HAMILTON, ON, Nov. 10 /CNW/ - Stelco Inc. (TSX:STE) today reported a net
loss of $42 million ($0.41 per common share) for the quarter ended
September 30, 2005. This compares to net earnings of $58 million ($0.57 per
common share) for the third quarter of 2004 and $40 million ($.39 per share)
for the previous quarter. Nine-month net earnings were $47 million ($0.46 per
common share) compared to net earnings of $63 million ($0.62 per common share)
for the same period in 2004.
The results, when compared to third quarter 2004, reflect lower spot
market selling prices, decreased shipments, reduced production levels, higher
reorganization costs and higher energy costs, partly offset by higher income
tax recoveries and lower scrap and coke costs. Also included in the third
quarter 2005 is a loss resulting from the sale of substantially all of the
assets of Stelpipe Ltd., more than offset by income tax recoveries recognized,
related to Stelpipe net operating loss carry forwards.
Net sales revenue in the third quarter was $725 million compared to
$897 million for the same period last year. During the first nine months of
2005, sales revenue was $2.462 billion compared to $2.446 billion recorded
during the first nine months of 2004.
The Company produced 1,107,000 net tons of semi-finished steel in the
third quarter of 2005 compared to 1,385,000 net tons produced in the third
quarter of 2004. Production for the first nine months of this year stood at
3,660,000 net tons compared to the 4,078,000 net tons produced during the same
period in 2004.
Shipments in the third quarter of 2005 totalled 1,067,000 net tons
compared to 1,143,000 net tons shipped during the third quarter of last year.
Shipments during the first nine months of this year totalled 3,306,000 net
tons compared to 3,564,000 net tons shipped during the first nine months of
2004.
At September 30, 2005, the Company's consolidated net liquidity position
was $307 million, consisting of $36 million of cash, cash equivalents and
restricted cash as well as $469 million in available lines of credit, less
$198 million of drawings on lines of credit. At June 30, 2005, net liquidity
was $407 million, consisting of $26 million of cash, cash equivalents and
restricted cash as well as $472 million in available lines of credit, less
$91 million of drawings on lines of credit. At December 31, 2004, net
liquidity was $284 million, consisting of $43 million of cash, cash
equivalents and restricted cash as well as $456 million in available lines of
credit, less $215 million of drawings on lines of credit.
During the third quarter the Company announced a number of significant
developments in its Court-supervised restructuring process. These included the
filing of a restructuring plan; a definitive agreement to sell substantially
all of the assets of Stelpipe Ltd.; restructuring agreements with the Province
of Ontario, the USW, and Tricap Management Limited; and the calling of a
meeting of Affected Creditors.
During the fourth quarter of 2005, the Company will be taking the first
major step in its "Strategic Capital Expenditure Plan". During the quarter,
the Lake Erie facility will have a 20-day planned shutdown beginning on
November 15, 2005. This is the initial step to increase the output of the Lake
Erie hot strip mill and allow for the closure of the 56" mill at Hamilton. It
is anticipated that this capital project will be complete in the third quarter
of 2006.
Spot market prices and shipments are expected to improve in the fourth
quarter. However, we expect this to be offset by higher energy costs, the
planned shutdown of the Stelco Lake Erie hot strip mill to install components
related to the Phase II upgrade, and the associated effect of lowering the
value-added mix of sales due to slab sales in the fourth quarter. The strength
of the Canadian dollar and the threat of increased import levels remain a
concern to the Corporation. In addition, the remaining estimated non-cash loss
of $31 million related to the sale of substantially all of the assets of
Stelpipe will be recorded in the fourth quarter. Should the criteria of assets
held for sale be met with respect to other non-core asset sales that are being
pursued, additional non-cash losses to be recorded will be material.
Courtney Pratt, Stelco President and Chief Executive Officer, said, "The
third quarter results demonstrate the continuing competitive challenge we face
and the vital importance of securing a consensual restructuring which will
enable us to move forward with our strategic capital program. As we have said
throughout this process, this capital program is essential to making Stelco
competitive through all stages of the market cycle and ensuring a positive
long-term future."
About Stelco
Stelco Inc. is a large, diversified steel producer. Stelco is involved in
major segments of the steel industry through its integrated steel business,
mini-mills and manufactured products businesses. This news release may contain
forward-looking information with respect to the Corporation's business
operations, financial performance and conditions. Actual results may differ
from expected results for a variety of reasons including factors discussed in
the Corporation's Management's Discussion and Analysis section of the
Corporation's 2004 Annual Report. To learn more about Stelco and its
businesses, please refer to our Web site at www.stelco.ca.
STELCO INC.
QUARTER 3, 2005
REPORT TO THE SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") is dated November 10,
2005. The purpose of Stelco Inc.'s ("Stelco" or the "Corporation") MD&A is to
provide commentary on the Corporation's financial situation and future
prospects, focusing on the Corporation's three reportable segments: Integrated
Steel, Mini-mill, and Manufactured Products. The Integrated Steel segment is
Stelco's core business. The other two segments are considered non-core. See
"Creditor Protection and Restructuring" below for additional comments. The
Corporation prepares its consolidated financial statements (the "Consolidated
Financial Statements") in accordance with Canadian generally accepted
accounting principles ("GAAP"). The following MD&A should be read in
conjunction with the MD&A and the annual audited Consolidated Financial
Statements contained in the Corporation's 2004 Annual Report, and with the
Interim Financial Statements and Notes contained in this report and the
previously released 2005 quarterly reports and the October 5, 2005 "Notice of
Proceedings and Meetings and Information Circular ("the Circular") with
respect to a Plan of Arrangement and Reorganization" (the "Plan"). These
reports and information together with additional information about Stelco
including information found in the Corporation's 2004 Annual Information Form
can be accessed from SEDAR at www.sedar.com. Definition of terms contained in
this MD&A can be found in the Circular.
Certain statements in this MD&A may constitute "forward-looking"
statements which involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance, or achievements of
Stelco, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Forward looking statements typically include words such as
"may," "will," "expect," "believe," "plan," "intend" or other similar
terminology. These statements reflect current expectations regarding future
events and operating performance and speak only as of the date of this MD&A.
Forward-looking statements involve significant risks and uncertainties should
not be read as guarantees of future performance or results, and will not
necessarily be accurate indications of whether or not such results will be
achieved. A number of factors could cause actual results to differ materially
from the results discussed in the forward-looking statements, including, but
not limited to, the risk factors discussed in the Corporation's 2004 Annual
MD&A, and in the Corporation's previously released 2005 quarterly reports and
in the Circular as well as the risks discussed under "Risk Factors" below.
Although the forward-looking statements contained in this MD&A are based upon
what management of the Corporation believes are reasonable assumptions, the
Corporation cannot assure investors that actual results will be consistent
with these forward-looking statements. Forward-looking statements contained in
this Quarter 3, 2005 report are made as of the date of this MD&A, and the
Corporation assumes no obligation to update or revise them to reflect new
events or circumstances.
Creditor Protection and Restructuring
On January 29, 2004 (the "Filing Date"), Stelco obtained an order (the
"Initial Order") from the Ontario Superior Court of Justice (the "Court")
granting it creditor protection under the Companies' Creditors Arrangement Act
(the "CCAA"). The Initial Order may be amended throughout the CCAA proceedings
on motions from Stelco, its creditors, and other interested stakeholders. On
the same date, Stelco made a concurrent petition for recognition of the
Initial Order and ancillary relief under Section 304 of the U.S. Bankruptcy
Code. The Canadian proceedings include Stelco and its wholly owned
subsidiaries, Stelwire Ltd. ("Stelwire"), Stelpipe Ltd. ("Stelpipe"), CHT
Steel Company Inc. ("CHT Steel"), and Welland Pipe Ltd. ("Welland Pipe"),
which are collectively referred to as the "Applicants." The U.S. proceedings
include Stelco, Stelwire, and Stelpipe. The Corporation's other subsidiaries
and joint ventures are not included in the proceedings. During the stay
period, the Applicants are authorized to continue operations. Ernst & Young
Inc. was appointed by the Court as monitor (the "Monitor") in the Canadian
proceedings and has been reporting to the Court from time to time on the
Applicants' cash flow and on other developments during the proceedings.
The Initial Order and the U.S. proceedings provided for an initial stay
period of 30 days, which has subsequently been extended to December 5, 2005,
and may potentially be extended to such later dates as the Court may order.
The purpose of the Initial Order and stay of proceedings was to provide the
Applicants with relief designed to stabilize their operations and business
relationships with their customers, suppliers, employees, and creditors.
The CCAA proceedings have triggered defaults under substantially all debt
obligations of the Applicants (see Notes 7 and 12 to the Consolidated
Financial Statements). The Initial Order generally stays actions against the
Applicants including steps to collect indebtedness incurred by the Applicants
prior to the Filing Date and actions to exercise control over the Applicants'
property. The Initial Order grants the Applicants the authority to pay
outstanding and future wages, salaries, employee pension contributions and
benefit payments, and other obligations to employees; the costs of goods and
services, both operating and of a capital nature, provided or supplied after
the date of the Initial Order; rent under existing arrangements payable after
the date of the filing; and principal, interest, and other payments to holders
of security in respect of the property of the Applicants if the amount secured
by such security is, in the reasonable opinion of the applicable Applicant,
with the concurrence of the Monitor, less than or equal to the fair value of
such security, having regard to, among other things, the priority of such
security.
Filing of Plan
On September 19, 2005, after extensive discussions with stakeholders, the
Board of Directors of Stelco approved a plan of arrangement (the "Plan") and
the Stelco/Province Restructuring Agreement discussed further below. On
September 20, 2005, Stelco filed motion materials with the Court seeking an
Order authorizing it to file the Plan and directing meetings of the Affected
Creditors. On October 4, 2005, pursuant to an order of the Court, Stelco was
authorized to call and conduct meetings of Affected Creditors to consider and
vote on the Plan. Meetings are scheduled to be held on November 15, 2005. For
additional information on the Plan, see the October 5, 2005 "Notice of
Proceedings and Meetings and Information Circular with Respect to a Plan of
Arrangement and Reorganization". A copy of the Circular can be obtained from
www.sedar.com or www.mccarthy.ca/en/ccaa.
Purpose of the Plan
The purpose of the Plan is, among other things, to restructure Stelco
into a viable and competitive industry participant able to deal with the
pricing and input cost volatility of the steel industry as well as other
competitive factors.
Stelco considers the implementation of its four point strategy (the "Four
Point Strategy") adopted in July 2004 as critical to its survival as a viable
and competitive steel producer. The objective of the Plan is to allow the
Applicants to emerge from CCAA Proceedings in a manner that will permit Stelco
to implement the Four Point Strategy, while also balancing the interests of
all stakeholders of the Applicants in a fair and reasonable manner in the
circumstances. To achieve viability, a number of key areas need to be
addressed, including:
Strategic Capital Expenditures
The Four Point Strategy identified a number of strategic capital
expenditures that Stelco believes will significantly reduce costs and result
in creating a more competitive, viable Stelco over the long term. The major
planned capital expenditures include: completion of the Stelco Lake Erie hot
strip mill upgrade, to allow the closure of Stelco Hamilton's 1950's vintage
56" hot strip mill; new pickling facilities, to allow the closure of Stelco
Hamilton's 1950's and 1960's vintage pickling facilities and repatriation of
external pickling; and co-generation at both Stelco Lake Erie and Stelco
Hamilton, to use Stelco's self-generated excess gas stream to produce
electricity and reduce power purchases.
Stelco estimates that the capital expenditure program will cost
approximately $425 million (of which it is expected that approximately
$125 million related to the Stelco Lake Erie hot strip mill upgrade will be
spent prior to the end of 2005) and anticipates approximately $145 million of
cost reductions annually by 2009. These improvements are entirely cost driven
and therefore do not rely on new markets or specific pricing of steel to
achieve the anticipated returns.
Cost Reductions
Stelco has identified a number of specific cost reduction initiatives.
These include its strategic capital expenditure program described above,
managed attrition and improvements in maintenance planning, which will reduce
repair and maintenance costs and increase throughput by reducing equipment
downtime.
Plan Outline
Proposed treatment of stakeholders
In proposing the Plan, the Applicants considered, among other things, the
legal entitlements of stakeholders in the absence of the CCAA proceedings,
their expected economic recovery if no Plan were approved and the proposed
treatment of stakeholders under the Plan. Since the estimated value of the
securities to be given to Affected Creditors under the Plan is less than their
Affected Claims, there is no residual value in the Applicants available for
the existing Common Shareholders. The Applicants believe that the Plan fairly
balances all stakeholder interests.
Affected Creditors
All Affected Claims of each Applicant are unsecured. The creditors
holding such claims have been grouped into one class (the "Affected
Creditors").
If the Plan is implemented, each Affected Creditor will receive in
satisfaction of its Affected Claims, its pro rata share of the following based
on the amount of its Proven Claim:
- New Secured Convertible Notes in the aggregate principal amount
of $225 million (10 year maturity, 9.5% coupon);
- New Convertible 5% Notes in the aggregate principal amount of
$300 million (5 year maturity);
- 1.1 million New Common Shares; and
- New Rights to subscribe for New Secured Convertible Notes at the
new rights subscription price to generate proceeds up to
$75 million.
Under the Plan, claims against the Applicants for any post filing
interest or costs in respect of Affected Claims will be released.
The actual level of recovery to be realized by Affected Creditors under
the Plan cannot be accurately determined at this time as it depends on a
number of factors including the trading prices, after the distribution record
date, of the securities issued to them under the Plan. However, the estimated
recovery on Affected Claims plus post filing interest to December 31, 2005, is
approximately 66% (excluding any recovery from the New Rights).
The Monitor believes that if a Plan is not approved and the assets of the
Applicants are realized, Affected Creditors would recover between 17% to 33%
of their proven claims inclusive of post-filing interest thereon to
December 31, 2005.
Shareholders
There are a total of 102,249,198 existing outstanding common shares as of
September 30, 2005. Under the Plan, the existing common shares have no
economic value since Affected Creditors will not receive full recovery. The
Plan has allocated no value to the common shares.
Pension Plans
There are no proposed changes to the level of pension benefits currently
being paid to pensioners, or to the pension benefits being earned by active
members as part of the implementation of the Plan. The changes that are to be
made relate to improving the funded status of Stelco's four main pension plans
(i.e. Stelco Hamilton hourly and salary and Stelco Lake Erie hourly and salary
plans) as discussed below.
Under current law, Stelco's four main pension plans are funded on a going
concern basis only, pursuant to the Section 5.1 Election, of the Pension
Benefits Act (the "PBA"). This will change upon implementation of the Plan.
Pension funding arrangements to be incorporated pursuant to the Province
Pension Funding Agreement will require an upfront lump sum cash contribution
allocated among Stelco's four main pension plans in a total amount of
$400 million upon the implementation of the Plan. The Province of Ontario (the
"Province") has agreed to provide Stelco with an advance by way of a note (the
"New Province Note") in the amount of $100 million to assist with this funding
requirement. After the implementation date of the Plan, the Section 5.1
Election will no longer be in effect for Stelco and annual cash contributions
to be allocated among Stelco's four main pension plans will equal $60 million
per annum from 2006 to 2010, and commencing in 2011 and continuing through
2015, total annual cash contributions will increase to $70 million per annum.
In addition, commencing in 2008, additional cash contributions will be paid if
Stelco generates cash flow in excess of a specific formula and will be capped
until 2011 at pre-determined levels. These funding requirements will replace
the normal funding requirements under the Pension Benefits Act ("PBA").
Changes in actuarial assumptions and/or investment returns will not affect
funding during this ten year period. Commencing in 2016, funding of Stelco's
four main pension plans will be in accordance with the PBA. Benefit
improvements, if any, during this ten year period will be funded separately,
in accordance with the PBA.
Employees
The Applicants' salaried and bargaining-unit employees are generally
unaffected by the Plan except that their positions will be improved by the
accelerated pension solvency funding described above. The Plan does not
require any concessions in terms of salaries, wages or pension and other
benefits.
Secured Creditors
The Plan does not affect Creditors with secured claims. The claims of the
Operating Lenders pursuant to the Credit Facility and the DIP Credit Facility
will be paid in full on or prior to the implementation date of the Plan. It is
a condition to implementation of the Plan that Stelco has arranged for an
asset based loan facility (the "New ABL Facility") for up to $600 million (see
below).
New funding and capital
New ABL Facility
On the Plan Implementation Date, the current $75 million DIP Credit
Facility and $350 million Credit Facility which are due to expire no later
than January 20, 2006, are to be replaced by a New ABL Facility. The
Corporation is in negotiations with lenders to provide this facility. The
available amount of the New ABL Facility will be dependant upon the value of
the underlying collateral, but will not exceed $600 million.
New Secured Revolving Term Loan
Pursuant to the Stelco/Tricap Restructuring Agreement, Tricap has agreed
to provide a new secured revolving term loan (the "New Secured Revolving Term
Loan") to Stelco in an amount of $350 million for a term of seven years from
Plan implementation date. The facility is revolving until the third
anniversary of the Plan Implementation Date (the "Target Date"). On and after
the Target Date, the facility will cease to revolve and any amount of the New
Secured Revolving Term Loan outstanding on the Target Date will be repayable
in full on the seventh anniversary of the Plan Implementation Date.
Restructuring Agreements
Stelco entered into agreements with the Province of Ontario, the USW
Local 8782 and a finance provider pursuant to which Stelco obtained their
support for, and financing in respect to, the Plan.
On October 4, 2005, pursuant to separate Orders, the Court authorized
Stelco to enter into each of the following restructuring agreements:
- the Stelco/Province Restructuring Agreement between Stelco and the
Province of Ontario dated September 19, 2005;
- the Stelco/Tricap Restructuring Agreement between Stelco and Tricap
Management Limited dated September 22, 2005;
- the Stelco/USW Restructuring Agreement between Stelco, the USW and
Local 8782 thereof dated September 23, 2005.
Stelco/Province Restructuring Agreement
Stelco and the Province entered into the Stelco/Province Restructuring
Agreement, which provides for funding arrangements with respect to Stelco's
four main pension plans aimed at substantially reducing or eliminating the
solvency deficiencies in these plans over a 10 year period. The Province has
agreed to provide Stelco with an advance by way of the New Province Note in
the amount of $100 million to assist with this funding requirement. The loan
will become repayable on December 31, 2015 and can be repaid in cash or Stelco
common shares and is subject to a 75% discount if the solvency deficiencies in
Stelco's four main pension plans are eliminated on or before that date.
Stelco/Tricap Restructuring Agreement
The Stelco/Tricap Restructuring Agreement sets out the terms and
conditions on which Tricap has committed to provide financing to Stelco
contemplated by the Plan by way of the New Secured Revolving Term loan in the
aggregate principal amount of $350 million and by agreeing to act as standby
purchaser in respect of a $75 million rights offering for new secured
convertible notes (the "New Rights Offering"). In addition, Tricap will have
an option to subscribe for New Secured Convertible Notes to generate proceeds
of $25 million.
Stelco and Tricap have agreed in the Stelco/Tricap Restructuring
Agreement that the implementation of the Plan will be conditional on a number
of issues including ratification of the Local 8782 memorandum of agreement
(the "MOA") and the Local 5220 MOA, the members of the new Board of Directors
of Stelco being acceptable to Tricap, the material terms and conditions of the
Plan being satisfactory to Tricap, execution of documentations with respect to
the New ABL Facility, Stelco having not less than $625 million of liquidity on
a consolidated basis and no "Material Adverse Change" having occurred.
