HAMILTON, ON, May 11 /CNW/ - Stelco Inc.(TSX:STE) today reported a net
loss of $122 million for the first quarter ended March 31, 2006, including the
impacts of discontinued operations and reorganization costs. This compares to
net earnings of $49 million in the first quarter of 2005, and a net loss of
$120 million in the fourth quarter of 2005. The results reported today are
related to Stelco prior to emerging from Court protection at the end of the
day on March 31, 2006, and prior to implementing the Corporation's Plan of
Arrangement and Reorganization. As such, the first quarter results are
referred to as those of the "Predecessor" in the Consolidated Financial
Statements. Any reference to Stelco after implementation of the CCAA Plan is
referred to as the "Successor".
The results reported today include a $43 million after-tax loss on
discontinued operations which represents the businesses of the Mini-mill and
Manufactured Products segments, the sales of which were completed in the first
quarter. As well, reorganization costs on a pre-tax basis in each of the first
quarters of 2006 and 2005 amounted to $21 million compared to $29 million in
the fourth quarter of 2005.
The following information excludes discontinued operations.
Net sales revenue in the first quarter of 2006 was $674 million compared
to $728 million for the same period in 2005. This 7% decrease was mainly due
to renewal of customer contracts at lower prices and lower spot market prices,
a lower value-added mix as a result of the fourth quarter 2005 Lake Erie
Steel's hot strip mill outage and the negative impact of the higher Canadian
dollar.
Cost of sales for the first quarter of 2006 was $695 million compared to
$593 million for the same quarter of 2005. This 17% increase was primarily due
to higher spending for repairs and maintenance, purchased services and
supplies; higher natural gas, coal, ore and zinc costs; the flow through of
high cost inventories produced in the previous quarter; and the impact of the
fourth quarter 2005 Lake Erie Steel's hot strip mill upgrade, which included
the high cost of outside conversion of slabs to hot roll coils. These costs
were partly offset by lower purchased coke, scrap and electricity costs; a
lower value-added mix of sales, and reduced labour costs at Hamilton Steel,
resulting from the continued attrition of the workforce.
Production in the first quarter of 2006 was 997,000 semi-finished net
tons compared to 1,020,000 semi-finished net tons produced during the same
period in 2005. Shipments during the first quarter of 2006 totaled 974,000 net
tons compared to 907,000 net tons shipped during the first quarter of 2005,
representing a 7% increase.
As of March 31, 2006, the net liquidity position of the "Predecessor"
company was $250 million, consisting of $36 million of cash, cash equivalents
and restricted cash, $396 million of available lines of credit, less
$182 million of drawings on credit lines. This compares to net liquidity of
$304 million for the same period of 2005, and $254 million for year-end 2005.
The net liquidity position for the "Successor" company, as of March 31, 2006
was $555 million, consisting of $36 million of cash, cash equivalents and
restricted cash, $946 million of available lines of credit, less $427 million
of drawings on lines of credit.
The $305 million increase in net liquidity from the Predecessor company
to the Successor company, is the result of the following events in connection
with the implementation of the CCAA Plan.
- The replacements of the Predecessor's credit facilities
($425 million) with new lines of credit ($975 million) thereby
increasing liquidity by $550 million.
- A $232 million reduction in liquidity arising from a payment of
$382 million to the Corporation's four main pension plans,
partially offset by proceeds of $150 million from the issue of a
long-term note payable to the Province of Ontario; and
- A further $13 million reduction in liquidity due to the payments
of fees related to the new credit facilities.
Net cash of $3 million was generated during the first quarter of 2006,
compared to $76 million generated in the first quarter of 2005. During the
first quarter proceeds of $107 million received from the sale of non-core
subsidiaries were offset primarily by capital expenditures of $49 million,
operations usage of $40 million and debt repayments of $12 million.
As previously announced, as of April 1, 2006, a new Board of Directors
assumed office, and Rodney B. Mott was appointed President and Chief Executive
Officer of the newly refinanced Stelco Inc.
The application of "fresh start accounting", on March 31, 2006, will
impact future financial results. All assets and liabilities of the Corporation
are being revalued to fair value at the time of implementation of the Plan of
Arrangement. The Successor Statement of Financial Position is based on the
Corporation's preliminary assessment of fair values. The Corporation expects
to finalize the fair value allocation by June 30, 2006. As a result of these
changes there will be impacts on future earnings including amortization
changes as a result of revaluing fixed assets, cost of sales increases in the
near term as a result of the revaluation of inventories from the lower of cost
and net realizable value to fair value, and a decrease in pension and other
post-employment benefits expense as previously unamortized actuarial losses
and past service costs have been eliminated from the Consolidated Statement of
Financial Position.
Commenting on the future, Rodney Mott, Stelco's President and Chief
Executive Officer, said, "My focus is to return the newly refinanced Stelco to
profitability. My initial emphasis will be on lowering our costs and improving
our productivity to ensure Stelco's long-term viability and future success.
Steps taken already include a focus on our primary business of making high-
quality steel for our customers, and a move toward a more effective management
structure."
At their meeting yesterday, Stelco's Board of Directors appointed Steve
Douglas to the Board, replacing Peter Gordon who has resigned from the Stelco
Board in order to focus on other Brookfield initiatives. Steve is Executive
Vice President and Chief Financial Officer of Falconbridge Limited. He brings
a strong background in both finance and the resource industry to the Board.
About Stelco
Stelco is one of Canada's largest publicly traded steel companies. It is
focused on its two Ontario-based integrated steel businesses located in
Hamilton and in Nanticoke. These operations produce high quality value-added
hot rolled, cold rolled, coated sheet and bar products. 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 2005 Annual Report. To learn more about Stelco and its
businesses, please refer to our Web site at www.stelco.ca.
STELCO INC.
QUARTER 1, 2006
REPORT TO THE SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") is dated May 10, 2006
and is in respect of the consolidated financial statements of Stelco Inc.
("Stelco" or the "Corporation") for the quarter ended March 31, 2006. The
purpose of Stelco's MD&A is to provide commentary on the Corporation's
financial situation and future prospects, focusing on the Corporation's
Integrated Steel segment. Stelco sold all of its Mini-mill and Manufactured
Products segments by February 1, 2006 - see "Discontinued Operations" below
for additional comments. The March 31, 2006 Consolidated Statement of
Financial Position has been prepared on a fresh start basis (see Note 5 to the
Consolidated Financial Statements) and, as such, is not comparable to prior
periods. All other financial statements contained in the interim Consolidated
Financial Statements are comparable. The Corporation prepares its interim
consolidated financial statements (the "Consolidated Financial Statements") in
accordance with Canadian generally accepted accounting principles ("Canadian
GAAP"). The following MD&A should be read in conjunction with the MD&A and
annual audited Consolidated Financial Statements and the accompanying notes
contained in the Corporation's 2005 Annual Report, and with the interim
Consolidated Financial Statements contained in this report. Additional
information about Stelco is available in the Corporation's 2005 Annual
Information Form, which can be accessed from SEDAR at www.sedar.com.
This document has been reviewed by the Audit Committee of Stelco's Board
of Directors and contains information current as of May 10, 2006. Events
occurring after that date could render the information covered herein
inaccurate or misleading in a material respect.
Forward-Looking Statements
This MD&A, including the documents incorporated by reference, contains
forward-looking statements. Often, but not always, forward-looking statements
can be identified by the use of words such as "plans", "expects" or "does not
expect", "is expected", "budget", "scheduled", "estimates", "forecasts",
"intends", "anticipates" or "does not anticipate", or "believes", or
variations of such words and phrases or state that certain actions, events or
results "may", "could", "would", "might" or "will" be taken, occur or be
achieved. Forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of Stelco to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking statements. Examples of such statements include, but are not
limited to factors relating to the future of the business, financial position,
operations and prospects of Stelco, including (1) Stelco's strategies and
plans to reduce costs; (2) labour matters related to Stelco's predominantly
unionized workforce; (3) pension matters; (4) consolidation in the steel
industry; (5) changes to environmental laws and regulations concerned with,
among other things, emissions into the air, discharges to water or land, noise
control and the generation, handling, storage, transportation and disposal of
toxic substances; (6) new technological developments and Stelco's ability to
make capital expenditures to maintain and enhance its technological ability;
(7) Stelco's energy and raw material costs and the availability of such
materials; (8) the volatility of selling prices for steel; (9) international
trade matters, including increases in steel imports into Canada; (10) employee
matters, including the retention of the skills and knowledge of Stelco's
employees and the ability to attract and retain new employees; (11)
development of new products; and (12) planned capital expenditures; (13)
currency fluctuations in the US dollar and its impact on steel pricing, and
costs. Actual results and developments are likely to differ, and may differ
materially, from those expressed or implied by the forward-looking statements
contained in this MD&A. Such forward-looking statements are based on a number
of assumptions which may prove to be incorrect, including, but not limited to:
exchange rates, energy and other anticipated and unanticipated costs; pension
contributions and expenses; the supply and demand for, deliveries of, and the
level and volatility of prices of, steel and raw materials; the continued
availability of financing on appropriate terms; market competition; the impact
on Stelco of various environmental regulations and initiatives; and Stelco's
ongoing relations with its employees. While Stelco anticipates that subsequent
events and developments may cause Stelco's views to change, Stelco
specifically disclaims any obligation to update these forward-looking
statements. These forward-looking statements should not be relied upon as
representing Stelco's views as of any date subsequent to the date of this
MD&A.
BUSINESS DESCRIPTION
Stelco Inc. operates its businesses through partnerships, subsidiaries
and joint ventures. The Corporation is one of Canada's largest publicly traded
steel companies. The Corporation operates two integrated steel plants in
Ontario, Canada which service customers in the automotive, steel service
center, appliance, energy, construction, and pipe and tube industries within
North America. In addition, Stelco has ownership interests in three iron ore
properties, which provide to the integrated steel plants approximately 90% of
their iron ore requirements as feedstock in the steelmaking process.
CCAA PLAN, RELATED AGREEMENTS, AND NEW FINANCING
On January 29, 2004, Stelco and certain related entities filed for
protection under the Companies' Creditors Arrangement Act ("CCAA") and
obtained an order (the "Initial Order") from the Ontario Superior Court of
Justice granting it creditor protection. 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 "U.S. Proceedings"). The
Canadian proceedings included Stelco and its wholly owned subsidiaries,
Stelpipe Ltd. ("Stelpipe"), CHT Steel Company Inc. ("CHT Steel"), Welland Pipe
Ltd. ("Welland Pipe"), and Stelwire Ltd. ("Stelwire"), which were collectively
referred to as the "Applicants". The U.S. Proceedings included Stelco,
Stelpipe, and Stelwire. The Corporation's other subsidiaries and joint
ventures were not included in the proceedings. For the periods prior to
emergence from CCAA, collectively, the Applicants and the Corporation's other
subsidiaries and joint ventures are referred to as the "Predecessor" in the
Consolidated Financial Statements.
At the end of the day on March 31, 2006, the Predecessor implemented its
Third Amended and Restated Plan of Arrangement and Reorganization (the "CCAA
Plan"), as approved by the Court on January 20, 2006, and emerged from CCAA
protection. For the purpose of these Consolidated Financial Statements the
Corporation is referred to as the "Successor" in respect of the period after
implementation of the CCAA Plan. Also, on March 31, 2006, a plan of
arrangement under the Canada Business Corporation's Act ("the CBCA") that
involved the Corporation (the "CBCA Plan") was implemented. In accordance with
the CBCA Plan, the Predecessor's business was reorganized with specific assets
and liabilities being transferred into separate limited partnerships. Upon
implementation of this reorganization, Stelco became the parent company and
limited partner of these limited partnerships. Further information on the CCAA
Plan and CBCA Plan is outlined below.
Treatment of Stakeholders Compromised under the CCAA Plan
Holders of Affected Claims
Under the CCAA Plan, the claims of the unsecured creditors (the "Affected
Creditors") were not satisfied in full by the consideration distributed under
the CCAA Plan. The final accepted Affected Creditor claims of $547 million
were settled in exchange for the following:
- New Secured Floating Rate Notes ("FRN's") in the U.S. dollar
equivalent of $275 million Canadian;
- 6,364,000 newly issued common shares (the "New Common Shares") of
Stelco (1,100,000 prorated among all Affected Creditors and 5,264,000
prorated based on amounts elected through the share election
process);
- Cash of $108,548,000;
- Warrants for 1,418,500 New Common Shares (the "New Warrants") with an
exercise price of $11.00 per New Common Share and a seven-year term.
Holders of Series A and B voting Common Shares
The Series A and B voting common shares previously outstanding were
exchanged into new redeemable shares, at a ratio of 0.000001 for each such
share. Such shares were then redeemed and cancelled on March 31, 2006 for nil
consideration.
Agreements
Plan Sponsor Agreement
The New Common Shares of the restructured Stelco were divided among three
groups under the CCAA Plan: the Affected Creditors (as referred to above), the
Province of Ontario (the "Province") and Tricap Management Limited ("Tricap"),
Sunrise Partners Limited Partnership ("Sunrise") and Appaloosa Management LP
("Appaloosa") (collectively the "Equity Sponsors"). The Province obtained its
equity interest as part of the financing provided to Stelco (see Note 12 to
the Consolidated Financial Statements) wherein it received warrants to
purchase 851,100 New Common Shares. The Equity Sponsors acquired their equity
interests for cash pursuant to a Plan Sponsor Agreement ("the PSA") between
the Corporation and the Equity Sponsors.
Pursuant to the PSA, the Equity Sponsors agreed to purchase 19,736,000
New Common Shares of Stelco at a price of $5.50 per share for proceeds of
$108,548,000. These funds were used for the cash distribution to Affected
Creditors under the CCAA Plan as referred to above.
Pension Plan Funding Arrangements
Stelco and the Province along with the Superintendent of Financial
Services of Ontario and certain of the newly formed LPs entered into a pension
funding agreement (the "Pension Agreement") on March 31, 2006, that outlines
the funding arrangements with respect to Stelco's four main pension plans. The
purpose of the Pension Agreement is to transition the four main plans from the
Section 5.1 election of Regulation 909 of the Pension Benefits Act (Ontario)
(the "PBA"), which had exempted the four main plans from funding of the
solvency deficiencies under the plans in exchange for higher pension benefit
guarantee fund payments, to the general regulatory requirements of the PBA by
no later than January 1, 2016.
The key terms of the Pension Agreement are as follows:
- Stelco was obligated to make an initial up-front payment of
$400 million to its four main pension plans less any contributions to
plans already made in 2006. As a result, Stelco made a $382 million
payment to the plans on March 31, 2006;
- Stelco will fund its four main pension plans in the following amounts
in the years subsequent to December 31, 2005:
Years 1 - 5: $65 million per year ($32.5 million in 2006),
payable monthly, commencing July 1, 2006;
Years 6 - 10: $70 million per year, payable monthly;
- Stelco will make additional pension plan payments to fund any
solvency deficiency in the Stelco four main pension plans if Stelco
generates free cash flow in excess of certain minimum thresholds as
set out in the Pension Agreement, subject to Stelco having more than
a minimum liquidity amount; and
- Stelco will not be required to make any adjustments to its pension
funding based on annual actuarial valuations up to December 31, 2015,
provided that any future benefit improvements required to be funded
in accordance with the PBA will be in addition to the funding
payments outlined above.
