HAMILTON, ON, Nov. 9 /CNW/ - Stelco Inc. (TSX:STE) today reported EBITDA
of $64 million and earnings before tax of $13 million for the third quarter
ended September 30, 2006, representing an improvement in operating performance
over the second quarter of 2006. Deducted from EBITDA and earnings before tax
are unusual items of $11 million and $17 million respectively. Of these
unusual items $11 million arose from a "fresh start" reporting inventory
revaluation and $6 million related to employee voluntary retirement incentive
costs. After deducting a tax provision of $38 million, which was largely
attributable to non-cash adjustments from "fresh start" reporting, the net
loss for the quarter was $25 million.
Net sales revenue for the quarter ended September 30, 2006 was $660
million compared to $698 million for the quarter ending June 30, 2006. The
decrease in net sales was due to a 5% decline in shipments resulting primarily
from reduced demand from the automotive sector and steel service centres.
Average revenue per ton was unchanged as higher spot prices offset a lower
priced product mix. Costs for the quarter ended September 30, 2006 were
$596 million compared to $679 million for the quarter ending June 30, 2006.
Costs in the third quarter were lower by 12% primarily due to the 5% decline
in shipments and a 7% decrease in the average cost per ton. The decline in the
average cost per ton is largely attributed to the flow through of the balance
of the "fresh start" inventory adjustment of $11 million for the third
quarter, which was significantly less than the amount recorded in the second
quarter of $49 million.
As a result of the reorganization and the revaluation of Stelco's assets
and liabilities under "fresh start" reporting, consolidated financial and
other information reported in the third quarter of 2006 may not be comparable
with consolidated financial and other information reported in prior periods.
Accordingly, only selective financial information on sales and shipments are
commented on by way of comparison with periods prior to the reorganization on
March 31, 2006.
Net sales revenue for the quarter ended September 30, 2006 was $660
million compared to $559 million for the same period in 2005. The increase in
revenue was due to a 13% increase in shipments and a 4% increase in average
revenue per ton. The average revenue per ton was higher primarily due to the
strength of the market in the third quarter of 2006 relative to the same
quarter of 2005 reflected in the pricing of spot business.
Looking forward, demand for steel in the North American market has
softened. It is expected that the reduced demand will continue through the
fourth quarter and into the first quarter of 2007. As a result of the lower
demand, certain major steel producers in North America, including Stelco, have
elected to reduce production levels in order to better match supply with
demand. In addition, Stelco will take advantage of the current market slowdown
in order to complete two previously announced planned outages on its Hamilton
blast furnace and Lake Erie hot strip mill. The North American market
continues to support a significant level of imports, which may lead to lower
selling prices and lower market share for domestic producers. The Corporation
is continuing to monitor market conditions and will adjust production levels
as required.
Changing market dynamics associated with the softening in North American
steel demand make it difficult for the Corporation to predict revenue,
shipments, liquidity, and EDITDA for the fourth quarter of 2006. The
Corporation does not anticipate that it will achieve its previously announced
revenue, shipments, production and EDITDA estimates relating to the second
half of 2006. The Corporation is continuing to build new customer
relationships, negotiate contracts with existing customers, and lower overall
operating costs through productivity initiatives and by negotiating better
terms with suppliers.
About Stelco
Stelco is one of Canada's largest steel companies. It is focused on its
two Ontario-based integrated steel businesses located in Hamilton and in
Nanticoke. These operations produce high-quality value-added hot rolled, cold
rolled, coated sheet and bar products. To learn more about Stelco and its
businesses, please refer to our Web site at www.stelco.ca.
NON-GAAP MEASURES
This press release contains "Non-GAAP" measures such as "EBITDA".
"EBITDA" refers to operating earnings (losses) before interest, income taxes,
amortization and other non operating income and expenses. Information
concerning EBITDA has been included in this press release because management
considers it to be, and uses it as, a meaningful indicator for assessing the
performance of the Corporation. EBITDA does not represent cash generated from
operations as defined by Canadian GAAP and it is not necessarily indicative of
cash available to fund cash needs. Non-Canadian GAAP earnings measures (such
as EBITDA) do not have any standardized meaning and therefore the
Corporation's use of EBITDA measures may not be comparable to measures used by
other companies.
The following table shows the reconciliation of EDITDA, as used in this
media release, to earnings before income tax, which is a GAAP financial
measure:
<<
($ millions)
----------------------------------------------------------
EBITDA $ 64
Amortization 25
Workforce reduction costs 6
Foreign exchange loss on long-term debt 1
Interest expense 19
----------------------------------------------------------
Earnings before income tax $ 13
>>
CAUTION REGARDING FORWARD-LOOKING INFORMATION
This press release contains "forward-looking information" that is based
on Stelco's expectations, estimates and projections as of the date of this
press release or as of the date which such information is identified to be
given. This forward-looking information includes, among other things, factors
relating to the business, financial position, operations and prospects of
Stelco, including: Stelco's strategies and plans to reduce costs and the
anticipated outcome of such strategies and plans; anticipated productivity
levels and profitability; labour matters related to Stelco's predominantly
unionized workforce; pension matters; consolidation in the steel industry;
Stelco's energy and raw material costs and the availability of such materials;
the volatility of selling prices for steel; international trade matters,
including increases in steel imports into Canada; employee matters, including
staffing levels, the retention of the skills and knowledge of Stelco's
employees and the ability to attract and retain new employees; changes to
environmental laws and regulations concerned with, among other things,
emissions into the air, discharges to water or land, noise control and the
generation, handling, storage, transportation and disposal of toxic
substances; new technological developments and Stelco's ability to make
capital expenditures to maintain and enhance its technological ability;
development of new products; planned capital expenditures; and currency
fluctuations in the US dollar and its impact on steel pricing, and costs.
Often, but not always, forward-looking information can be identified by the
use of words and phrases such as "plans", "expects" or "does not expect", "is
expected", "budget", "scheduled", "estimates", "forecasts", "intends",
"anticipates" or "does not anticipate", or "believes", or variations of such
words and phrases or states that certain actions, events or results "may",
"could", "would", "might" or "will" be taken, occur or be achieved.