If the agreement is terminated, Tricap would be entitled to break fees of
up to $11 million depending on specific circumstances.
Stelco/USW Restructuring Agreement
On September 23, 2005, Stelco and USW Local 8782 entered into the Local
8782 MOA. USW Local 8782 is required to recommend the Local 8782 MOA to its
members for ratification if the final restructuring plan is similar to the
existing Plan or is otherwise acceptable to the USW. The ratification vote of
the Local 8782 MOA is to occur within eight days after the meeting of the
Affected Creditors to be held to consider and approve the Plan, and if
ratified the renewal 8782 Collective Bargaining Agreement will be in force on
the date Stelco receives written notice of ratification which will occur no
later than the Plan Implementation Date. Under the Stelco/USW Restructuring
Agreement, the 90 day strike notice provided on July 27, 2005 by USW Local
8782 has been suspended effective September 23, 2005.
On September 23, 2005, AltaSteel and USW Local 5220 entered into the
Local 5220 MOA but no date has been set at this time for the ratification
vote.
Liquidity and Leverage Impacts of the Plan
Liquidity
Liquidity reflects the amount of cash and undrawn credit facilities
Stelco has available.
Stelco's liquidity position will be enhanced under the Plan.
Substantially all of Stelco's outstanding debt is now due or subject to
immediate acceleration. Under the Plan, Stelco's current bond maturities and
stayed trade debt will effectively be extended to maturity dates ranging from
five to ten years after the Plan Implementation Date through the delivery of
the New Notes to the Affected Creditors. The New Notes also provide for, at
the option of Stelco and subject to applicable regulatory approvals, for the
payment of principal, to be made in New Common Shares rather than cash. The
New Notes also provide for, at the option of Stelco, the payment of interest
to be made in underlying securities rather than cash. If Stelco decides to pay
its interest and/or principal obligation in securities, its liquidity will be
enhanced accordingly.
Stelco believes that once it exits CCAA, its trade credit terms will be
extended, which will improve the Corporation's liquidity position. It is
expected that if Stelco's key suppliers become increasingly more comfortable
with the financial position and prospects for the Corporation, in most cases
they will provide Stelco with more favourable trade terms.
The level of liquidity contemplated by the Plan will:
- allow the financial flexibility to execute Stelco's strategic
plan and meet obligations as they become due;
- provide the ability to fund the annual pension plan payments to
Stelco's four main pension plans of $60 million per annum for
2006 to 2010 and $70 million per annum for 2011 to 2015;
- better position Stelco to withstand steel pricing volatility and
unplanned events; and
- provide for future capital market access.
Leverage
It is estimated that the face value of Stelco's total debt outstanding at
the Plan implementation date would be approximately $960 million including the
New Secured Convertible Notes, the New Convertible 5% Notes and the New
Province Note but excluding any securities issued under the New Rights
Offering. The Plan reduces Stelco's leverage levels by providing for the
conversion of the $300 million of New Convertible 5% Notes into equity
provided that certain conditions are met and the conversion of the
$225 million of New Convertible Secured Notes into equity upon maturity. The
New Province Note has a number of features, such as partial forgiveness under
certain conditions and below market interest rates, that mitigate its impact
on Stelco. Upon implementation of the Plan, Stelco believes that it has a
capital structure and leverage levels that are manageable and will allow it to
execute on its strategic plan and operate successfully in the future.
Remaining Issues
Required Approvals and Other Requirements
The conditions to implementation of the Plan include a number of
approvals, orders and consents that must be obtained. If any of these
approvals is not obtained, subject to the right of Stelco, if any, to waive
such conditions, the Plan will not be implemented. They include Affected
Creditor, regulatory, and Court approvals.
Stelco must have the New Credit Facilities available to provide up to
$950 million (subject to borrowing base calculations on commercial terms for
the New ABL Facility) to finance Stelco's ongoing operations.
Prior to the Plan Implementation Date, arrangements satisfactory to
Stelco and the Operating Lenders must have been made for the repayment or
refinancing of their loans and definitive agreements with one or more
financial institutions must have been executed and delivered for the New ABL
Facility.
Bondholders
To date, a number of large bondholders have indicated that they do not
support the Plan. These bondholders appealed the Orders made on October 4,
2005 authorizing Stelco to enter into the Stelco/Province Restructuring
Agreement, the Stelco/Tricap Restructuring Agreement and the Stelco/USW
Restructuring Agreement. By reasons released on November 4, 2005, the Court of
Appeal dismissed the bondholders' appeal. Continued opposition could result in
a defeat of the Plan when a vote is held. Discussions are continuing with the
bondholders to try to resolve the differences before the November 15, 2005
meeting of Affected Creditors.
Status of Claims Process
Pursuant to the Claims Procedure Order, the Applicants initiated a
process for certain creditors to file Proofs of Claim against the Applicants
for Claims incurred prior to January 29, 2004 and for Restructuring Claims.
The claims bar dates for filing Proofs of Claim for Claims arising prior to
January 29, 2004 and for Restructuring Claims arising prior to December 17,
2004 was set at January 31, 2005. The claims bar date for filing Proofs of
Claim for Restructuring Claims arising after December 17, 2004 was set at
October 26, 2005.
A dispute mechanism is in place for those Claims that cannot be resolved
by way of negotiation with the Applicants and/or the Monitor. These Claims are
forwarded to a Claims Officer providing the claimant filed a notice of dispute
by the earlier of eight business days following receipt of a dispute package
or March 7, 2005 (or, in respect of a Restructuring Claim arising after
December 17, 2004, on October 26, 2005). These Claims are reviewed and ruled
on by the Claims Officer. Both the Applicants and the claimant have the right
to appeal the decision of the Claims Officer to the Court within five business
days of notification of the Claims Officer's decision. All determinations from
the Court regarding appealed Claims are final for the purpose of recording
Claims. See Note 7 to the Consolidated Financial Statements for the Claim
Summary as at September 30, 2005.
Special Committee
On August 31, 2005, Stelco received a letter from two directors
announcing their resignation. The letter indicated that the directors were
resigning due to concerns over the restructuring process, including the role
of management and the Board of Directors in the preparation of forecasts
underlying the Plan.
Following receipt of the letter, the Board formed a Special Committee and
sought an order from the Honourable Justice Farley on September 7, 2005 which
appointed a Special CCAA Officer to provide assistance to the Special
Committee and oversee the Special Committee's review of the identified issues.
Subsequent to the delivery of the report of the Special Committee of the
Board, the Special CCAA Officer reported to the Ontario Superior Court of
Justice that there was no basis to suggest any conflict of interest on
management's part and that the Board had acted responsibly in respect of the
matters subject to complaint. The Report of the Special CCAA Officer is
available at www.mccarthy.ca/en/ccaa.
Non-Core Businesses
The Corporation's 2004 strategic review determined that all of the
businesses of the Mini-mill and Manufactured Products segments are non-core
and as a result may not form part of Stelco's business going forward. The
Corporation initiated a sales process in respect of these business units which
was approved by the Court on October 19, 2004.
On November 2, 2005, Stelco signed a letter of intent concerning the sale
of Norambar, Stelfil, and Stelwire to Mittal Canada Inc ("Mittal"). The
transaction is subject to a number of conditions, including the negotiation of
a definitive agreement and obtaining Court approval. It is anticipated that,
if all the conditions are satisfied as planned, the sale will close early in
2006. With the sale of Camrose Pipe and Stelpipe (see Discontinued Operations
below), Stelfil and Stelwire represent the majority of the remaining
manufactured products segment.
Included in the Consolidated Statement of Financial Position are the
following amounts related to the non-core businesses, excluding Camrose Pipe
and Stelpipe which have been sold and are included in discontinued operations
(see below):
<<
Manufactured
At September 30 (in millions) Mini-mill Segment Products Segment
(unaudited) 2005 2004 2005 2004
-------------------------------------------------------------------------
Current assets $ 148 $ 169 $ 75 $ 106
Current liabilities 70 83 25 30
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Working capital 78 86 50 76
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Property, plant, and equipment 97 89 9 16
Deferred pension cost 12 9 32 25
Future income taxes 12 9 2 2
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Other assets 121 107 43 43
-------------------------------------------------------------------------
Employee future benefits 51 47 49 47
Long-term debt 13 17 - -
Future income taxes 9 8 - -
Other liabilities 73 72 49 47
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Net investment in non-core
businesses $ 126 $ 121 $ 44 $ 72
-------------------------------------------------------------------------
Stelco's $170 million net investment in these businesses is funded
through share capital and intercompany loans and advances. The sale process is
progressing with respect to the non-core businesses. Completion of the
transactions may be affected by progress on the Corporation's restructuring.
Under GAAP, losses resulting from the disposition of an asset group are
recorded only when specific criteria have been met including when the
disposition is probable. The Corporation has determined that the criteria for
accounting for assets held for sale have not been met with respect to these
businesses. Should the criteria of assets held for sale be met, future losses
related to the Corporation's net investment would likely be material and are
dependent on, among other items, the purchase price, the assets sold, and
liabilities and obligations assumed by the prospective purchasers.
Discontinued Operations
The Consolidated Financial Statements have been retroactively restated to
include Stelpipe and Camrose earnings (loss) and cash flows as part of
discontinued operations.
Stelpipe
On August 19, 2005 the Corporation reached an agreement for the sale of
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 will assume all of the pension
and benefit obligations of Stelpipe's existing retirees. The Court approved
the transaction on September 6, 2005. The transaction closed on October 31,
2005.
The pre-tax loss to be recorded related to this asset sale is estimated
to be $53 million, of which $22 million was recorded in the quarter ended
September 30, 2005, with the remaining estimated loss of $31 million to be
recorded in fourth quarter 2005, at the time of closing. The fourth quarter
2005 loss reflects the estimated settlement and other losses primarily related
to the pension plans of the employees transferred to Lakeside Steel.
Camrose Pipe
The sale of the Corporation's 40% partnership interest in Camrose Pipe to
Canadian National Steel Corporation closed for gross proceeds of $23 million
on April 20, 2005. The resulting gain of $3 million, net of $1 million tax,
was included in discontinued operations during second quarter 2005.
Welland Pipe
A purchase and sale agreement was signed for the U and O pipe mill for
$4 million in April 2005 and was subsequently approved by the Court on May 4,
2005. The sale closed on June 29, 2005 when title to the assets passed to the
purchaser. Proceeds received are being held in trust with the Monitor (see
Note 6 to the Consolidated Financial Statements). A gain of $4 million was
recorded in discontinued operations during the second quarter 2005 as the net
book value of the assets was nil.
Idled or Closed Facilities
Stelco Hamilton Plate Mill
The sale of the plate mill assets closed on June 9, 2005. The gross
proceeds of sale of $25 million were secured by irrevocable letters of credit,
which have and will continue to be drawn down in tandem with progress made on
dismantling of the equipment. The carrying value of these assets was nil,
therefore a gain (net of fees) of $20 million was recorded during the second
quarter 2005.
Financial and Operational Summary
Stelco Inc. (Unaudited)
(Under Creditor
Protection as of
January 29, 2004
- Note 1 to the
Consolidated
Financial
Statements) Three months ended Nine months ended
September 30 September 30
($ in millions,
except as Favourable Favourable
indicated (x)) (Unfavour- (Unfavour-
(unaudited) 2005 2004(xx) able) 2005(xx) 2004(xx) able)
-------------------------------------------------------------------------
Net sales $ 725 $ 897 $ (172) $2,462 $2,446 $ 16
Costs 720 762 42 2,217 2,181 (36)
Amortization of
property, plant,
and equipment 30 30 - 88 89 1
Amortization
of intangible
assets 1 1 - 3 2 (1)
Gain on sale of
plate mill
assets (Note 5) - - - (20) - 20
-------------------------------------------------------------------------
Operating
earnings
(loss)(xxx) (26) 104 (130) 174 174 -
Reorganization
items (Note 4) (13) (8) (5) (47) (38) (9)
-------------------------------------------------------------------------
(39) 96 (135) 127 136 (9)
-------------------------------------------------------------------------
Financial expense
Interest on
long-term debt
and debt subject
to compromise (11) (11) - (32) (34) 2
Other interest
- net (4) (6) 2 (10) (17) 7
-------------------------------------------------------------------------
Earnings (loss)
before income
tax from
continuing
operations (54) 79 (133) 85 85 -
Income tax
expense
(recovery)
(Note 10)
Current (14) 3 17 13 7 (6)
Future (6) 28 34 10 30 20
Future income
tax asset
valuation
allowance
(release) (21) (13) 8 (10) (14) (4)
-------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations (13) 61 (74) 72 62 10
Net earnings
(loss) from
discontinued
operations
(Note 9) (29) (3) (26) (25) 1 (26)
-------------------------------------------------------------------------
Net earnings
(loss) $ (42) $ 58 $ (100) $ 47 $ 63 $ (16)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss)
per common share
from continuing
operations
(Note 17) (x)$(0.13) (x)$0.60 (x)$(0.73) (x)$0.70 (x)$ 0.61 (x)$ 0.09
Earnings (loss)
per common
share
(Note 17) (x)$(0.41) (x)$0.57 (x)$(0.98) (x)$0.46 (x)$ 0.62 (x)$(0.16)
Average
revenue
per ton (x)$ 679 (x)$ 785 (x)$ (106) (x)$ 745 (x)$ 686 (x)$ 59
Cost per
ton (x)$ 675 (x)$ 667 (x)$ (8) (x)$ 671 (x)$ 612 (x)$ (59)
Semi-finished
steel
production
(thousands
of net tons) 1,107 1,385 (278) 3,660 4,078 (418)
Shipments
(thousands
of net tons) 1,067 1,143 (76) 3,306 3,564 (258)
(xx) Restated - see Notes 3 and 9 to the Consolidated Financial
Statements
(xxx) "Operating earnings (loss)" is a non-GAAP financial measure used
by management to assess the performance of the Corporation and its
business segments. The Corporation's use of this measure may not
be comparable to measures used by other companies. In accordance
with GAAP, a reconciliation of operating earnings (loss) to net
earnings (loss) is presented above.
All note references in this document are to the Corporation's
September 30, 2005 Consolidated Financial Statements.
Overview
Net earnings in third quarter 2005 decreased by $100 million compared to
third quarter 2004.
Results in third quarter 2005 were significantly lower than the same
period 2004, mainly due to lower selling prices, decreased shipments, reduced
Integrated Steel primary and finishing mill production, higher reorganization
costs and higher energy costs, partly offset by higher income tax recoveries,
and lower scrap and coke costs.
Also, included in the net loss for third quarter 2005 is a loss from the
sale of substantially all of Stelpipe's assets, more than offset by income tax
recoveries recognized, primarily related to Stelpipe net operating loss carry
forwards.
Net Sales and Costs
Net sales of $725 million for the quarter ended September 30, 2005 were
19% lower than in the same quarter of 2004. Steel shipments of 1,067,000 tons
were 7% lower than the same quarter 2004, while average revenue per ton of
$679 was down 14%. The third quarter 2005 decrease in average revenue per ton
was primarily due to soft market conditions (compared to exceptionally strong
demand and short supply in third quarter 2004) and the negative impact of the
higher Canadian dollar.
For the first nine months of 2005, net sales of $2,462 million were 1%
higher than the same period in 2004. Steel shipments of 3,306,000 tons were 7%
lower due to weaker market conditions, while average revenue per ton of $745
was up 9%. The nine month increase in average revenue per ton was primarily
due to the renewal of customer contracts at substantially higher prices and
higher spot prices in the first half of 2005, partly offset by lower spot
prices caused by softer market conditions in the third quarter 2005.
Production of semi-finished steel for the nine month period of 3,660,000
tons was 418,000 tons lower than the same period 2004 mainly due to reduced
output required to achieve planned steel inventory reductions.
Costs in third quarter 2005 of $720 million were down 6% compared with
the same quarter 2004 primarily due to lower shipments and average cost per
ton of $675 was up 1%. Cost per ton was higher in the third quarter primarily
due to:
- the fixed cost per ton impact of reduced output at the primary
operations and Integrated Steel finishing mills required to
balance steel inventory levels with market demand;
- higher raw material and energy costs, particularly coal,
electricity and natural gas;
- higher spending for purchased services and supplies at Integrated
Steel;
- the flow through of higher-cost inventories produced in the second
quarter and the writedown of certain inventories to market value
necessitated by lower selling prices.
The above cost increases were partially offset by:
- lower scrap and purchased coke costs;
- the third quarter 2004 included recognition of certain pension
liabilities associated with the closed Chisholm coal mine;
- the impact of a stronger Canadian dollar on U.S. dollar
denominated purchases;
- decreased cost of rod, as raw materials at the Manufactured
Products segment;
- reduced labour costs at Stelco Hamilton.
Cost per ton for the nine months period of $671 was up 10% compared to
the same period 2004.
Costs were higher primarily due to:
- the fixed cost per ton impact of reduced output at the primary
operations and Integrated Steel finishing mills required to
balance steel inventory levels with market demand;
- higher raw material and energy costs, particularly scrap, coal,
iron ore, natural gas and electricity;
- higher spending for repairs and maintenance, purchased services,
and supplies at Integrated Steel and Norambar;
- the flow through of higher-cost inventories and the writedown of
inventories to market value necessitated by lower selling prices.
The above costs increases were partially offset by:
- $14 million for the balance of the insurance claim recovery
related to the June 2004 blast furnace outage;
- the impact of a stronger Canadian dollar on U.S. dollar
denominated purchases;
- lower purchased coke prices;
- the third quarter 2004 included recognition of certain pension
liabilities associated with the closed Chisholm coal mine.
Reorganization items
In third quarter 2005, reorganization expenses of $13 million were
incurred which related entirely to professional fees. For the nine months
ended September 30, 2005 reorganization expenses were $47 million consisting
of $36 million of professional fees, and the $11 million Deutsche Bank break
fee.
Comparatively, $8 million of reorganization expenses were incurred in
third quarter 2004, which were mainly for professional fees. For the first
nine months of 2004, reorganization expense amounted to $38 million consisting
mainly of professional fees ($18 million), a $15 million non-cash adjustment
related to the write-up to face value of the convertible debentures, and the
write-off and amortization of deferred financing fees ($4 million).
Professional fees will continue to be incurred in the near term as the
Corporation moves ahead with its restructuring plan, deals with related
issues, and completes the Claims Process that was initiated in December 2004.
Other material revenues, expenses, gains, or losses may be recorded dependent
upon results from the Claims Process, or other events that may transpire
during the final phase of the Corporation's restructuring.
Further information regarding the nature and composition of
reorganization items are outlined in Note 4 to the Consolidated Financial
Statements.
Financial expense
Post-filing interest continues to be recorded on long-term debt subject
to compromise under GAAP ($64 million as of September 30, 2005). No interest
has been paid on the stayed portion of long-term debt, since the date of the
Filing.
Interest on long-term debt and debt subject to compromise was $2 million
lower for nine months ended September 30, 2005 compared to the same period of
2004 due to regularly scheduled non-Applicant debt repayments, and the
conversion of two existing loans to a lower, variable rate.
Due to lower interim borrowings as compared to the same period in 2004,
other interest was $2 million lower in third quarter 2005 and $7 million lower
for nine months ended September 30, 2005.
Income Tax expense
Future income tax assets are recognized to the extent that realization is
considered more likely than not. The assessment as to the future realization
of future income tax assets, including loss carry-forwards, is conducted on a
company-by-company basis for the Stelco group of businesses. Realization of
future income tax assets is dependent upon the availability of sufficient
taxable income within the carry-forward periods. The assessment of realization
is based upon the weight of evidence at the respective balance sheet date.