New Province Note
The Province has provided Stelco with an advance by way of the New
Province Note in the amount of $150 million. The Note bears an interest rate
of 1% per annum and is repayable on December 31, 2015 (subject to an extension
to March 31, 2016 in certain circumstances) and can be repaid in cash or
Stelco common shares. The Note is subject to a 75% discount if the solvency
deficiencies in Stelco's four main pension plans are eliminated on or before
that date and provided there is no Event of Default under the Note. See Note
12 to the Consolidated Financial Statements for additional information.
Federal Government Grant
The Government of Canada announced on November 23, 2005, that it would
provide a $30 million co-generation grant. The federal contribution represents
approximately 60% of the initial cost of the Corporation's near- term
cogeneration spending. Since the time of the commitment, there has been a
change in Government. The Corporation has initiated a dialogue with the new
government in order to reconfirm and secure the $30 million commitment. To
date, the grant has not been reconfirmed.
Corporate Reorganization
On February 14, 2006, the Court approved a reorganization of the
Predecessor pursuant to the CBCA Plan. As a result, specific assets and
liabilities of the Predecessor's business were transferred into nine separate
limited partnerships upon implementation of the CBCA Plan at the time of its
emergence from the Court-supervised restructuring process.
The following business units of the Predecessor were established and the
Predecessor transferred assets and liabilities to these business units which
were formed as limited partnerships ("LPs"): Hamilton Steel Limited
Partnership; Lake Erie Steel Limited Partnership; two LPs related to energy
assets (primarily a future business); two surplus land LPs; two coke
production facility LPs; and an LP related to the Corporation's mining
interests. Upon reorganization, Stelco became the parent company and limited
partner of these limited partnerships.
DISCONTINUED OPERATIONS
The Corporation completed the sale of AltaSteel Ltd., Norambar Inc.,
Stelwire, and Stelfil LtDee (collectively the "Non-Core Subsidiaries") during
the first quarter of 2006 for gross proceeds of $107 million (subject to final
working capital adjustments). A $40 million net pre-tax loss was recorded on
the disposition of Stelco's shares in the Non-Core Subsidiaries. This loss is
included in discontinued operations on the Consolidated Statement of Earnings
(Loss). The net pre-tax loss is comprised of:
- $145 million settlement losses relating to the pension and other
benefit plans of the Non-Core Subsidiaries; and
- $105 million gain on the sale of the shares of the Non-Core
Subsidiaries.
AltaSteel Ltd.
The shares of AltaSteel Ltd. and its corresponding investment in both
MOLY-COP Canada and GenAlta Recycling Inc. were sold to Moly Cop Steel Inc.,
an affiliate of Scaw International Sarl. The sale closed on January 31, 2006
for gross proceeds of $77 million (subject to final working capital
adjustments). Stelco recorded a net pre-tax gain of $12 million comprised of a
$36 million gain on the sale of Stelco's investment in AltaSteel Ltd.,
partially offset by a settlement loss of $24 million relating to the pension
and other benefit plans of AltaSteel Ltd.
Norambar Inc., Stelwire, and Stelfil LtDee
Mittal Canada Inc. purchased the shares of Norambar Inc., Stelwire, and
Stefil LtDee from Stelco on February 1, 2006 for a gross purchase price of $30
million (subject to final working capital adjustments). Stelco recorded a net
pre-tax loss of $52 million comprised of a settlement loss of $121 million
relating to the pension and other benefit plan of these subsidiaries,
partially offset by a $69 million gain on the disposition of Stelco's
investment.
Financial Statement Information
The following tables summarize the net sales, earnings (loss) before
income taxes, and net earnings (loss) relating to all of the Corporation's
discontinued operations:
<<
Three months ended
March 31 (in millions) 2006
-------------------------------------------------------------------------
Manufactured
Mini-mills(1) Products(2) Total
-------------------------------------------------------------------------
(Predecessor)
Net Sales $ 41 14 55
Costs, amortization,
and financial expense 37 19 56
-------------------------------------------------------------------------
4 (5) (1)
Settlement loss (employee
future benefits) 71 74 145
Gain on sale of investment
in subsidiaries (46) (59) (105)
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (21) (20) (41)
Current income taxes
(recovery) 1 - 1
Future income taxes
(recovery) (8) (1) (9)
Future income tax
valuation allowance 9 1 10
-------------------------------------------------------------------------
Net earnings (loss) $ (23) (20) (43)
-------------------------------------------------------------------------
Three months ended
March 31 (in millions) 2005
-------------------------------------------------------------------------
Manufactured
Mini-mills(1) Products(2) Total
-------------------------------------------------------------------------
(Predecessor)
Net Sales $ 116 143 259
Costs, amortization,
and financial expense 105 141 246
-------------------------------------------------------------------------
11 2 13
Settlement loss (employee
future benefits) - - -
Gain on sale of investment
in subsidiaries - - -
-------------------------------------------------------------------------
Earnings (loss) before
income taxes 11 2 13
Current income taxes
(recovery) - 2 2
Future income taxes
(recovery) 3 (1) 2
Future income tax
valuation allowance - 1 1
-------------------------------------------------------------------------
Net earnings (loss) $ 8 - 8
-------------------------------------------------------------------------
(1) AltaSteel Ltd. including its 50% interest in GenAlta Recycling Inc.,
and Norambar Inc. including its wholly owned subsidiary Fers et
MDetaux LtDee.
(2) Stelwire, Stelfil LtDee., Stelpipe, Welland Pipe, Camrose Pipe Company
(2005 only), and MOLY-COP Canada.
FINANCIAL AND OPERATIONAL SUMMARY
Stelco Inc.
($ in millions, except as indicated(x)) (unaudited)
Favourable
Three months ended March 31 2006 2005(xx)(Unfavourable)
-------------------------------------------------------------------------
(Predecessor) (Predecessor)
Net sales $ 674 $ 728 $ (54)
Costs 695 593 (102)
Amortization of property, plant,
and equipment 27 26 (1)
Amortization of intangible assets 1 1 -
-------------------------------------------------------------------------
Operating earnings (loss)(xxx) (49) 108 (157)
Reorganization items (Note 6) 21 21 -
-------------------------------------------------------------------------
(70) 87 (157)
-------------------------------------------------------------------------
Financial expense
Interest on long-term debt and
debt subject to compromise 10 10 -
Other interest - net 5 4 (1)
-------------------------------------------------------------------------
Earnings (loss) before income
tax from continuing operations (85) 73 (158)
Income tax expense (recovery)
(Note 10)
Current 7 21 14
Future (33) 3 36
Future income tax asset
valuation allowance (release) 20 8 (12)
-------------------------------------------------------------------------
Net earnings (loss) from
continuing operations (79) 41 (120)
Net earnings (loss) from
discontinued operations (Note 9) (43) 8 (51)
-------------------------------------------------------------------------
Net earnings (loss) $ (122) $ 49 $ (171)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per common share
from continuing operations
(Note 17) (x)$ (0.77) (x)$ 0.40 (x)$ (1.17)
Earnings (loss) per common
share (Note 17) (x)$ (1.19) (x)$ 0.48 (x)$ (1.67)
Average revenue per ton (x)$ 692 (x)$ 803 (x)$ (111)
Cost per ton (x)$ 714 (x)$ 654 (x)$ (60)
Semi-finished steel production
(thousands of net tons) 997 1,020 (23)
Shipments (thousands of net tons) 974 907 67
(xx) Restated - see Note 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. The
Corporation's use of this measure may not be comparable to measures
used by other companies. In accordance with Canadian GAAP, a
reconciliation of Operating earnings (loss) to Net earnings (loss)
is presented above.
All note references in this document are to the Corporation's March 31,
2006 Consolidated Financial Statements.
All information stated below excludes the discontinued operations of the
Corporation. The continuing operations are the Integrated Steel segment, which
comprise those business units that include and are primarily associated with
the Hamilton and Lake Erie 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.
OVERVIEW
Overall revenue per ton decreased by 14% in first quarter 2006 compared
to first quarter 2005. This was due to the renewal of customer contracts for
2006 at lower prices than the previous year as well as lower spot market
prices. Demand and pricing in the first quarter remained stable when compared
to fourth quarter 2005 as steel service centre inventory levels remain at
lower levels.
The planned fourth quarter 2005 Phase 2 upgrade to the Lake Erie hot
strip mill extended longer than planned, negatively impacting the facility's
overall production, the volume and mix of products shipped, and revenue from
sales in the first quarter of 2006, as well as the fourth quarter of 2005.
Financial Information
Net Sales and Costs
Quarter ended March 31, 2006
Net sales for the quarter ended March 31, 2006 were 7% lower than the
same quarter of 2005 mainly due to a 14% decrease in average revenue per ton,
partly offset by an 7% increase in steel shipments. The first quarter decrease
in revenue and average revenue per ton was primarily due to:
- renewal of customer contracts at lower prices and lower spot prices;
- the fourth quarter 2005 Lake Erie hot strip mill outage resulting in
a lower value-added mix of sales mainly due to increased slab sales;
- the negative impact of the higher Canadian dollar; and
- the first quarter 2005 included selling price surcharges implemented
to cover high raw material and energy costs.
Costs in first quarter 2006 were up 17% compared with the same quarter
2005 and average cost per ton was up 9% primarily due to:
- higher spending for repairs and maintenance, purchased services and
supplies;
- higher natural gas, coal and ore, and zinc costs;
- the flow through of high-cost inventories produced in the previous
quarter; and
- the impact of the fourth quarter 2005 Lake Erie hot strip mill
upgrade, which resulted in high-cost outside conversion of slabs to
hot roll coils.
The above cost increases were partially offset by:
- lower purchased coke and scrap costs;
- lower electricity costs, which were positively impacted by the
provincial government rebate program;
- a lower value-added mix of sales; and
- reduced labour costs at Hamilton resulting from the continuing
attrition of the workforce.
Reorganization Items
Reorganization items incurred in the first quarter of 2006 amounted to
$21 million, of which $12 million related to professional fees (including fees
to professionals representing other stakeholders) and $9 million for success
fees that were triggered upon implementation of the CCAA Plan and emergence
from CCAA and paid to a number of the Corporation's advisors. Comparatively,
$21 million was incurred in the first quarter of 2005, which included
professional fees of $10 million and a break fee of $11 million paid to
Deutsche Bank. Professional fees will continue to be incurred into the second
quarter of 2006 but are expected to be substantially lower than amounts
incurred in previous quarters.
Financial Expense
Total financial expense of $15 million was incurred during the first
quarter of 2006 as compared to $14 million in the same quarter of 2005. The
difference relates predominantly to higher interim borrowings on the
Corporation's short-term credit facility in 2006.
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 and its subsidiaries recognize future income tax
assets where applicable, a future income tax asset valuation allowance of
$20 million and $8 million was incurred in the first quarters of 2006 and 2005
respectively related to continuing operations.
Operational Information
Trade
Imports reached 54% of apparent domestic steel consumption in January,
which is a record high. Domestic producers, including Stelco, continue to lose
market share. Import permit data for first quarter 2006 indicates that steel
imports from China increased almost 23% over the same period a year earlier.
On March 30, 2006, the Canadian Border Services Agency ("CBSA") completed
the first phase of a sunset review of the August 1, 2001 ruling by the
Canadian International Trade Tribunal ("CITT") that imports of hot rolled
sheet from certain countries had injured the Canadian domestic industry. The
CBSA ruled that the termination of the finding would likely result in a
resumption of dumping by exporters from Brazil, China, Chinese Taipei, India,
South Africa, and Ukraine. At the same time it ruled that dumping is unlikely
to resume from Bulgaria, Macedonia, and Serbia and Montenegro. The CITT will
now assess the likelihood of continued injury as a result of imports from the
first set of countries and will convene a hearing starting June 19, 2006 in
Ottawa. A ruling is expected before the end of July.
On March 8, 2006, the U.S. Department of Commerce ("DOC") issued its
final determination in its 11th Administrative Review of Canadian shipments of
Corrosion Resistant Steel Sheet (primarily galvanized) and assigned a 3.08%
duty deposit rate to Stelco. That rate is higher than the 'de minimis' rates
found in the 10th review and in the preliminary for the 11th review,
reflecting a change in DOC methodology.
The U.S. International Trade Commission ("ITC") has begun a sunset review
of the same Corrosion Resistant Steel Sheet ruling which covers certain other
countries as well as Canada. The Corporation intends to participate in the
review process in order to demonstrate that imports into the U.S. from Canada
are not a continuing cause of injury to U.S. producers. The public hearing is
scheduled for October 16, 2006 in Washington, D.C.
Health, Safety and Environment
Hamilton Steel LP and Lake Erie Steel LP are both International Standards
Organization ("ISO") 14001 registered. The compliance audits of Hamilton Steel
LP and Lake Erie Steel LP ISO 14001 systems were satisfactorily completed.
This system provides the framework for the implementation, maintenance, and
continuous improvement process for managing environmental aspects at both
integrated plants.
It is anticipated the Hamilton Steel LP sinter plant will achieve
reductions in its dioxin emissions in 2006. In the fourth quarter 2005, using
new trial technology, dioxin emissions were reduced to levels below limits
that apply after 2010. Permanent equipment is now being installed to implement
this technology.
Equipment Upgrades
An outage of approximately 10 days, including commissioning, is scheduled
for June, 2006 to install the sixth finishing stand at the Lake Erie Steel LP
hot strip mill as the next stage of the Phase 2 upgrade. The sixth finishing
stand is expected to be fully functional six weeks after the outage. The
incremental drive conversion and the quick roll change are scheduled to be
completed by the first half of 2007.
Facilities/Competitiveness
The cold rolled and coated products facilities at Hamilton Steel LP are
registered to ISO/TS 16949. The Bar Product mills at Hamilton Steel LP, and
the 2050 hot strip mill at Lake Erie Steel LP are scheduled to be registered
to ISO/TS 16949 in the 2nd and 3rd quarters of 2006 respectively. ISO/TS 16949
is an international quality management system standard developed by the
International Automotive Task Force and the Japan Automotive Manufacturers
Association in conjunction with the international standards community. As
internal suppliers to the finishing mills, the Hamilton Steel LP and Lake Erie
Steel LP blast furnace and steelmaking facilities are scheduled to be
registered to ISO 9001 by the end of 2006. By meeting these standards, Stelco
demonstrates its ability to consistently provide product that meets customer
requirements, and enhance customer satisfaction through continual improvement
of processes, products and services.
The Corporation's previously announced strategic capital spending plan is
currently under review by the Corporation's new management.
Labour Matters
The Hamilton Steel LP labour contract with USW Local 1005 will expire on
July 31, 2006. Negotiations are expected to commence mid-May with the
objective of achieving a new contract prior to this expiration.
SUMMARY OF QUARTERLY RESULTS
The following table shows the Corporation's quarterly financial
performance over the last eight quarters. The Corporation does not typically
experience significant seasonal fluctuations in revenues.