Forward-looking information involves known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of Stelco to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking information. Actual results, performance and achievements are
likely to differ, and may differ materially, from those expressed or implied
by the forward-looking information contained herein. Such forward-looking
information is based on a number of assumptions which may prove to be
incorrect, including, but not limited to: exchange rates, energy and other
anticipated and unanticipated costs; pension contributions and expenses; the
supply and demand for, deliveries of, and the level and volatility of prices
of, steel and raw materials; the continued availability of financing on
appropriate terms; market competition; the impact on Stelco of various
environmental regulations and initiatives; and Stelco's ongoing relations with
its employees and staffing levels. While Stelco anticipates that subsequent
events and developments may cause Stelco's views to change, Stelco
specifically disclaims any obligation to update this forward-looking
information. This forward-looking information should not be relied upon as
representing Stelco's views as of any date subsequent to the date of this
press release.
STELCO INC.
QUARTER 3, 2006
REPORT TO THE SHAREHOLDERS
Message to Shareholders
We are pleased to report improving financial results for Stelco Inc. for
the third quarter 2006. Implementation of cost saving initiatives in the
second and third quarters are beginning to show positive results leading to a
third quarter EBITDA(x) of $64 million and earnings before income tax of
$13 million. Before the unusual item relating to "fresh start" reporting
EBITDA(x) would have increased to $75 million for the three months ended
September 30, 2006.
The focus since exiting from the CCAA process on March 31, 2006 has been
on a number of key areas:
<<
- Implementation of productivity improvement initiatives resulted in the
reduction of the labour force. Through this initiative voluntary
programs were offered to both hourly and salary employees providing
for their early retirement from the corporation. A total of 280 hourly
and 282 salary employees elected to participate in these plans. The
labour force has been reduced from 4,954 on March 31, 2006 to 4,363 on
September 30, 2006, largely due to these voluntary retirement
programs. The labour force reduction will result in annualized wage
savings of approximately $44 million and has not negatively affected
productivity or the quality of our products or services.
- Reducing production costs by improving work flow in both plants, and
through the implementation of a strategic purchasing program to reduce
the cost of raw materials, energy, supplies and third party services.
- Optimizing capital expenditures by selecting those projects that have
a short pay back or that offer the Corporation a unique position in
the market.
>>
As we enter the fourth quarter, demand for steel in the North American
market has softened. When coupled with our two previously announced planned
outages in the fourth quarter, a negative impact on fourth quarter results is
likely. The Corporation is closely monitoring market conditions and will
adjust production levels as required. However, Stelco will endeavour to pursue
the initiatives listed above and believes that this will lead to increased
volumes, revenue growth, lower costs and improved productivity in order to
ensure long term viability and profitability.
We would like to thank our employees, suppliers and customers for their
continued support during this period of transition.
<<
Rodney B. Mott C. Pratt
President and Chief Executive Officer Chairman of the Board
(x) Please refer to the note regarding Non-GAAP financial measures in
"Financial and Operational Summary" in the accompanying management
discussion and analysis.
As a result of the Reorganization and the revaluation of Stelco's
assets and liabilities under "fresh start" reporting, certain
consolidated financial and other information regarding the Successor
may not be comparable with consolidated financial and other
information regarding the Predecessor.
>>
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis (this "MD&A") is in respect of
the interim unaudited consolidated financial statements and accompanying notes
(the "Consolidated Financial Statements") of Stelco Inc. ("Stelco" or the
"Corporation") for the quarter ended September 30, 2006. The purpose of
Stelco's MD&A is to provide commentary on the Corporation's financial
condition and future prospects and to assist security holders and others to
understand the Corporation and the key factors underlying its financial
results. This discussion of the Corporation's business may include
forward-looking information that is subject to risks and uncertainties that
may cause actual results to differ materially. This MD&A should be read in
conjunction with the Consolidated Financial Statements, the interim reports
for the quarters ended March 31 and June 30, 2006, the 2005 Annual Report and
the 2005 Annual Information Form.
This document has been reviewed by the Audit Committee of Stelco's Board
of Directors and contains information current as of November 9, 2006. Events
occurring after that date could render the information contained herein
inaccurate or misleading in a material respect.
BUSINESS DESCRIPTION
Established in 1910, Stelco is one of Canada's largest steel producers.
The Corporation operates two integrated steel plants in Ontario, Canada which
produce a variety of steel products for customers in the automotive, steel
service centre, appliance, energy, construction and pipe and tube industries
within North America. In addition, through its ownership interests in iron ore
mining properties and related supply agreements, Stelco has secured
approximately 90% of its requirements for iron ore. Stelco operates its
business through partnerships, subsidiaries and joint ventures.
<<
FINANCIAL AND OPERATIONAL SUMMARY
Stelco Inc.
($ in millions, except as indicated(x)) (unaudited)
-------------------------------------------------------------------------
Six Three Nine
Months Months Months
Three Months Ended Ended Ended Ended
Sept. 30 June 30 Sept. 30 Sept. 30 March 31 Sept. 30
2006 2006 2005(1) 2006(2) 2006(2) 2005(1)
-------------------------------------------------------------------------
(Pre- (Pre- (Pre-
(Successor) decessor) (Successor) decessor) decessor)
Net
Sales $ 660 $ 698 $ 559 $ 1,358 $ 674 $ 1,945
Costs 596 679 567 1,275 695 1,731
-------------------------------------------------------------------------
EBITDA(3) 64 19 (8) 83 (21) 214
Amortization
of property,
plant and
equipment 25 28 27 53 27 81
Amortization
of intangible
assets - 1 1 1 1 3
-------------------------------------------------------------------------
Operating
earnings
(loss)
before the
following : 39 (10) (36) 29 (49) 130
Employee
future
benefits -
workforce
reduction
costs
(Note 13) 6 41 - 47 - -
Foreign
exchange
(gain)
loss on
long-term
debt
(Note 9) 1 (13) - (12) - -
Gain on
sale of
plate mill
assets - - - - - (20)
Reorgan-
ization
items - - 13 - 21 47
Financial
and other
expense
Interest
on long-
term debt
and debt
subject
to
com-
promise 10 9 10 19 10 31
Other
interest
- net 9 8 3 17 5 8
-------------------------------------------------------------------------
Earnings
(loss) before
income tax
from
continuing
operations 13 (55) (62) (42) (85) 64
Income tax
expense
(recovery)
(Note 7)
Current 5 2 (13) 7 7 17
Future 33 (26) (31) 7 (13) (11)
-------------------------------------------------------------------------
Net earnings
(loss) from
continuing
operations (25) (31) (18) (56) (79) 58
Net earnings
(loss) from
discontinued
operations
(Note 1) - - (24) - (43) (11)
-------------------------------------------------------------------------
Net earnings
(loss) $ (25) $ (31) $ (42) $ (56) $ (122) $ 47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average
revenue
per
ton (x)$ 719 $ 719 (x)$ 690 (x)$ 719 (x)$ 692 (x)$ 761
Cost per
ton (x)$ 649 $ 699 (x)$ 700 (x)$ 675 (x)$ 714 (x)$ 677
Semi-
finished
steel
production
(thousands
of net
tons) 912 1,108 875 2,020 997 2,949
Shipments
(thousands
of net
tons) 918 971 810 1,889 974 2,557
-------------------------------------------------------------------------
(1) Restated to disclose the activities of the Predecessor's continuing
and discontinued operations separately. See "Reorganization and
Adoption of "Fresh Start" Reporting".
