1 million
tax, from the sale was included in discontinued operations during
second quarter 2005. 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:
(in millions) Three months ended Six months ended
June 30 June 30
2005 2004 2005 2004
---------------------------------------------------------------------
Net sales $ - $ 3 $ 19 $ 8
Earnings (loss) before
income taxes 9 - 11 (1)
Net earnings (loss) $ 8 $ - $ 9 $ (1)
---------------------------------------------------------------------
The assets and liabilities of these discontinued operations are as
follows:
At June 30 (in millions) 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Other Other
assets and Assets held assets and
liabilities(2) for sale(1) liabilities(2)
---------------------------------------------------------------------
Current assets $ 10 $ - $ 3
Property, plant, and
equipment - 3 -
Deferred pension cost 11 - 9
---------------------------------------------------------------------
Total assets 21 3 12
---------------------------------------------------------------------
Current liabilities 1 - 4
Employee future benefits 17 - 17
---------------------------------------------------------------------
Total liabilities 18 - 21
---------------------------------------------------------------------
Net investment (liability) $ 3 $ 3 $ (9)
---------------------------------------------------------------------
(1) The balance represents the assets of CHT Steel.
(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 June 30, 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 earnings
before income taxes, as follows:
2005 2004
---------------------------------- ----------
Entities
Entities in not in
Three Months Reorgan- Reorgan- Consoli- Consoli-
ended June 30 ization ization dated dated
(in millions) Proceedings Proceedings Totals Totals
--------------------------------------------------------- ----------
Earnings from continuing
operations before
income taxes $ 4 48 $ 52 $ 48
--------------------------------------------------------- ----------
Income tax expense
computed using
statutory income tax
rates (2005 - 43%;
2004 - 43%) 2 20 22 21
--------------------------------------------------------- ----------
Add (deduct):
Manufacturing and
processing credit - (4) (4) (4)
Resource allowance/
depletion - (1) (1) -
Valuation allowance
(release) 10 (6) 4 (9)
Impact of intercompany
dividends 4 (4) - -
Other - (1) (1) (2)
--------------------------------------------------------- ----------
14 (16) (2) (15)
--------------------------------------------------------- ----------
Income tax expense $ 16 4 $ 20 $ 6
--------------------------------------------------------- ----------
--------------------------------------------------------- ----------
2005 2004
---------------------------------- ----------
Entities
Entities in not in
Six Months Reorgan- Reorgan- Consoli- Consoli-
ended June 30 ization ization dated dated
(in millions) Proceedings Proceedings Totals Totals
--------------------------------------------------------- ----------
Earnings from continuing
operations before
income taxes $ 74 61 $ 135 $ 11
--------------------------------------------------------- ----------
Income tax expense
computed using
statutory income tax
rates (2005 - 43%;
2004 - 43%) 32 26 58 5
--------------------------------------------------------- ----------
Add (deduct):
Manufacturing and
processing credit (7) (5) (12) (1)
Resource allowance/
depletion - (2) (2) -
Valuation allowance
(release) 19 (6) 13 (3)
Impact of intercompany
dividends 8 (8) - -
Impact of
reclassification of
convertible debentures - - - 5
Impact of intercompany
foreign exchange - (1) (1) -
Other - (1) (1) (1)
--------------------------------------------------------- ----------
20 (23) (3) -
--------------------------------------------------------- ----------
Income tax expense $ 52 3 $ 55 $ 5
--------------------------------------------------------- ----------
--------------------------------------------------------- ----------
11. BANK AND OTHER SHORT-TERM INDEBTEDNESS
At June 30 At December 31
(in millions) 2005 2004 2004
---------------------------------------------------------------------
Applicants $ 52 $ 238 $ 187
Non-Applicants 39 21 29
---------------------------------------------------------------------
Total bank and other
short-term indebtedness $ 91 $ 259 $ 216
---------------------------------------------------------------------
---------------------------------------------------------------------
On June 27, 2005, Norambar amended its operating credit facility from
$30 million to $40 million. The amended facility is available until
January 28, 2007, with borrowings subject to an interest rate of
Canadian prime rate plus 1%. Accounts receivable, inventory, and
other assets of Norambar and its wholly owned subsidiary
collateralize the facility. Norambar is required to maintain a
minimum of $5 million of excess eligible collateral over its
borrowings and letters of credit.