Stelco Inc. (Predecessor)
(in millions except as indicated(x))
2006 2005 2005(xx) 2005(xx)
-------------------------------------------------------------------------
Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Net Sales $ 674 608 559 658
Operating earnings (loss)(xxx) $ (49) (58) (36) 78
Earnings (loss) before income tax
from continuing operations $ (85) (103) (62) 53
Net earnings (loss) from continuing
operations $ (79) (67) (18) 35
Net earnings (loss) $ (122) (120) (42) 40
Earnings (loss) from continuing
operations per common share +
Basic (x)$(0.77) (0.66) (0.18) 0.34
Fully diluted (x)$(0.77) (0.66) (0.18) 0.30
Net earnings (loss) per common
share +
Basic (x)$(1.19) (1.17) (0.41) 0.39
Fully diluted (x)$(1.19) (1.17) (0.41) 0.34
Average revenue per ton (x)$ 692 685 690 783
Cost per ton (x)$ 714 720 700 680
Semi-finished steel production
(thousands of net tons) 997 982 875 1,054
Shipments (thousands of net tons) 974 888 810 840
-------------------------------------------------------------------------
2005(xx) 2004(xx) 2004(xx) 2004(xx)
-------------------------------------------------------------------------
Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Net Sales $ 728 678 691 626
Operating earnings (loss)(xxx) $ 108 53 78 34
Earnings (loss) before income tax
from continuing operations $ 73 23 54 11
Net earnings (loss) from continuing
operations $ 41 21 42 14
Net earnings (loss) $ 49 1 58 42
Earnings (loss) from continuing
operations per common share +
Basic (x)$ 0.40 0.21 0.41 0.14
Fully diluted (x)$ 0.35 0.18 0.36 0.13
Net earnings (loss) per common
share +
Basic (x)$ 0.48 0.01 0.57 0.41
Fully diluted (x)$ 0.41 0.01 0.49 0.36
Average revenue per ton (x)$ 803 770 789 680
Cost per ton (x)$ 654 681 667 613
Semi-finished steel production
(thousands of net tons) 1,020 1,115 1,141 1,085
Shipments (thousands of net tons) 907 881 876 921
-------------------------------------------------------------------------
(xx) Restated - see Note 9 to the Consolidated Financial Statements.
(xxx) Operating earnings (loss) is a non-GAAP financial measure. See
Financial and Operational Summary on page 5 for a GAAP
reconciliation.
+ Earnings (loss) per common share is calculated using the weighted
average number of common shares outstanding during the quarter.
Net Sales and Costs
Quarter 1, 2006 Compared to Quarter 4, 2005
Net sales for the first quarter of 2006 were 11% higher than fourth
quarter 2005. Steel shipments were 10% higher than fourth quarter 2005, while
revenue per ton was 1% higher. Fourth quarter 2005 revenue and shipments were
negatively impacted by the Phase 2 upgrade of the Lake Erie hot strip mill.
Cost per ton in first quarter 2006 was down 1% compared with fourth
quarter 2005 primarily due to:
- lower natural gas and purchased coke costs;
- lower electricity costs, which were positively impacted by the
provincial government rebate program;
- lower repairs and maintenance and supplies spending; and
- increased production levels at Lake Erie and Hamilton.
The above cost decreases were partially offset by:
- a higher value-added mix of sales; and
- the flow through of high-cost inventories produced in the previous
quarter.
RISK FACTORS
Pricing
Factors affecting volatility of selling prices include:
- the strength of the economy in the United States;
- the impact China may have globally as its economy grows and the
relationship of its consumption of steel relative to its growth in
steelmaking capacity;
- the impact of imports and threat of imports from Europe and Asia on
North American selling prices;
- the U.S./Canadian dollar exchange rate;
- the cyclical nature of the steel industry;
- material substitution when steel prices are relatively high.
Due to price volatility, the Corporation cannot rely on high selling
prices being sustainable in the longer term and believes it cannot compete
effectively in the longer term unless it takes steps to lower its overall
costs.
Costs
Stelco is continuing with its efforts to lower costs in order to ensure
its long-term viability, which includes improved productivity and a leaner
management structure with fewer layers between the customer and the
Corporation's senior management. There can be no assurance that cost reduction
initiatives will be sufficient to sustain long-term viability.
Labour Matters
The Corporation's workforce is predominantly unionized and is covered by
various labour agreements. The Hamilton Steel collective bargaining agreement
with USW Local 1005 will expire on July 31, 2006. There can be no assurance
that labour difficulties at any of Stelco'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, and results of operations at
Stelco.
Pension Plans
Stelco and the Province entered into the Pension Agreement to provide for
funding arrangements with respect to Stelco's four main pension plans. See
"Pension Plan Funding Arrangements" under "CCAA Plan, Related Agreements, and
New Financing - Agreements" for further details. Despite the level of
contributions required under the Pension Agreement, the solvency deficiency
could grow as a result of future actuarial losses and benefit changes.
Environmental Compliance
The Corporation is subject to substantial and evolving environmental laws
and regulations concerned with, among other things, emissions into the air,
discharges to water or land, 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 regularly reviews and audits the operating practices of each
business to monitor compliance with the Corporation's health, safety and
environmental policies and legal requirements. The Corporation believes that
future costs relating to environmental compliance can be dealt with in a
manner such that they will not have a material adverse effect on the
Corporation's financial position. There is always the possibility, however,
that unforeseen changes, such as in the laws or enforcement policies of
relevant government bodies, or the discovery of changed conditions on the
Corporation's real property or its operations could result in an increase in
the costs of environmental compliance that could result in a material adverse
effect on the Corporation's financial position.
Unplanned Repairs or Equipment Outages
Stelco is heavily dependent upon the continuous operation of its plants
and equipment. There can be no assurance that unplanned downtime at any of
Stelco's facilities will not have a material adverse effect on Stelco. Stelco
maintains first party property and boiler and machinery breakdown insurance,
both of which include business interruption coverage, to address some of these
exposures to the extent of the limits of coverage and the terms of the
individual insurance contracts.
Technology
The Corporation is subject to competition from new technological
developments used by other steel producers.
Expenditures in 2006 are expected to include approximately $70 million
related to the Lake Erie Steel Limited Partnership hot strip mill upgrade.
Stelco must continue to improve both its product and process technologies
in order to achieve a competitive cost structure and maintain its competitive
position in the high value-added automotive market. In particular, failure to
meet the automotive industry's ever-more demanding requirements for product
quality and service, and failure to provide the new grades of advanced high-
strength steels will seriously jeopardize Stelco's long-term participation in
this market. There is no assurance that Stelco will be able to improve its
product and process technologies or that improvements, once implemented, will
meet the automotive market's quality and service requirements. Refer to
"Forward-Looking Statements" on page 1.
Steel Industry Consolidation
Stelco could face risks related to cost competitiveness and access to
large customers if it does not participate in the steel industry
consolidation.
Supply and Pricing of Raw Material and Energy
The Corporation's operations require substantial amounts of raw materials
and energy including coal, iron ore, coke, scrap, natural gas, electricity,
and other inputs. The price and availability of such raw materials and inputs
are subject to market forces where the Corporation does not have ownership
interests and, in some cases, to government regulations and, accordingly, are
subject to change. Increases in the price of natural gas, coal, scrap, and
coke can have a significant negative impact on the Corporation's costs.
The Corporation produces approximately 85% of its annual coke
requirements through its own coke ovens. However, it purchases 100% of its
metallurgical coal requirements (raw material for the coke ovens) at market
prices. Stelco has secured 100% of its 2006 metallurgical coal requirements
under purchase contracts.
Through its ownership interests in iron ore mining properties and related
supply agreements Stelco has secured approximately 90% of its 2006
requirements at its cost of production.
The Corporation's financial performance is exposed to price volatility
associated with the electricity commodity market. The Government of Ontario
introduced competition to the electricity market on May 1, 2002, giving rise
to uncertainty of prices since commodity prices are now determined based on
hourly supply and demand requirements. Large industrial end-users such as
Stelco have been provided with some relief through a rebate program called the
"Rebate on OPG Non-Prescribed Assets". On February 9, 2006, the provincial
government announced they have extended the rebate program to April 30, 2009.
Stelco's strategic plan includes co-generation facilities that will minimize
Stelco's short- and long-term exposure to energy price fluctuations.
Trade Regulations
A number of foreign steel producers have in the past exported large
quantities of steel to North America, impairing Stelco's ability to sell its
products and, accordingly, its profitability. This steel has often been sold
at levels that are below cost or below home market price, a practice known as
"dumping". Existing trade laws and regulations in Canada may be inadequate to
prevent such trade practices. Some foreign steel producers are owned,
controlled or subsidized by foreign governments. Decisions by these foreign
producers to continue production at marginal facilities may be influenced to a
greater degree by political and economic policy considerations than by
prevailing market conditions and may further contribute to excess global
capacity. Moreover, trade regulation in other countries, particularly in the
United States, could materially adversely affect Stelco through the imposition
of dumping duties which would reduce or effectively eliminate their access to
certain steel markets.
Employees
Approximately 27% of Stelco's salaried workforce and 45% of the hourly
workforce at Hamilton Steel Limited Partnership are eligible to retire under
the current provisions of the defined pension benefit plans. A further 34% and
46% respectively of these groups could retire in the next five years under
current eligibility provisions. Stelco is evaluating the necessary manpower
requirements consistent with its succession plans and attrition rates.
Retention of the skills and knowledge of Stelco's employees, and the
ability to attract and retain new employees where replacement is considered
necessary, is essential to Stelco's continued operations.
Enterprise Resource Planning Systems
The implementation of a new order flow ERP system which was planned for
second quarter 2006 was cancelled in May, 2006. Management is of the view that
the cost/benefit analysis does not justify continuation of this project. This
decision will be considered in the allocation of fair values to specific
assets as part of the fresh start accounting. Existing systems remain
available for these applications.
Currency Fluctuations
Stelco is a net purchaser of U.S. dollars. Accordingly, any strengthening
of the Canadian dollar results in a benefit to Stelco for its net purchases of
U.S. funds. However, more than offsetting the above is the negative effect on
Stelco's domestic sales revenue due to the following reasons. Firstly, many of
Stelco's domestic customers export their products into the U.S. Thus, a
stronger Canadian dollar can cause those customers to be less competitive in
the U.S. and the customers may resist price increases or request steel price
reductions from Stelco. Secondly, U.S. exports of steel into Canada have
historically forced domestic steel prices in Canadian dollars downward.
Finally, the North American benchmark for spot market prices for certain
products, such as hot rolled, are established and determined in U.S. dollars.
A strong Canadian dollar results in lower benchmark prices in Canadian dollars
for 2006.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity and capital resources of the Corporation will be determined
by a number of 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 fund critical capital projects, pension
issues, and labour negotiations or disputes.
With the recapitalization of the Corporation upon emergence from CCAA,
interest will be serviced in accordance with the terms and conditions of the
related debt obligations. While under CCAA protection, the previous debt
obligations were stayed and therefore did not impact cash flow.
The Corporation's liquidity and capital resources position is summarized
as follows:
-------------------------------------------------------------------------
At At At At
March 31 March 31 March 31 December
(in millions) 2006 2006 2005(x) 31 2005
-------------------------------------------------------------------------
(Suc- (Pre- (Pre- (Pre-
cessor) decessor) decessor) decessor)
Cash, cash equivalents and
restricted cash $ 36 $ 36 $ 35 $ 42
Available lines of credit(a) 946(b) 396(c) 397(c) 403(c)
Lines of Credit drawn down(d) (427) (182) (128) (191)
-------------------------------------------------------------------------
Net liquidity $ 555 $ 250 $ 304 $ 254
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) After letters of credit usage, and subject to the availability under
their agreements (described below).
(b) Includes the $600 ABL facility and the $375 Secured Revolving Term
Loan.
(c) Includes the $350 million credit facility and the $75 million DIP
Credit Agreement.
(d) In accordance with Canadian GAAP, the borrowings of the Successor are
classified predominately as long-term liabilities on the Consolidated
Statement of Financial Position, and borrowings of the Predecessor
are classified as short-term liabilities. See Note 11 to the
Consolidated Financial Statements for additional information.
(x) Represents the continuing operations (Integrated Steel segment) of
the Predecessor.
The following reflects the quarterly net cash deficiency (cash, cash
equivalents and restricted cash less lines of credit drawn down) of the
Successor's and Predecessor's continuing operations over the previous eight
quarters.
Net Cash Deficiency
($ in millions)
-------------------------------------------------------------------------
June Sept. Dec. Mar. June Sept. Dec. Mar.
30, 30, 31, 31, 30, 30, 31, 31,
2004 2004 2004 2005 2005 2005 2005 2006
-------------------------------------------------------------------------
Net Cash ($209) ($201) ($153) ($93) ($35) ($143) ($149) ($391)
-------------------------------------------------------------------------
Effect of the CCAA Plan
The Corporation's net cash position decreased significantly during the
first quarter of 2006. Net cash of $3 million was generated from operating
activities during the first quarter of 2006 (outlined below). Borrowings of
$245 million were required for the implementation of the CCAA Plan. The
pension contribution of $382 million and the deferred financing fees of
$13 million were significant cash outflows that were partially funded by
$150 million of proceeds from the issue of the New Province Note.
The net cash flow and working capital analyses that follow exclude the
cash flows associated with the implementation of the CCAA Plan and cash flows
associated with discontinued operations. Only continuing operating activities
that influence the Corporation's liquidity and capital resources during the
first quarters of 2006 and 2005 are discussed.
Financing Arrangements
Stelco Inc.
Asset Based Loan Facility
On March 31, 2006, the $75 million Debtor-in-Possession short-term credit
facility and the $350 million short-term credit facility were replaced by a
long-term asset based loan facility (the "ABL facility"). The ABL facility
bears interest at the Canadian bankers' acceptance rate + 2.25%, prime rate +
0.5%, the US Base rate + 0.5% or LIBOR + 2.25%, depending on the nature of the
loan instrument incurred. The ABL facility is available until March 31, 2008
and is secured by a first priority security interest in the eligible inventory
and accounts receivable of Stelco. The ABL is additionally secured by a second
priority security interest on all other property and assets of the
Corporation, limited to $300 million and a fourth priority security interest
for the balance. The available amount of the ABL facility is dependent upon
the value of the underlying collateral, but will not exceed $600 million.
Secured Revolving Term Loan
On March 31, 2006, as part of the Plan, the Corporation entered into a
secured revolving term loan facility with Tricap (a shareholder - see CCAA
Plan, Related Agreements, and New Financing - Plan Sponsor Agreement) in the
amount of $375 million for a term of seven years. The facility is revolving
for three years, after which time the facility will cease to revolve and any
amount outstanding on that date will be repayable in full at the end of the
seventh year. The secured revolving term loan currently bears interest at
bankers' acceptance rate plus 6.75%. The secured revolving term loan is
secured by a second priority interest on the working capital assets of Stelco,
except project financings, and a first priority security interest in the fixed
assets of Stelco. The secured revolving term loan is also secured by all the
tangible and non-tangible assets of certain subsidiaries of Stelco and a
pledge of and security interest in all of the outstanding shares of interests
in the subsidiaries, partnerships and joint ventures of Stelco.
Net Cash Flow
Three months ended March 31 Favourable
(in millions) 2006 2005(xx)(Unfavourable)
-------------------------------------------------------------------------
(Predecessor) (Predecessor)
Cash provided by (used for)
Net earnings (loss) from
continuing operations adjusted
for items not affecting cash $ (40) $ 117 $ (157)
Changes in operating elements
of working capital (2) (18) 16
Proceeds from the sale of Non-Core
subsidiaries and assets (Note 9) 107 - 107
Expenditure for capital assets (49) (17) (32)
Reduction of long-term debt
(Note 12) (12) (6) (6)
Other - net (1) - (1)
-------------------------------------------------------------------------
Change in net cash position $ 3 $ 76 $ (73)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(xx) Restated - see Note 9 to the Consolidated Financial Statements.
Net cash of $3 million was generated during the three months ended
March 31, 2006. Net proceeds of $107 million received primarily from the sale
of the Non-Core Subsidiaries were primarily offset by capital expenditures
($49 million), operating results ($40 million), and debt repayments
($12 million). Overall $73 million more cash was required during the first
quarter of 2006 as compared to the same quarter of 2005. Operating results
deteriorated significantly ($157 million), and coupled with capital spending
($32 million), exceeded the $107 million of net proceeds received primarily
from the sale of Non-Core Subsidiaries.