In the third quarter 2005, the Corporation determined that it would be
able to realize certain future income tax assets previously included in the
future income tax valuation allowance. These assets consist of tax loss
carry-forwards primarily related to Stelpipe.
Quarter-to-Quarter Comparison
Stelco Inc.
(Under Creditor Protection as of January 29, 2004 - See Note 1
to the Consolidated Financial Statements)
($ in millions, except as Quarter 3 Quarter 2(xx) Favourable
indicated (x)) (unaudited) 2005 2005 (Unfavourable)
-------------------------------------------------------------------------
Net sales $ 725 $ 832 $ (107)
Costs 720 738 18
Amortization of property, plant,
and equipment 30 30 -
Amortization of intangible assets 1 1 -
Gain on sale of plate mill assets
(Note 5) - (20) (20)
-------------------------------------------------------------------------
Operating earnings (loss) (26) 83 (109)
Reorganization items (Note 4) (13) (13) -
-------------------------------------------------------------------------
(39) 70 (109)
-------------------------------------------------------------------------
Financial expense
Interest on long-term debt and
debt subject to compromise (11) (11) -
Other interest - net (4) (2) (2)
-------------------------------------------------------------------------
Earnings (loss) before income
tax from continuing operations (54) 57 (111)
Income tax expense (recovery)
(Note 10)
Current (14) 7 21
Future (6) 10 16
Future income tax asset
valuation allowance (release) (21) 2 23
-------------------------------------------------------------------------
Net earnings (loss) from
continuing operations (13) 38 (51)
Net earnings (loss) from
discontinued operations (Note 9) (29) 2 (31)
-------------------------------------------------------------------------
Net earnings (loss) $ (42) $ 40 $ (82)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per common share
from continuing operations
(Note 17) (x)$ (0.13) (x)$ 0.37 (x)$ (0.50)
Earnings (loss) per common
share (Note 17) (x)$ (0.41) (x)$ 0.39 (x)$ (0.80)
Average revenue per ton (x)$ 679 (x)$ 769 (x)$ (90)
Cost per ton (x)$ 675 (x)$ 682 (x)$ 7
Semi-finished steel production
(thousands of net tons) 1,107 1,297 (190)
Shipments (thousands of net
tons) 1,067 1,082 (15)
(xx) Restated - see Note 9 to the Consolidated Financial Statements
Overview
Net earnings in third quarter 2005 decreased by $82 million compared to
second quarter 2005.
Results in third quarter 2005 were significantly lower than the second
quarter 2005, mainly due to lower spot market prices, reduced Integrated Steel
primary and finishing mill production, second quarter included $14 million for
the balance of the insurance claim recovery related to the June 2004 blast
furnace outage, higher energy costs, partly offset by higher tax recoveries,
lower scrap and reagent costs. Net earnings in second quarter 2005 also
included a gain on the sale of the plate mill assets of $20 million.
The net loss for third quarter 2005 also included a $22 million loss from
the sale of substantially all of Stelpipe's assets, more than offset by income
tax recoveries recognized ($35 million) related to Stelpipe net operating loss
carry forwards.
Net sales and costs
Net sales of $725 million for the third quarter of 2005 were 13% lower
than second quarter 2005 net sales of $832 million. Steel shipments of
1,067,000 net tons were 1% lower than second quarter 2005 while average
revenue per ton of $679 was down 12% from $769. The third quarter decrease in
average revenue per ton was primarily due to softening market demand partly
caused by excess customer inventories and the continued negative impact of the
higher Canadian dollar.
Cost per ton in third quarter 2005 of $675 was down 1% compared with
second quarter 2005 cost per ton of $682 primarily due to:
- lower scrap, reagent, fluxes, and purchased coke costs;
- reduced labour costs at Stelco Hamilton;
- lower cost of rod as raw material at the Manufactured Products
segment.
The above cost decreases were mainly offset by:
- $14 million for the balance of the insurance claim recovery
related to the June 2004 blast furnace outage;
- higher energy costs, particularly, electricity and natural gas;
- higher spending for purchased services, repairs and maintenance
and supplies at Integrated Steel;
- the fixed cost per ton impact of reduced output at the primary
operations and Integrated Steel finishing mills required to
balance steel inventory levels with market demand.
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.
(Under Creditor Protection as of January 29, 2004 -
see Note 1 to the Consolidated Financial Statements)
(in millions except as
indicated(x)) (unaudited) 2005(x) 2005(xx) 2005(xx) 2004(xx)
-------------------------------------------------------------------------
Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Net sales $ 725 832 905 854
Operating earnings (loss) $ (26) 83 117 45
Net earnings (loss) from
continuing operations $ (13) 38 47 12
Net earnings (loss) $ (42) 40 49 1
Earnings (loss) from
continuing operations
per common share(+)
Basic (x)$ (0.13) 0.37 0.46 0.12
Fully diluted (x)$ (0.13) 0.32 0.40 0.11
Net earnings (loss) per
common share(+)
Basic (x)$ (0.41) 0.39 0.48 0.01
Fully diluted (x)$ (0.41) 0.34 0.41 0.01
-------------------------------------------------------------------------
(in millions except as
indicated(x)) (unaudited) 2004(xx) 2004(xx) 2004(xx) 2003(xx)
-------------------------------------------------------------------------
Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Net sales $ 897 828 721 650
Operating earnings (loss) $ 104 67 3 (137)
Net earnings (loss) from
continuing operations $ 61 37 (36) (370)
Net earnings (loss) $ 58 42 (37) (398)
Earnings (loss) from
continuing operations
per common share(+)
Basic (x)$ 0.60 0.36 (0.35) (3.62)
Fully diluted (x)$ 0.51 0.31 (0.35) (3.62)
Net earnings (loss) per
common share(+)
Basic (x)$ 0.57 0.41 (0.36) (3.89)
Fully diluted (x)$ 0.49 0.36 (0.36) (3.89)
-------------------------------------------------------------------------
(xx) Restated - see Notes 3 and 9 to the Consolidated Financial
Statements
(+) Earnings (loss) per common share is calculated using the weighted
average number of common shares outstanding during the quarter
Segmented Information
In the following segment narratives, net sales, shipments, and average
revenue per ton data include intersegment sales.
The Corporation has three primary business segments: Integrated Steel,
Mini-mill and Manufactured Products. The Integrated Steel segment has been
identified as the core business. The other two segments have been identified
as non-core. See Creditor Protection and Restructuring - Non-core Businesses
for additional comments.
Integrated Steel segment
The Integrated Steel segment of the Corporation comprises those business
units that include and are primarily associated with the Stelco Hamilton and
Stelco Lake Erie Integrated Steel plants and their raw materials properties.
The primary markets served by this segment are automotive, transportation,
construction, manufacturing, pipe and tubular manufacturers, steel service
centres, and steel fabricators.
Integrated Steel
Three months ended Nine months ended
September 30 September 30
($ in millions,
except as Favourable Favourable
indicated(x)) (Unfavour- (Unfavour-
(unaudited) 2005 2004 able) 2005 2004 able)
-------------------------------------------------------------------------
Net sales $ 584 $ 760 $ (176) $2,054 $2,061 $ (7)
Costs 591 653 62 1,835 1,870 35
Amortization of
property, plant,
and equipment 27 27 - 82 82 -
Gain on sale of
plate mill
assets (Note 5) - - - (20) - 20
-------------------------------------------------------------------------
Operating
earnings
(loss) $ (34) $ 80 $ (114) $ 157 $ 109 $ 48
-------------------------------------------------------------------------
Shipments
(thousands
of net tons) 845 962 (117) 2,700 3,032 (332)
Average
revenue
per ton (x)$ 691 (x)$ 790 (x)$ (99) (x)$ 761 (x)$ 680 (x)$ 81
Cost per
ton (x)$ 699 (x)$ 679 (x)$ (20) (x)$ 680 (x)$ 617 (x)$ (63)
Semi-finished
steel
production
(thousands
of net tons) 875 1,141 (266) 2,949 3,359 (410)
-------------------------------------------------------------------------
Overview
Operating loss in third quarter 2005 was $34 million, a decrease of
$114 million compared to third quarter 2004 earnings of $80 million.
Market demand softened significantly throughout the third quarter of
2005, resulting in lower shipments and a decline in spot market prices.
Customer inventory levels dropped to normal levels from high levels
experienced through the first half of the year. Automotive sales in the third
quarter were impacted by seasonal shutdowns. North American steel producers
reduced production levels in the second and third quarter of 2005, which
helped to mitigate the steel pricing decline.
Net Sales, Costs and Production
Net sales for the Integrated Steel segment in third quarter 2005 were
$584 million compared with $760 million in third quarter 2004, a decrease of
23%. Average revenue per ton of $691 was down 13%, primarily due to a softer
market, which had a negative impact on spot market prices as well as
shipments.
For the first nine months of 2005, net sales for the Integrated Steel
segment were $2,054 million compared with $2,061 million for the same period
2004.
Cost per ton increased $20 in the third quarter 2005 compared with the
same quarter of 2004. Cost per ton was higher in the third quarter primarily
due to:
- the fixed cost per ton impact of reduced output at the primary
operations and Integrated Steel finishing mills required to
balance steel inventory levels with market demand;
- higher raw material and energy costs, particularly coal,
electricity and natural gas;
- higher spending for purchased services and supplies at Integrated
Steel;
- the flow through of higher-cost inventories produced in the second
quarter and the writedown of certain inventories to market value
necessitated by lower selling prices.
The above cost increases were partially offset by:
- lower scrap and purchased coke costs;
- the third quarter 2004 included recognition of certain pension
liabilities associated with the closed Chisholm coal mine;
- the impact of a stronger Canadian dollar on U.S. dollar
denominated purchases;
- reduced labour costs at Stelco Hamilton.
Cost per ton increased $63 in the first nine months 2005 compared with
the same period 2004. Costs were higher primarily due to:
- the fixed cost per ton impact of reduced output at the primary
operations and Integrated Steel finishing mills required to
balance steel inventory levels with market demand;
- higher raw material and energy costs, particularly scrap, coal,
iron ore, natural gas and electricity;
- higher spending for repairs and maintenance, purchased services,
and supplies at Integrated Steel;
- the flow through of higher-cost inventories and the write-down of
inventories to market value necessitated by lower selling prices.
The above costs increases were partially offset by:
- $14 million for the balance of the insurance claim recovery
related to the June 2004 blast furnace outage;
- the impact of a stronger Canadian dollar on U.S. dollar
denominated purchases;
- lower purchased coke prices;
- the third quarter 2004 included recognition of certain pension
liabilities associated with the closed Chisholm coal mine.
Facilities/competitiveness
The Stelco Hamilton plant is not competitive as measured by cost per ton
of hot rolled steel with either reorganized U.S. integrated mills, Canadian
integrated mills, or U.S. mini-mills. The Stelco Hamilton 56-inch mill is
uncompetitive as a result of its high conversion cost and its width, coil
weight, and quality limitations. The historic competitive advantages of the
Stelco Lake Erie plant in hot rolled costs per ton have been reduced because
of the cost savings achieved by reorganized U.S. integrated steel mills and
the appreciation of the Canadian dollar. Work is currently progressing on the
Phase II upgrade of the Stelco Lake Erie hot strip mill in order to meet
scheduled shutdowns to install components in November this year and June 2006.
Following completion of the Phase II upgrade of the Stelco Lake Erie hot strip
mill the Stelco Hamilton 56-inch mill will be closed.
Currently, two pickle lines operate in Hamilton to supply the cold
rolling and coating operations. In addition, approximately 440,000 tons per
year of Stelco Hamilton's steel requirements are pickled externally. The
Hamilton pickle lines have significant operational issues related to
reliability, conversion cost, and product quality. The cost of external
pickling, however, is relatively expensive. Ultimately, Stelco will need to
replace the Hamilton pickle lines or outsource all pickling. New pickle line
facilities are included as part of the Corporation's strategic capital
requirements.
Labour Matters
On September 23, 2005, Stelco and USW Local 8782 entered into the Local
8782 MOA. USW Local 8782 is required to recommend the Local 8782 MOA to its
members for ratification if the final restructuring plan is similar to the
existing Plan, or is otherwise acceptable to the USW. The ratification vote of
the Local 8782 MOA is to occur within eight days after the Meetings, and if
ratified the Renewal 8782 Collective Bargaining Agreement will be in force on
the date Stelco receives written notice of ratification which will occur no
later than the Plan implementation date. Under the Stelco/USW Restructuring
Agreement, the 90 day strike notice provided on July 27, 2005 by USW Local
8782 has been suspended effective September 23, 2005.
There can be no assurance that labour difficulties at any of the
Corporation's business units will not result in a significant loss of
production and revenue and have a material adverse effect on the business,
financial condition, results of operations of the Corporation, or the ability
of the Corporation to restructure.
Trade
The overall year-to-date level of steel imports through the end of July
2005 was approximately 51% of the Canadian apparent steel consumption, about
8% higher than the comparable 2004 figures.
On March 23, 2005, Canada, United States and Mexico set up the Security
and Prosperity Partnership of North America. As part of this initiative, a
North America Steel Strategy is to be developed and put in place by 2006. The
strategy will be implemented by the three governments and the North American
Steel Trade Committee (NASTC) to promote growth, competitiveness and
prosperity in the steel industry. Stelco is a member of the NASTC.
On September 9, 2005, the U.S. Department of Commerce preliminarily found
a de minimis weighted-average dumping margin for Stelco Inc. in its 2004
administrative review of Corrosion-Resistant steel Flat Products from Canada.
If the preliminary results are adopted in the final result of this review,
Stelco will not be required to post duty deposits over the coming year.
On October 11, 2005, the Canadian International Trade Tribunal (CITT)
issued a notice of expiry for its Hot Rolled Finding covering hot rolled sheet
from Brazil, Bulgaria, China, Chinese Taipei, India, Macedonia, South Africa,
Ukraine, Yugoslavia, and India. The CITT is asking for submissions from
interested parties requesting or opposing the initiation of an expiry review.
Stelco has submitted a letter in support of a submission by Algoma Steel
seeking a review to extend the finding.
Mini-mill segment
The Mini-mill segment of the Corporation includes Norambar Inc.
("Norambar") and AltaSteel Ltd. ("AltaSteel") located in Contrecoeur, Quebec,
and Edmonton, Alberta, respectively. These wholly owned subsidiaries comprise
electric arc steelmaking, billet casting, and bar rolling facilities, and have
combined annual steelmaking capacity of approximately 1,000,000 tons. This
segment also includes the mini-mills' respective metal recyclers, wholly owned
Fers et MDetaux RecyclDes LtDee and 50%-owned GenAlta Recycling Inc. The primary
markets served by this segment are automotive, construction, oil and gas,
mining, manufacturing, and steel service centres.
The Corporation's 2004 strategic review concluded that Norambar and
AltaSteel are not core to the Corporation's operations and as a result may not
form part of the Corporation's post-restructuring business. The Corporation
initiated a sales process in respect of these business units. The Corporation
has identified potential buyers for these businesses. Completing transactions
may be affected by the progress of the Corporation's restructuring.
On November 2, 2005, Stelco signed a letter of intent concerning the sale
of Norambar, to Mittal. The transaction is subject to a number of conditions,
including the negotiation of a definitive agreement and obtaining Court
approval. It is anticipated that, if all the conditions are satisfied as
planned, the sale will close early in 2006.
Mini-mill
Three months ended Nine months ended
September 30 September 30
($ in millions,
except as Favourable Favourable
indicated(x)) (Unfavour- (Unfavour-
(unaudited) 2005 2004 able) 2005 2004 able)
-------------------------------------------------------------------------
Net sales $ 118 $ 144 $ (26) $ 369 $ 385 $ (16)
Costs 107 122 15 340 328 (12)
Amortization of
property, plant,
and equipment 4 3 (1) 9 7 (2)
-------------------------------------------------------------------------
Operating
earnings $ 7 $ 19 $ (12) $ 20 $ 50 $ (30)
-------------------------------------------------------------------------
Shipments
(thousands
of net tons) 222 227 (5) 639 661 (22)
Average
revenue
per ton (x)$ 532 (x)$ 634 (x)$(102) (x)$ 577 (x)$ 582 (x)$ (5)
Cost per
ton (x)$ 482 (x)$ 537 (x)$ 55 (x)$ 532 (x)$ 496 (x)$ (36)
Semi-finished
steel
production
(thousands
of net tons) 232 244 (12) 711 719 (8)
-------------------------------------------------------------------------
Overview
AltaSteel's performance was strong in third quarter 2005 and for the
first nine months due to strong marketplace demand and high shipment levels.
There was an overall decrease in the Mini-mill segment as Norambar experienced
weaker market demand and reduced output required to control steel inventory
levels.
Net Sales, Costs and Production
Net sales for the Mini-mill segment in third quarter 2005 were $118
million compared with $144 million in third quarter 2004. Shipments of 222,000
net tons in the quarter were 5,000 net tons lower than the same quarter of
2004. Average revenue per ton decreased by $102 in third quarter 2005 from
$634 per ton in the same quarter of 2004. The decrease in sales revenue and
shipments in third quarter 2005 was primarily due to:
- weaker market demand for Norambar products due to high customer
inventory levels and low import price offerings;
- the sustained strength of the Canadian dollar.
Net sales for the Mini-mill segment for the first nine months of 2005
were $369 million compared with $385 million in the same period 2004.
Shipments of 639,000 net tons in the first nine months were 22,000 net tons
lower than the same period 2004. The decrease in sales revenue was primarily
due to:
- weaker market demand for Norambar products due to high customer
inventory levels and low import price offerings;
- the sustained strength of the Canadian dollar.
Partially offset by:
- improved market demand and higher selling prices at AltaSteel.
Cost per ton decreased $55 in the third quarter compared with the same
quarter of 2004. The decrease in the third quarter was primarily due to a drop
in scrap costs at Norambar. Cost per ton increased $36 in the first nine
months of 2005, compared with the same period 2004. The increase was primarily
due to:
- a rise in input material costs, particularly fluxes, and reagents;
- higher spending for repairs and maintenance and supplies at
Norambar;
- write-down of scrap inventory to current market value at Norambar
in second quarter 2005.
The Corporation expects that demand will be stronger in the fourth
quarter for Norambar's rebar, billets and spring flat bar products. However,
pricing levels are under pressure due to domestic competition, low import
price offerings, and the continued strength of the Canadian currency.
Marketplace demand for AltaSteel's products continues to be strong,
particularly in the oil patch and the mining sectors, which are being driven
by high energy and metal prices.
Labour matters
On September 23, 2005, AltaSteel and USW Local 5220 entered into the
Local 5220 MOA but no date has been set at this time for the ratification
vote.
At Norambar a new USW salaried employees bargaining unit was certified by
the Quebec Ministry of Labour on March 9, 2005. Negotiations with the USW
started in October 2005.
Trade
Imports of rebar from China continue to be a major concern for both
AltaSteel and Norambar since the value for duty is approximately 19% below
comparable product sourced from the U.S. Both businesses continue to assess
the various remedies to such unfair trade with other North American rebar
producers.
On September 14, 2005, the CITT stated that no expiry review will be
initiated for the June 1, 2001 Rebar finding against Indonesia, Japan, Latvia,
Moldova, Poland, Chinese Taipei, and Ukraine since no submissions in support
of a review were submitted. The finding will expire on May 31, 2006.