(2) The six-month period ended September 30, 2006 is not comparable with
three months ended March 31, 2006 and has therefore been reported
separately.
(3) Non-GAAP Financial Measures
The financial information contained in this MD&A and in the
accompanying message to shareholders is presented in accordance with
Canadian GAAP. Reference is also made to "EBITDA", which is a non-
Canadian GAAP measure. "EBITDA" refers to operating earnings (losses)
before interest, income taxes, amortization and other non-operating
income and expenses such as workforce reduction costs, foreign
exchange gains and losses on long-term debt and gains and losses on
the sale of assets and, in the case of the Predecessor, also before
restructuring costs and asset write-downs. Information concerning
EBITDA has been included in this MD&A because management considers it
to be, and uses it as, a meaningful indicator for assessing the
operating performance of the Corporation. EBITDA does not represent
cash generated from operations as defined by Canadian GAAP and it is
not necessarily indicative of cash available to fund cash needs. Non-
Canadian GAAP earnings measures (such as EBITDA) do not have any
standardized meaning and therefore the Corporation's use of EBITDA
measures may not be comparable to measures used by other companies. A
reconciliation to net earnings (loss), which is a Canadian GAAP
measure, is presented above in the Financial and Operational Summary.
>>
All note references in this document are to the Consolidated Financial
Statements.
Reorganization and Adoption of "Fresh Start" Reporting
Stelco and certain related entities filed for protection under the
Companies' Creditors Arrangement Act (the "CCAA") on January 29, 2004. The
Corporation emerged from CCAA protection at the end of the day on March 31,
2006 upon the implementation of Stelco's third amended and restated plan of
arrangement and reorganization (the "CCAA Plan"). Also on March 31, 2006, a
plan of arrangement involving Stelco was implemented under the Canada Business
Corporations Act (the "CBCA Plan") pursuant to which Stelco's business was
reorganized and specific assets and liabilities of Stelco were transferred
into nine separate limited partnerships. Stelco's emergence from CCAA
protection and the implementation of the CCAA Plan and the CBCA Plan is
referred to in this MD&A as the "Reorganization". Further information
regarding the Reorganization is set out in Note 1 to the Consolidated
Financial Statements.
When used in this MD&A, the term "Predecessor" refers to Stelco and its
related entities prior to the Reorganization and the term "Successor" refers
to Stelco and its related entities following the Reorganization.
In connection with the Reorganization, Stelco adopted "fresh start"
reporting on March 31, 2006 and, accordingly, has completed a comprehensive
revaluation of its assets and liabilities. See "Changes in Accounting Policy"
in this MD&A and Notes 2 and 4 to the Consolidated Financial Statements for
further information.
As a result of the Reorganization and the revaluation of Stelco's assets
and liabilities under "fresh start" reporting, certain consolidated financial
and other information regarding the Successor may not be comparable with
consolidated financial and other information regarding the Predecessor.
Accordingly, selected comparative information in this MD&A regarding sales and
shipments has been provided where such information was not affected by the
Reorganization or the adoption of "fresh start" reporting.
FINANCIAL AND OPERATING RESULTS
Overview
Earnings before income tax for the three months ended September 30, 2006
were $13 million, compared to a loss before income tax of $55 million for the
second quarter of 2006. Deducted from pre-tax earnings for the third quarter
of 2006 are unusual items totalling $17 million. Of this amount, $11 million
arose from a "fresh start" reporting inventory revaluation and $6 million
relates to employee voluntary retirement incentive costs. The pre-tax loss for
the second quarter ended June 30, 2006 includes unusual items totalling
$90 million. Of this amount, $49 million arose from a "fresh start" reporting
inventory revaluation, $27 million largely related to employee voluntary
retirement incentive costs and $14 million related to an employee future
benefit curtailment expense.
Net Sales and Costs
Quarter ended September 30, 2006 compared to quarter ended June 30, 2006
Net sales for the quarter ended September 30, 2006 were 5% lower than the
second quarter of 2006 due to a decline in shipments primarily resulting from
higher levels of inventory at our customers, particularly steel service
centres, and reduced consumption by the automotive sector. The average revenue
per ton was unchanged as a lower priced product mix offset higher spot prices.
Costs in the third quarter were lower by 12% primarily due to a 5%
decline in shipments and a 7% decrease in the average cost per ton. The
decline in the average cost per ton is largely attributed to the flow through
of the balance of the fresh start inventory adjustment which was significantly
less than the amount recorded in the second quarter. The average cost per ton
in the quarter was further impacted by lower cost inventories produced in the
second quarter, a lower value product mix, the impact of the staff reduction
initiatives and a drop in natural gas pricing partly offset by operating
inefficiencies (largely at the Hamilton blast furnace and Lake Erie
steelmaking), payments for productivity and profitability improvements and
increases in the cost of zinc and reagents.