Working Capital
While a number of components fluctuated substantially, net working
capital did not represent a significant use or source of cash during the first
quarters of 2006 or 2005.
Quarter ended March 31, 2006
Three months ended March 31 Favourable
(in millions) 2006 2005 (Unfavourable)
-------------------------------------------------------------------------
Cash provided by (used for)
Accounts receivable $ (127) $ (92) $ (35)
Inventory 102 55 47
Accounts payable 9 (4) 13
Other 14 23 (9)
-------------------------------------------------------------------------
Total $ (2) $ (18) $ 16
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Those components of working capital that changed substantially are
discussed below.
Accounts Receivable
Accounts receivable required $127 million during the first quarter of
2006 and $92 million in the same quarter of 2005. The primary driver was
stronger shipments in the latter half of each of the first quarters which
resulted in more sales being billed to customers than was collected from lower
sales in the latter half of each of the preceding fourth quarters.
Inventories
$102 million was sourced from inventories during the first quarter of
2006 primarily from the seasonal draw down of raw material inventories due to
the closure of the shipping season. In addition, slab inventories that were
temporarily built up during the outage at the Lake Erie hot strip mill, were
converted into coils and sold during the quarter.
Cash provided during the first quarter of 2005 was $55 million. The most
significant source of cash was from the seasonal draw down of raw materials
while the shipping season was closed. Partially offsetting this was an
increase in steel inventories mainly due to high input costs.
Other
During the first quarter of 2005, $23 million of cash was provided
relating primarily due to an increase in income taxes payable as the
Corporation had utilized a majority of its loss carry-forwards at that time
and was taxable in some of its jurisdictions. The income tax liability
exceeded the required tax installments, which were based on the previous
year's estimated income tax liability.
Investing Activities
The Corporation closed the sales of the Non-Core Subsidiaries for gross
proceeds of $107 million. Partially offsetting this cash flow were
expenditures on capital projects ($49 million), primarily the Phase 2
expansion of the Lake Erie hot strip mill, and projects at the Corporation's
mining-related interests.
Capital expenditures during the first quarter of 2005 were $17 million.
Spending was largely targeted towards the Lake Erie Phase 2 hot strip mill
upgrade, the enterprise resource planning systems, and projects at the
Corporation's various mining interests.
Financing Activities
During the first quarter of 2006, $6 million received as partial payment
related to the sale of the Hamilton plate mill assets was used to make a
repayment against the debt associated with that facility.
Regularly scheduled repayments of long-term debt were $6 million in the
first quarters of both 2006 and 2005.
Contractual Obligations
The following is a summary of the principal obligations of the
Corporation at March 31, 2006:
greater
2007- 2009- than
(in millions) Total 2006 2008 2010 2010
-------------------------------------------------------------------------
Long-term debt(1) $ 456 $ 11 $ 20 $ - $ 425
Revolving term loans(2) 427 - 392 35 -
Capital leases 7 4 2 1 -
Operating leases 23 10 9 3 1
Purchase obligations
and other commitments 577 252 156 110 59
-------------------------------------------------------------------------
Total $ 1,490 $ 277 $ 579 $ 149 $ 485
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Note 12 to the Consolidated Financial Statements for more
information.
(2) See Note 11 to the Consolidated Financial Statements for more
information.
The implementation of the Plan had the effect of extending the maturity
of $275 million of stayed liabilities to March 31, 2016, rather than being due
immediately or subject to immediate acceleration, as they were exchanged for
FRN's. The New Province Note, due December 31, 2015 (subject to a possible 3
month extension) governs the $150 million cash advance from the Province. Both
of these liabilities are reflected at face value and categorized as long-term
debt in the contractual obligations table above in the post-2010 period.
Purchase obligations and other commitments are for coal, electricity, natural
gas, oxygen, certain operating services and equipment, and information systems
support services.
OFF-BALANCE SHEET ARRANGEMENTS
Other than the operating leases included in the Contractual Obligations
above, the Corporation had no off-balance sheet arrangements at either
March 31, 2006 or 2005 or December 31, 2005.
FINANCIAL INSTRUMENTS
The Corporation did not utilize any third party financial instruments to
mitigate interest rate or foreign exchange risk in the first quarters of 2006
or 2005, and accordingly no such financial instruments were outstanding at
either March 31, 2006 or 2005.
OUTSTANDING SHARE DATA
Common Shares
-------------------------------------------------------------------------
At March 31 At March 31 At December
(in millions) 2006 2005 31 2005
-------------------------------------------------------------------------
(Successor) (Predecessor) (Predecessor)
New Common Shares 26,100,000 - -
Convertible Series A - 101,778,203 100,735,965
Convertible Series B - 470,996 1,513,233
-------------------------------------------------------------------------
Total number of shares 26,100,000 102,249,199 102,249,198
-------------------------------------------------------------------------
Total $144 $781 $781
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Series A and B Common Shares
The Series A and B Common Shares of the Predecessor were delisted from
the Toronto Stock Exchange as at the close of trading on March 10, 2006. These
shares were eliminated on Plan implementation with no value being attributed
to them (see Note 2 to the Consolidated Financial Statements).
New Common Shares
Under the Plan and in accordance with the Plan Sponsor Agreement (see
Note 2 to the Consolidated Financial Statements), the Corporation issued
26,100,000 New Common Shares upon emergence from CCAA with a value of $5.50
per share. The Affected Creditors received 6,364,000 New Common Shares as
partial consideration for settlement of their Affected Claims. The Equity
Sponsors received 19,736,000 New Common Shares in exchange for proceeds of
$108.5 million.
On April 2, 2006, the Chief Executive Officer purchased 1,000,000 New
Common Shares from Treasury for total consideration of $5.5 million, bringing
the total number of shares outstanding as of that date to 27,100,000.
CHANGES IN ACCOUNTING POLICY
Accounting Changes Effective in 2006
Comprehensive Revaluation of Assets and Liabilities
Upon emergence from CCAA at the end of the day on March 31, 2006, there
was a substantial realignment of the equity and non-equity interests in the
Corporation and the Corporation was required, under Canadian GAAP, to adopt
"fresh start" reporting in accordance with CICA Handbook section 1625 -
Comprehensive Revaluation of Assets and Liabilities. Under "fresh start"
reporting, the Corporation is undertaking a comprehensive revaluation, based
on the reorganization value as established and confirmed in the Plan, of its
assets and liabilities by assigning a new fair value cost to all of the
Corporation's assets and liabilities. Once the Corporation has completed this
revaluation, the Statement of Financial Position will not be comparable to
those previously reported (see Notes 3 and 5 to the Consolidated Financial
Statements).
CRITICAL ACCOUNTING ASSUMPTIONS AND ESTIMATES
The Corporation's critical accounting assumptions and estimates are
described in the MD&A of the 2005 Annual Report. 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. With the exception of the
following, the Corporation has not made any significant changes in the
Corporation's critical accounting assumptions and estimates from those
disclosed in the MD&A of the 2005 Annual Report.
Basis of Valuation
The Corporation's assets and liabilities on the Consolidated Statement of
Financial Position as at March 31, 2006 are reported at their estimated fair
value, with the exception of future income taxes (see Note 10 to the
Consolidated Financial Statements) and pensions and other post-employment
benefits (see Note 16 to the Consolidated Financial Statements). The
determination of the fair value of the assets and liabilities of the Successor
has not been finalized as at the date of the preparation of this MD&A.
Accordingly there can be no assurance of the estimates, assumptions, and
values reflected in the Consolidated Statement of Financial Position of the
Successor as at March 31, 2006, will result in their final fair values (see
Note 5 to the Consolidated Financial Statements).
Intangible assets will be recognized at their fair value effective March
31, 2006, including those identified through the fresh start process but not
previously recorded. This process is not complete at this time (see Note 5 to
the Consolidated Financial Statements).
The useful lives of the Corporation's plant, equipment and intangible
assets are currently under review as part of fresh start reporting. Certain of
these assets may have their useful life adjusted upon completion of this
process.
Segmented Information
The Corporation is currently reviewing its segmented reporting
requirements in accordance with the guidance under CICA Handbook Section 1701 -
Segment Disclosures, as a result of the Corporate Reorganization outlined in
Note 2 to the Consolidated Financial Statements.
Previously, the Corporation's segments included the Integrated Steel
segment, the Mini-mill segment and the Manufactured Products segment. Stelco
sold all of its Mini-mill and Manufactured Products segments by February 1,
2006 - see "Discontinued Operations".
OUTLOOK
Entering second quarter 2006, management expects continued strength in
all end markets, with customer inventories at or below target levels. Stelco's
steel mill capacity is fully committed through the second quarter.
Stelco's new President and Chief Executive Officer, Rodney Mott, has
appointed four new senior managers with backgrounds at U.S.-based
International Steel Group and Nucor to head up certain key areas of Stelco's
business.
The new senior managers are:
Bill McKenzie, Vice President, Stelco, and General Manager, Hamilton
Steel Limited Partnership;
Jerome Nelson, Vice President, Sales and Marketing, Stelco;
Karen Smith, Vice President, Human Resources, Stelco; and
Gordon Spelich, Vice President, Purchasing and Logistics, Stelco.
The emphasis will be to lower costs and improve productivity in order to
ensure long-term viability and a leaner and more effective management
structure.
An outage of approximately 10 days, including commissioning, is scheduled
for June 2006 to install the sixth finishing stand at the Lake Erie Steel
Limited Partnership hot strip mill as the next stage of the Phase 2 upgrade.
The sixth finishing stand is expected to be fully functional six weeks after
the outage.
The application of "fresh start accounting" will impact future financial
results. All assets and liabilities of the Corporation have been revalued to
their estimated fair value at the time of implementation of the CCAA Plan.
Some of the impacts include amortization changes as a result of revaluing
fixed assets, cost of sales increases as a result of the revaluation of
inventories from the lower of cost and net realizable value to fair value
(impact should be limited to the second quarter), and a decrease in pension
and other post-employment benefits expense as previously unamortized actuarial
losses and past service costs were eliminated from the Consolidated Statement
of Financial Position.
Please refer to "Forward-Looking Statements" on page 1.
ADDITIONAL FINANCIAL INFORMATION
Additional information concerning Stelco, including the Corporation's
2005 Annual Information Form, may be viewed on the System for Electronic
Document Analysis and Retrieval at www.sedar.com, and at Stelco's Web site
www.stelco.ca.
Rodney B. Mott W. E. Vaughan
President and Chief Executive Officer Chief Financial Officer
HAMILTON, ONTARIO
May 10, 2006
CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
-------------------------------------------------------------------------
Three months ended March 31
(in millions, except per share amounts)
(unaudited) 2006 2005
-------------------------------------------------------------------------
(Note 2) (Restated
(Predecessor) - Note 9)
(Predecessor
- Note 2)
Net sales $ 674 $ 728
Costs 695 593
-------------------------------------------------------------------------
(21) 135
Amortization of property, plant, and equipment 27 26
Amortization of intangible assets 1 1
-------------------------------------------------------------------------
Operating earnings (loss) (49) 108
Reorganization items (Note 6) 21 21
-------------------------------------------------------------------------
(70) 87
-------------------------------------------------------------------------
Financial expense
Interest on long-term debt and debt
subject to compromise 10 10
Other interest - net 5 4
-------------------------------------------------------------------------
Earnings (loss) before income taxes from
continuing operations (85) 73
Income tax expense (recovery) (Note 10)
Current 7 21
Future (33) 3
Future income tax asset valuation allowance
(release) 20 8
-------------------------------------------------------------------------
Net earnings (loss) from continuing operations (79) 41
Net earnings (loss) from discontinued operations
(Note 9) (43) 8
-------------------------------------------------------------------------
Net earnings (loss) $ (122) $ 49
-------------------------------------------------------------------------
Earnings (loss) per common share (Note 17)
Basic
Continuing operations $ (0.77) $ 0.40
Net earnings (loss) $ (1.19) $ 0.48
Fully diluted
Continuing operations $ (0.77) $ 0.35
Net earnings (loss) $ (1.19) $ 0.41
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average common shares outstanding
- millions 102.2 102.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)
Three months ended March 31 (in millions)
(unaudited) 2006 2005
-------------------------------------------------------------------------
Balance at beginning of period - Predecessor $ (461) $ (388)
Net earnings (loss) (122) 49
----------------------------------------------------------- ------------
Balance at end of period - Predecessor (583) $ (339)
Plan implementation and fresh start adjustments ------------
(Note 5) 583 ------------
-----------------------------------------------------------
Balance at end of period - Successor $ -
-----------------------------------------------------------
-----------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
-------------------------------------------------------------------------
At March 31 At March 31 At December
(in millions) (unaudited) 2006 2005 31 2005
-------------------------------------------------------------------------
(Notes 2, (Note 2) (Note 2)
3, and 5) (Predecessor) (Predecessor)
(Successor)
Assets
Current assets
Cash and cash equivalents $ 2 $ 38 $ 25
Restricted cash (Note 7) 34 11 17
Accounts receivable 413 569 294
Inventories 755 785 783
Prepaid expenses 24 43 29
Future income taxes (Note 10) 7 14 22
Assets held for sale (Note 9) - 52 351
-------------------------------------------------------------------------
1,235 1,512 1,521
-------------------------------------------------------------------------
Other assets
Property, plant, equipment,
and intangible assets 1,774 1,055 1,004
Deferred pension cost (Note 16) - 191 112
Future income taxes (Note 10) 19 4 12
Other 36 22 21
-------------------------------------------------------------------------
1,829 1,272 1,149
-------------------------------------------------------------------------
Total Assets $ 3,064 $ 2,784 $ 2,670
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Current liabilities
Bank and other short-term
indebtedness (Note 11) $ - $ 157 $ 191
Revolving term loans (Note 11) 35 - -
Accounts payable and accrued 241 283 232
Employee future benefits
(Note 16) 60 62 60
Pension liability (Note 16) 67 - -
Income and other taxes 17 29 8
Long-term debt due within
one year (Note 12) 18 45 23
Liabilities held for sale
(Note 9) - 34 206
Liabilities subject to
compromise (Note 5(a)) - 588 630
-------------------------------------------------------------------------
438 1,198 1,350
-------------------------------------------------------------------------
Other liabilities
Employee future benefits
(Note 16) 1,260 918 834
Pension liability (Note 16) 349 - -
Long-term debt (Notes 5 and 12) 346 41 20
Revolving term loans (Note 11) 392 - -
Future income taxes (Note 10) 110 133 92
Asset retirement obligations
(Note 8) 22 13 15
-------------------------------------------------------------------------
2,479 1,105 961
-------------------------------------------------------------------------
Total Liabilities $ 2,917 $ 2,303 $ 2,311
-------------------------------------------------------------------------
Shareholders' Equity
Convertible debentures
conversion option (Note 5) $ - $ 23 $ 23
Capital stock (Note 14) 144 781 781
Contributed surplus - 16 16
Warrants (Note 14) 3 - -
Retained deficit - (339) (461)
-------------------------------------------------------------------------
Total Shareholders' Equity 147 481 359
-------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 3,064 $ 2,784 $ 2,670
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingencies (Note 13).