Manufactured Products segment
The Manufactured Products segment of the Corporation includes business
units, both wholly and partially owned, involved in the manufacturing of steel
products. Products manufactured by units in this segment include a wide
variety of wire and wire products, and grinding balls.
The Corporation's 2004 strategic review concluded that Stelwire,
Stelpipe, Stelfil and the Corporation's 40% interest in Camrose Pipe were not
core to the Corporation's operations and as a result may not form part of the
Corporation's post-restructuring business. The Corporation initiated a sales
process in respect of these business units, which was approved by the Court on
October 19, 2004.
On November 2, 2005, Stelco signed a letter of intent concerning the sale
of Stelfil, and Stelwire to Mittal. The transaction is subject to a number of
conditions, including the negotiation of a definitive agreement and obtaining
Court approval. It is anticipated that, if all the conditions are satisfied as
planned, the sale will close early in 2006. With the sale of Camrose Pipe and
Stelpipe (see below), these subsidiaries collectively represent the majority
of the remaining manufactured products segment.
The sale of the Corporation's 40% partnership interest in Camrose Pipe to
Canadian National Steel Corporation closed with gross proceeds on the sale of
$23 million on April 20, 2005. The resulting gain of $3 million, net of
$1 million tax, from the sale was included in discontinued operations during
second quarter 2005.
On August 19, 2005 the Corporation reached an agreement for the sale of
substantially all of Stelpipe's assets to Lakeside Steel Corporation
("Lakeside Steel"), a wholly-owned subsidiary of Romspen Investment
Corporation. As part of the agreement, Stelco will assume all of the pension
and benefit obligations of Stelpipe's existing retirees. The Court approved
the transaction on September 6, 2005. The transaction closed on October 31,
2005.
The applicable assets and liabilities of Stelpipe are presented as held
for sale on the Statement of Financial Position. The criteria have also been
met for discontinued operations presentation. Accordingly, the Consolidated
Financial Statements have been retroactively restated to separately disclose
earnings (losses) and cash flows associated with Camrose Pipe and Stelpipe as
discontinued operations and have been excluded from the following segmented
disclosures.
Manufactured Products
Three months ended Nine months ended
September 30 September 30
($ in millions,
except as Favourable Favourable
indicated(x)) (Unfavour- (Unfavour-
(unaudited) 2005 2004(xx) able) 2005(xx) 2004(xx) able)
-------------------------------------------------------------------------
Net sales $ 54 $ 74 $ (20) $ 175 $ 216 $ (41)
Costs 53 68 15 178 199 21
Amortization of
property, plant,
and equipment - 1 1 - 2 2
-------------------------------------------------------------------------
Operating
earnings
(loss) $ 1 $ 5 $ (4) $ (3) $ 15 $ (18)
-------------------------------------------------------------------------
Shipments
(thousands
of net tons) 49 68 (19) 161 216 (55)
Average
revenue
per ton (x)$1,102 (x)$1,088 (x)$ 14 (x)$1,087 (x)$1,000 (x)$ 87
Cost per
ton (x)$1,082 (x)$1,000 (x)$ (82)(x)$1,106 (x)$ 921 (x)$ (185)
-------------------------------------------------------------------------
(xx) Restated - see Note 9 to the Consolidated Financial Statements
Net Sales and Costs
Manufactured Products had net sales of $54 million in third quarter 2005
compared with $74 million in third quarter 2004. Shipments of 49,000 tons in
the third quarter were 19,000 tons lower than the same period 2004. The
decrease in sales revenue and shipments was primarily due to:
- weak demand for wire and wire products;
- higher levels of wire imports;
- the negative impact of the higher Canadian dollar on U.S.
denominated sales.
Cost per ton increased $82 or 8% in third quarter 2005 to $1,082 when
compared to third quarter 2004 mainly due to reduced operations and the flow
through of high cost rod inventories from the second quarter.
Manufactured Products net sales of $175 million in the first nine months
compared with $216 million in the same period 2004. Shipments of 161,000 tons
in the first nine months were 55,000 tons lower than the same period 2004 due
to weaker market conditions.
Cost per ton increased $185 or 20% in the first nine months of 2005 to
$1,106 when compared to the same period 2004, mainly due to the increased cost
of rod, as raw materials and reduced operations due to weaker market
conditions.
The high Canadian dollar continues to negatively impact sales revenues
for export wire and wire products. This also increases the attractiveness of
imports. Recent storms in the U.S. have created a temporary demand for Stelfil
armour products, which should favourably impact sales in the fourth quarter.
Labour Matters
The collective agreement at Stelpipe that was due to expire on
September 30, 2004 has been extended to October 31, 2005. Under the terms of a
Definitive Agreement between Stelco and Lakeside Steel, substantially all the
assets of Stelpipe were sold to Lakeside Steel, with the sale closing
October 31, 2005. Lakeside Steel became the successor employer under the
Ontario Labour Relations Act and assumed the collective agreement between
Stelpipe and Local 523, CAW.
The Stelwire Parkdale labour contract with USW Local 5328 expired on
July 31, 2005 and operations are continuing.
Risk Factors
Plan Implementation
There are no assurances that the Plan, which is set for consideration and
vote by Affected Creditors on November 15, 2005, will be implemented. There
are a number of conditions to implementation including the requisite support
of Affected Creditors. The failure to approve the Plan on November 15, 2005
could materially negatively affect the Corporation.
Pricing
Risks regarding selling prices include:
- the strength of the U.S. economy;
- the continued strength of the economy in China and continued
absorption in the global market of significant steel capacity
built in China over the last five years;
- the U.S./Canadian dollar exchange rate;
- material substitution when steel prices are relatively high;
- the price volatility of the steel industry; and
- actions of competitors.
Selling prices softened in the second and third quarter of 2005. North
American steel producers reduced production levels in both second and third
quarters of 2005, attempting to better balance supply with demand, which
appears to have had some effect as prices have risen in the fourth quarter.
Following the seasonal shutdowns, automotive demand remained constant through
the balance of the third quarter of 2005.
Possible Fluctuation in Raw Material and Energy Costs
The Applicants' operations are heavily dependent on the supply of various
raw materials, including iron ore, coal, coke and energy. The Applicants'
results of operations could be adversely affected by supply interruptions or
increases in the cost of materials and energy.
Labour Matters
The Corporation's workforce is predominantly unionized and is covered by
various labour agreements. 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, results of operations of Stelco, or the ability of Stelco
to restructure.
Pension Plans
Provincial pension standards legislation requires that the funded status
of registered pension plans be determined periodically on both a going concern
basis (i.e., assuming indefinite plan continuation) and a solvency basis
(i.e., essentially assuming immediate plan termination).
Where an actuarial valuation reveals a solvency deficiency, current
regulations in Ontario generally requires it to be funded by equal monthly
cash payments over a maximum period of five years from the date of valuation.
The solvency liability is influenced primarily by long-term interest
rates on which annuity purchase rates are based. The interest rate used to
calculate the benefit obligations for solvency purposes is a prescribed rate
derived from the interest rates on long-term Government of Canada bonds. In
the current low interest rate environment, the calculation results in a higher
present value of the pension obligations, leading to larger solvency
liabilities.
Future pension contributions would increase in the event of poor pension
fund investment returns and/or further declines in the long-term Government of
Canada bond rates.
The aggregate solvency deficiency under Stelco's four main pension plans
as at December 31, 2004 was $1.1 billion.
Solvency deficiency payments are not required where the employer has
taken the Section 5.1 Election under the PBA. Stelco operates under the
Section 5.1 Election for Stelco's four main pension plans, but pursuant to
arrangements with the Province, to take effect upon the implementation of the
Plan, will cease to operate under the Section 5.1 Election and will commence
payments on account of the solvency deficiencies in 2006 aimed at eliminating
the solvency deficiencies in Stelco's four main pension plans over a 10 year
period.
If the Plan fails to be accepted by the stakeholders and the law is
changed to eliminate Stelco's ability to operate under the Section 5.1
Election, then annual pension funding will increase significantly beyond
annual payments required under the arrangements to be incorporated into the
Province Pension Agreement. For example, had the Section 5.1 Election not been
in effect in 2005 with no other arrangement in place, Stelco's 2005
contributions to its four main pension plans would have increased more than
$348 million over the current level of funding. This level of payment is not
sustainable by Stelco.
Costs
Stelco must continue with its efforts to lower costs in order to ensure
its long-term viability. Stelco has identified specific cost reduction
initiatives including managed attrition and improvement in maintenance
planning which will reduce repairs and maintenance costs, increase throughput
as well as reduce electrical and mechanical delays. These cost reduction
initiatives, along with Stelco's strategic capital spending program, are
essential to achieving long-term viability.
Environmental Compliance and Associated Costs
The Applicants are subject to complex environmental laws affecting
matters such as waste water effluent, air emissions, waste disposal and mine
closure and rehabilitation. The Applicants operate in an industry that has
incurred and will continue to incur substantial operating and maintenance
expenses as a result of environmental requirements. The costs of environmental
compliance may place North American steel producers at a competitive
disadvantage to foreign steel producers, which may not be subject to
environmental requirements as stringent as those in Canada or the United
States, as well as to producers of materials that compete with steel, which
producers may not be required to bear equivalent costs in producing their
products.
There can be no assurance that environmental requirements will not change
in the future, that unanticipated environmental remediation will not be
required or that Stelco will not incur significant costs in the future in
complying with such requirements. Compliance with these and other increasingly
stringent environmental laws and regulations could have a material adverse
effect on Stelco's results of operations and financial condition.
Unplanned Repairs or Equipment Outages
Stelco is heavily dependant upon the continuous operation of its plants
and equipment. There can be no assurance that unplanned down time 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
A successful restructuring will ensure that Stelco is able to move ahead
with identified strategic capital projects: the completion of the Stelco Lake
Erie hot strip mill upgrade; a new pickle line at Stelco Hamilton; and
co-generation facilities at both Stelco Hamilton and Stelco Lake Erie. A
significant delay or failure to complete a restructuring could affect the
ability of Stelco to move ahead with some of the capital projects.
Stelco's Four Point Strategy requires continual improvement in both
product and process technologies in order to maintain Stelco's competitive
position in the high value-added automotive market. In particular, failure to
meet the automotive industry's demanding requirements for product quality and
service, and failure to provide the new grades of advanced high-strength
steels will seriously jeopardize Stelco's long-term participation in this
market. Similarly, the maintenance of competitive cost structure will require
the ongoing selective implementation of new process technologies throughout
the Core Business processes. There is no assurance that Stelco will be able to
improve its product and process technologies in accordance with its strategic
plan or that the improvements, once implemented, will meet the automotive
market's quality and service requirements.
Enterprise Resource Planning System ("ERP")
Implementation of the first phase of the order flow ERP system, which
will reduce Stelco's dependence on aging legacy systems, is now planned for
the second quarter of 2006. Although the application has been delivered and
tested in modules, there is a risk that the integrated testing may reveal
additional development requirements, which could further delay the
implementation. In the meantime, the legacy systems remain available for these
applications.
Trade Regulations
A number of foreign steel producers have been exporting large quantities
of steel to North America at depressed prices, impairing the Applicants'
ability to sell their products at favourable prices and, accordingly, its
profitability. This steel is often 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 the Applicants through the imposition of dumping duties which would
reduce or effectively eliminate their access to certain steel markets.
Employees
Approximately 16% of Stelco's salaried workforce and 43% of the hourly
workforce at Stelco Hamilton who participate under one of the two Hamilton
defined benefit pension plans are eligible to retire under those plans. A
further 40% and 37% respectively of these groups could retire in the next five
years under current eligibility provisions. Stelco is currently recruiting
individuals to satisfy its 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
critical, is essential to Stelco's continued operations.
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 causes those customers to be less competitive in the
U.S. and the customers 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. Shifts in currency exchange rates could affect the Applicants'
relative competitive position.
Liquidity and Capital Resources
As described in Notes 1 and 7 to the Consolidated Financial Statements,
pursuant to the CCAA Court Order, the Applicants ceased making principal and
interest payments on long-term debt subject to compromise and on pre-filing
accounts payable subject to compromise. As a result, liquidity and cash flow
are not directly comparable to periods before the Corporation entered into
CCAA.
With the CCAA filing, the liquidity and capital resources of the
Corporation will be determined by the outcome of the restructuring process and
a number of other factors, including without limitation, market and economic
conditions and the impact of these conditions on the price of steel products,
raw material costs, the ability to implement critical capital projects, and
resolve pension issues, and labour negotiations or disputes.
The Corporation's liquidity and capital resources position is summarized
as follows:
As at As at
September 30 Dec 31
(in millions) 2005 2004(x) 2004(x)
-------------------------------------------------------------------------
Cash, cash equivalents and
restricted cash $ 36 $ 70 $ 43
Available lines of credit(a) 469 466 456
Less: Lines of Credit drawn down (198) (281) (215)
-------------------------------------------------------------------------
Net liquidity $ 307 $ 255 $ 284
-------------------------------------------------------------------------
(a) After letters of credit usage and including a $75 million DIP Credit
Agreement
(x) Excluding amounts related to Camrose Pipe
The Applicants' liquidity and capital resources position (included in the
above consolidated amounts) is summarized as follows:
As at As at
September 30 Dec 31
(in millions) 2005 2004 2004
-------------------------------------------------------------------------
Cash, cash equivalents and
restricted cash $ 15 $ 36 $ 24
Available lines of credit(a) 402 412 400
Less: Lines of Credit drawn down (170) (249) (187)
-------------------------------------------------------------------------
Net liquidity $ 247 $ 199 $ 237
-------------------------------------------------------------------------
(a) After letters of credit usage and including a $75 million DIP Credit
Agreement
The accommodation agreement (the "Accommodation Agreement"), which
provides for the continued access to the Applicants $350 million credit
facility (the "$350 Million Credit Facility"), and the $75 million Debtor-In-
Possession Credit Agreement (the "DIP Credit Agreement") were amended on
September 29, 2005, resulting in the extension of these credit facilities to
the earlier of January 20, 2006, the effective date of a Plan, termination of
the DIP Credit Facility, and the date at which the Operating Lenders terminate
the forbearance under the terms of the Accommodation Agreement due to a
further event of default.
This graph reflects the quarterly net cash deficiency (cash, cash
equivalents, and restricted cash less lines of credit drawn down) of the
Corporation and the Applicants.
To view the graph now please refer to the following:
http://media.corporate-
ir.net/media_files/tor/ste.to/presentations/liquidity_chart.pdf
For further details, refer to the Consolidated Statement of Cash Flows.
Information regarding the cash flows of the Applicants is contained in Note 8
to the Consolidated Financial Statements.
As a result of the CCAA proceedings, no payments are being made on the
Applicants' unsecured debt and other liabilities as disclosed in Note 7 to the
Consolidated Financial Statements. To date, the Corporation is servicing all
charges under its credit facilities.
Net Cash Flow
Three months ended Nine months ended
September 30 September 30
(in millions)
Favourable Favourable
Cash provided by (Unfavour- (Unfavour-
(used for) 2005 2004(xx) able) 2005(xx) 2004(xx) able)
-------------------------------------------------------------------------
Net earnings
from continuing
operations
adjusted for
items not
affecting cash $ 8 $ 134 $ (126) $ 222 $ 290 $ (68)
Changes in
operating
elements of
working capital (64) (105) 41 (102) (229) 127
Directors and
Officers in
trust - - - - (10) 10
Proceeds from
the sale of
plate mill
assets (Note 5) 5 - 5 5 - 5
Proceeds from
sale of Camrose
Pipe (Note 5) - - - 23 - 23
Expenditure for
capital assets (45) (15) (30) (116) (33) (83)
Reduction of
long-term debt
(Note 12) (9) (7) (2) (18) (31) 13
Discontinued
operations 7 1 6 (7) (6) (1)
Other - net 1 2 (1) 4 - 4
-------------------------------------------------------------------------
Change in net
cash position $ (97) $ 10 $ (107) $ 11 $ (19) $ 30
-------------------------------------------------------------------------
(xx) Restated - see Note 9 to the Consolidated Financial Statements
Operating Activities
Net cash of $97 million was required during the third quarter 2005, most
of which was used to finance working capital ($64 million) and capital
expenditures ($45 million). In comparison to third quarter 2004, an additional
$107 million of net cash was required. The majority pertained to weaker
operating cash flow ($126 million) as a result of selling price and cost
pressures during third quarter 2005 and capital spending ($30 million),
partially offset by a reduction of cash used for working capital ($41
million).
For the first nine months of 2005, net cash of $11 million was generated.
Strong operating results ($222 million), mainly from the first half of the
year provided slightly more cash than was required for capital expenditures
($116 million) and working capital requirements ($102 million). An additional
$30 million of net cash was generated during the nine months ended
September 30, 2005 compared to the same period in 2004. Much of the
improvement was related to reduced cash used for working capital ($127
million) and gross proceeds from the sale of Camrose Pipe ($23 million), and
lower long-term debt repayments ($13 million) offset partially by weaker
operating earnings ($68 million) and expenditures for capital assets ($83
million).
Working capital represented a significant component of operating cash
flows during both third quarter and nine months ended September 30, 2005 and
2004 as identified below:
Three months ended Nine months ended
September 30 September 30
(in millions)
Favourable Favourable
Cash provided by (Unfavour- (Unfavour-
(used for) 2005 2004(x) able) 2005(x) 2004(x) able)
-------------------------------------------------------------------------
Accounts
receivable $ (6) $ (2) $ (4) $ (15) $ (133) $ 118
Inventories (26) (121) 95 (72) (154) 82
Accounts payable
and accrued (14) 13 (27) (8) 90 (98)
Other (18) 5 (23) (7) (32) 25
-------------------------------------------------------------------------
Total $ (64) $ (105) $ 41 $ (102) $ (229) $ 127
-------------------------------------------------------------------------
(x) Restated - see note 9 to the Consolidated Financial Statements
Accounts Receivable
$15 million was required for accounts receivable during the first nine
months of 2005 resulting from strong shipments in the latter half of third
quarter 2005 partially offset by a significant drop in selling prices from
2004.
For the first nine months of 2004, $133 million was required to finance
an increase in receivables resulting largely from a favourable steel-pricing
environment along with higher shipments.
Inventories
$26 million was required for an increase in inventories during third
quarter 2005. Production curtailment efforts reduced semi-finished steel
inventories but were more than offset by an increase in coal and ore
inventories and a shift in steel product mix to a higher proportion of
finished product.
During third quarter 2004, $121 million of cash was consumed as a result
of increased inventory volumes, particularly steel products, coke, and scrap.
Steel inventories recovered to more normal operating levels from over depleted
levels in the second quarter 2004. Coke and scrap inventories increased as a
result of perceived shortages in the industry and stockpiling efforts to
ensure operations were not interrupted in subsequent quarters, particularly
over the winter months.
For the first nine months of 2005, $72 million was required for an
increase in inventories. Steel tonnages did not change substantially, but the
inventory mix shifted more towards finished product due to the previously
mentioned production curtailments efforts in third quarter 2005. Iron ore
inventory levels have increased as contractual purchases were greater than
quantities required to support the reduced Integrated Steel primary
production. In addition, coal inventories have increased due to earlier
shipments in 2005. It is anticipated that coal levels will decrease by the end
of the year. In addition, the cost of coal has also increased substantially
from prices in 2004.