Amortization
Amortization expense for the third quarter ended September 30, 2006 is
$4 million lower than the second quarter of 2006, primarily due to the impact
of the finalization of "fresh start" reporting on the values of plant,
equipment and intangible assets as of March 31, 2006 and an extension of their
useful lives. (see "Critical Accounting Assumptions and Estimates - Basis of
Valuation").
Employee Future Benefits
In the third quarter of 2006, a Transition Assistance Program ("TAP")
provided incentives for early retirement to Hamilton Steel and Lake Erie Steel
bargaining unit employees, which when combined with other termination
expenses, resulted in a workforce reduction cost of $6 million.
In the second quarter of 2006, a total of $41 million in workforce
reduction costs were expensed. The Salaried Transition Assistance Program
("STAP") resulted in a voluntary retirement incentive cost of $19 million,
other terminations resulted in severances costs of $8 million and, a net
curtailment expense of $14 million relating to pensions and employees future
benefits was recognized because of the significant reduction of the salary
workforce (see Note 13 to the Consolidated Financial Statements).
Financial Expense and Foreign Exchange Gains and Losses
Interest expense totaled $19 million for the third quarter of 2006,
compared to interest expense of $17 million for the second quarter of 2006.
The difference is due to an increase in both the interest rates and average
levels of borrowing. Included in interest expense for the third quarter of
2006 is approximately $1 million relating to borrowings under the Secured
Revolving Term Loan (see "Liquidity and Capital Resources - Financing
Arrangements") which is held indirectly by a significant shareholder ($1
million in the second quarter of 2006).
The Corporation's Floating Rate Notes (see Note 9 to the Consolidated
Financial Statements) are denominated in US dollars. A $1 million foreign
exchange loss recorded in the third quarter of 2006 due to the revaluation of
the notes using the September 30, 2006 US dollar exchange rate of $1.1177,
compares to a $13 million foreign exchange gain recorded in the second quarter
of 2006, when the US dollar exchange rate was $1.1162 ($1.1699 upon issue).
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.
The finalization of the fresh start reporting increased tax expense
recorded for the three months ended September 30, 2006 by approximately $36
million comprised of an increase in the valuation allowance of $28 million and
the income tax rate reduction adjustment of $8 million.
The Corporation had certain future tax assets which existed at March 31,
2006 but were not recognized on the Consolidated Statement of Financial
Position at that date. A portion of these future tax assets were recognized in
the third quarter of 2006 and were applied to reduce unamortized intangible
assets.
Other Financial Comparisons
As a result of the Reorganization and the revaluation of Stelco's assets
and liabilities under "fresh start" reporting, certain consolidated financial
and other information regarding the Successor may not be comparable with
consolidated financial and other information regarding the Predecessor.
Accordingly, comparative information in this MD&A from Successor periods to
Predecessor periods and for periods combining Successor and Predecessor
information has been limited to sales and shipments.
Quarter ended September 30, 2006 compared to quarter ended September 30,
2005
Net sales for the quarter ended September 30, 2006 were 18% higher than
the same quarter of 2005 mainly due to a 13% increase in shipments and a 4%
increase in average revenue per ton. The average revenue per ton was higher
primarily due to the strength of the market in the third quarter of 2006
relative to the same quarter of 2005 reflected in the pricing of spot business
partly offset by lower contract pricing, a shift in mix to lower revenue
products and a higher Canadian dollar in 2006 compared to 2005.
Nine months ended September 30, 2006 compared to nine months ended
September 30, 2005
Net sales for the first nine months of the year were 4% higher than the
same period in 2005. Steel shipments were 12% higher due to the strength of
demand in the market, while average revenue per ton was down 7%. A shift in
mix to lower revenue products and a stronger Canadian dollar contributed to
the lower average revenue per ton.
SUMMARY OF QUARTERLY RESULTS
The following table reflects the Corporation's quarterly financial
performance over the last eight quarters. The Corporation does not typically
experience significant seasonal fluctuations in revenues.
As a result of the Reorganization and the revaluation of Stelco's assets
and liabilities under fresh start reporting, certain consolidated financial
and other information regarding the Successor may not be comparable with
consolidated financial and other information regarding the Predecessor.
<<
Stelco Inc.
-------------------------------------------------------------------------
(in millions, 2006 2006 2006 2005 2005 2005 2005 2004
except as (1) (1) (1) (1)
indicated(x)) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
(Successor) (Predecessor)
-------------------------------------------------------------------------
Net Sales $ 660 698 674 608 559 658 728 678
EBITDA(2) 64 19 (21) (31) (8) 87 135 78
Operating
earnings
(loss) $ 39 (10) (49) (58) (36) 58 108 53
Earnings (loss)
before income
tax from
continuing
Operations $ 13 (55) (85) (103) (62) 53 73 23
Net earnings
(loss) from
continuing
operations $ (25) (31) (79) (67) (18) 35 41 21
Net earnings
(loss) $ (25) (31) (122) (120) (42) 40 49 1
Earnings (loss)
from
continuing
operations per
common
share(3)
Basic (x)$(0.93) (1.14) (0.77) (0.66) (0.18) 0.34 0.40 0.21
Fully
diluted (x)$(0.93) (1.14) (0.77) (0.66) (0.18) 0.30 0.35 0.18
Net earnings
(loss) per
common
share(3)
Basic (x)$(0.93) (1.14) (1.19) (1.17) (0.41) 0.39 0.48 0.01
Fully
diluted (x)$(0.93) (1.14) (1.19) (1.17) (0.41) 0.34 0.41 0.01
Average
revenue per
ton (x)$ 719 719 692 685 690 783 803 770
Cost per ton (x)$ 649 699 714 720 700 680 654 681
Semi-finished
steel
production
(thousands
of net tons) 912 1,108 997 982 875 1,054 1,020 1,115
Shipments
(thousands
of net tons) 918 971 974 888 810 840 907 881
-------------------------------------------------------------------------
(1) Restated to disclose the activities of the Predecessor's continuing
and discontinued operations separately.
(2) EBITDA is a non-GAAP financial measure. See "Financial and
Operational Summary - Non GAAP Financial Measures" (page 3).