See accompanying Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
-------------------------------------------------------------------------
Three months ended March 31
(in millions) (unaudited) 2006 2006 2005
-------------------------------------------------------------------------
(Notes 2 and 5) (Note 2) (Restated
(Plan (Predecessor) - Note 9)
Implementation) (Predecessor
- Note 2)
Cash provided by (used for)
Operating activities
Net earnings (loss) from
continuing operations $ - $ (79) $ 41
Adjustments for items not
affecting cash
Reorganization items (Note 6) - (1) -
Amortization of property,
plant, and equipment - 27 26
Amortization of intangible
assets - 1 1
Future income taxes - (33) 3
Future income tax asset
valuation allowance
(release) (Note 10) - 20 8
Employee pension and other
future benefits (Note 16) (382) 28 37
Other - (3) 1
-------------------------------------------------------------------------
(382) (40) 117
Changes in operating elements
of working capital (see below) - (2) (18)
Other - net - (1) -
Discontinued operations - - (14)
-------------------------------------------------------------------------
(382) (43) 85
-------------------------------------------------------------------------
Investing activities
Proceeds from sale of non-core
assets (Notes 7 and 9) - 107 -
Expenditures for capital assets - (49) (17)
Discontinued operations - - (3)
-------------------------------------------------------------------------
- 58 (20)
-------------------------------------------------------------------------
Financing activities
Decrease in bank indebtedness (182) (9) (58)
Increase in revolving term loans 427 - -
Financing issue expenses (13) - -
Reduction of long-term debt
(Note 12) - (12) (6)
Proceeds from issue of long-term
debt (Note 12(b)) 150 - -
Proceeds from issue of New Common
Shares (Note 14) 108 - -
Reduction of liabilities subject
to compromise (Note 5(a)) (108) - -
Discontinued operations - - 5
-------------------------------------------------------------------------
382 (21) (59)
-------------------------------------------------------------------------
Cash, cash equivalents and
restricted cash
Net increase (decrease) - (6) 6
Balance at beginning of period 36 42 43
-------------------------------------------------------------------------
Balance at end of period $ 36 $ 36 $ 49
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consists of:
Cash and cash equivalents $ 2 $ 2 $ 38
Restricted cash (Note 7) 34 34 11
-------------------------------------------------------------------------
$ 36 $ 36 $ 49
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes in operating elements
of working capital
Accounts receivable $ - $ (127) $ (92)
Inventories - 102 55
Prepaid expenses - 5 (1)
Accounts payable and accrued - 9 (4)
Income and other taxes - 9 24
-------------------------------------------------------------------------
$ - $ (2) $ (18)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BUSINESS DESCRIPTION
Stelco Inc. operates its businesses through partnerships,
subsidiaries and joint ventures. The Corporation is one of Canada's
largest publicly traded steel companies. The Corporation operates two
integrated steel plants in Ontario, Canada, which service customers
in the automotive, steel service center, appliance, energy,
construction, and pipe and tube industries within North America. In
addition, Stelco has ownership interests in three iron ore
properties, which provide to the integrated steel plants
approximately 90% of their iron ore requirements as feedstock in the
steelmaking process.
2. THE PLAN AND RELATED AGREEMENTS
On January 29, 2004, Stelco and certain related entities filed for
protection under the Companies' Creditors Arrangement Act ("CCAA")
and obtained an order (the "Initial Order") from the Ontario Superior
Court of Justice granting it creditor protection. 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 "U.S. Proceedings"). The Canadian proceedings included
Stelco and its wholly owned subsidiaries, Stelpipe Ltd. ("Stelpipe"),
CHT Steel Company Inc. ("CHT Steel"), Welland Pipe Ltd. ("Welland
Pipe"), and Stelwire Ltd. ("Stelwire"), which were collectively
referred to as the "Applicants". The U.S. Proceedings included
Stelco, Stelpipe, and Stelwire. The Corporation's other subsidiaries
and joint ventures were not included in the proceedings. For the
periods prior to emergence from CCAA, collectively, the Applicants,
and the Corporation's other subsidiaries and joint ventures are
referred to as the "Predecessor" in the consolidated financial
statements and notes.
At the end of the day on March 31, 2006, the Predecessor implemented
its Third Amended and Restated Plan of Arrangement and Reorganization
(the "CCAA Plan"), as approved by the Court on January 20, 2006, and
emerged from CCAA protection. For the purpose of these Consolidated
Financial Statements the Corporation is referred to as the
"Successor" in respect of the period after implementation of the CCAA
Plan. Also, on March 31, 2006, a plan of arrangement under the Canada
Business Corporation's Act ("the CBCA") that involved the Corporation
(the "CBCA Plan") was implemented. In accordance with the CBCA Plan,
the Predecessor's business was reorganized with specific assets and
liabilities being transferred into separate limited partnerships.
Upon implementation of this reorganization, Stelco became the parent
company and limited partner of these limited partnerships. Further
information on the CCAA Plan and CBCA Plan is outlined below.
Treatment of Stakeholders Compromised Under the CCAA Plan
Holders of Affected Claims
As discussed in Note 1 to the 2005 Consolidated Financial Statements,
under the CCAA Plan, the claims of the unsecured creditors (the
"Affected Creditors") were not satisfied in full by the consideration
distributed under the CCAA Plan. At March 31, 2006, the final
accepted Affected Creditor claims of $547 million were settled in
exchange for the following:
- New Secured Floating Rate Notes ("FRNs") in the US dollar
equivalent of $275 million Canadian;
- 6,364,000 newly issued common shares (the "New Common Shares")
of Stelco (1,100,000 prorated among all Affected Creditors and
5,264,000 prorated based on amounts elected through the share
election process);
- Cash of $108,548,000;
- Warrants for 1,418,500 New Common Shares (the "New Warrants")
with an exercise price of $11.00 per New Common Share and a
seven-year term.
Holders of Series A and B voting Common Shares
The Series A and B voting common shares previously outstanding were
exchanged into new redeemable shares, at a ratio of 0.000001 for each
such share. Such shares were then redeemed and cancelled on March 31,
2006 for nil consideration.
Agreements
Plan Sponsor Agreement
The New Common Shares of the restructured Stelco were divided among
three groups under the CCAA Plan: the Affected Creditors (as referred
to above), the Province of Ontario (the "Province") and Tricap
Management Limited ("Tricap"), Sunrise Partners Limited Partnership
("Sunrise") and Appaloosa Management LP ("Appaloosa") (collectively
the "Equity Sponsors"). The Province obtained its equity interest as
part of the financing provided to Stelco (Note 12) wherein it
received warrants to purchase 851,100 New Common Shares. The Equity
Sponsors acquired their equity interests for cash pursuant to a Plan
Sponsor Agreement ("the PSA") between the Corporation and the Equity
Sponsors.
Pursuant to the PSA, the Equity Sponsors agreed to purchase
19,736,000 New Common Shares of Stelco at a price of $5.50 per share
for proceeds of $108,548,000. These funds were used for the cash
distribution to Affected Creditors under the Plan as referred to
above.
Pension Plan Funding Agreement
Stelco and the Province along with the Superintendent of Financial
Services of Ontario and certain of the newly formed LPs entered into
a pension funding agreement (the "Pension Agreement") on March 31,
2006 that outlines the funding arrangements with respect to Stelco's
four main pension plans. The purpose of the Pension Agreement is to
transition the four main plans from the Section 5.1 election of
Regulation 909 of the Pension Benefits Act (Ontario) (the "PBA"),
which had exempted the four main plans from funding of the solvency
deficiencies under the plans in exchange for higher pension benefit
guarantee fund payments, to the general regulatory requirements of
the PBA by no later than January 1, 2016. See Notes 12, 14, and 16
for further details.
Plan Financing
New financing was raised under the Plan from the following sources:
- New ABL Facility (asset based loan)
(Note 11) up to $600 million
- New Secured Revolving Term Loan (Note 11) $375 million
- New Province Note (Note 12) $150 million
- Federal Government Grant (Note 13) $30 million
Corporate Reorganization
On February 14, 2006, the Court approved a reorganization of the
Predecessor pursuant to the CBCA Plan. As a result, specific assets
and liabilities of the Predecessor's business were transferred into
nine separate limited partnerships upon implementation of the CBCA
Plan at the time of its emergence from the Court-supervised
restructuring process.
The following business units of the Predecessor were established and
the Predecessor transferred assets and liabilities to these business
units which were formed as limited partnerships ("LPs"): Hamilton
Steel Limited Partnership; Lake Erie Steel Limited Partnership; two
LPs related to energy assets (primarily a future business); two
surplus land LPs; two coke production facility LPs; and an LP related
to the Corporation's mining interests.
3. BASIS OF PRESENTATION
As a result of a substantial realignment of equity and non-equity
interests in the Corporation (Note 2), "fresh start" reporting was
adopted on March 31, 2006. In accordance with CICA Handbook Section
1625 - "Comprehensive Revaluation of Assets and Liabilities", the
Corporation is undertaking a comprehensive revaluation of its assets
and liabilities. As required by CICA Handbook Section 1625, the
enterprise value has been allocated based upon management's
best estimate of the relative fair values of the identifiable
assets and liabilities of the Corporation in accordance
with the guidance in CICA Handbook Section 1581 - "Business
Combinations". As the Corporation has only recently emerged from
CCAA, it is not practicable to definitely allocate the enterprise
value. Once this matter has been resolved, the Corporation will
reassess its initial allocation (see Note 5). The effect may be to
transfer an amount from property, plant and equipment, inventories,
intangible assets, asset retirement obligations, and the Province
Note. The amount, if any, is not presently determinable.
As defined in Note 2, references to the "Predecessor" in these
consolidated financial statements refer to Stelco Inc. and its
subsidiaries, partnerships, and joint ventures in periods prior to
the end of the day on March 31, 2006. All references to the
"Successor" in these consolidated financial statements refer to
Stelco Inc. and its subsidiaries, partnerships, and joint ventures as
at the end of the day on March 31, 2006, and thereafter.
The Consolidated Statement of Financial Position as at March 31, 2006
reflects the accounts of the Successor. While not comparable to the
Successor, the Consolidated Statement of Financial Position of the
Predecessor as at March 31, 2005 and December 31, 2005 have also been
presented. The Consolidated Statement of Earnings (Loss) reflects the
activities of the Predecessor. The Consolidated Statement of Cash
Flows for the three months ended March 31, 2006 reflects the
Successor and Predecessor activities along with comparative activity
for the Predecessor in the corresponding period in 2005.
While the Predecessor was under creditor protection (January 29, 2004
- March 31, 2006), the Predecessor applied 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), where it did not conflict with
Canadian generally accepted accounting principles ("Canadian GAAP"),
in the preparation of its consolidated financial statements. As a
result, the Predecessor made adjustments 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. Further, allowed claims, which arose prior to and during
the CCAA proceedings, were recorded as liabilities subject to
compromise and presented separately on the Consolidated Statement of
Financial Position.
The consolidated financial statements of the Successor and
Predecessor companies are expressed in Canadian dollars and are
prepared in accordance with Canadian GAAP 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. These interim financial
statements do not include all of the disclosure required for annual
financial statements and should be read in conjunction with the most
recent annual consolidated financial statements.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
With the exception of the following, these unaudited interim
consolidated financial statements have been consistently prepared
using the same accounting policies as disclosed in Note 2 to the 2005
audited consolidated financial statements of Stelco:
a) Basis of Valuation
The Corporation's assets and liabilities on the Consolidated
Statement of Financial Position as at March 31, 2006 are reported
at their estimated fair value (Note 5), with the exception of
future income taxes, which have been reported in accordance with
CICA Handbook Section 3465 - Income Taxes (Note 10) and pension
and other post-employment benefits, which have been reported in
accordance with CICA Handbook Section 3461 - Employee Future
Benefits (Note 16.)
Intangible assets will be recognized at their fair value
effective March 31, 2006, including those identified through the
fresh start process but not previously recorded. This process is
not complete at this time (see Note 5).
The useful lives of the Corporation's plant, equipment and
intangible assets are currently under review as part of fresh
start reporting. Certain of these assets may have their useful
life adjusted upon completion of this process.
b) Segmented Information
The Corporation is currently reviewing its segmented reporting
requirements in accordance with the guidance under CICA Handbook
Section 1701 - Segment Disclosures, as a result of the Corporate
Reorganization outlined in Note 2.
5. FRESH START REPORTING
As outlined in Note 3, Stelco adopted fresh start reporting on March
31, 2006. As a result, all assets and liabilities of the Successor
have been reported at fair values, except for future income taxes,
which are reported in accordance with the requirements of CICA
Handbook Section 3465, and pension and other post-employment
benefits, which are reported in accordance with CICA Handbook Section
3461 (Note 4). As a result of the implementation of the Plan and the
adoption of fresh start reporting, a revaluation adjustment of
$781 million has been recorded as a reduction of shareholders' equity
and the retained deficit of Stelco of $583 million as at March 31,
2006 has been eliminated.
The fair values of the assets and liabilities of the Successor have
been based on Management's best estimates as of March 31, 2006. The
determination of the fair values of the assets and liabilities of the
Successor has not been finalized as at the date of preparing these
interim consolidated financial statements. The Successor is
continuing to finalize its valuation of assets and liabilities,
primarily property, plant and equipment, inventories, intangible,
asset retirement obligations, and the Province Note. Any adjustments
will be made to the consolidated statement of financial position as
at March 31, 2006. The determination of fair values involves certain
estimates and assumptions, which are inherently subject to
significant uncertainties and contingencies. Accordingly, there can
be no assurance that the estimates, assumptions, and values reflected
in the consolidated statement of financial position of the Successor
as at March 31, 2006 will result in their final fair values. At this
time, the fair value adjustment is estimated to be an asset of
$739 million and has currently been allocated to Property, plant,
equipment, and intangible assets on the Consolidated Statement of
Financial Position.
Stelco Inc.