$154 million of cash was required for an increase in inventories for the
nine months ended September 30, 2004. Raw material shortages in coke and scrap
spurred stockpiling efforts in order to ensure operations would not be
interrupted in the ensuing quarters. These same shortages also increased the
cost of these materials substantially from 2003. While steel volumes did not
change materially, the higher cost of raw material inventories flowed into the
cost of steel inventories. Partially offsetting these increases was a decrease
in the volume of coal and ore due to raw material shortages, which delayed the
stockpiling of inventories into the fourth quarter of 2004.
Accounts Payable and Accrued
During third quarter 2005, $14 million of cash was required due to
reduced accounts payable and accrued items that largely pertained to the
timing of payroll related payments partially offset by an increase in post-
filing interest.
In comparison, $13 million was sourced from an increase in accounts
payable and accrued during third quarter 2004 largely due to the accrual of
post-filing interest and the timing of payments relating to increased raw
material purchases.
$8 million was required as a result of reduced accounts payable and
accrued during the first nine months of 2005 relating to the timing of payroll
related payments and reduced raw material payables partially offset by the
accrual of post-filing interest.
For the first nine months of 2004, $90 million was sourced from accounts
payable and accrued largely resulting from the staying of pre-filing trade
payables and both pre- and post-filing interest under the Initial Order
partially offset by the erosion of credit terms following the CCAA filing as
the majority of vendors required either cash or prepayment terms.
Other
Cash requirements during third quarter 2005 were $18 million, largely the
result of operating losses incurred in the Integrated Steel segment in the
quarter, which had the effect of decreasing estimated, current income taxes
payable.
$5 million was provided mainly from a decrease in prepaids during third
quarter 2004 due to the timing of raw material related prepayments.
For the first nine months of 2005, $7 million of cash was required
primarily related to an increase in prepaid insurance.
Comparatively, $32 million was required for the same period in 2004, much
of which pertained to suppliers switching the Corporation to prepayment terms
in reaction to the CCAA filing and staying of pre-filing trade payables.
Investing Activities
Capital expenditures during third quarter 2005 amounted to $45 million
and $15 million in third quarter 2004 primarily related to the Stelco Lake
Erie hot strip mill upgrade.
During the nine months ended September 30, 2005, $116 million was spent
on capital projects including the Stelco Lake Erie hot strip mill upgrade,
various projects at the Corporation's mining interests, the AltaSteel roughing
mill equipment upgrade, and the Corporation's ERP system.
$33 million was spent on capital projects for the first nine months of
2004 including various projects at the Corporation's mining interests, the
Corporation's ERP systems, the Stelco Lake Erie hot strip mill upgrade, and a
new processing line at Baycoat.
Financing activities
Reduction of long-term debt during third quarter 2005 ($9 million) and
2004 ($7 million) largely pertained to regularly scheduled repayments of
non-Applicant Debt.
During the nine months ended September 30, 2005, there was a reduction of
long-term debt of $18 million compared to $31 million during the comparable
period of 2004. Included in the $31 million was a $16 million refinancing of
Norambar long-term debt to an operating line. The remaining difference between
the two periods is due to regularly scheduled payments of non-Applicants.
Off-Balance Sheet Arrangements
Other than operating lease obligations, the Corporation had no off-
balance sheet arrangements as at September 30, 2005 or 2004 or December 31,
2004.
Critical Accounting Assumptions and Estimates
The Corporation's critical accounting assumptions and estimates are
described in the Annual MD&A. The Corporation's Consolidated Financial
Statements are prepared in accordance with 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 GAAP, and utilizes outside consultants as necessary
to arrive at appropriate assumptions and estimates to be used in the
preparation of Consolidated Financial Statements. During the first nine months
of 2005 there were no significant changes in the Corporation's critical
accounting assumptions and estimates.
Changes in Accounting Policy
Financial Instruments
Effective January 1, 2005, the Corporation adopted a change in accounting
policy to conform with amendments to the CICA Handbook Section 3860 -
Financial Instruments - disclosure and presentation as outlined in Note 3 to
the Consolidated Financial Statements.
Outlook
Spot market prices and shipments are expected to improve in the fourth
quarter. However, we expect this to be offset by higher energy costs, the
planned shutdown of the Stelco Lake Erie hot strip mill to install components
related to the Phase II upgrade and the associated effect of lowering the
value-added mix of sales due to slab sales in the fourth quarter. The strength
of the Canadian dollar, and the threat of increased import levels remain a
concern to the Corporation. In addition, the remaining estimated non-cash loss
of $31 million related to the sale of substantially all of the assets of
Stelpipe will be recorded in the fourth quarter. Should the criteria of assets
held for sale be met with respect to other non-core asset sales that are being
pursued additional non-cash losses to be recorded would likely be material.
On September 19, 2005, after extensive discussions with stakeholders, the
Board of Directors of Stelco approved a Plan, the filing of the Plan, and a
meeting of Affected Creditors. The purpose of the Plan is, among other things,
to restructure Stelco into a viable and competitive industry participant able
to deal with the pricing volatility of the steel industry and other
competitive factors. To date, a number of large bondholders have indicated
that they do not support the Plan. Continued opposition could result in a
defeat of the Plan when a vote is held. Discussions are continuing with the
bondholders to try to resolve the differences before the November 15, 2005
meeting of Affected Creditors.
Affected Creditors of the Applicants will have an opportunity to vote on
the Plan on November 15, 2005 so that Stelco can emerge from the CCAA
proceedings as a viable business able to compete effectively in the North
American steel industry. If the Plan is not implemented, possible alternatives
include a liquidation of certain assets of the Applicants and a sale of
certain other operations on a going concern basis through receivership,
exercise of creditors' rights or bankruptcy.
Additional Information
Additional information concerning Stelco, including the Corporation's
2004 Annual Information Form (AIF), may be viewed on the System for Electronic
Document Analysis and Retrieval (SEDAR) at www.sedar.com, and at Stelco's web
site www.stelco.com.
HAMILTON, ONTARIO
November 10, 2005
Courtney Pratt William E. Vaughan
President and Chief Executive Senior Vice President - Finance
Officer and Chief Financial Officer
CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
(Under Creditor Protection as of January 29, 2004 - Note 1)
Three months ended Nine months ended
(in millions - except September 30 September 30
per share amounts) Restated Restated
(unaudited) (Notes 3 (Notes 3
and 9) and 9)
2005 2004 2005 2004
-------------------------------------------------------------------------
Net sales $ 725 $ 897 $ 2,462 $ 2,446
Costs 720 762 2,217 2,181
-------------------------------------------------------------------------
5 135 245 265
Amortization of property, plant,
and equipment 30 30 88 89
Amortization of intangible assets 1 1 3 2
Gain on sale of plate mill assets
(Note 5) - - (20) -
-------------------------------------------------------------------------
Operating earnings (loss) (26) 104 174 174
Reorganization items (Note 4) (13) (8) (47) (38)
-------------------------------------------------------------------------
(39) 96 127 136
-------------------------------------------------------------------------
Financial expense
Interest on long-term debt and
debt subject to compromise (11) (11) (32) (34)
Other interest - net (4) (6) (10) (17)
-------------------------------------------------------------------------
Earnings (loss) before income
taxes from continuing operations (54) 79 85 85
Income tax expense (recovery)
(Note 10)
Current (14) 3 13 7
Future (6) 28 10 30
Future income tax asset
valuation release (21) (13) (10) (14)
-------------------------------------------------------------------------
Net earnings (loss) from
continuing operations (13) 61 72 62
Net earnings (loss) from
discontinued operations (Note 9) (29) (3) (25) 1
-------------------------------------------------------------------------
Net earnings (loss) $ (42) $ 58 $ 47 $ 63
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per common
share (Note 17)
Basic
Continuing operations $ (0.13) $ 0.60 $ 0.70 $ 0.61
Net earnings (loss) $ (0.41) $ 0.57 $ 0.46 $ 0.62
Fully Diluted
Continuing operations $ (0.13) $ 0.51 $ 0.62 $ 0.55
Net earnings (loss) $ (0.41) $ 0.49 $ 0.42 $ 0.55
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average common shares
outstanding - millions 102.2 102.2 102.2 102.2
See Notes to Consolidated
Financial Statements
OPERATIONS (thousands of net tons)
(Unaudited)
Production of semi-finished steel 1,107 1,385 3,660 4,078
Shipments 1,067 1,143 3,306 3,564
CONSOLIDATED STATEMENT OF RETAINED DEFICIT
(Under Creditor Protection as of January 29, 2004 - Note 1)
Nine months ended
September 30
(in millions) (unaudited) Restated
(Note 3)
2005 2004
-------------------------------------------------------------------------
Balance at beginning of year $ (388) $ (452)
Net earnings 47 63
-------------------------------------------------------------------------
Balance at end of period $ (341) $ (389)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Under Creditor Protection as of January 29, 2004 - Note 1)
(in millions) At At
(figures at September 30 September 30 December 31
are unaudited) 2005 2004 2004
-------------------------------------------------------------------------
Current assets
Cash and cash equivalents $ 20 $ 65 $ 32
Restricted cash (Note 6) 16 5 11
Accounts receivable 490 521 470
Inventories 857 739 844
Prepaid expenses 47 59 38
Future income taxes 16 - 15
Assets held for sale (Note 9) 71 - -
-------------------------------------------------------------------------
1,517 1,389 1,410
-------------------------------------------------------------------------
Current liabilities
Current liabilities not subject to
compromise
Bank and other short-term
indebtedness (Note 11) 198 281 216
Accounts payable and accrued 245 263 283
Employee future benefits 61 48 62
Income and other taxes 13 17 10
Long-term debt due within one year
(Note 12) 42 44 44
Liabilities held for sale (Note 9) 40 - -
-------------------------------------------------------------------------
599 653 615
-------------------------------------------------------------------------
Working capital 918 736 795
-------------------------------------------------------------------------
Other assets
Property, plant, and equipment 1,015 1,027 999
Intangible assets 70 65 66
Deferred pension cost 143 215 213
Future income taxes 46 2 6
Assets held for sale (Note 9) - 2 -
Other 20 25 24
-------------------------------------------------------------------------
1,294 1,336 1,308
-------------------------------------------------------------------------
Total investment 2,212 2,072 2,103
-------------------------------------------------------------------------
Other liabilities
Other liabilities not subject to
compromise
Employee future benefits 924 914 907
Long-term debt (Note 12) 33 50 49
Future income taxes 153 94 120
Asset retirement obligations 15 12 12
-------------------------------------------------------------------------
1,125 1,070 1,088
-------------------------------------------------------------------------
Liabilities subject to compromise
(Note 7) 608 572 583
-------------------------------------------------------------------------
Shareholders' equity $ 479 $ 430 $ 432
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Derived from:
Convertible debentures conversion
option (Note 12) $ 23 $ 23 $ 23
Capital stock (Note 14) 781 781 781
Contributed surplus 16 15 16
Retained deficit (341) (389) (388)
-------------------------------------------------------------------------
$ 479 $ 430 $ 432
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingencies (Notes 7 and 13)
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
(Under Creditor Protection as of January 29, 2004 - Note 1)
CASH PROVIDED BY (USED FOR) Three months ended Nine months ended
September 30 September 30
Restated Restated
(Notes 3 (Notes 3
and 9) and 9)
(in millions)(unaudited) 2005 2004 2005 2004
-------------------------------------------------------------------------
Operating activities
Net earnings (loss) from
continuing operations $ (13) $ 61 $ 72 $ 62
Adjustments for items not
affecting cash
Reorganization items (Note 4) 2 3 2 20
Amortization of property, plant,
and equipment 30 30 88 89
Amortization of intangible assets 1 1 3 2
Future income taxes (6) 28 10 30
Future income tax asset
valuation allowance (21) (13) (10) (14)
Employee pension and other
future benefits 15 24 80 99
Gain on sale of plate mill
assets (Note 5) - - (20) -
Gain on sale of Camrose Pipe
(Note 9) - - (4) -
Other - - 1 2
-------------------------------------------------------------------------
8 134 222 290
Changes in operating elements of
working capital (see below) (64) (105) (102) (229)
Other - net 1 2 4 -
Discontinued operations (Note 9) 7 2 (13) (4)
-------------------------------------------------------------------------
(48) 33 111 57
-------------------------------------------------------------------------
Investing activities
Capital asset expenditures (45) (15) (116) (33)
Proceeds from sale of Camrose Pipe
(Note 5) - - 23 -
Proceeds from sale of plate mill
assets (Note 5) 5 - 5 -
Directors' and officers' trust - - - (10)
Discontinued operations (Note 9) - (1) (1) (2)
-------------------------------------------------------------------------
(40) (16) (89) (45)
-------------------------------------------------------------------------
Financing activities
Increase (decrease) in bank
indebtedness 107 22 (18) 66
Reduction of long-term debt
(Note 12) (9) (7) (18) (31)
Discontinued operations (Note 9) - - 7 -
-------------------------------------------------------------------------
98 15 (29) 35
-------------------------------------------------------------------------
Cash, cash equivalents and
restricted cash
Net increase (decrease) 10 32 (7) 47
Balance at beginning of period 26 38 43 23
-------------------------------------------------------------------------
Balance at end of period $ 36 $ 70 $ 36 $ 70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consists of:
Cash and cash equivalents 20 65 20 65
Restricted cash (Note 6) 16 5 16 5
-------------------------------------------------------------------------
36 70 36 70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes in operating elements
of working capital
Accounts receivable $ (6) $ (2) $ (15) $ (133)
Inventories (26) (121) (72) (154)
Prepaid expenses (2) 6 (9) (37)
Accounts payable and accrued (14) 13 (8) 90
Income and other taxes (16) (1) 2 5
-------------------------------------------------------------------------
$ (64) $ (105) $ (102) $ (229)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. CREDITOR PROTECTION AND RESTRUCTURING
On January 29, 2004 (the "Filing Date"), Stelco obtained an order
(the "Initial Order") from the Ontario Superior Court of Justice (the
"Court") granting it creditor protection under the Companies'
Creditors Arrangement Act (the "CCAA"). The Initial Order may be
amended throughout the CCAA proceedings on motions from Stelco, its
creditors, and other interested stakeholders. On the same date,
Stelco made a concurrent petition for recognition of the Initial
Order and ancillary relief under Section 304 of the U.S. Bankruptcy
Code. The Canadian proceedings include Stelco and its wholly owned
subsidiaries, Stelwire Ltd. ("Stelwire"), Stelpipe Ltd. ("Stelpipe"),
CHT Steel Company Inc. ("CHT Steel"), and Welland Pipe Ltd. ("Welland
Pipe"), which are collectively referred to as the "Applicants". The
U.S. proceedings include Stelco, Stelwire, and Stelpipe. Welland Pipe
was closed on March 7, 2003 (see Note 9). The Corporation's other
subsidiaries and joint ventures are not included in the proceedings.
During the stay period, the Applicants are authorized to continue
operations. Ernst & Young Inc. was appointed by the Court as monitor
(the "Monitor") in the Canadian proceedings and has been reporting to
the Court from time to time on the Applicants' cash flow and other
developments during the proceedings.
The Initial Order and the U.S. proceedings provided for an initial
stay period of 30 days, which has subsequently been extended to
December 5, 2005, and may potentially be extended to such later dates
as the Court may order. The purpose of the Initial Order and stay of
proceedings was to provide the Applicants with relief designed to
stabilize their operations and business relationships with their
customers, suppliers, employees, and creditors.
The CCAA proceedings have triggered defaults under substantially all
debt obligations of the Applicants (see Notes 7 and 12). The Initial
Order generally stays actions against the Applicants including steps
to collect indebtedness incurred by the Applicants prior to the
Filing Date and actions to exercise control over the Applicants'
property. The Initial Order grants the Applicants the authority to
pay outstanding and future wages, salaries, employee pension
contributions and benefit payments, and other obligations to
employees; the costs of goods and services, both operating and of a
capital nature, provided or supplied after the date of the Initial
Order; rent under existing arrangements payable after the date of the
filing; and principal, interest, and other payments to holders of
security in respect of the property of the Applicants if the amount
secured by such security is, in the reasonable opinion of the
applicable Applicant, with the concurrence of the Monitor, less than
or equal to the fair value of such security, having regard to, among
other things, the priority of such security.
Filing of Plan
On September 19, 2005, after extensive discussions with stakeholders,
the Board of Directors of Stelco approved a plan of arrangement (the
"Plan"), and the Stelco/Province Restructuring Agreement. On
September 20, 2005, Stelco filed motion materials with the Court
seeking an order authorizing it to file the Plan and directing
meetings of the Affected Creditors. On October 4, 2005, pursuant to
an order of the Court, Stelco was authorized to call and conduct
meetings of Affected Creditors to consider and vote on the Plan. For
additional information on the Plan, see the October 5, 2005 "Notice
of Proceedings and Meetings and Information Circular with Respect to
a Plan of Arrangement and Reorganization (the "Circular")". A copy of
the Circular can be obtained from www.sedar.com or
www.mccarthy.ca/en/ccaa.
Remaining Issues
Required Approvals and Other Requirements
The conditions to implementation of the Plan include a number of
approvals, orders and consents that must be obtained. If any of these
approvals is not obtained, subject to the right of Stelco, if any, to
waive such conditions, the Plan will not be implemented. They include
Affected Creditor, regulatory, and Court approvals.
Stelco must have the new credit facilities available to provide up to
$950 million (subject to borrowing base conditions on commercial
terms for the New ABL Facility) to finance Stelco's ongoing
operations.
Prior to the Plan Implementation Date, arrangements satisfactory to
Stelco and the operating lenders, must have been made for the
repayment or refinancing of their loans and definitive agreements
with one or more financial institutions must have been executed and
delivered for the New ABL Facility.
Bondholders
To date, a number of large bondholders have indicated that they do
not support the Plan. These bondholders appealed the Orders made on
October 4, 2005 authorizing Stelco to enter into the Stelco/Province
Restructuring Agreement, the Stelco/Tricap Restructuring Agreement
and the Stelco/USW Restructuring Agreement. By reasons released on
November 4, 2005, the Court of Appeal dismissed the bondholders'
appeal. Continued opposition could result in a defeat of the Plan
when a vote is held. Discussions are continuing with the bondholders
to try to resolve the differences before the November 15, 2005
meeting of Affected Creditors.
Other
Should the stay period and any subsequent extensions, if granted, not
be sufficient to implement the Plan, or should the Plan not be
accepted by the Affected Creditors or the Court, or if the Applicants
otherwise lose the protection of the stay of proceedings,
substantially all debt obligations will then be due and payable
immediately, or subject to acceleration, creating an immediate
liquidity crisis, which may lead to the realization of the
Applicants' assets. Under a realization scenario, adjustments would
be necessary to the carrying amounts and/or classification of assets
and liabilities, and expenses in these consolidated financial
statements.
Plan Outline
Affected Creditors
All Affected Claims of each Applicant are unsecured. The creditors
holding such claims have been grouped into one class (the "Affected
Creditors").
If the Plan is implemented, each Affected Creditor will receive in
satisfaction of its Affected Claims, its pro rata share of the
following based on the amount of its Proven Claim:
- New Secured Convertible Notes in the aggregate principal amount of
$225 million (10 year maturity, 9.5% coupon);
- New Convertible 5% Notes in the aggregate principal amount of
$300 million (5 year maturity);
- 1.1 million New Common Shares; and
- New Rights to subscribe for New Secured Convertible Notes at the
new rights subscription price to generate proceeds up to
$75 million.
For greater certainty, claims against the Applicants for any post
filing interest or costs in respect of Affected Claims will be
released.