12. LONG-TERM DEBT
At
At June 30 December 31
Restated Restated
(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 $ 84 $ 101 $ 93
---------------------------------------------------------------------
Less amount due within
one year 44 44 44
---------------------------------------------------------------------
Total Long-term debt
(non-Applicants) $ 40 $ 57 $ 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 claim is being reviewed by the Corporation. The total debt
before accrued interest is $27 million at June 30, 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.
Net proceeds from the sale of the plate mill assets (see Note 5) will
be used to partially satisfy this obligation. The residual balance
and accrued interest will be subject to the claims process (see
Note 7).
Convertible Debentures
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).
13. COMMITMENTS AND CONTINGENCIES
Capital programs
The estimated cost to complete previously approved capital programs
is $181 million. Of this amount, $128 million relates to Phase II of
the Stelco Lake Erie hot strip mill upgrade, $17 million pertains to
steam generators for both Integrated Steel plants and $10 million for
the 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.
In addition, a $350 million lawsuit was launched against the
Corporation by Georgian Windpower Corporation ("GWC") relating to a
Memorandum of Understanding ("MOU") and Agreement to Enter into a
Land Lease Agreement ("ALLEA") that the Corporation terminated in
accordance with its provisions in April 2005. As ordered by the
Court on June 28, 2005, the claim relating to the MOU should be
removed from the statement of claim and dismissed. With respect to
that portion of the claim that relied on the ALLEA, the Court held
that the ALLEA portion of the claim could proceed and that the stay
would be lifted to allow it to be initiated and filed, but that no
further action may be taken by GWC until the Corporation emerges from
CCAA protection except with leave of the Court. The Corporation
believes it has a good defence to the ALLEA portion of the claim and
consequently has not recorded any provisions in the Consolidated
Financial Statements.
14. CAPITAL STOCK
Convertible Common Shares
June 30, June 30, December 31,
2005 2004 2004
---------------------------------------------------------------------
Series A 101,696,403 101,453,242 101,783,542
Series B 552,796 795,958 465,658
---------------------------------------------------------------------
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 June 30, the following options were
outstanding:
June 30, June 30, Dec. 31,
2005 2004 2004
------------- ------------- -------------
Exercisable................ 4,108,697 3,639,714 3,643,711
Unexercisable.............. 948,318 1,760,968 1,487,641
------------- ------------- -------------
Total.................... 5,057,015 5,400,682 5,131,352
------------- ------------- -------------
------------- ------------- -------------
Compensation cost of $0.1 million has been included in Costs for
second quarter 2005 ($0.2 million for second quarter 2004) and
$0.2 for the first six months of 2005 ($0.5 for the first six months
of 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 June 30 2005 2004
---------------------------------------------------------------------
Weighted Weighted
average average
DSUs price DSUs price
---------------------------------------------------------------------
Outstanding at
beginning of period 362,030 $ 3.428 362,030 $ 0.773
Granted - - - -
Exercised - - - -
---------------------------------------------------------------------
Balance at end
of period 362,030 $ 1.156 362,030 $ 0.592
---------------------------------------------------------------------
---------------------------------------------------------------------
Compensation cost
(gain) loss
($ in millions) $ (0.8) $ (0.1)
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months ended June 30 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 $ 1.156 362,030 $ 0.592
---------------------------------------------------------------------
---------------------------------------------------------------------
Compensation cost
(gain) loss
($ in millions) $ (0.3) $ (0.6)
---------------------------------------------------------------------
---------------------------------------------------------------------
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:
Three months ended Six months ended
(in millions) June 30 June 30
2005 2004 2005 2004
---------------------------------------------------------------------
Pension benefit plans $ 41 $ 39 $ 85 $ 78
Other benefit plans 25 28 56 55
---------------------------------------------------------------------
$ 66 $ 67 $ 141 $ 133
---------------------------------------------------------------------
---------------------------------------------------------------------
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. Without the benefit
of the Section 5.1 election, 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. The July 15, 2005
proposed restructuring plan includes a plan to retire the
Corporation's four principal pension plan solvency deficiencies of
about $1.3 billion by 2015.
The loss of the exemption under Section 5.1 of the Regulation under
the Pension Benefit Act (Ontario) without an acceptable funding
alternative would 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 such a
precipitous event.
17. EARNINGS PER COMMON SHARE
Interest and accretion on the convertible debentures is recorded on
the Consolidated Statement of Earnings as interest on long-term debt
and debt subject to compromise. This amount, net of tax, is added
back to net earnings from continuing operations and net earnings in
order to calculate fully diluted earnings from continuing operations
and fully diluted earnings per common share. Fully diluted earnings
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 $4.50 per share conversion price applicable to
these debentures.