Consolidated Statement of Financial Position
Third Amended and Restated Plan
of Arrangement and Reorganization
-------------------------------------------------------------------------
Affected
Creditors
At March 31, Predecessor and Equity
(in millions) 2006 Shareholders Sponsors
-------------------------------------------------------------------------
(Predecessor)
Assets
Current assets
Cash and cash equivalents $ 2 $ - $ 108(b)
(108)(a)
Restricted cash (Note 7) 34 - -
Accounts receivable 413 - -
Inventories 680 - -
Prepaid expenses 24 - -
Future income taxes (Note 10) 5 - -
-------------------------------------------------------------------------
1,158 - -
-------------------------------------------------------------------------
Other assets
Property, plant, equipment,
and intangible assets 1,035 - -
Deferred pension cost (Note 16) 99 - -
Future income taxes (Note 10) 38 - -
Other 21 - -
-------------------------------------------------------------------------
1,193 - -
-------------------------------------------------------------------------
Total Assets 2,351 - -
-------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Current liabilities
Bank and other short-term
Indebtedness (Note 11) 182 - -
Revolving term loans (Note 11) - - -
Accounts payable and accrued 241 - -
Employee future benefits (Note 16) 60 - -
Pension liability (Note 16) - - -
Income and other taxes 17 - -
Long-term debt due within one year
- existing (Note 12) 18 - -
Future income taxes (Note 10) - - -
Liabilities subject to compromise 640 - (640)(a)
-------------------------------------------------------------------------
1,158 - (640)
-------------------------------------------------------------------------
Other liabilities
Employee future benefits (Note 16) 847 - -
Pension liability (Note 16) - - -
Long-term debt - existing (Note 12) 14 - -
Long-term debt - New Secured Floating
Rate Notes (Note 12) - - 275(a)
Long-term debt - New Province Note -
(Note 12) - - -
Revolving term loans (Note 11) - - -
Future income taxes (Note 10) 79 - -
Asset retirement obligation (Note 8) 16 - -
-------------------------------------------------------------------------
956 - 275
-------------------------------------------------------------------------
Total Liabilities 2,114 - (365)
-------------------------------------------------------------------------
Shareholders' Equity
Convertible debentures conversion
option 23 - (23)(a)
Capital stock 781 (781)(a) 36(a)
108(b)
New Warrants (Note 14) - - 2(a)
Province Warrants (Note 14) - - -
Contributed surplus 16 (16)(a) -
Retained deficit (583) 797(a) 242(a)
-------------------------------------------------------------------------
Total Shareholders' Equity 237 - 365
-------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 2,351 $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Third Amended and Restated Plan
of Arrangement and Reorganization
-------------------------------------------------------------------------
Pensions
And Fresh Start At March 31,
(in millions) Financing Adjustments 2006
-------------------------------------------------------------------------
(Successor)
Assets
Current assets
Cash and cash equivalents $ (382)(f) $ - $ 2
150(d)
232 (e)
Restricted cash (Note 7) - - 34
Accounts receivable - - 413
Inventories - 75(g) 755
Prepaid expenses - - 24
Future income taxes (Note 10) - 2(h) 7
-------------------------------------------------------------------------
- 77 1,235
-------------------------------------------------------------------------
Other assets
Property, plant, equipment,
and intangible assets - 739(g) 1,774
Deferred pension cost (Note 16) - (99)(g) -
Future income taxes (Note 10) - (19)(h) 19
Other 13(c) 2(g) 36
-------------------------------------------------------------------------
13 623 1,829
-------------------------------------------------------------------------
Total Assets 13 700 3,064
-------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Current liabilities
Bank and other short-term
Indebtedness (Note 11) (182)(e) - -
Revolving term loans (Note 11) 35 (c,e) - 35
Accounts payable and accrued - - 241
Employee future benefits (Note 16) - - 60
Pension liability (Note 16) - 67(g) 67
Income and other taxes - - 17
Long-term debt due within one year
- existing (Note 12) - - 18
Future income taxes (Note 10) - - -
Liabilities subject to compromise - - -
-------------------------------------------------------------------------
(147) 67 438
-------------------------------------------------------------------------
Other liabilities
Employee future benefits (Note 16) - 413(g) 1,260
Pension liability (Note 16) (382)(f) 731(g) 349
Long-term debt - existing (Note 12) - - 14
Long-term debt - New Secured Floating
Rate Notes (Note 12) - - 275
Long-term debt - New Province Note -
(Note 12) 149(d) (92)(g) 57
Revolving term loans (Note 11) 392 (c,e) - 392
Future income taxes (Note 10) - 31(h) 110
Asset retirement obligation (Note 8) - 6(g) 22
-------------------------------------------------------------------------
159 1,089 2,479
-------------------------------------------------------------------------
Total Liabilities 12 1,156 2,917
-------------------------------------------------------------------------
Shareholders' Equity
Convertible debentures conversion
option - - -
Capital stock - - 144
New Warrants (Note 14) - - 2
Province Warrants (Note 14) 1(d) - 1
Contributed surplus - - -
Retained deficit - (456)(g) -
-------------------------------------------------------------------------
Total Shareholders' Equity 1 (456) 147
-------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 13 $ 700 $ 3,064
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following legend describes the adjustments made to the
Predecessor accounts resulting from the implementation of the Plan
and consummation of the various agreements:
(a) Implementation of the Plan as outlined in Note 2.
The following table reconciles the Predecessor's liabilities
subject to compromise to those that were accepted claims under
the Plan:
At March 31 At March 31 At December
(in millions) 2006 2005 31 2005
-----------------------------------------------------------------
(Predecessor) (Predecessor) (Predecessor)
Liabilities subject to
compromise
Accepted claims $ 547 $ 532 $ 546
Post-filing interest 83 44 73
Unfiled claims 10 12 11
------------------------------------- ---------------------------
Total liabilities subject
to compromise $ 640 $ 588 $ 630
------------------------------------- ---------------------------
------------------------------------- ---------------------------
Settlement
Cash $ 108
FRN's 275
New Common Shares 36
New Warrants 2
-------------------------------------
Total consideration 421
-------------------------------------
Excess of claims over
distribution $ 219
Convertible debenture
conversion option 23
-------------------------------------
Total adjustment to retained
deficit $ 242
-------------------------------------
-------------------------------------
The holders of Series A and B voting common shares received nil
consideration.
(b) Issuance of shares for cash under the Plan Sponsor Agreement
(Note 2).
(c) Payment of financing fees on implementation of the Plan, which
have been deferred and will be amortized over the term of the
related facilities (Note 11).
(d) Receipt of cash under the Province Agreement in exchange for a
note payable and issuance of warrants (Note 12).
(e) Repayment of borrowings under the Predecessor's line of credit
and increase in revolving term loans in order to make pension
funding payment.
(f) Initial pension funding made under the Province Agreement
(Note 16).
(g) Comprehensive revaluation of assets and liabilities and
elimination of the deficit.
(h) Future income taxes have been adjusted to reflect the tax effects
of differences between the fair value of identifiable assets and
liabilities and their estimated tax bases and the benefits of any
unused tax losses and other deductions to the extent that these
amounts are more likely than not to be realized. The resulting
future tax amounts have been measured based on the rates
substantively enacted that are expected to apply when the
temporary differences reverse or the unused tax losses or other
deductions are realized.
Included under the Fresh Start Adjustment caption are all tax
adjustments required to transition the Predecessor's accounts to
the Successor's accounts at March 31, 2006
6. REORGANIZATION ITEMS
Reorganization items relating to continuing operations 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 included in the Consolidated Statement of
Earnings (Loss):
Three months ended March 31 (in millions) 2006 2005
---------------------------------------------------------------------
(Predecessor) (Predecessor)
Professional fees $ 12 $ 10
Success fees (i) 9 -
Break fees (ii) - 11
---------------------------------------------------------------------
Total reorganization items $ 21 $ 21
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) Fees paid to various advisors of the Corporation when the Third
Amended Restated Plan of Arrangement and Reorganization was
approved and implemented.
(ii) In March 2005, Stelco discontinued the capital raising process
and decided to pursue a recapitalization of the Corporation.
As a result, Deutsche Bank became entitled to a break fee of
approximately $11 million.
The cash flow associated with reorganization and restructuring items
is summarized as follows:
Three months ended March 31 (in millions) 2006 2005
---------------------------------------------------------------------
(Predecessor) (Predecessor)
Professional fees $ 13 $ 10
Success fees 9 -
Break fees - 11
---------------------------------------------------------------------
Total cash usage $ 22 $ 21
---------------------------------------------------------------------
---------------------------------------------------------------------
7. RESTRICTED CASH
The Predecessor's restricted cash represented funds being held in
trust with the Monitor pending direction from the Court for its use.
The composition of these funds is derived as follows:
---------------------------------------------------------------------
At March 31 At March 31 At December
(in millions) 2006 2005 31 2005
---------------------------------------------------------------------
(Successor) (Predecessor) (Predecessor)
Post-closing purchase of
inventory of Stelpipe $ - $ - $ 2
Proceeds from the sale of
Stelpipe assets - 1 1
Proceeds relating to the
sale of CHT assets - 4 4
Proceeds pertaining to the
sale of Welland Pipe assets - 6 10
Proceeds from the sale of the
shares of Norambar, Stelwire
and Stelfil 30 - -
Proceeds from the sale of the
shares of AltaSteel 4 - -
---------------------------------------------------------------------
Total restricted cash $ 34 $ 11 $ 17
---------------------------------------------------------------------
---------------------------------------------------------------------
During the first quarter of 2006, the Monitor received an additional
$108 million on behalf of Stelco, primarily from the sale of
AltaSteel ($77 million), and Norambar, Stelwire, and Stefil
($30 million). In March 2006, the Corporation obtained an order from
the Court authorizing the Monitor to release approximately
$91 million of restricted cash for general use on March 31, 2006.
The Successor's remaining funds will be released in accordance with
the terms of their respective purchase and sales agreements.
8. ASSET RETIREMENT OBLIGATIONS
Asset retirement obligations of continuing operations relate to the
site restoration and reclamation of iron ore properties at the
Corporation's mining interests in Wabush, Tilden, and Hibbing. The
following table provides the pertinent information associated with
these obligations:
---------------------------------------------------------------------
At At At At
March 31 March 31 March 31 December
(in millions) 2006 2006 2005 31 2005
---------------------------------------------------------------------
(Pre- (Pre- (Pre-
(Successor) decessor) decessor) decessor)
Opening balance $ - $ 15 $ 12 $ 12
Accretion expense - 1 1 2
Effect of change in
estimates - - - 1
---------------------------------------------------------------------
Liabilities incurred
(settled) - - - -
---------------------------------------------------------------------
Ending balance $ 22(x) $ 16 $ 13 $ 15
---------------------------------------------------------------------
Underlying assumptions:
Undiscounted cash flow
estimates 86 86 84 86
Credit-adjusted risk-free
interest rate 12.00%(xx) 16.65% 16.65% 16.65%
Time frame to settle
the obligations (years) 2013-2050 2013-2050 2013-2050 2013-2050
---------------------------------------------------------------------
(x) Reflects the estimated fair value assigned to this obligation
under fresh start reporting (Note 5).
(xx) Reflects the estimated credit-adjusted risk-free interest rate
of the Corporation, subject to finalization upon completion of
the Corporation's comprehensive revaluation of assets and
liabilities (Note 5).
9. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
All the businesses that comprised the Manufactured Products segment
and Mini-mill segment were determined to be non-core upon the
conclusion of the Corporation's strategic review in 2004 and have
been subsequently sold.
All of these businesses have been presented as discontinued
operations resulting in the retroactive restatement of the
consolidated financial statements to isolate the earnings (loss) and
cash flows associated with these businesses.
Mini-mill Segment
AltaSteel Ltd.
AltaSteel Ltd. ("AltaSteel") was a wholly owned subsidiary with its
plant and head office located near Edmonton, Alberta. AltaSteel
produced grinding rod, merchant quality and special quality bars,
rebar, and ballstock. On December 1, 2005 the Corporation entered
into a definitive purchase and sale agreement to sell the shares of
AltaSteel, which included its 50% investment in both MOLY-COP Canada
("MOLY-COP") - see Manufactured Products Segment - and GenAlta
Recycling Inc. ("Genalta") to Moly Cop Steel Inc., an affiliate of
Scaw International Sarl. The Court approved this transaction on
December 16, 2005. The transaction closed on January 31, 2006 for
gross proceeds of $77 million (subject to final working capital
adjustments). During the first quarter of 2006, Stelco recorded a net
pre-tax gain of $12 million comprised of a $36 million gain on the
sale of Stelco's investment in AltaSteel partially offset by a
settlement loss of $24 million relating to the pension and other
benefit plans of AltaSteel.
Norambar Inc.
Norambar Inc. ("Norambar") was a wholly owned subsidiary located in
Contrecoeur, Quebec which manufactured billets, automotive leaf
spring flat bars, rebar, merchant quality and special quality bars,
and railway-related products. On November 23, 2005, the Corporation
entered into a definitive purchase and sale agreement to sell the
its investment in wholly owned subsidiary FDers et MDetaux RecyclDes
LtDee ("FDers et MDetaux") and the shares of Stelwire and Stelfil - see
Manufactured Products Segment. The Court approved this transaction on
December 12, 2005. The transaction closed on February 1, 2006
generating gross proceeds of $30 million (subject to final working
capital adjustments). During the first quarter of 2006, Stelco
recorded a net pre-tax loss of $37 million comprised of a settlement
loss of $47 million relating to the pension and other benefit plans
of Norambar partially offset by a $10 million gain on the sale of
Stelco's investment in Norambar.
Financial Information
The following outlines the net sales, earnings (loss) before income
taxes, and net earnings (loss) applicable to discontinued operations
of the Mini-mill Segment:
Three months ended March 31 (in millions) 2006 2005
---------------------------------------------------------------------
(Predecessor) (Predecessor)
Net Sales $ 41 $ 116
Costs, amortization, and financial expense 37 105
---------------------------------------------------------------------
4 11
Settlement loss (employee future benefits) 71 -
Gain on sale of investment in subsidiaries (46) -
---------------------------------------------------------------------
Earnings (loss) before income taxes (21) 11
Current income taxes (recovery) 1 -
Future income taxes (recovery) (8) 3
Future income valuation allowance 9 -
---------------------------------------------------------------------
Net earnings (loss) $ (23) $ 8
---------------------------------------------------------------------
The assets and liabilities of these discontinued operations of the
Mini-mill segment have been sold as at March 31, 2006. Comparative
information is as follows:
At March 31, At December
(in millions) 2005 31, 2005
---------------------------------------------------------------------
Assets and Held for
Liabilities(1) Sale(2)
---------------------------------------------------------------------
(Predecessor) (Predecessor)
Current assets $ 143 $ 145
Property, plant and equipment 92 98
Deferred pension cost 8 (7)
Future income taxes 11 11
---------------------------------------------------------------------
Total assets 254 247
---------------------------------------------------------------------
Current liabilities 63 62
Employee future benefits 49 53
Long-term debt 15 12
Future income taxes 7 -
Other - 1
---------------------------------------------------------------------
Total liabilities 134 128
---------------------------------------------------------------------
Total investment $ 120 $ 119
---------------------------------------------------------------------
(1) Represents the assets and liabilities of the Mini-mill segment
that are included in the consolidated balances on the
Consolidated Statement of Financial Position.
(2) Represents the assets and liabilities of the Mini-mill segment
presented as assets or liabilities held for sale on the
Consolidated Statement of Financial Position.
Manufactured Products Segment
Stelwire
Stelwire operated plants in both Hamilton and Burlington, Ontario,
and, was a wholly owned subsidiary, which was one of North America's
largest producers of steel wire and wire products. Stelwire was part
of the previously mentioned sale to Mittal Canada Inc. that closed on
February 1, 2006. During the first quarter of 2006, Stelco Inc.
recorded a net loss of $11 million comprised of a settlement loss of
$54 million relating to the pension and other benefit plans of
Stelwire partially offset by a gain of $43 million on the sale of
Stelco's investment.
Stelfil LtDee
Stelfil LtDee ("Stelfil") operated in Lachine, Quebec producing wire
and wire products and was a wholly owned subsidiary of the
Corporation. Stelfil was part of the previously mentioned sale to
Mittal Canada Inc. that closed on February 1, 2006. Stelco Inc.
recorded a net loss of $4 million during the first quarter of 2006
comprised of a settlement loss of $20 million relating to both the
pension and other benefit plans of Stelfil partially offset by a
$16 million gain on the sale of Stelco's investment.
Stelpipe
Stelpipe, a wholly owned subsidiary located in Welland, Ontario,
manufactured a number of pipe and tubular products. On October 31,
2005 the Corporation sold substantially all of Stelpipe's assets to
Lakeside Steel Corporation ("Lakeside Steel"), a wholly owned
subsidiary of Romspen Investment Corporation. As part of the
agreement, Stelco retained all of the pension and benefit obligations
of Stelpipe's existing retirees. The final proceeds from the sale
remain subject to review and finalization of working capital and
assumed liabilities.
Welland Pipe
On March 7, 2003, the Corporation permanently closed its wholly owned
subsidiary, Welland Pipe Ltd. ("Welland Pipe"), a manufacturer of
large-diameter pipe located in Welland, Ontario. The primary assets
of the company were two pipe mills, a spiral-weld and U and O pipe
mill, which were sold during 2004 and 2005.