(3) Earnings (loss) per common share is calculated using the weighted
average number of common shares outstanding during the quarter.
>>
LIQUIDITY AND CAPITAL RESOURCES
The liquidity and capital resources of the Corporation are dependent upon
a number of factors, including, without limitation, market and economic
conditions and the impact of these conditions on the price of steel products,
raw material costs, the ability to fund critical capital projects, pension
issues and labour negotiations and disputes.
The Corporation has a significant requirement of working capital related
primarily to inventories due to the lead time of acquiring raw materials, the
quantities of raw materials that are required to produce semi-finished steel
and the amount of time required to process this semi-finished steel into a
finished product. This working capital requirement is characteristic of many
companies within the steel industry.
With the recapitalization of the Corporation upon emergence from CCAA,
interest is being serviced in accordance with the terms and conditions of the
related debt obligations.
<<
Cash Flow Summary
-------------------------------------------------------------------------
Six Three Nine
Months Months Months
Three Months Ended Ended Ended Ended
(in millions) Sept. 30 Sept. 30 Sept. 30 March 31 Sept. 30
2006 2005(1) 2006(2) 2006(2) 2005(1)
-------------------------------------------------------------------------
(Pre- (Pre- (Pre-
(Successor) decessor) (Successor) decessor) decessor)
Cash provided by
(used for)
Continuing
operations adjusted
for items not
affecting cash $ 36 $ - $ 58 $ (41) $ 195
Changes in operating
elements of working
capital (10) (74) (23) (2) (118)
-------------------------------------------------------------------------
Operating activities 26 (74) 35 (43) 77
-------------------------------------------------------------------------
Investment activities (8) (37) (49) 58 (76)
Financing activities (23) 110 (9) (21) (30)
Discontinued
operations (net) - 11 - - 22
-------------------------------------------------------------------------
Net change in cash
position $ (5) $ 10 $ (23) $ (6) $ (7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Restated to disclose the activities of the Predecessor's continuing
and discontinued operations separately.
(2) The six month period ended September 30, 2006 is not comparable with
three months ended March 31,2006 and has therefore been reported
separately.
>>
Due to the non-comparable nature of the financial results between the
Successor and the Predecessor (see "Reorganization and Adoption of "fresh
start" reporting" in this MD&A), the following commentary pertains to the
results of the Successor only.
Cash provided by (used for) operating activities
Cash from continuing operations before changes in operating elements of
working capital was $58 million for six months ended September 30, 2006 and
was largely attributable to a lower net loss in the third quarter of 2006.
Cash used for the operating elements of working capital in the six months
ended September 30, 2006 of $23 million was the result of higher inventory
after excluding "fresh start" adjustments, an increase in prepaid expenses, a
decrease in accounts payable and accrued liabilities, and lower taxes payable
offset partly by lower accounts receivables. Prepaid expense increased
principally due to vendor deposits and prepaid insurance. Lower activity
levels during the third quarter resulted in decreased accounts payable and
accrued liabilities. Taxes payable declined primarily due to the final
payments for 2005 and interim instalments for 2006 income tax for certain
subsidiaries. Lower accounts receivable reflected decreased sales activity and
improved collection.
Cash provided by (used for) investment activities
Capital spending amounted to $21 million during the third quarter of
2006. For the six months ended September 30, 2006 capital spending totalled
$62 million. Spending during these periods was focused primarily on the
completion of the Phase II hot strip mill upgrade at Lake Erie Steel and at
the Corporation's mining interests. Partially offsetting these cash
requirements were $13 million of final proceeds received from the sale of
non-core assets.
Cash provided by (used for) financing activities
The Corporation reduced borrowings by $11 million during the third
quarter of 2006. In addition, $12 million of long-term debt was repaid
relating primarily to a regularly scheduled debt repayment at one of the
Corporation's wholly owned subsidiaries. For the six months ended
September 30, 2006, the previously mentioned debt repayment was partially
offset by $5 million of cash provided by the issuance of common shares.
Liquidity
The Corporation's liquidity and capital resources position is summarized
as follows:
<<
-------------------------------------------------------------------------
At At At At At
(in millions) September June March September December
30 2006 30 2006 31 2006 30 2005 31 2005
-------------------------------------------------------------------------
(Pre- (Pre-
(Successor)(Successor)(Successor) decessor) decessor)
Cash, cash
equivalents and
restricted cash 13 18 36 36 42
Available lines of
credit(1) 836(2) 881(2) 859(2) 403(3) 403(3)
Lines of credit
drawn down(4) (425) (436) (427) (198) (191)
-------------------------------------------------------------------------
Net liquidity 424 463 468 241 254
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) After letters of credit usage, and subject to the availability under
their governing agreements.
(2) Includes the amount available from the $600 ABL facility and the $375
secured revolving term loan. See "Financing Arrangements" below.
(3) Includes the former $350 million credit facility and the former
$75 million debtor-in-possession short-term credit facility.
(4) In accordance with Canadian GAAP, the borrowings of the Successor are
classified predominantly as long-term liabilities on the Consolidated
Statement of Financial Position. See Note 8 to the Consolidated
Financial Statements for additional information.
>>
Financing Arrangements
Asset Based Loan Facility
On March 31, 2006, the $75 million debtor-in-possession short-term credit
facility and the $350 million short-term credit facility were replaced by a
long-term asset based loan facility (the "ABL facility"). The ABL facility
bears interest at the Canadian bankers' acceptance rate + 2.25%, prime rate +
0.5%, the US base rate + 0.5% or LIBOR + 2.25%, depending on the nature of the
loan instrument incurred. The ABL facility is available until March 31, 2008
and is secured by a first priority security interest in the eligible inventory
and accounts receivable of Stelco. The ABL facility is additionally secured by
a second priority security interest on all other property and assets of the
Corporation, limited to $300 million, and a fourth priority security interest
for the balance. The available amount of the ABL facility is dependent upon
the value of the underlying collateral and reserves, but will not exceed
$600 million. At September 30, 2006 the available amount of the ABL was $461
million and the amount drawn on this facility was $390 million.