Shareholders
There are a total of 102,249,198 existing outstanding common shares
as of September 30, 2005. Under the Plan, the existing common shares
have no economic value since Affected Creditors will not receive full
recovery. The Plan has allocated no value to the common shares.
Pension Plans
There are no proposed changes to the level of pension benefits
currently being paid to pensioners, or to the pension benefits being
earned by active members as part of the implementation of the Plan.
The changes that are to be made relate to improving the funded status
of Stelco's four main pension plans (i.e. Stelco Hamilton hourly and
salary and Stelco Lake Erie hourly and salary plans) as discussed
below.
Under current law, Stelco's four main pension plans are funded on a
going concern basis only pursuant to the Section 5.1 Election. This
will change upon implementation of the Plan.
Pension funding arrangements to be incorporated pursuant to the
Province Pension Funding Agreement will require an upfront lump sum
cash contribution allocated among Stelco's four main pension plans in
a total amount of $400 million upon the implementation of the Plan.
The Province of Ontario (the "Province") has agreed to provide Stelco
with an advance by way of a note (the "New Province Note") in the
amount of $100 million to assist with this funding requirement. After
the Plan implementation date of the Plan, the Section 5.1 Election
will no longer be in effect for Stelco and annual cash contributions
to be allocated among Stelco's four main pension plans will equal
$60 million per annum from 2006 to 2010, and commencing in 2011 and
continuing through 2015, total annual cash contributions will
increase to $70 million per annum. In addition, commencing in 2008
additional cash contributions will be paid if Stelco generates cash
flow in excess of a specific formula and will be capped until 2011 at
pre-determined levels. These funding requirements will replace the
normal funding requirements under the Pension Benefits Act ("PBA").
Changes in actuarial assumptions and/or investment returns will not
affect funding during this ten year period. Commencing in 2016,
funding of Stelco's four main pension plans will be in accordance
with the PBA. Benefit improvements, if any, during the ten year
period will be funded separately, in accordance with the PBA.
Secured Creditors
The Plan does not affect creditors with secured claims. The claims of
the operating lenders pursuant to the Credit Facility and the DIP
Credit Facility will be paid in full on or prior to the Plan
implementation date. It is a condition to implementation of the Plan
that Stelco has arranged for an asset based loan facility (the "New
ABL Facility") for up to $600 million (see below).
New Funding and Capital
New ABL Facility
On the Plan implementation date, the current $75 million DIP Credit
Facility and $350 million Credit Facility which are due to expire no
later than January 20, 2006 as described below, are to be replaced by
a New ABL Facility. The Corporation is in negotiations with lenders
to provide this facility. The available amount of the New ABL
Facility will be dependant upon the value of the underlying
collateral, but will not exceed $600 million.
New Secured Revolving Term Loan
Pursuant to the Stelco/Tricap Restructuring Agreement, Tricap has
agreed to provide a new secured revolving term loan (the "New Secured
Revolving Term Loan") to Stelco in an amount of $350 million for a
term of seven years from Plan implementation date. The facility is
revolving until the third anniversary of the Plan implementation date
(the "Target Date"). On and after the Target Date the facility will
cease to revolve and any amount of the New Secured Revolving Term
Loan outstanding on the Target Date will be repayable in full on the
seventh anniversary of the Plan implementation date (see
Stelco/Tricap Restructuring Agreement).
Restructuring Agreements
Stelco entered into agreements with the Province of Ontario, the USW
Local 8782 and a finance provider pursuant to which Stelco obtained
their support for, and financing in respect to, the Plan.
On October 4, 2005, pursuant to separate Orders, the Court authorized
Stelco to enter into each of the following restructuring agreements:
- the Stelco/Province Restructuring Agreement between Stelco and the
Province of Ontario dated September 19, 2005;
- the Stelco/Tricap Restructuring Agreement between Stelco and
Tricap Management Limited dated September 22, 2005;
- the Stelco/USW Restructuring Agreement between Stelco, the USW and
Local 8782 thereof dated September 23, 2005.
Stelco/Province Restructuring Agreement
Stelco and the Province entered into the Stelco/Province
Restructuring Agreement, which provides for funding arrangements with
respect to Stelco's four main pension plans aimed at substantially
reducing or eliminating the existing solvency deficiencies in these
plans over a 10 year period. The Province has agreed to provide
Stelco with an advance by way of the New Province Note in the amount
of $100 million to assist with this funding requirement. The loan
will become repayable on December 31, 2015 and can be repaid in cash
or Stelco common shares and is subject to a 75% discount if the
solvency deficiencies in Stelco's four main pension plans are
eliminated on or before that date.
Stelco/Tricap Restructuring Agreement
The Stelco/Tricap Restructuring Agreement sets out the terms and
conditions on which Tricap has committed to provide financing to
Stelco contemplated by the Plan by way of the New Secured Revolving
Term loan in the aggregate principal amount of $350 million and by
agreeing to act as standby purchaser in respect of a $75 million
rights offering for new secured convertible notes (the "New Rights
Offering"). In addition, Tricap will have an option to subscribe for
New Secured Convertible Notes to generate proceeds of $25 million.
Stelco and Tricap have agreed in the Stelco/Tricap Restructuring
Agreement that the implementation of the Plan will be conditional on
a number of issues including ratification of the Local 8782
memorandum of agreement (the "MOA") and the Local 5220 MOA, the
members of the new Board of Directors of Stelco being acceptable to
Tricap, the material terms and conditions of the Plan being
satisfactory to Tricap, execution of documentations with respect to
the New ABL Facility, Stelco having not less than $625 million of
liquidity on a consolidated basis and no "Material Adverse Change"
having occurred.
If the agreement is terminated, Tricap would be entitled to a break
fee of up to $11 million depending on specific circumstances.
Stelco/USW Restructuring Agreement
On September 23, 2005, Stelco and USW Local 8782 entered into the
Local 8782 MOA. USW Local 8782 is required to recommend the
Local 8782 MOA to its members for ratification if the final
restructuring plan is similar to the existing Plan or is otherwise
acceptable to the USW. The ratification vote of the Local 8782 MOA is
to occur within eight days after the meeting of the Affected
Creditors to be held to consider and approve the Plan, and if
ratified the renewal 8782 Collective Bargaining Agreement will be in
force on the date Stelco receives written notice of ratification
which will occur no later than the Plan implementation date. Under
the Stelco/USW Restructuring Agreement, the 90-day strike notice
provided on July 27, 2005 by USW Local 8782 has been suspended
effective September 23, 2005.
On September 23, 2005, AltaSteel and USW Local 5220 entered into the
Local 5220 memorandum of agreement but no date has been set at this
time for the ratification vote.
Claims process order
On December 17, 2004 and October 4, 2005, the Court made Orders
establishing a process by which certain creditors of the Applicants
must prove their claims. The purpose of commencing the claims process
was to enable the Applicants and the Monitor to review and process
potential claims including supplier, contingent, damage, litigation,
restructuring and other claims so that the Applicants will be in a
position to hold meetings of affected creditors on November 15, 2005
to vote on the proposed Plan. Further details are outlined in Note 7.
Financing during CCAA proceedings
To ensure the Corporation has sufficient liquidity to fund the
ordinary course of operations for the duration of the CCAA process,
Debtor-in-Possession (DIP) financing has been secured. In addition,
an accommodation agreement to the Corporation's $350 million
revolving operating credit facility was negotiated as the CCAA filing
was an event of default under its terms and conditions.
DIP Financing
This financing is with CIT Business Credit Canada Inc., General
Electric Capital Canada Inc., and BABC Global Finance Inc. (the
"Operating Lenders"), participating in the same percentages, as in
the $350 million revolving credit facility.
The Agreement includes Stelco Inc., (the "Borrower"), Stelwire,
Stelpipe, Welland Pipe, and CHT Steel ("Subsidiary Companies") and is
for $75 million as a revolving line of credit. The DIP is secured by
a second charge on the receivables, inventory and general intangibles
and a first charge on property, plant, and equipment. Additionally,
the DIP is secured by a first pledge of the shares of certain
subsidiaries of Stelco Inc. Each of the Applicant Subsidiary
Companies has guaranteed payment of the Borrower's obligations and
provided Lenders' liens on all their assets as security.
An amendment to the DIP agreement was negotiated on September 29,
2005 extending the maturity date to the earliest of (i) January 20,
2006; (ii) the effective date of a Plan; and (iii) termination of the
$350 million revolving credit facility.
Interest rates are Canadian prime rate plus 4%, U.S. base rate plus
4%, or unused facility fee margin of 0.5%. A commitment fee of 0.5%
remains from the initial revolving line of credit dated March 8, 2004
and is to be paid at the time of the first drawing on this loan.
Accommodation Agreement
Under the Accommodation Agreement dated January 29, 2004, the
Operating Lenders have agreed (i) to continue to make the credit
facilities available; (ii) to make certain amendments to the
revolving operating credit facility; and (iii) to forbear exercising
remedies under the revolving operating credit facility as a result of
the CCAA filing event of default.
Based on an extension granted September 29, 2005, this Accommodation
Agreement (and the term of the $350 million revolving operating
credit facility) will expire at the earliest of (i) January 20, 2006;
(ii) the effective date of a Plan; (iii) termination of the DIP
facility; and (iv) the date at which the Lenders shall have
terminated the forbearance under the terms of the Accommodation
Agreement due to a further event of default.
Interest rates under the Accommodation Agreement are (i) prime rate
loans - prime rate plus 2.50%; (ii) U.S. base rate loans - U.S. base
rate plus 2.50%; (iii) LIBOR loans - LIBOR plus 4%; (iv) Banker's
acceptance drawing fee - 4%; (v) issuance of any letter of credit -
4%.
Basis of presentation and going concern issues
These consolidated financial statements have been prepared using the
same Canadian generally accepted accounting principles ("GAAP") as
applied by the Corporation prior to the filing for CCAA. While the
Corporation and certain of its subsidiaries have filed for and been
granted creditor protection, these consolidated financial statements
continue to be prepared using the going concern concept, which
assumes that the Corporation will be able to realize its assets and
discharge its liabilities in the normal course of business for the
foreseeable future. The creditor protection proceedings provide the
Corporation with a period of time to stabilize its operations and
financial condition and develop a Plan. Debtor-In-Possession
financing, as described above, has been approved by the Court and is
available if required, subject to borrowing conditions. Management
believes that these actions make the going concern basis appropriate.
However, it is not possible to predict the outcome of these
proceedings and accordingly substantial doubt exists as to whether
the Corporation will be able to continue as a going concern. Further,
it is not possible to predict whether the actions taken in any
restructuring will result in improvements to the financial condition
of the Corporation sufficient to allow it to continue as a going
concern. If a restructuring plan is not approved and the Corporation
fails to emerge from CCAA, the Corporation could be forced into
liquidation of the Applicants' assets. Under a liquidation scenario,
adjustments would be necessary to the carrying amounts and/or
classification of assets and liabilities, and expenses in these
consolidated financial statements.
While the Corporation is under creditor protection, the Corporation
will make adjustments to the consolidated financial statements to
isolate assets, liabilities, revenues, and expenses related to the
reorganization and restructuring activities so as to distinguish
these events and transactions from those associated with the ongoing
operation of the business (see Note 2 - Summary of Significant
Accounting Policies). Further, allowed claims arising under the CCAA
proceedings may be recorded as liabilities subject to compromise and
presented separately on the Consolidated Statement of Financial
Position. If a restructuring occurs and there is substantial
realignment of the equity and non-equity interests in the
Corporation, the Corporation will be required, under Canadian GAAP,
to adopt "fresh start" reporting. Upon emergence from CCAA, the
accounting will be dependent upon the terms of the Plan and whether
there is a substantial realignment of equity and non-equity
interests. Under fresh start reporting, the Corporation would
undertake a comprehensive revaluation of its assets and liabilities
based on the reorganization value as established and confirmed in the
Plan. The consolidated financial statements do not present any
adjustments that may be required under fresh start reporting. If the
Plan is accepted, fresh start accounting will be required.
In accordance with GAAP appropriate for a going concern, property,
plant, and equipment is carried at cost less accumulated
amortization. This carrying amount is reviewed for impairment
whenever events or circumstances indicate that the carrying amount
may not be recoverable. The carrying value is considered recoverable
if the sum of undiscounted cash flows from operations and cash flow
from disposal of the property, plant, and equipment exceeds the
carrying amount. The Corporation's filing for creditor protection
under CCAA triggered an impairment review. In estimating future cash
flows from operations of the Corporation's property, plant, and
equipment, the Corporation made certain assumptions about revenue,
reductions in operating costs and its liabilities that could be
achieved in the restructuring of its operations. The Corporation
believes that these assumptions are consistent with use of the going
concern assumption in the preparation of these consolidated financial
statements. In connection with the CCAA proceedings, any compromise
of liabilities will require the approval of affected creditors. There
can be no assurance that such agreement or cost reductions will be
reached and that future cash flows will be sufficient to recover the
carrying amount of property, plant, and equipment.
Pensions
If the Plan fails to be accepted by the stakeholders and the law is
changed to eliminate Stelco's ability to operate under the
Section 5.1 Election under the Pension Benefit Act, then annual
pension funding will increase significantly beyond annual payments
required under the arrangements to be incorporated into the Province
Pension Agreement. For example, had the Section 5.1 Election not been
in effect in 2005 with no other arrangement in place, Stelco's 2005
contributions to its four main pension plans would have increased
more than $348 million over the current level of funding. This level
of payment is not sustainable by Stelco.
Labour related restructuring matters
On September 23, 2005, Stelco and USW Local 8782 entered into the
Local 8782 MOA. USW Local 8782 is required to recommend the
Local 8782 MOA to its members for ratification if the final
restructuring plan is similar to the existing Plan, or is otherwise
acceptable to the USW. The ratification vote of the Local 8782 MOA is
to occur within eight days after the Meetings, and if ratified the
Renewal 8782 Collective Bargaining Agreement will be in force on the
date Stelco receives written notice of ratification which will occur
no later than the Plan Implementation Date. Under the Stelco/USW
Restructuring Agreement, the 90 days notice provided on July 27, 2005
by USW Local 8782 has been suspended effective September 23, 2005.
On September 23, 2005, AltaSteel and USW Local 5220 entered into the
Local 5220 MOA but no date has been set at this time for the
ratification vote.
The collective agreement at Stelpipe that was due to expire on
September 30, 2004 was extended to October 31, 2005. Under the terms
of a Definitive Agreement between Stelco and Lakeside Steel,
substantially all the assets of Stelpipe were sold to Lakeside Steel.
The transaction closed on October 31, 2005. Lakeside Steel became the
successor employer under the Ontario Labour Relations Act and assumed
the collective agreement between Stelpipe and Local 523, CAW.
At Norambar, a new USW salaried employees bargaining unit was
certified by the Quebec Ministry of Labour on March 9, 2005.
Negotiations with the USW started in October 2005. However, a
contract has not yet been entered into.
The Stelwire Parkdale labour contract with the USW Local 5328 expired
on July 31, 2005. Although a new contract has not been entered into,
operations are continuing.
There can be no assurance that labour difficulties at any of the
Corporation's business units will not result in a significant loss of
production and revenue and have a material adverse effect on the
business, financial condition, results of operations of the
Corporation, or the ability of the Corporation to restructure.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared using the
same generally accepted accounting principles as applied to the
Corporation prior to certain entities of the Corporation filing for
creditor protection, except as described below under the heading
Accounting policies applicable to an entity under Creditor
Protection. Interim consolidated financial statements have been
prepared in accordance with the accounting policies and methods used
in the consolidated financial statements for the year ended
December 31, 2004, except for the prescribed change in accounting for
certain financial instruments as described in Note 3. The
Consolidated Financial Statements and notes presented in this interim
report should be read in conjunction with the most recent annual
consolidated financial statements.
Uncertainties arose upon the filing under CCAA on January 29, 2004,
which are described in Note 1 - Creditor Protection and
Restructuring - Basis of presentation and going concern issues. As
stated in Note 1, these Consolidated Financial Statements are
prepared using the going concern concept.
Accounting policies applicable to an entity under Creditor Protection
As a result of the filings as described in Note 1, the Corporation
will follow accounting policies, including disclosure items,
applicable to entities that are under creditor protection. In
addition to Canadian GAAP, the Corporation is applying the guidance
in the American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" (SOP 90-7). While SOP 90-7 refers
specifically to Chapter 11 in the U.S., its guidance, in management's
view, is also applicable to an entity restructuring under CCAA, where
it does not conflict with GAAP.
Consistent with GAAP, SOP 90-7 does not change the manner in which
financial statements are prepared. However, SOP 90-7 does require
that the financial statements for periods subsequent to the filing
distinguish transactions and events that are directly associated with
the reorganization from the ongoing operations of the business where
it does not conflict with Canadian GAAP. Revenues, expenses, gains
and losses, and provisions for losses that can be directly associated
with the reorganization and restructuring of the business are
reported separately as Reorganization items (see Note 4). The timing
of the recognition of Reorganization items is consistent with GAAP.
Cash flows related to Reorganization items have been disclosed
separately in Note 4.
While payments may not be made on liabilities subject to compromise,
including long-term debt, interest on debt obligations will continue
to be recognized under GAAP, consistent with Canadian legal
requirements. Interest is not a Reorganization item. The Consolidated
Statement of Financial Position distinguishes pre-filing liabilities
subject to compromise from both those pre-filing liabilities that are
not subject to compromise and from post-filing liabilities (see
Note 7). Liabilities that may be affected by the Plan have been
reported at the amounts estimated to be allowed, even if they may be
settled for lesser amounts. A claims procedure was established on
December 17, 2004, for which a claims bar date of January 31, 2005
was set. Resulting adjustments to the estimated allowed claims may be
material and may be recorded as a reorganization adjustment.
Consolidated financial statements that include one or more entities
in reorganization proceedings and one or more entities not in
reorganization proceedings are required to include disclosure of
Condensed Combined Financial Statements of the entities in
reorganization proceedings, including disclosure of the amount of
intercompany receivables and payables therein between Applicants and
non-Applicants (see Note 8).
SOP 90-7 has been applied effective January 29, 2004, and for
subsequent reporting periods while the Corporation continues to
operate under creditor protection.
The resulting changes in reporting are described in Note 4
(Reorganization items), and Note 7 (Liabilities subject to
compromise), and Note 8 (Condensed Combined Financial Statements).
3. CHANGES IN ACCOUNTING POLICY
Financial Instruments
Effective January 1, 2005, the Corporation adopted a change in
accounting policy to conform with amendments to the CICA Handbook
Section 3860 - Financial Instruments - disclosure and presentation.
The amendments modify the presentation and accounting of financial
instruments where there is an option of satisfying the obligation
and/or interest payments with the issuance of an entity's own shares.
Such instruments are no longer presented and accounted for as a
component of Shareholders' Equity on the Consolidated Statement of
Financial Position but rather as Long-term Debt. Interest and
accretion, net of tax, applicable to these instruments are no longer
charged directly to retained deficit and are now accounted for
separately as interest and tax expense on the Statement of Earnings.
The amendment applies to the Corporation's $90 million convertible
debentures and has been adopted retroactively resulting in a
restatement of prior periods. Interest expense of $1 million relating
to accretion of the convertible debentures prior to filing for CCAA
has been recorded in the Statement of Earnings (Loss) for first
quarter 2004 offset by a corresponding adjustment to retained
deficit. The presentation and accounting for the convertible
debentures that was triggered by the CCAA filing (see Note 12) is
consistent with the amendment and therefore will not result in any
additional adjustments in 2005. There was no impact to the basic or
diluted earnings per share for prior periods as a result of adopting
this change retroactively.