The property and plant of Welland Pipe were listed for sale in March
2005. In January 2006, the Corporation entered into a purchase and
sale agreement, which is subject to a number of conditions. If all
conditions are met, the sale is expected to close in the second
quarter of 2006. The net book value of these assets is immaterial.
Camrose Pipe Company
Camrose Pipe Company was a partnership situated in Camrose, Alberta
which manufactured small- and large-diameter pipe. The Corporation
held a 40% interest in this partnership. The sale closed in the
second quarter 2005.
MOLY-COP Canada
MOLY-COP Canada ("MOLY-COP") is located in Kamloops, British Columbia
and produced forged grinding balls for the mining and mineral
industry. AltaSteel, as a wholly owned subsidiary of the Corporation,
had a 50% ownership interest in this partnership. All of the
ballstock processed at this plant was acquired from AltaSteel.
MOLY-COP was sold as part of the previously mentioned sale to
Moly Cop Steel Inc. that closed on January 31, 2006.
Financial Information
The following outlines the net sales, earnings (loss) before income
taxes, and net earnings (loss) applicable to discontinued operations
of the Manufactured Products Segment:
Three months ended March 31 (in millions) 2006 2005
---------------------------------------------------------------------
(Predecessor) (Predecessor)
Net Sales $ 14 $ 143
Costs, amortization, and financial expense 19 141
---------------------------------------------------------------------
(5) 2
Settlement loss (employee future benefits) 74 -
Gain on sale of investment in subsidiaries (59) -
---------------------------------------------------------------------
Earnings (loss) before income taxes (20) 2
Current income taxes (recovery) - 2
Future income taxes (recovery) (1) (1)
Future income tax valuation allowance 1 1
---------------------------------------------------------------------
Net earnings (loss) $ (20) $ -
---------------------------------------------------------------------
The assets and liabilities of the discontinued operations in the
Manufactured Products Segment are as follows:
(in millions) At March 31, 2005 At December 31, 2005
---------------------------------------------------------------------
Assets and Held for Assets and
Liabilities(3) Sale(1) Liabilities(2)
---------------------------------------------------------------------
(Predecessor) (Predecessor) (Predecessor)
Current assets $ 186 $ 69 $ 18
Property, plant, and
equipment 9 9 -
Deferred pension cost 62 26 25
Future income taxes 7 - -
---------------------------------------------------------------------
Total assets 264 104 43
---------------------------------------------------------------------
Current liabilities 53 26 11
Employee future benefits 86 52 45
Pension liability - - -
---------------------------------------------------------------------
Total liabilities 139 78 56
---------------------------------------------------------------------
Net investment (liability) $ 125 $ 26 $ (13)
---------------------------------------------------------------------
(1) Represents the assets and liabilities of Stelwire, Stelfil and
MOLY-COP that are presented as assets or liabilities held for
sale on the Consolidated Statement of Financial Position.
(2) Pertains to the assets and liabilities of Welland Pipe and
Stelpipe that are not for sale.
(3) Pertains to the assets and liabilities of Stelpipe, Stelwire,
Stelfil, and MOLY-COP that are included in the balances on the
Consolidated Statement of Financial Position.
Summary
The following tables summarize the net sales, earnings (loss) before
income taxes, and net earnings (loss) relating to all of the
Corporation's discontinued operations:
Three months ended
March 31
(in millions) 2006 2005
---------------------------------------------------------------------
Manu- Manu-
factured factured
Mini-mills Products Total Mini-mills Products Total
---------------------------------------------------------------------
(Pre- (Pre-
decessor) decessor)
Net Sales $ 41 14 55 $ 116 143 259
Costs,
amortization,
and financial
expense 37 19 56 105 141 246
---------------------------------------------------------------------
4 (5) (1) 11 2 13
Settlement loss
(employee future
benefits) 71 74 145 - - -
Gain on sale of
investment in
subsidiaries (46) (59) (105) - - -
---------------------------------------------------------------------
Earnings (loss)
before income
taxes (21) (20) (41) 11 2 13
Current income
taxes
(recovery) 1 - 1 - 2 2
Future income
taxes
(recovery) (8) (1) (9) 3 (1) 2
Future income
tax valuation
allowance 9 1 10 - 1 1
---------------------------------------------------------------------
Net earnings
(loss) $ (23) (20) (43) $ 8 - 8
---------------------------------------------------------------------
The total assets and liabilities held for sale at December 31, 2005,
as noted below, related to all of the Corporation's discontinued
operations. These investments were sold in the first quarter of 2006.
At December 31 (in millions) 2005
---------------------------------------------------------------------
Manu-
factured
Mini-mills Products Total
---------------------------------------------------------------------
(Pre-
decessor)
Current assets $ 145 69 214
Property, plant, and equipment 98 9 107
Deferred pension cost (7) 26 19
Future income taxes 11 - 11
---------------------------------------------------------------------
Total assets held for sale 247 104 351
---------------------------------------------------------------------
Current liabilities 62 26 88
Employee future benefits 53 52 105
Long-term debt 12 - 12
Future income taxes - - -
Other 1 - 1
---------------------------------------------------------------------
Total liabilities held for sale 128 78 206
---------------------------------------------------------------------
Net investment held for sale $ 119 26 145
---------------------------------------------------------------------
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
(loss) before income taxes from continuing operations, as follows:
Three months
ended March 31
(in millions) 2006 2005
---------------------------------------------------------------------
Discon- Conti- Discon- Conti-
tinued nuing tinued nuing
Opera- Opera- Opera- Opera-
Total tions tions Total tions tions
---------------------------------------------------------------------
(Pre- (Pre-
decessor) decessor)
Earnings (loss)
before income
taxes $ (126) (41) (85) $ 85 12 73
---------------------------------------------------------------------
Income tax
expense
(recovery)
computed
using
statutory
income tax
rates (43%) (55) (18) (37) 37 5 32
---------------------------------------------------------------------
Add (deduct):
Manufacturing
and processing
credit 12 4 8 (8) (1) (7)
Resource
allowance/
depletion - - - (1) - (1)
Valuation
allowance 30 10 20 9 1 8
Minimum tax 1 - 1 - - -
Sale of
investment
in Non-Core
Businesses 6 6 - - - -
Impact of
intercompany
foreign
exchange - - - (1) - (1)
Other 2 - 2 - (1) 1
---------------------------------------------------------------------
51 20 31 (1) (1) -
---------------------------------------------------------------------
Income tax
expense
(recovery) (4) 2 (6) 36 4 32
---------------------------------------------------------------------
Net earnings
(loss) $ (122) (43) (79) $ 49 8 41
---------------------------------------------------------------------
---------------------------------------------------------------------
Components of future income tax assets and liabilities are summarized
as follows:
---------------------------------------------------------------------
At March 31 At March 31 At December
(in millions) 2006 2005 31 2005
---------------------------------------------------------------------
(Successor) (Predecessor) (Predecessor)
Future income tax assets
Employee future benefits $ 445 $ 333 $ 300
Deferred pension cost 143 - -
Non-capital loss carry-
forwards 154 91 97
Corporate minimum taxes 17 21 18
Net capital losses 27 7 7
Other 24 5 17
---------------------------------------------------------------------
Total future income tax assets
before valuation allowance $ 810 $ 457 $ 439
Less: valuation allowance (483) (327) (289)
---------------------------------------------------------------------
Total future income tax assets
after valuation allowance $ 327 $ 130 $ 150
---------------------------------------------------------------------
Future income tax liabilities
Plant and equipment -
difference in net book value
and unamortized capital cost $ 335 $ 140 $ 118
Deferred pension cost - 65 37
Investment in joint ventures 35 35 36
Other 41 5 17
---------------------------------------------------------------------
Total future income tax
liabilities $ 411 $ 245 $ 208
---------------------------------------------------------------------
Net future income tax asset
(liability) $ (84) $ (115) $ (58)
---------------------------------------------------------------------
The future income tax asset (liability) is reflected in the
Consolidated Statement of Financial Position as follows:
---------------------------------------------------------------------
At March 31 At March 31 At December
(in millions) 2006 2005 31 2005
---------------------------------------------------------------------
(Successor) (Predecessor) (Predecessor)
Future income tax asset -
current $ 7 $ 14 $ 22
Future income tax asset -
non current 19 4 12
Future income tax liability -
non-current (110) (133) (92)
---------------------------------------------------------------------
Total future income tax asset
(liability) $ (84) $ (115) $ (58)
---------------------------------------------------------------------
Future Income Taxes
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 and its subsidiaries recognize future income
tax assets where applicable, a future income tax asset valuation
allowance of $483 million related to continuing operations was
recorded as of March 31, 2006 ($289 million as of December 31, 2005)
to reduce the consolidated net future income tax asset.
11. BANK AND OTHER SHORT-TERM INDEBTEDNESS AND REVOLVING TERM LOANS
---------------------------------------------------------------------
At March 31 At March 31 At December
(in millions) 2006 2005 31 2005
---------------------------------------------------------------------
(Successor) (Predecessor) (Predecessor)
Stelco $ - $ 128 $ 191
Non-Core Subsidiaires - 29 -
---------------------------------------------------------------------
Total bank and other
short-term indebtedness $ - $ 157 $ 191
---------------------------------------------------------------------
---------------------------------------------------------------------
Revolving Term Loans
Current $ 35 $ - $ -
Non-current 392 - -
---------------------------------------------------------------------
Total revolving term loans $ 427 $ - $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
Revolving Term Loans
Asset Based Loan Facility
On March 31, 2006, the $75 million Debtor-in-Possession short-term
credit facility and the $350 million short-term credit facility were
replaced by a long-term asset based loan facility (the "ABL
facility"). The ABL facility bears interest at the Canadian bankers'
acceptance rate + 2.25%, prime rate + 0.5%, the US Base rate + 0.5%
or LIBOR + 2.25%, depending on the nature of the loan instrument
incurred. The ABL facility is available until March 31, 2008 and
prior to each anniversary date, the facility can be renewed for a
period of two years if the lendor and Stelco mutually agree. The ABL
facility is secured by a first priority security interest in the
eligible inventory and eligible accounts receivable of Stelco. The
ABL facility is additionally secured by a second priority security
interest in all other property and assets of the Corporation, limited
to $300 million and a fourth priority security interest for the
balance. The available amount of the ABL facility is dependent upon
the value of the underlying collateral of eligible accounts
receivable and eligible inventory, but will not exceed $600 million.
At March 31, 2006, borrowings under the facility are $392 million,
letters of credit are $29 million, and the available amount remaining
under the facility is approximately $179 million. The ABL facility
incurs an annual fee of 0.375% of any non-use of funds available
under the facility. The facility is subject to certain restrictive
covenants.
Secured Revolving Term Loan
On March 31, 2006, as part of the Plan, the Corporation entered into
a secured revolving term loan facility with Tricap (a shareholder -
Note 2), in the amount of $375 million for a term of seven years. The
facility is revolving for three years, after which time the facility
will cease to revolve and any amount outstanding on that date will be
repayable in full at the end of the seventh year. The secured
revolving term loan currently bears interest at bankers' acceptance
rate plus 6.75% until March 31, 2009 after which the loan bears
interest at bankers' acceptance rate plus 7.25%. The secured
revolving term loan is secured by a second priority interest on the
working capital assets of Stelco, except project financings, and a
first priority security interest in the fixed assets of Stelco. The
secured revolving term loan is also secured by all the tangible and
non-tangible assets of certain subsidiaries of Stelco and a pledge of
and security interest in all of the outstanding shares of interests
in certain subsidiaries, partnerships and joint ventures of Stelco.
As at March 31, 2006, there were borrowings of $35 million
outstanding under this facility. Stelco intends to repay amounts
borrowed under this facility within one year, therefore these
borrowings have been reflected as a current liability on the
Statement of Financial Position. Under this facility, Stelco is
required to pay an annual fee of 3% of the aggregate commitment of
$375 million on each anniversary date of Plan implementation. In
addition, the facility requires the Company to pay 3% of the
outstanding credit facility in place at March 31, 2009, if it intends
to extend the facility.
12. LONG-TERM DEBT
At March 31 At March 31 At December
(in millions) 2006 2005 31 2005
---------------------------------------------------------------------
(Successor) (Predecessor) (Predecessor)
10.4% retractable unsecured
debentures due November 30,
2009 $ - $ 125 $ 125
9.5% convertible unsecured
subordinated debentures due
February 1, 2007 - 90 90
8% retractable unsecured
debentures due February 15,
2006 - 150 150
Computer system financing
maturing March 31, 2012 - 47 47
---------------------------------------------------------------------
Long-term debt of Applicants
subject to compromise
(Note 5) - 412 412
---------------------------------------------------------------------
Floating Rate Notes at LIBOR
+ 5.50% or LIBOR + 8.50%(a) 275 - -
1.0% Province Note(b) 149 - -
1.0% Province Note - fair
value adjustment(b) (92) - -
Term loan at Canadian Prime
Rate plus 2.50% matured on
June 10, 2005(c) 5 27 22
Term loan at Bankers'
Acceptance Rate plus 1.50%
maturing On January 31, 2008 27 40 33
Term loan at 7.20% maturing
on January 3, 2008(d) - 7 6
Term loans at Bankers'
Acceptance Rate plus 1.00 to
1.125%
Or Canadian Prime Rate plus
0.5% maturing on January 3,
2008(d) - 12 10
---------------------------------------------------------------------
Long-term debt 364 498 483
Less: amount held for sale
(Note 9) - - (16)
Less: amount subject to
compromise (Note 5) - (412) (424)
---------------------------------------------------------------------
Long-term debt not subject
to compromise 364 86 43
Less amount due within one year 18 45 23
---------------------------------------------------------------------
Long-term debt $ 346 $ 41 $ 20
---------------------------------------------------------------------
---------------------------------------------------------------------
(a) Floating Rate Notes
As part of the consideration in settlement of the affected
claims of the Predecessor, Affected Creditors received FRN's
equal to the US dollar equivalent of $275 million Canadian
dollars ($235 million US dollars). The FRN's mature on March
31, 2016. Interest is payable semi-annually. At Stelco's
option, the FRN's will bear an interest rate of London Inter-
Bank Overnight Rate ("LIBOR") plus 5.50% if paid in cash and
LIBOR plus 8.50% if paid in new FRN's. For periods after March
31, 2008, the interest rate will be calculated in the same
manner as noted above, with the exception that under certain
conditions, the interest rate will be subject to a reduction of
0.50%. For periods after March 31, 2011, interest is payable in
cash only. The FRN's are callable at 110% until March 31, 2008;
then callable at 105% of face value until March 31, 2009; then
at 102.5% of face value until March 31, 2010; and at par
thereafter, in each case payable in cash. The FRN's are secured
by a security interest in the assets of Stelco, subordinated
and postponed to the security granted to the ABL Facility and
the Secured Revolving Term Loan (Note 11) in all respects
including rights to payment and enforcement until both the ABL
Facility and Secured Revolving Term Loan are repaid in full.