Secured Revolving Term Loan
On March 31, 2006, as part of the CCAA Plan, the Corporation entered into
a secured revolving term loan facility with a wholly owned subsidiary of
Tricap Management Limited (a significant shareholder of the Corporation) in
the amount of $375 million for a term of seven years. The amount drawn on this
facility at September 30, 2006 was $35 million. The facility is revolving for
three years, after which time the facility will cease to revolve and any
amount outstanding on that date will be repayable in full at the end of the
seventh year. The secured revolving term loan currently bears interest at
bankers' acceptance rate plus 6.75%. The secured revolving term loan is
secured by a second priority interest on the working capital assets of Stelco,
except project financings, and a first priority security interest in the
property, plant and equipment of Stelco. The secured revolving term loan is
also secured by all the tangible and non-tangible assets of certain
subsidiaries of Stelco and a pledge of and security interest in all of the
outstanding shares of interests in the subsidiaries, partnerships and joint
ventures of Stelco.
Floating Rate Notes
As part of the consideration in settlement of the affected claims of the
Predecessor, affected creditors received floating rate notes ("FRN's") equal
to the US dollar equivalent of $275 million Canadian dollars ($235 million US
dollars). The FRN's mature on March 31, 2016. Interest on the FRN's is payable
semi-annually. At Stelco's option, the FRN's will bear an interest rate of
LIBOR plus 5.50% if paid in cash and LIBOR plus 8.50% if paid in new FRN's or
if interest payments are deferred and accrued in accordance with the terms of
the FRN's. For periods after March 31, 2008, the interest rate will be
calculated in the same manner as noted above, with the exception that under
certain conditions, the interest rate will be subject to a reduction of 0.50%.
For periods after March 31, 2011, interest is payable in cash only. The FRN's
are callable at 110% of face value until March 31, 2008; then callable at 105%
of face value until March 31, 2009; then at 102.5% of face value until
March 31, 2010; and at par thereafter, in each case payable in cash. The FRN's
are secured by a security interest in the assets of Stelco, subordinated and
postponed to the security granted to the ABL facility and the secured
revolving term loan in all respects including rights to payment and
enforcement until both the ABL facility and secured revolving term loan are
repaid in full. For further details see Note 9 to the Consolidated Financial
Statements.
Province Note
In accordance with the Pension Agreement (see Note 13 to the Consolidated
Financial Statements), the Province of Ontario provided Stelco with $150
million on March 31, 2006 in exchange for a note payable (the "Province Note")
and warrants to purchase 851,100 common shares of Stelco. The Province Note is
unsecured and is repayable on December 31, 2015, at Stelco's option, in cash
or by delivering an equivalent value in Stelco common shares. The Province
Note is also subject to a 75% discount if the solvency deficiencies in
Stelco's four main pension plans are eliminated on or before the maturity
date. At this time, there is no assurance that the Corporation will receive
the 75% discount. The Province Note bears an interest rate of 1% per annum,
payable semi-annually in cash or, at Stelco's option, by delivering Stelco
common shares. For further details see Note 9 to the Consolidated Financial
Statements.
Liquidity Risks
In addition to those risks discussed below under risk factors, some of
the provisions contained in the Corporation's financing arrangements provide
for the escalation of lending rates in certain circumstances which, if
triggered, could impact the liquidity of the Corporation depending upon the
amount outstanding under the particular facility. These agreements also
contain provisions (along with the Corporation's long-term debt agreements),
which restrict the Corporation's ability to issue additional debt.
Since September 30, 2006, there has been a decrease in the liquidity of
the Corporation as a result of declining sales and its effect on the
underlying collateral. As of October 31, 2006 the net liquidity of the
Corporation declined to $350 million.
Contractual Obligations
The following is a summary of the principal obligations of the
Corporation at September 30, 2006:
<<
(greater
2007- 2009- than)
(in millions) Total 2006 2008 2010 2010
-------------------------------------------------------------------------
Long-term debt(1) $ 436 $ 3 $ 20 $ - $ 413
Revolving term
loans(2) 425 - 390 35 -
Capital leases 7 1 6 - -
Operating leases(3) 16 2 10 3 1
Purchase obligations
and other
commitments(4) 899 104 469 265 61
-------------------------------------------------------------------------
Total $ 1,783 $ 110 $ 895 $ 303 $ 475
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) See Note 9 to the Consolidated Financial Statements for more
information.
(2) See Note 8 to the Consolidated Financial Statements for more
information.
(3) Principally related to mobile equipment.
(4) Principally related to coal purchases, raw material transportation
services, information technology services, oxygen and power
requirements.
>>
Capital Resources
The cash position, cash flow from operations and available credit
facilities are expected to enable the corporation to satisfy its anticipated
operating and capital cash requirements which includes the fourth quarter 2006
outages at the Hamilton Steel blast furnace and the Lake Erie Steel hot strip
mill.
OFF-BALANCE SHEET ARRANGEMENTS
Other than the operating leases referred to above, the Corporation does
not engage in off balance sheet accounting to structure any of its financial
arrangements and had no off-balance sheet arrangements at September 30, 2006.
FINANCIAL INSTRUMENTS
The Corporation did not utilize any third party financial instruments to
mitigate interest rate or foreign exchange risk in the third quarter of 2006
and therefore no such financial instruments were outstanding at September 30,
2006.
<<
Outstanding Share Data
Common Shares
-------------------------------------------------------------------------
(in millions, At At At At
except share September 30, March 31, September 30, December 31,
numbers) 2006 2006 2005 2005
-------------------------------------------------------------------------
(Successor) (Successor) (Predecessor)(Predecessor)
New Common Shares 27,103,921 26,100,000 - -
Convertible Series A - - 101,339,415 100,735,965
Convertible Series B - - 909,783 1,513,233
-------------------------------------------------------------------------
Total number of
shares 27,103,921 26,100,000 102,249,198 102,249,198
-------------------------------------------------------------------------
Total Capital Stock $ 149 $ 144 $ 781 $ 781
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Series A and B Common Shares
The Series A and B common shares of the Predecessor were delisted from
the Toronto Stock Exchange as at the close of trading on March 10, 2006. These
shares were eliminated on the implementation of the CCAA Plan with no value
being attributed to them.