Three months ended Six months ended
($ in millions) June 30 June 30
Restated Restated
(Note 3 (Note 3
and 9) and 9)
2005 2004 2005 2004
---------------------------------------------------------------------
Basic net earnings
from continuing
operations 32 42 80 6
Convertible
debentures
- interest
expense net
of tax 2 1 3 3
---------------------------------------------------------------------
Fully diluted net
earnings from
continuing
operations $ 34 $ 43 $ 83 $ 9
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic net earnings 40 42 89 5
Convertible
debentures
- interest
expense net
of tax 2 1 3 3
---------------------------------------------------------------------
Fully diluted net
earnings $ 42 $ 43 $ 92 $ 8
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average
number of common
shares outstanding
- basic 102,249,199 102,249,200 102,249,200 102,249,200
Incremental number
of common shares
assumed to be
issued on the
exercise of stock
options 86,957 - 122,340 -
Common shares
issued on the
assumed
conversion of
convertible
debentures 20,000,000 20,000,000 20,000,000 20,000,000
---------------------------------------------------------------------
Weighted average
number of common
shares outstanding
- fully diluted 122,336,156 122,249,200 122,371,540 122,249,200
---------------------------------------------------------------------
---------------------------------------------------------------------
Options to purchase
common shares
not included
in the above
calculation(x) 4,807,015 5,400,682 4,807,015 5,400,682
---------------------------------------------------------------------
---------------------------------------------------------------------
(x) exercise prices were greater than the average market price of
the common shares during the periods
18. SEGMENTED INFORMATION
Financial information for Welland Pipe and Camrose Pipe has been
excluded from the Manufactured Products reportable segment for 2005
and 2004 (Note 9).
Three months ended Six months ended
June 30 June 30
Restated Restated
($ in millions) (Note 9) (Note 9)
2005 2004 2005 2004
---------------------------------------------------------------------
Net sales - trade
Integrated Steel $ 690 $ 688 $ 1,470 $ 1,301
Mini-mill 123 136 251 241
Manufactured
Products 118 133 241 243
Intersegment sales
Integrated Steel (33) (63) (85) (113)
Mini-mill (9) (12) (20) (21)
Manufactured
Products (1) (1) (1) (1)
---------------------------------------------------------------------
$ 888 $ 881 $ 1,856 $ 1,650
---------------------------------------------------------------------
---------------------------------------------------------------------
Shipments - trade
(thousands of net tons)
Integrated Steel 882 1,018 1,855 2,070
Mini-mill 202 229 417 434
Manufactured
Products 99 120 197 242
Intersegment shipments
Integrated Steel (42) (95) (108) (190)
Mini-mill (16) (23) (36) (41)
Manufactured
Products - - - -
---------------------------------------------------------------------
1,125 1,249 2,325 2,515
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating earnings (loss)
Integrated Steel 80 36 191 29
Mini-mill 4 24 13 31
Manufactured
Products (6) 12 (8) 15
---------------------------------------------------------------------
$ 78 $ 72 $ 196 $ 75
---------------------------------------------------------------------
---------------------------------------------------------------------
Assets
Integrated Steel 2,231 2,110 2,231 2,110
Mini-mill 264 240 264 240
Manufactured
Products 239 231 239 231
---------------------------------------------------------------------
$ 2,734 $ 2,581 $ 2,734 $ 2,581
---------------------------------------------------------------------
---------------------------------------------------------------------
Amortization of
capital assets
Integrated Steel 28 27 55 55
Mini-mill 2 2 4 4
Manufactured
Products 1 1 1 2
---------------------------------------------------------------------
$ 31 $ 30 60 61
---------------------------------------------------------------------
---------------------------------------------------------------------
Expenditures for
capital assets
Integrated Steel 45 4 62 16
Mini-mill 6 1 8 2
Manufactured
Products - 1 1 1
---------------------------------------------------------------------
$ 51 $ 6 $ 71 $ 19
---------------------------------------------------------------------
---------------------------------------------------------------------
Geographic segments
Net sales
Canada 712 696 1,495 1,334
United States 143 144 285 259
Other 33 41 76 57
---------------------------------------------------------------------
$ 888 $ 881 $ 1,856 $ 1,650
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital assets - net
Canada 1,014 1,046 1,014 1,046
United States 57 56 57 56
---------------------------------------------------------------------
$ 1,071 $ 1,102 $ 1,071 $ 1,102
---------------------------------------------------------------------
---------------------------------------------------------------------
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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