(b) Province Note
In accordance with the Pension Agreement, the Province of
Ontario provided Stelco with $150 million on March 31, 2006 in
exchange for a note payable (the "Province Note") and warrants
to purchase 851,100 common shares. The Province Note is
unsecured and is repayable on December 31, 2015, at Stelco's
option, in cash or by delivering an equivalent value in Stelco
common shares. The Province Note is also subject to a 75%
discount if the solvency deficiencies in Stelco's four main
pension plans are eliminated on or before the maturity date. At
this time, there is no assurance that the Corporation will
receive the 75% discount. The Province Note bears an interest
rate of 1% per annum, payable semiannually in cash or, at
Stelco's option, by delivering Stelco common shares. At March
31, 2006, the $150 million was allocated between the Province
Note and the fair value of the warrants (see Note 14 for terms
of the warrants). Upon the application of fresh start
reporting, the Province Note will be adjusted to its fair value
upon the completion of the comprehensive revaluation of assets
and liabilities (Note 5). The fair value of the Province Note
is currently estimated to be $57 million.
(c) The term loan is an obligation of a wholly owned subsidiary of
the Corporation. The loan is in default and secured against
letters of credit associated with the sale of the plate mill
assets. In addition, a $12 million claim was accepted through
the claims process and was settled upon implementation of the
CCAA Plan (see Note 2).
(d) These term loans were assumed by the purchaser upon completion
of the sale of the Non-Core Subsidiaries during the first
quarter of 2006 (Note 9).
13. COMMITMENTS AND CONTINGENCIES
Capital Programs
The estimated cost to complete previously approved capital programs
is $106 million. Of this amount $47 million relates to Phase 2 of the
Lake Erie Steel Limited Partnership hot strip mill upgrade. An
additional $17 million pertains to projects at the Corporation's
mining interests.
Federal Government Grant
The Government of Canada announced on November 23, 2005 that it
agreed to provide a $30 million co-generation grant, representing
approximately 60% of the initial cost of the Corporation's near-term
cogeneration spending. Since the time of the commitment, there has
been a change in Government. The Corporation has initiated a dialogue
with the new government in order to reconfirm and secure the
$30 million commitment. To date, the grant has not been reconfirmed.
Contingencies
Georgian Windpower Corporation ("GWC") commenced a lawsuit against
Stelco Inc. during the course of the CCAA proceedings alleging, among
other things, breach of contract by Stelco in connection with
Stelco's termination in April 2005 of a Memorandum of Understanding
("MOU") and Agreement to Enter into a Land Lease Agreement ("AELLA")
between Stelco and GWC. GWC has claimed damages of $350 million. The
lawsuit is still at the pleadings stage. The Corporation intends to
vigorously defend this action. The result and value of the GWC claim
is not determinable at this time and consequently the Corporation has
not recorded any provisions in the consolidated financial statements.
14. CAPITAL STOCK
Common Shares
---------------------------------------------------------------------
At March 31 At March 31 At December
2006 2005 31 2005
---------------------------------------------------------------------
(Successor) (Predecessor) (Predecessor)
New Common Shares 26,100,000 - -
Convertible Series A - 101,778,203 100,735,965
Convertible Series B - 470,996 1,513,233
---------------------------------------------------------------------
Total number of shares 26,100,000 102,249,199 102,249,198
---------------------------------------------------------------------
Total (in millions) $144 $781 $781
---------------------------------------------------------------------
---------------------------------------------------------------------
Convertible Series A and B Common Shares
The Series A and B Common Shares of the Predecessor were delisted
from the Toronto Stock Exchange as at the close of trading on
March 10, 2006. These shares were eliminated on Plan implementation
with no value being attributed to them (Note 2).
New Common Shares
Under the Plan and in accordance with the Plan Sponsor Agreement
(Note 2), the Corporation issued 26,100,000 New Common Shares upon
emergence from CCAA with a value of $5.50 per share. The Affected
Creditors received 6,364,000 New Common Shares as partial
consideration for settlement of their Affected Claims (Note 2). The
Equity Sponsors received 19,736,000 New Common Shares in exchange for
proceeds of $108.5 million.
On April 2, 2006, the President and Chief Executive Officer purchased
1,000,000 New Common Shares from Treasury for cash consideration of
$5.5 million, bringing the total number of shares outstanding as of
that date to 27,100,000.
Warrants
Under the Plan, the Corporation issued a total of 2,269,600 warrants.
The warrants entitle the holder to purchase one common share at an
exercise price of $11.00, and if exercised in full, would result in
the holders owning approximately 8% of fully diluted equity. These
warrants have a term of seven years and are exercisable at anytime
after June 26, 2006 up to their expiration on March 31, 2013. The
Affected Creditors received 1,418,500 warrants with an estimated fair
value of $2 million as partial consideration in exchange for their
Affected Claims (Note 2). The Province received 851,100 warrants with
an estimated fair value of $1 million as partial consideration for
the province loan (Note 12).
15. STOCK-BASED COMPENSATION
Key Employee Stock Option Plan ("KESOP")
The KESOP terminated on Plan Implementation. No options remain
outstanding under this plan.
Deferred Share Unit Plan
The holders of all the deferred share units ("DSU's") were settled
for nil consideration on Plan Implementation. While the DSU Plan
continues to exist, there are currently no deferred share units
outstanding.
Incentive Stock Option Plan
Effective April 1, 2006, the Board of Directors approved an Incentive
Stock Option Plan (the "ISOP"). The ISOP is intended to attract and
retain superior directors, officers, advisors, employees and other
persons engaged to provide ongoing services to the Corporation or its
affiliates. The total number of stock options available under the
ISOP is 2,610,000, of which 1,944,000 were issued at a strike price
of $5.50 per share. The options vest semi-annually over a four-year
period from the date of the grant (the "Grant Date") in equal
installments beginning in September 2006, subject to acceleration
under certain circumstances. The options mature 10 years after the
Grant Date. All options granted under the ISOP may not be issued for
less than the market price of the Corporation's Common Shares on the
Grant Date.
16. EMPLOYEE FUTURE BENEFITS
Net Benefit Plan Cost
The defined benefit costs recognized in the first quarter of 2006 and
2005 are outlined as follows:
Three months ended
March 31 2006 2005
---------------------------------------------------------------------
Continuing Discontinued Continuing Discontinued
Operatings Operations Operatings Operations
---------------------------------------------------------------------
(Predecessor) (Note 9) (Predecessor) (Note 9)
Pensions $ 36 $ 101 $ 40 $ 4
Other benefit
plans 27 48 26 5
---------------------------------------------------------------------
Total net
benefit plan
costs $ 63 $ 149 $ 66 $ 9
---------------------------------------------------------------------
---------------------------------------------------------------------
Accrued Benefit Obligation and Plan Assets
Information about the Corporation's pension benefit plans, in
aggregate, is as follows:
Pension Benefit Plans
Year ended
December
Three months ended March 31, 2006 31, 2005
-------------------------------------------------------------------------
Fresh
Pension Start
Pre- Contri- Adjust- Pre-
(in millions) decessor bution ments Successor decessor
-------------------------------------------------------------------------
(Note 5) (Note 5)
Accrued Benefit
Obligation
Balance at beginning
of period $ 3,806 $ - $ - $ 3,415
Current service and
interest cost 56 - - 237
Benefits paid (56) - - (217)
Actuarial (gains)
losses - - (108) 372
Exchange and other - - (8) (1)
-------------------------------------------------------------------------
Balance end of
period $ 3,806 $ - $ (116) $ 3,690 $ 3,806
-------------------------------------------------------------------------
Plan Assets
Fair value at
beginning of
period $ 2,853 $ - $ - $ 2,600
Actual return
on assets 78 - - 375
Employer
contributions 23 382 - 98
Benefits paid (56) - - (217)
Exchange and other (1) - (5) (3)
-------------------------------------------------------------------------
Fair value at end
of period 2,897 382 (5) 3,274 2,853
-------------------------------------------------------------------------
Funded status -
plan deficit (909) 382 111 (416) (953)
Unamortized net
actuarial loss 823 - (823) - 877
Unamortized past
service costs 185 - (185) - 188
-------------------------------------------------------------------------
Accrued benefit
asset (liability) $ 99 $ 382 $ (897) $ (416) $ 112
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accrued benefit asset (liability) is reflected in the
Consolidated Statement of Financial Position as follows:
At March 31, At December
(in millions) 2006 31, 2005
---------------------------------------------------------------------
(Predecessor) (Successor) (Predecessor)
Deferred pension cost $ 99 $ - $ 112
Pension liability - current - (67) -
Pension liability - non-current - (349) -
---------------------------------------------------------------------
Total Accrued benefit asset
(liability) $ 99 $ (416) $ 112
---------------------------------------------------------------------
---------------------------------------------------------------------
Substantially all of the Corporation's pension benefit plans are not
fully funded.
Pension Plan Funding Arrangements
As a condition of the CCAA Plan, Stelco and the Province entered into
the Pension Agreement, effective on March 31, 2006 containing the
following key terms:
- Stelco was obligated to make an initial up-front payment of
$400 million to its four main pension plans less any contributions
to plans already made in 2006. As a result, Stelco made a
$382 million payment to the plans on March 31, 2006;
- Stelco will fund its four main pension plans in the following
amounts in the years subsequent to December 31, 2005:
Years 1 - 5: $65 million per year ($32.5 million in 2006),
payable monthly, commencing July 1, 2006;
Years 6 - 10: $70 million per year, payable monthly;
- Stelco will make additional pension plan payments to fund any
solvency deficiency in the Stelco four main pension plans if
Stelco generates free cash flow in excess of certain minimum
thresholds as set out in the Pension Agreement, subject to Stelco
having more than a minimum liquidity amount; and
- Stelco will not be required to make any adjustments to its pension
funding based on annual actuarial valuations up to December 31,
2015 provided that any future benefit improvements which will be
required to be funded in accordance with the Pension Benefits Act
and will be in addition to the funding payments outlined above.
Other Benefit Plans
Year ended
December 31,
Three months ended March 31, 2006 2005
-------------------------------------------------------------------------
Fresh Start
(in millions) Predecessor Adjustments Successor Predecessor
-------------------------------------------------------------------------
(Note 5)
Accrued Benefit
Obligation
Balance at beginning
of period $ 1,376 $ - $ 1,212
Current service and
interest cost 20 - 80
Benefits paid (12) - (58)
Actuarial (gains)
losses - (30) 139
Exchange and other 1 (21) 3
-------------------------------------------------------------------------
Balance end of period $ 1,385 $ (51) $ 1,334 $ 1,376
-------------------------------------------------------------------------
Plan Assets
Fair value at
beginning of period 12 - 11
Actual return on
assets - - 1
Employer contributions 4 - 2
Benefits paid (2) - (1)
Exchange and other - - (1)
-------------------------------------------------------------------------
Fair value at end
of period $ 14 $ - $ 14 $ 12
-------------------------------------------------------------------------
Funded status - plan
deficit (1,371) 51 (1,320) (1,364)
Unamortized net
actuarial loss 470 (470) - 476
Unamortized past
service costs (6) 6 - (6)
-------------------------------------------------------------------------
Accrued benefit
liability $ (907) $ (413) $ (1,320) $ (894)
-------------------------------------------------------------------------
The accrued benefit liability is reflected in the Consolidated
Statement of Financial Position as follows:
At March 31, At December
(in millions) 2006 31, 2005
---------------------------------------------------------------------
(Predecessor) (Successor) (Predecessor)
Employee future benefits
liability - current $ 60 $ 60 $ 60
Employee future benefits
liability - non-current 847 1,260 834
---------------------------------------------------------------------
Total accrued benefit
liability $ 907 $ 1,320 $ 894
---------------------------------------------------------------------
---------------------------------------------------------------------
All of the Corporation's other benefit plans are not fully funded.
17. EARNINGS (LOSS) PER COMMON SHARE
Interest on the convertible debentures is recorded in the
Consolidated Statement of Earnings (Loss) as interest on long-term
debt and debt subject to compromise. This amount, net of tax, is
added back to net earnings (loss) from continuing operations and net
earnings (loss) in order to calculate fully diluted earnings (loss)
from continuing operations and fully diluted earnings (loss) per
common share. Fully diluted earnings (loss) per common share is
calculated by applying the treasury stock method for the potential
exercise of stock options, and assuming the dilutive effect of the
conversion of all outstanding convertible debentures at the $4.50 per
share conversion price applicable to these debentures.
Three months ended March 31
($ in millions) 2006 2005
---------------------------------------------------------------------
(Predecessor) Restated
(Note 9)
(Predecessor)
Basic net earnings (loss) from
continuing operations $ (79) $ 41
Convertible debentures -
interest expense net of tax 1 1
---------------------------------------------------------------------
Fully diluted net earnings (loss)
from continuing operations $ (78) $ 42
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic net earnings (loss) (122) 49
Convertible debentures - interest
expense net of tax 1 1
---------------------------------------------------------------------
Fully diluted net earnings (loss) $ (121) $ 50
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average number of common
shares outstanding - basic 102,249,198 102,249,199
Incremental number of common shares
assumed to be issued on the exercise
of stock options - 281,250
Common shares issued on the assumed
conversion of convertible 20,000,000 20,000,000
---------------------------------------------------------------------
Weighted average number of common shares
outstanding - fully diluted 122,249,198 122,530,449
---------------------------------------------------------------------
---------------------------------------------------------------------
Options to purchase common shares not
included in the above calculation(x) 4,986,012 3,851,351
---------------------------------------------------------------------
---------------------------------------------------------------------
(x) Exercise prices were greater than the average market price of the
common shares during the periods.
During the three months ended March 31, 2006, a basic net loss from
continuing operations and a basic net loss were incurred, therefore
options and convertible debentures related information have not been
used to calculate fully diluted earnings per share from continuing
operations and fully diluted earnings per share as both are anti-
dilutive.
18. SEGMENTED INFORMATION
Discontinued Operations
Due to the restructuring of the Corporation's business, the
operations of the Mini-mill segment (AltaSteel, Norambar, Genalta,
and Fers et MDetaux) and the Manufactured Products segment (Stelwire,
Stelpipe, Stelfil, Camrose Pipe, MOLY-COP, and Welland Pipe) were
discontinued and have been sold in whole or in part. Information
relating to these businesses is contained in Note 9 - Discontinued
Operations and is not disclosed below due to the related retroactive
restatement of the consolidated financial statements.
Continuing Operations
The continuing operations of the Corporation, the Integrated Steel
Segment, operate primarily within the North American market, as a
group of businesses producing and marketing a wide range of steel
products. Businesses in this segment produce raw materials (iron ore)
and manufacture and sell slabs, hot rolled, cold rolled, and coated
sheet, and bar. Intersegment sales are recorded at market value.
The following provides segmented information pertaining to the
Integrated Steel Segment where the information cannot otherwise be
found directly in the consolidated financial statements:
Three months ended March 31 (in millions) 2006 2005
---------------------------------------------------------------------
(Predecessor) (Restated
- Note 9)
(Predecessor)
Net sales - trade 674 780
Intersegment sales - (52)
---------------------------------------------------------------------
Net Sales $ 674 $ 728
---------------------------------------------------------------------
---------------------------------------------------------------------
Shipments - trade (thousands of net tons) 974 973
Intersegment shipments - (66)
---------------------------------------------------------------------
Shipments 974 907
---------------------------------------------------------------------
---------------------------------------------------------------------
Geographic segments
Net sales
Canada 609 659
United States 60 63
Other 5 6
---------------------------------------------------------------------
Net sales $ 674 $ 728
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital assets - net
Canada 977 997
United States 58 58
---------------------------------------------------------------------
Capital assets - net(x) $ 1,035 $ 1,055
---------------------------------------------------------------------
---------------------------------------------------------------------
(x) The valuation of assets under fresh start accounting is still
under review, therefore these capital assets are reported at
historical cost (Note 5).
>>
%SEDAR: 00001549E