4. REORGANIZATION ITEMS
Reorganization items represent post-filing revenues, expenses, gains
and losses, and provisions for losses that can be directly associated
with the reorganization and restructuring of the Applicants. The
following table summarizes the reorganization items incurred:
Three months ended Nine months ended
September 30 September 30
(in millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Professional fees $ 13 $ 6 $ 36 $ 18
Capital raising process
break fee(i) - - 11 -
Amortization and write-off of
deferred financing fees - 1 - 4
Adjustment of convertible
debenture balance(ii) - - - 15
Other - 1 - 1
---------------------------------------------------------------------
Total reorganization items $ 13 $ 8 $ 47 $ 38
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) Stelco decided to pursue a recapitalization of the Corporation
and as a result, Deutsche Bank became entitled to a break fee of
approximately $11 million.
(ii) To adjust principal element of convertible debentures from
$75 million to the anticipated claim amount of $90 million (see
Note 12).
The cash flow associated with reorganization and restructuring items
is summarized as follows:
Three months ended Nine months ended
September 30 September 30
(in millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Professional fees $ 11 $ 4 $ 34 $ 14
Capital raising process break
fee (see i above) - - 11 -
Accommodation Agreement and
DIP financing fees - - - 3
Other - 1 - 1
---------------------------------------------------------------------
Total cash usage $ 11 5 $ 45 $ 18
---------------------------------------------------------------------
---------------------------------------------------------------------
5. NON-CORE ASSET SALES PROCESS AND ASSET SALES
Non-core Asset Sales Process
As part of the Corporation's strategic review concluded in 2004, a
number of its operating wholly owned subsidiaries, joint ventures and
partnerships were no longer deemed core assets.
Stelco obtained Court approval on October 19, 2004 to proceed with
the sale process for entities within the following business segments:
- Mini-mills - AltaSteel and its 50% interest in GenAlta Recycling
Inc., Norambar and its wholly owned subsidiary Fers et MDetaux
RecyclDes LtDee.
- Manufactured Products - Stelwire, Stelpipe, Stelfil, Stelco's 40%
interest in Camrose Pipe Company, and AltaSteel's 50% ownership of
MOLY-COP Canada
With the exception of Camrose Pipe and Stelpipe (see Note 9), which
have been sold, offers received for the non-core businesses continue
to be reviewed or negotiated by the Corporation, its advisors, and
the Monitor.
On November 2, 2005, Stelco signed a letter of intent concerning the
sale of Norambar, Stelfil, and Stelwire to Mittal Canada Inc. The
transaction is subject to a number of conditions, including the
negotiation of a definitive agreement and obtaining Court approval.
It is anticipated that, if all the conditions are satisfied as
planned, the sale will close early in 2006. With the sale of Camrose
Pipe and Stelpipe (see Note 9), Stelfil and Stelwire represent the
majority of the remaining manufactured products segment.
Included in the Consolidated Statement of Financial Position are the
following amounts related to these non-core businesses excluding
Camrose Pipe and Stelpipe which are included in discontinued
operations (see Note 9):
Manufactured
At September 30 Mini-mill Segment Products Segment
(in millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Current assets $ 148 $ 169 $ 75 $ 106
Current liabilities 70 83 25 30
---------------------------------------------------------------------
Working capital 78 86 50 76
---------------------------------------------------------------------
Property, plant, and equipment 97 89 9 16
Deferred pension cost 12 9 32 25
Future income taxes 12 9 2 2
---------------------------------------------------------------------
Other assets 121 107 43 43
---------------------------------------------------------------------
Employee future benefits 51 47 49 47
Long-term debt 13 17 - -
Future income taxes 9 8 - -
---------------------------------------------------------------------
Other liabilities 73 72 49 47
---------------------------------------------------------------------
Net Investment in Non-Core
Businesses $ 126 $ 121 $ 44 $ 72
---------------------------------------------------------------------
Further information regarding these business segments is contained in
Note 18.
Stelco's $170 million net investment in these businesses is funded
through share capital and intercompany loans and advances. The sale
process is progressing with respect to the non-core businesses.
Completing transactions may be affected by progress on the
Corporation's restructuring. Under GAAP, losses resulting from the
disposition of an asset group are recorded only when specific
criteria have been met including when the disposition is probable.
The Corporation has determined that the criteria for accounting for
assets held for sale have not been met with respect to these
businesses. Should the criteria of assets held for sale be met, for
some of these businesses, future losses related to the Corporation's
net investment would likely be material and are dependent on, among
other items, the purchase price, the assets sold, and liabilities and
obligations assumed by the prospective purchasers.
Asset Sales
As part of the Corporation's overall effort to restructure
operations, simplify processes, and rationalize non-core resources, a
number of assets have been sold. The proceeds received from certain
asset sales of the Applicants are held in trust with the Monitor and
are therefore included in restricted cash (Note 6) on the
Consolidated Statement of Financial Position.
The following asset sales activity occurred during 2005:
Stelpipe
On August 19, 2005 the Corporation reached an agreement for the sale
of 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 will assume
all of the pension and benefit obligations of Stelpipe's existing
retirees. The Court approved the transaction on September 6, 2005.
The transaction closed on October 31, 2005 (see Note 9).
Camrose Pipe
On March 30, 2005, the Court approved the sale of the Corporation's
40% partnership interest in Camrose Pipe. The transaction closed with
gross proceeds on the sale of $23 million on April 20, 2005 (see
Note 9).
Stelco Hamilton Plate Mill
The sale of the plate mill assets closed on June 9, 2005. The gross
sale price of $25 million has been secured by irrevocable letters of
credit, which will be drawn down in tandem with progress made on
dismantling of the equipment. The carrying value of these assets was
nil, therefore a gain (net of fees) of $20 million was recorded
during the second quarter 2005.
Welland Pipe
The sale of the U and O pipe mill closed on June 29, 2005 for
$4 million (see Note 9).
6. RESTRICTED CASH
The Corporation has recorded $16 million in restricted cash as at
September 30, 2005 representing funds being held in trust with the
Monitor pending direction from the Court for its distribution. The
composition of these funds is derived from proceeds and deposits
received from the sale of non-core assets pertaining to Stelpipe, CHT
Steel and Welland Pipe.
7. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise refers to liabilities incurred
prior to the filing date that may be dealt with as affected claims
under a Plan in the CCAA proceedings, as well as claims arising out
of any repudiated leases, contracts, and other arrangements. It is
possible that consolidated financial statement items not currently
included below as liabilities subject to compromise will be added to
this category of liabilities at a later date. The amounts below are
the Corporation's estimate of known and expected claims in this
category and are subject to future adjustment as a result of
negotiations, Court orders, proofs of claim, and other events. Any
additions to this category of liabilities and any adjustments may be
material and, depending on their nature, may be recorded as a
reorganization adjustment. The Plan will determine how the affected
claims will be settled, including payment terms, if applicable.
The Corporation continues to accrue for interest on long-term debt
that is subject to compromise ($64 million as of September 30, 2005).
No interest has been paid on unsecured debt of the Applicants
subsequent to the date of filing.
Claims procedure
As established by Court order on December 17, 2004, the Applicants
initiated a process for certain creditors to file claims against the
Applicants for liabilities incurred prior to January 29, 2004 and
those arising between January 29, 2004 and December 17, 2004 as a
result of the restructuring, repudiation or termination of any
contract, lease or other agreement. The claims bar date for filing of
proofs of claim was set at January 31, 2005, unless the claim relates
to the restructuring, repudiation or termination of any contract,
lease or other agreement on or after December 17, 2004, in which case
the bar date for these types of claims was set at October 26, 2005.
A dispute mechanism is in place for those claims that cannot be
resolved by way of negotiation with the Applicants and/or Monitor.
These claims are forwarded to a claims officer providing the claimant
filed a dispute notice by the earlier of eight business days
following receipt of a dispute package or March 7, 2005 (or, in
respect of a restructuring claim arising after December 17, 2004, on
October 28, 2005). These claims are reviewed and ruled on by the
claims officer. Both the Applicants and the claimant have the right
to appeal the decision of the claims officer to the Court within five
business days of notification of the claims officer's decision. All
determinations from the Court regarding appealed claims are final for
the purposes of recording claims.
Claims Summary
At September 30, Subject
2005 to Under Adjust-
(in millions) Filed Excepted(b) Review Review(c) ments(d) Recorded
---------------------------------------------------------------------
Accounts payable
and accrued
liabilities $ 128 - 128 (3) (7) $ 118
Employee
related 107 (84) 23 (1) (21) 1
Long-term debt
(Note 12) 428 - 428 (16) - 412
Related party
claims 245 (216) 29 - (29) -
Litigation and
contingencies 2,747 (5) 2,742 (433) (2,308) 1
---------------------------------------------------------------------
Total Claims $3,655 (305) 3,350 (453) (2,365) $ 532
---------------------------------------------------------------------
Liabilities for
which no proof
of claim was
filed:
Post-filing
interest(a) 64
Accounts payable
and accrued
liabilities 12
--------
Liabilities
subject to
compromise $ 608
--------
--------
(a) The Corporation continues to accrue for interest on long-term
debt that is subject to compromise. No interest has been paid on
long-term debt of the Applicants subsequent to January 29, 2004,
the date of the CCAA filing. The holders of long-term debt
subject to compromise (Note 12) have reserved their right to file
a claim for post-filing interest, although this is not a provable
claim pursuant to the claims procedure order.
(b) Certain claims have been excepted from the process and will not
have to be proven at this stage of the CCAA proceedings
including, but not limited to:
- claims pursuant to existing financing and DIP documents;
- claims secured by CCAA charges and any further charge ordered
by the Court;
- claims of any non-Applicant wholly owned subsidiary, other
than such claims that are the subject of a security interest
in favour of a second creditor and the second creditor is
enforcing, or is entitled to enforce, its security;
- employment, compensation, group benefit and pension claims;
- certain claims arising from a cause of action for which the
Applicants are fully insured.
(c) Represents amounts that are under review by the Corporation and
the claimants. Of the litigation and contingent claims filed, the
majority related to two claims filed by joint venture partners of
Stelco in which they claimed, $2.1 billion against Stelco. These
claims were filed in the event Stelco does not honour its
obligations under the joint venture agreements. Management and
the Monitor do not believe these are valid claims as no breach of
contract has occurred. During the quarter ended September 30,
2005, one of these claims ($1.7 billion) was withdrawn.
(d) Represents amounts that have been disallowed from the original
claim. Included are revisions from the original claim amount for
which the Corporation and the claimant have agreed upon, a Claims
Officer has ruled on, or for which the claimant has not filed a
dispute notice within the timeframe outlined in the claims
procedure.
8. CONDENSED COMBINED FINANCIAL STATEMENTS
As stated in Note 2, consolidated financial statements should provide
disclosure of Condensed Combined Financial Statements of the entities
in reorganization proceedings (Applicants), including disclosure of
the amount of intercompany receivables and payables between
Applicants and non-Applicants. Following are the Condensed Combined
Financial Statements of the Applicants and non-Applicants.
Intercompany receivables and payables are disclosed on a net basis.
Claims of Applicants and non-Applicant joint ventures and
partnerships are subject to the claims process as established by the
Court on December 17, 2004 (see Note 7). Resulting adjustments may be
material. Claims of non-Applicant wholly owned subsidiaries have
generally been excepted from the claims process and did not have to
be proven by the claims bar date of January 31, 2005 or restructuring
claims bar date of October 26, 2005.
Entities not in reorganization proceedings include AltaSteel,
Norambar, Stelfil, Stelco Holding Company, and their wholly owned
subsidiaries and joint ventures.
Condensed Combined Statement of Earnings
Entities
Entities in not in
Three months ended Reorgan- Reorgan-
September 30, 2005 ization ization Elimi- Consolidated
(in millions) Proceedings Proceedings nations Totals
---------------------------------------------------------------------
Net sales $ 584 179 (38)(1) $ 725
Costs 634 124 (38)(1) 720
---------------------------------------------------------------------
(50) 55 - 5
Amortization 22 9 - 31
---------------------------------------------------------------------
Operating earnings (loss) (72) 46 - (26)
---------------------------------------------------------------------
Intercompany income
expense(2) 18 (18) - -
Reorganization items
(Note 4) (13) - - (13)
---------------------------------------------------------------------
(67) 28 - (39)
---------------------------------------------------------------------
Financial expense (13) (2) - (15)
---------------------------------------------------------------------
Net earnings (loss) from
continuing operations
before
Income taxes (80) 26 - (54)
Income tax expense
(recovery)(Note 10) (45) 4 - (41)
---------------------------------------------------------------------
Net earnings (loss) from
continuing operations (35) 22 - (13)
Net earnings from
discontinued operations
(Note 9) (29) - - (29)
---------------------------------------------------------------------
Net earnings (loss) $ (64) 22 - $ (42)
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Intercompany sales elimination
(2) Intercompany interest, foreign exchange and management fees
Condensed Combined Statement of Cash Flows
Entities
Entities in not in
Three months ended Reorgan- Reorgan-
September 30, 2005 ization ization Consolidated
(in millions) Proceedings Proceedings Totals
---------------------------------------------------------------------
Net cash provided by (used for)
operating activities(x) $ (77) 29 $ (48)
---------------------------------------------------------------------
Investing activities
Proceeds on sale of plate mill
assets (Note 5) 5 - 5
Expenditures for capital assets (38) (7) (45)
---------------------------------------------------------------------
(33) (7) (40)
---------------------------------------------------------------------
Financing activities
Dividends 2 (2) -
Increase (decrease) indebtedness 118 (11) 107
Reduction of long-term debt (Note 12) - (9) (9)
---------------------------------------------------------------------
120 (22) 98
---------------------------------------------------------------------
Cash, cash equivalents and
restricted cash
Net decrease 10 - 10
Balance at beginning of period 10 16 26
---------------------------------------------------------------------
Balance at end of period $ 20 16 $ 36
---------------------------------------------------------------------
Consists of:
Cash and cash equivalents 4 16 $ 20
Restricted cash (Note 6) 16 - 16
---------------------------------------------------------------------
$ 20 16 $ 36
---------------------------------------------------------------------
---------------------------------------------------------------------
(x) Includes intercompany receivables and payables
Condensed Combined Statement of Earnings
Entities
(Restated - Note 9) Entities in not in
Nine months ended Reorgan- Reorgan-
September 30, 2005 ization ization Elimi- Consolidated
(in millions) Proceedings Proceedings nations Totals
---------------------------------------------------------------------
Net sales $ 2,036 551 (125)(1) $ 2,462
Costs 1,905 437 (125)(1) 2,217
---------------------------------------------------------------------
131 114 - 245
Gain on sale of plate
mill assets (Note 5) - (20) (20)
Amortization 65 26 - 91
---------------------------------------------------------------------
Operating earnings 66 108 - 174
---------------------------------------------------------------------
Intercompany income
(expense)(2) 16 (16) - -
Reorganization items
(Note 4) (47) - - (47)
---------------------------------------------------------------------
35 92 - 127
---------------------------------------------------------------------
Financial expense (37) (5) - (42)
---------------------------------------------------------------------
Net earnings (loss) from
continuing operations
before
Income taxes (2) 87 - 85
Income tax expense
(recovery) (Note 10) 6 7 - 13
---------------------------------------------------------------------
Net earnings (loss) from
continuing operations (8) 80 - 72
Net earnings (loss) from
discontinued operations
(Note 9) (29) 4 - (25)
---------------------------------------------------------------------
Net earnings (loss) $ (37) 84 - $ 47
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Intercompany sales elimination
(2) Intercompany interest, foreign exchange and management fees
Condensed Combined Statement of Cash Flows
Entities
Entities in not in
Nine months ended Reorgan- Reorgan-
September 30, 2005 ization ization Consolidated
(in millions) Proceedings Proceedings Totals
---------------------------------------------------------------------
Net cash provided by operating
activities(x) $ 63 48 $ 111
---------------------------------------------------------------------
Investing activities
Proceeds from sale of Camrose
Pipe (Note 5) - 23 23
Proceeds from sale of plate mill
assets (Note 5) 5 - 5
Expenditures for capital assets (92) (25) (117)
---------------------------------------------------------------------
(87) (2) (89)
---------------------------------------------------------------------
Financing activities
Dividends 36 (36) -
Increase (decrease) indebtedness (16) 5 (11)
Reduction of long-term debt (Note 12) - (18) (18)
---------------------------------------------------------------------
20 (49) (29)
---------------------------------------------------------------------
Cash, cash equivalents and
restricted cash
Net increase (4) (3) (7)
Balance at beginning of period 24 19 43
---------------------------------------------------------------------
Balance at end of period $ 20 16 $ 36
---------------------------------------------------------------------
---------------------------------------------------------------------
Consists of:
Cash and cash equivalents 4 16 $ 20
Restricted cash (Note 6) 16 - 16
---------------------------------------------------------------------
$ 20 16 $ 36
---------------------------------------------------------------------
---------------------------------------------------------------------
(x) Includes intercompany receivables and payables
Condensed Combined Statement of Financial Position
Entities
(Restated - Note 9) Entities in not in
Reorgan- Reorgan-
At September 30, ization ization Elimi- Consolidated
2005 (in millions) Proceedings Proceedings nations Totals
---------------------------------------------------------------------
Current assets $ 1,153 293 - $ 1,446
Intercompany receivables 29 363 (392)(1) -
Assets held for sale 71 - - 71
---------------------------------------------------------------------
Current assets 1,253 656 (392) 1,517
---------------------------------------------------------------------
Current liabilities $ 373 186 - 559
Intercompany payables 48 29 (77)(1) -
Liabilities held for sale 40 - - 40
---------------------------------------------------------------------
Current liabilities 461 215 (77) 599
---------------------------------------------------------------------
Working capital 792 441 (315) 918
---------------------------------------------------------------------
Other assets
Property, plant, and
equipment 721 294 - 1,015
Intangible assets 70 - - 70
Deferred pension cost 119 24 - 143
Future income taxes 39 7 - 46
Intercompany investments
and loans 274 (71) (203)(2) -
Other 10 10 - 20
---------------------------------------------------------------------
1,233 264 (203) 1,294
---------------------------------------------------------------------
Total investment 2,025 705 (518) 2,212
---------------------------------------------------------------------
Other liabilities
Employee future benefits 780 144 - 924
Other liabilities not
subject to compromise 86 115 - 201
---------------------------------------------------------------------
866 259 - 1,125
---------------------------------------------------------------------
Liabilities subject to
compromise 923 - (315)(1) 608
---------------------------------------------------------------------
Shareholders' equity $ 236 446 (203) $ 479
---------------------------------------------------------------------
---------------------------------------------------------------------
Derived from:
Convertible debentures
conversion option
(Note 12) 23 - - 23
Capital stock (Note 14) 781 203 (203)(2) 781
Contributed surplus
(Note 15) 16 - - 16
Retained earnings
(deficit) (584) 243 - (341)
---------------------------------------------------------------------
$ 236 446 (203) $ 479
---------------------------------------------------------------------
---------------------------------------------------------------------
Commitments and contingencies (Notes 7 and 13)
(1) Intercompany receivables and payables
(2) Intercompany investment at cost
Manufactured Products Segment
Welland Pipe
On March 7, 2003, the Corporation permanently closed its wholly owned
subsidiary, Welland Pipe, a manufacturer of large diameter pipe
located in Welland, Ontario. The decision to permanently close the
facility was based on a lack of order prospects. The primary assets
of the company were two pipe mills, spiral weld and U and O mill
which were sold during the fourth quarter of 2004 and the second
quarter 2005 resulting in a gain on sale of $6 million and $4 million
respectively.