New Common Shares
The Corporation issued 26,100,000 new common shares upon emergence from
CCAA with a value of $5.50 per share. On April 2, 2006, the Chief Executive
Officer purchased 1,000,000 newly issued common shares for total consideration
of $5.5 million, bringing the total number of common shares outstanding as of
that date to 27,100,000. As a result of the exercise of warrants in the third
quarter of 2006, referred to below, there were 27,103,921 common shares
outstanding at September 30, 2006.
Warrants
Upon emergence from CCAA, the Corporation issued a total of 2,269,600
warrants. Each warrant entitles the holder to purchase one common share at an
exercise price of $11.00. The total number of common shares issueable upon the
exercise of all outstanding warrants represents approximately 7% of the common
shares outstanding upon the exercise of warrants on a diluted basis. The
warrants have a term of seven years and are exercisable at any time after June
26, 2006 up to their expiration on March 31, 2013. See Note 11 to the
Consolidated Financial Statements for additional information. A total of 3,921
warrants were exercised in the third quarter of 2006.
Incentive Stock Option Plan
Effective April 1, 2006, the Board of Directors approved an Incentive
Stock Option Plan (the "ISOP"). The total number of options available under
the ISOP is 2,610,000, of which 1,944,000 were issued at an exercise price of
$5.50 per common share. The options vest semi-annually over a four-year period
from the date of the grant (the "Grant Date") in eight equal instalments,
subject to acceleration under certain circumstances. The options expire 10
years after the Grant Date. In accordance with the provisions of the ISOP, the
exercise price of options granted thereunder is required to be the market
value, as defined in the ISOP, of the common shares on the Grant Date. During
the second quarter of 2006, 200,000 options were forfeited and 150,000
additional options were granted at an exercise price of $17.75. During the
third quarter of 2006 no options were exercised, granted or forfeited. See
Note 12 to the Consolidated Financial Statements for more information.
CHANGES IN ACCOUNTING POLICY
Accounting Changes Effective in 2006
Comprehensive Revaluation of Assets and Liabilities
Upon emergence from CCAA on March 31, 2006, there was a substantial
realignment of the equity and non-equity interests in the Corporation. The
Corporation was required, under Canadian GAAP, to adopt "fresh start"
reporting in accordance with the Canadian Institute of Chartered Accountants
("CICA") Handbook section 1625 - Comprehensive Revaluation of Assets and
Liabilities. The Corporation's assets and liabilities on the Consolidated
Statement of Financial Position as at March 31, 2006 were reported at their
estimated fair value with the exception of future income taxes, which have
been reported in accordance with CICA Handbook Section 3465 - Income Taxes
(Note 7) and pension and other post-employment benefits, which have been
reported in accordance with CICA Handbook Section 3461 - Employee Future
Benefits (see Note 13 to the Consolidated Financial Statements). The
Corporation finalized the fair values of the assets and liabilities of the
Successor in the third quarter of 2006. Accordingly, changes to the initial
estimated fair value adjustment have been reflected in the March 31, 2006
Consolidated Statement of Financial Position (see Note 4 to the Consolidated
Financial Statements).
Accounting Changes Effective in 2007
Financial Instruments
During 2005, the CICA issued three new Handbook Sections: Section 3855,
"Financial Instruments - Recognition and Measurement", Section 3865, "Hedges"
and Section 1530, "Comprehensive Income". These standards provide guidance on
the recognition, measurement and classification of financial assets and
financial liabilities. The standards also establish new accounting
requirements for hedges. These standards also provide guidance for reporting
items in other comprehensive income, which will be included on the
Consolidated Statement of Financial Position as a separate component of
shareholders' equity. These accounting standards are to be applied no later
than the fiscal years beginning on or after October 1, 2006. The Corporation
is currently evaluating the potential impact of these new standards on our
Consolidated Financial Statements for 2007.
CRITICAL ACCOUNTING ASSUMPTIONS AND ESTIMATES
The Corporation's Consolidated Financial Statements are prepared in
accordance with Canadian GAAP as disclosed in Note 3 thereto.
In preparing the Consolidated Financial Statements, management is
required to make certain assumptions and estimates. Choosing one assumption or
estimate from a range of possibilities can materially impact the amounts
reported on the Statement of Earnings (Loss) or the Statement of Financial
Position. Management reviews accounting assumptions and estimates regularly in
light of past experience and current conditions or changes in Canadian GAAP,
and utilizes outside consultants as necessary to arrive at appropriate
assumptions and estimates to be used in the preparation of the Consolidated
Financial Statements. The Audit Committee of the Board of Directors reviews
the significant assumptions and estimates.
Management considers assumptions and estimates relating to the following
matters to be the most critical:
<<
- valuation of accounts receivable;
- carrying value of long-lived assets (property, plant and equipment);
- employee future benefits;
- income taxes;
- inventory valuation;
- environmental matters; and
- basis of valuation.
>>
Unless indicated otherwise, all adjustments related to the items below
are reflected in Costs in the Consolidated Statement of Earnings (Loss).
Valuation of Accounts Receivable
Stelco records an allowance for doubtful collection of accounts
receivable based on the Corporation's best estimate of any potential
uncollectible amounts. The best estimate considers past experience with the
customer base and a review of current economic conditions and specific
customer issues. While there is no significant exposure to individual
customers, there is a significant exposure to the automotive industry.
Although the Corporation and its Predecessor have not had significant bad debt
expenses in prior periods, deteriorating economic conditions could result in
financial difficulties in the customer base that could lead to bad debts.
Carrying Value of Long-Lived Assets
In accordance with Canadian GAAP appropriate for a going concern,
property, plant and equipment is carried at cost less accumulated
amortization. This carrying amount is reviewed for impairment whenever events
or circumstances indicate that the carrying amount may not be recoverable. The
carrying value is considered recoverable if the sum of undiscounted cash flows
from operations and cash flow from disposal of the property, plant and
equipment exceeds the carrying amount. Future cash flows are dependent upon
the assumptions used for revenues and costs to produce product. There is a
high degree of uncertainty in estimating future cash flows, primarily as a
result of the uncertainty regarding future prices for steel, operating costs
and economic conditions. The application of different assumptions for steel
prices, operating costs and economic conditions could result in a conclusion
that the Corporation would not recover the carrying amount of our property,
plant and equipment and other long-lived assets, which could result in a
material charge to earnings.