The property and plant of Welland Pipe are listed for sale. The
Corporation is currently discussing offers with interested parties.
The net book value of these assets is nominal.
Camrose Pipe
Camrose Pipe was a manufacturer of small- and large-diameter pipe
situated in Camrose, Alberta. The Corporation held a 40% interest in
this partnership. The decision to sell the business was based on the
Corporation's strategic analysis in 2004 that concluded this and
other businesses were non-core assets. The sale, with gross proceeds
of $23 million, was recorded in the second quarter 2005. The
resulting gain of $3 million, net of $1 million tax, from the sale
was included in discontinued operations during second quarter 2005.
The consolidated financial statements have been retroactively
restated to reflect the partnership earnings and cash flows of
Camrose Pipe as part of discontinued operations.
Stelpipe
Stelpipe is a manufacturer of pipe and tubular products located in
Welland, Ontario.
On August 19, 2005 the Corporation reached an agreement for the sale
of 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 will assume
all of the pension and benefit obligations of Stelpipe's existing
retirees. The Court approved the transaction on September 6, 2005.
The assets and liabilities in the purchase and sale agreement are
presented as held for sale on the Consolidated Statement of Financial
Position. The pre-tax loss to be recorded related to this asset sale
is estimated to be $53 million, of which $22 million was recorded in
the quarter ended September 30, 2005, with the remaining estimated
loss of $31 million to be recorded in fourth quarter 2005, at the
time of closing. The fourth quarter 2005 loss to be recorded reflects
the estimated settlement and other losses primarily related to the
pension plans of the employees transferred to Lakeside Steel. The
transaction closed on October 31, 2005. The consolidated financial
statements have been restated to reflect the earnings (loss) and
cashflows of Stelpipe as part of discontinued operations.
The following outlines the revenues, pre-tax earnings (loss), and net
earnings (loss) applicable to discontinued operations of Welland
Pipe, Camrose Pipe and Stelpipe:
Three months ended Nine months ended
September 30 September 30
(in millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Net sales $ 46 $ 56 $ 184 $ 165
Earnings (loss) before income
taxes (36) (2) (29) 2
Net earnings (loss) $ (29) $ (3) $ (25) $ 1
---------------------------------------------------------------------
The assets and liabilities of these discontinued operations are as
follows:
At September 30 (in millions) 2005 2004
---------------------------------------------------------------------
Other Other
assets Assets assets
and held and
Assets held liabil- for liabil-
for sale(1) ities(2) sale(1) ities(2)
---------------------------------------------------------------------
Current assets $ 44 $ 19 $ - $ 5
Property, plant, and
equipment - - 2 -
Deferred pension cost 27 19 - 8
---------------------------------------------------------------------
Total assets 71 38 2 13
---------------------------------------------------------------------
Current liabilities 22 13 - 6
Employee future benefits 18 41 - 17
---------------------------------------------------------------------
Total liabilities 40 54 - 23
---------------------------------------------------------------------
Net investment (liability) $ 31 $ (16) $ 2 $ (10)
---------------------------------------------------------------------
(1) Represents the assets and liabilities of Stelpipe (2005) and CHT
Steel (2004).
(2) Pertains to the assets and liabilities of the discontinued
operations of Welland Pipe (2004 and 2005) and Stelpipe (2005)
that are not for sale and are therefore included within the
balances on the Consolidated Statement of Financial Position.
10. COMPONENTS OF CONSOLIDATED INCOME TAXES
The income tax expense (recovery) differs from the amount calculated
by applying Canadian income tax rates (Federal and Provincial) to the
earnings (loss) before income taxes, as follows:
2005 2004
----------------------------------- -----------
Entities
Entities in not in
Three Months ended Reorgan- Reorgan- Consol- Consol-
September 30, ization ization idated idated
(in millions) Proceedings Proceedings Totals Totals
--------------------------------------------------------- -----------
Earnings (loss) from
continuing operations
before income taxes $ (80) 26 $ (54) $ 79
--------------------------------------------------------- -----------
Income tax expense
(recovery) computed
using statutory
income tax rates
(2005 - 43%; 2004
- 43% ) (34) 11 (23) 34
--------------------------------------------------------- -----------
Add (deduct):
Manufacturing and
processing credit 7 (2) 5 (7)
Resource allowance/
depletion - (2) (2) -
Valuation allowance
(release) (21) - (21) (13)
Impact of
intercompany
dividends 4 (4) - -
Impact of
intercompany
foreign exchange - 4 4 2
Other (1) (3) (4) 2
--------------------------------------------------------- -----------
(11) (7) (18) (16)
--------------------------------------------------------- -----------
Income tax expense
(recovery) $ (45) 4 $ (41) $ 18
--------------------------------------------------------- -----------
--------------------------------------------------------- -----------
2005 2004
----------------------------------- -----------
Entities
Entities in not in
Nine Months ended Reorgan- Reorgan- Consol- Consol-
September 30, ization ization idated idated
(in millions) Proceedings Proceedings Totals Totals
--------------------------------------------------------- -----------
Earnings (loss) from
continuing operations
before income taxes $ (2) 87 $ 85 $ 85
--------------------------------------------------------- -----------
Income tax expense
(recovery) computed
using statutory
income tax rates
(2005 - 43%; 2004 -
43% ) (1) 38 37 37
--------------------------------------------------------- -----------
Add (deduct):
Manufacturing and
processing credit - (7) (7) (8)
Resource allowance/
depletion - (4) (4) -
Valuation allowance
(release) (4) (6) (10) (14)
Impact of
intercompany
dividends 12 (12) - -
Impact of
reclassification
of convertible
debentures - - - 5
Impact of intercompany
foreign exchange - 3 3 2
Other (1) (5) (6) 1
--------------------------------------------------------- -----------
7 (31) (24) (14)
--------------------------------------------------------- -----------
Income tax expense
(recovery) $ 6 7 $ 13 $ 23
--------------------------------------------------------- -----------
--------------------------------------------------------- -----------
11. BANK AND OTHER SHORT-TERM INDEBTEDNESS
At At
September 30 December 31
(in millions) 2005 2004 2004
---------------------------------------------------------------------
Applicants $ 170 $ 249 $ 187
Non-Applicants 28 32 29
---------------------------------------------------------------------
Total bank and other
short-term indebtedness $ 198 $ 281 $ 216
---------------------------------------------------------------------
---------------------------------------------------------------------
The agreements covering Stelco's DIP financing and operating line of
credit were amended on September 29, 2005 to extend the expiry date
of the facilities to the earliest of (i) January 20, 2006; (ii) the
effective date of a Plan; (iii) the termination of either facility
individually; (iv) the date at which the Lenders shall have
terminated the forbearance under the terms of the Accomodation
Agreement due to a further event of default.
12. LONG-TERM DEBT
At
At September 30 December 31
Restated Restated
(Note 3) (Note 3)
(in millions) 2005 2004 2004
---------------------------------------------------------------------
10.4% retractable unsecured
debentures due November 30,
2009 $ 125 $ 125 $ 125
8% retractable unsecured
debentures due February 15,
2006 150 150 150
9.5% convertible unsecured
subordinated debentures due
February 1, 2007 90 90 90
Computer system financing 47 47 47
---------------------------------------------------------------------
Long-term debt of Applicants
subject to compromise
(Note 7) $ 412 $ 412 $ 412
---------------------------------------------------------------------
---------------------------------------------------------------------
Long-term debt of
non-Applicants $ 75 $ 94 $ 93
---------------------------------------------------------------------
Less amount due within
one year 42 44 44
---------------------------------------------------------------------
Total Long-term debt
(non-Applicants) $ 33 $ 50 $ 49
---------------------------------------------------------------------
---------------------------------------------------------------------
On March 10, 2004, the Corporation did not make the quarterly
installment on the term loan associated with the Stelco Hamilton
plate mill which resulted in a default of the debt. This debt is a
liability of a wholly owned subsidiary of Stelco Inc., which is not
an Applicant under the CCAA filing described in Note 1. On
October 13, 2004, the agent for the lenders of the term loan notified
Stelco Inc. that, as a result of the default in payment, Stelco Inc.
is obligated to pay under a tolling agreement between Stelco Inc. and
the subsidiary an amount equal to the amount owing under the term
loan. The debt as at September 30, 2005 is $25 million. Net proceeds
from the sale of the plate mill assets (see Note 5) have and will be
used to partially satisfy this obligation. Interest is being
calculated in accordance with the terms of the credit agreement.
Convertible Debentures
As a result of the change in accounting referred to in Note 3, a
portion of the debentures have been reclassified as a component of
long-term debt with an initial allocation of $67 million to the
principal element. The balance, $23 million, remains in equity and is
allocated to the value of the debenture holders' conversion option at
the date of issue.
As a result of the filings described in Note 1, the Corporation
recorded in first quarter 2004 a reorganization charge of $15 million
(see Note 4) in order to reflect the convertible debenture balance at
the principal amount of $90 million and the convertible debentures
have been classified as liabilities subject to compromise (see
Note 7).
13. COMMITMENTS AND CONTINGENCIES
Capital programs
The estimated cost to complete previously approved capital programs
is $172 million. Of this amount, $103 million relates to Phase II of
the Stelco Lake Erie hot strip mill upgrade, $13 million pertains to
steam generators for both Integrated Steel plants and $9 million for
the replacement roughing mill equipment at the AltaSteel bar mill.
Contingencies
Various lawsuits and claims, other than matters arising out of the
filings as described in Note 1 and the claims process as described in
Note 7, are pending by and against the Corporation and provisions
have been recorded where appropriate under liabilities subject to
compromise. In addition, as a result of the filings as described in
Note 1, proceedings related to matters arising prior to January 29,
2004 are stayed and suspended and are subject to compromise under the
CCAA process.
In addition, a $350 million lawsuit was launched against the
Corporation by Georgian Windpower Corporation ("GWC") relating to a
Memorandum of Understanding ("MOU") and Agreement to Enter into a
Land Lease Agreement ("ALLEA") that the Corporation terminated in
accordance with its provisions in April 2005. As ordered by the Court
on June 28, 2005, the claim relating to the MOU should be removed
from the statement of claim and dismissed. With respect to that
portion of the claim that relied on the ALLEA, the Court held that
the ALLEA portion of the claim could proceed and that the stay would
be lifted to allow it to be initiated and filed, but that no further
action may be taken by GWC until the Corporation emerges from CCAA
protection except with leave of the Court. The Corporation believes
it has a good defence to the ALLEA portion of the claim and
consequently has not recorded any provisions in the Consolidated
Financial Statements.
14. CAPITAL STOCK
Convertible Common Shares
September 30 December 31
($ in millions) 2005 2004 2004
---------------------------------------------------------------------
Series A 101,339,415 101,555,442 101,783,542
Series B 909,783 693,758 465,658
---------------------------------------------------------------------
Total number of shares 102,249,198 102,249,200 102,249,200
---------------------------------------------------------------------
Total $ 781 $ 781 $ 781
---------------------------------------------------------------------
---------------------------------------------------------------------
The Corporation has been granted creditor protection under the CCAA.
The Plan has allocated no value to these shares.
15. STOCK-BASED COMPENSATION
Key Employee Stock Option Plan (KESOP)
Under the Corporation's KESOP, the following options were
outstanding:
September 30 December 31
2005 2004 2004
---------------------------------------------------------------------
Exercisable 4,055,362 3,605,046 3,643,711
Unexercisable 946,318 1,570,975 1,487,641
---------------------------------------------------------------------
Total 5,001,680 5,176,021 5,131,352
---------------------------------------------------------------------
---------------------------------------------------------------------
Compensation cost of $0.1 million has been included in Costs for
third quarter 2005 ($0.2 million for third quarter 2004) and $0.3 for
the first nine months of 2005 ($0.7 for the first nine months of
2004).
The compensation cost for the grants made under the KESOP was
determined at the grant dates using the fair value method by applying
the Black-Scholes option-pricing model using the following
assumptions:
Jan. 5, Nov. 25, Feb. 5,
Grant date 2004 2003 2003
--------- --------- ---------
Expected volatility 30% 30% 23%
Risk-free interest rate 3.60% 3.75% 4.0%
Expected life 4-6 years 4-6 years 4-6 years
Expected dividends Nil Nil Nil
Deferred Share Unit Plan (DSUP)
Three months ended
September 30 2005 2004
---------------------------------------------------------------------
Weighted Weighted
average average
DSUs price DSUs price
---------------------------------------------------------------------
Outstanding at
beginning of period 362,030 $ 1.156 362,030 $ 0.592
Granted - - - -
Exercised - - - -
---------------------------------------------------------------------
Balance at end of
period 362,030 $ 0.341 362,030 $ 1.171
---------------------------------------------------------------------
---------------------------------------------------------------------
Compensation cost
(gain) loss
($ in millions) $ (0.3) $ 0.2
---------------------------------------------------------------------
---------------------------------------------------------------------
Nine months ended
September 30 2005 2004
---------------------------------------------------------------------
Weighted Weighted
average average
DSUs price DSUs price
---------------------------------------------------------------------
Outstanding at
beginning of period 362,030 $ 2.031 429,740 $ 2.182
Granted - - 3,153 0.773
Exercised - - (70,863) 2.279
---------------------------------------------------------------------
Balance at end of
period 362,030 $ 0.341 362,030 $ 1.171
---------------------------------------------------------------------
---------------------------------------------------------------------
Compensation cost
(gain) loss
($ in millions) $ (0.6) $ (0.4)
---------------------------------------------------------------------
---------------------------------------------------------------------
The Corporation has been granted creditor protection under the CCAA.
As there is no value to the common shares under the Plan (see Note
14), accordingly there is likely no value to the KESOP and the DSUP.
16. EMPLOYEE FUTURE BENEFITS
An expense was recorded pertaining to defined benefit pension and
other future benefit plans of the Corporation as follows:
Three months Nine months
(in millions) ended Sept 30 ended Sept 30
2005 2004 2005 2004
---------------------------------------------------------------------
Pension benefit plans $ 43 $ 38 $ 128 $ 116
Other benefit plans 28 34 84 89
---------------------------------------------------------------------
$ 71 $ 72 $ 212 $ 205
---------------------------------------------------------------------
---------------------------------------------------------------------
Note 1 provides further details with respect to the status of funding
and the funding proposal under the Plan.
17. EARNINGS PER COMMON SHARE
Interest and accretion on the convertible debentures is recorded on
the Consolidated Statement of Earnings (Loss) as interest on
long-term debt and debt subject to compromise. This amount, net of
tax, is added back to net earnings (loss) from continuing operations
and net earnings (loss) in order to calculate fully diluted earnings
(loss) from continuing operations and fully diluted earnings (loss)
per common share. Fully diluted earnings (loss) per common share is
calculated by applying the treasury stock method for the potential
exercise of stock options, and assuming the dilutive effect of the
conversion of all outstanding convertible debentures at the $4.50 per
share conversion price applicable to these debentures.
Three months ended Nine months ended
($ in millions) September 30 September 30
Restated Restated
(Note 3 (Note 3
and 9) and 9)
2005 2004 2005 2004
-------------------------------------------------------------------------
Basic net earnings
(loss) from
continuing
operations (13) 61 72 62
Convertible
debentures -
interest
expense net
of tax 1 2 4 5
-------------------------------------------------------------------------
Fully diluted net
earnings (loss)
from continuing
operations $ (12) $ 63 $ 76 $ 67
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic net
earnings (loss) (42) 58 47 63
Convertible
debentures -
interest
expense
net of tax 1 2 4 5
-------------------------------------------------------------------------
Fully diluted net
earnings (loss) $ (41) $ 60 $ 51 $ 68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
number of
common shares
outstanding -
basic 102,249,198 102,249,203 102,249,199 102,249,203
Incremental
number of
common shares
assumed to be
issued on the
exercise of
stock options - - 84,254 -
Common shares
issued on the
assumed
conversion of
convertible
debentures 20,000,000 20,000,000 20,000,000 20,000,000
-------------------------------------------------------------------------
Weighted average
number of
common shares
outstanding
- fully diluted 122,249,198 122,249,203 122,333,453 122,249,203
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options to purchase
common shares not
included in the
above
calculation(x) 5,001,680 5,176,021 4,751,680 5,1761,021
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(x) exercise prices were greater than the average market price of the
common shares during the periods
18. SEGMENTED INFORMATION
Financial information for Welland Pipe, Camrose Pipe and Stelpipe has
been excluded from the Manufactured Products reportable segment for
2005 and 2004 (Note 9).
Three months Nine months
(in millions) ended Sept 30 ended Sept 30
2005 2004 2005 2004
---------------------------------------------------------------------
Net sales - trade
Integrated Steel $ 584 $ 760 $ 2,054 $ 2,061
Mini-mill 118 144 369 385
Manufactured Products 54 74 175 216
Intersegment sales
Integrated Steel (24) (67) (108) (180)
Mini-mill (7) (14) (28) (35)
Manufactured Products - - - (1)
---------------------------------------------------------------------
$ 725 $ 897 $ 2,462 $ 2,446
---------------------------------------------------------------------
---------------------------------------------------------------------
Shipments - trade (thousands
of net tons)
Integrated Steel 845 962 2,700 3,032
Mini-mill 222 227 639 661
Manufactured Products 49 68 161 216
Intersegment shipments
Integrated Steel (34) (89) (143) (279)
Mini-mill (15) (25) (51) (66)
Manufactured Products - - - -
---------------------------------------------------------------------
1,067 1,143 3,306 3,564
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating earnings (loss)
Integrated Steel (34) 80 157 109
Mini-mill 7 19 20 50
Manufactured Products 1 5 (3) 15
---------------------------------------------------------------------
$ (26) $ 104 $ 174 $ 174
---------------------------------------------------------------------
---------------------------------------------------------------------
Assets
Integrated Steel 2,318 2,172 2,318 2,172
Mini-mill 268 277 268 277
Manufactured Products 119 144 119 144
---------------------------------------------------------------------
$ 2,705 $ 2,593 $ 2,705 $ 2,593
---------------------------------------------------------------------
---------------------------------------------------------------------
Amortization of capital assets
Integrated Steel 27 27 82 82
Mini-mill 4 3 9 7
Manufactured Products - 1 - 2
---------------------------------------------------------------------
$ 31 $ 31 $ 91 $ 91
---------------------------------------------------------------------
---------------------------------------------------------------------
Expenditures for capital assets
Integrated Steel 41 13 103 29
Mini-mill 4 2 13 4
Manufactured Products - - - -
---------------------------------------------------------------------
$ 45 $ 15 $ 116 $ 33
---------------------------------------------------------------------
---------------------------------------------------------------------
Geographic segments
Net sales
Canada 597 755 2,032 2,036
United States 98 111 323 322
Other 30 31 107 88
---------------------------------------------------------------------
$ 725 $ 897 $ 2,462 $ 2,446
---------------------------------------------------------------------
---------------------------------------------------------------------
Capital assets - net
Canada 1,029 1,017 1,029 1,017
United States 56 57 56 57
---------------------------------------------------------------------
$ 1,085 $ 1,074 $ 1,085 $ 1,074
---------------------------------------------------------------------
---------------------------------------------------------------------
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%SEDAR: 00001549E