Employee Future Benefits
The Corporation participates in a number of employee future benefit
arrangements (principally providing pension and health care benefits) in
Canada and the United States. These benefits represent a substantial
obligation and cost to the Corporation. As indicated in Note 3 to the
Consolidated Financial Statements, these plans are primarily of a defined
benefits nature. As a result, complex actuarial and accounting rules are used
to determine the expense to be recorded for the year and the accrued benefit
obligation as at each measurement date, which generally corresponds to the
year-end date, for the Corporation's principal defined benefit plans.
To arrive at the cost of employee future benefits to be recognized in the
Consolidated Financial Statements, management is required to review and update
various actuarial assumptions each year, based on a going concern concept.
These assumptions include investment yields, discount rates, salary
escalation, health care cost trends, retirement age, mortality rates and other
factors. Management consults certain outside advisors, including actuaries, in
determining these factors in order to ensure that the assumptions chosen are
reasonable.
The Corporation has elected under Canadian GAAP to use the corridor
method to amortize actuarial gains and losses (arising from changes in
actuarial assumptions and experience gains and losses) over the expected
average remaining service life (EARSL) of active employees. Under the corridor
method, amortization is recorded only if the accumulated net actuarial gains
or losses exceed 10% of the greater of the accrued benefit obligation and the
value of the plan assets. These amortizations reflect the concept, as stated
in Canadian GAAP, that the cost of employee future benefits should be recorded
based on long-term assumptions to be consistent with the nature of the
economic benefits derived therefrom. Short-term actuarial gains and losses may
occur which differ from the long-term nature of the assumptions used under
Canadian GAAP. Under Canadian GAAP the cost of employee future benefits in any
year is not unduly impacted by such short-term changes in market returns,
discount rates or in the level of benefits provided. Continued trends in these
factors will be reflected by changes in assumptions if these trends persist,
and would affect future costs.
The following comments highlight the significant 2006 assumptions,
changes and trends within the Corporation's principal pension and other
benefit plans.
Pension Benefits
The major assumptions include:
The discount rate enables the Corporation to calculate the present value
of the benefit obligation as of the measurement date (December 31, subject to
the remeasurements required as at March 31, 2006 and June 30, 2006). The rate
used is the current yield on high-quality fixed income investments whose term
and cash flow are similar to the liabilities under the plan. A higher discount
rate decreases the present value of the benefit obligation and increases
pension expense.
The expected long-term rate of return on plan assets is determined by
assessing historical and anticipated investment returns on the various
categories of plan assets. Lower expected returns result in an increased
expense.
Establishment of the expected average retirement age is based on a review
of the actual experience of the pension plans. Lower retirement ages result in
increasing the benefit obligation as well as the pension expense.
The mortality rate allows the Corporation to estimate the duration for
which benefits are expected to be paid. Mortality rates are based on actuarial
tables that are updated periodically to reflect expected mortality trends in
the general population. A lower mortality rate (higher life expectancy)
lengthens the benefit payment stream resulting in a higher benefit obligation
and pension expense.
Pension Plan Amendment and Curtailments
The Hamilton Steel USW Local 1005 union contract ratified in June 2006
includes certain pension benefit improvements. For accounting purposes,
management determined that these changes were a plan amendment and accordingly
the pension plan assets and liabilities were remeasured to reflect the impact
of these amendments. The participation in the salaried workforce reduction
program resulted in a significant reduction in estimated future years of
service of the salaried workforce who were members of the defined benefit
pension and post-employment plans. Management determined that this was a
curtailment for accounting and accordingly the pension plan assets and
liabilities were remeasured. The curtailment resulted in immediate recognition
in the second quarter 2006 operating results.
As at June 30, 2006, management updated the following assumptions for
three of the four principal pension plans, which were subject to
remeasurement:
<<
- discount rate - from 5.25% to 5.50%; and
- retirement age salaried employees - from 58 to 59.
>>
The consolidated funded status deteriorated from a deficit of $416
million as at March 31, 2006 to a deficit of $618 million as at June 30, 2006,
mainly as a result of the loss on pension plan assets, plan amendments and
early retirements somewhat offset by the revised assumption for the discount
rate for the three remeasured plans (Lake Erie salary, Hamilton and Corporate
salary and Hamilton Steel bargaining unit). Under Canadian GAAP, the impact of
changes to the above assumptions, benefit improvements, actual investment
returns, and other changes are recognized over a number of years rather than
in the year of occurrence. As a result, for accounting purposes, there was an
accrued benefit liability of $431 million on the Consolidated Statement of
Financial Position as at June 30, 2006 reflecting the deficit of $618 million
reduced by $100 million of unamortized net actuarial losses, and $87 million
of unamortized past service costs.
Further details on pension plans are included in Note 13 to the
Consolidated Financial Statements.
Other Benefits
The assumptions for other benefit plans are similar to pension plans,
with the additional factor of health care cost trend rates. Changes in the
health care cost trend rate have a significant effect on the accrued benefit
obligation and recorded expense. As these plans are generally unfunded,
changes to the assumptions do not materially impact cash outlays. Cash outlays
are the actual amounts paid for other benefits.
As at June 30, 2006, management updated the following assumptions for
other benefit plans for three of the four principal plans, which were subject
to remeasurement:
<<
- discount rate - from 5.25% to 5.75%; and
- retirement age salaried employees - from 58 to 59.
>>
The consolidated funded status improved from a deficit of $1,320 million
as at March 31, 2006 to a deficit of $1,194 million as at June 30, 2006,
primarily due to these revised assumptions and plan amendments. Similar to the
accounting rules for pension plans, the full impact of changes in assumptions
is not recognized in the current year. Unamortized actuarial gains and past
service costs of $107 million increased the liability recorded on the
Consolidated Statement of Financial Position to $1,301 million as at June 30,
2006 from $1,320 million as at March 31, 2006.
Further details on other benefit plans are included in Note 13 to the
Consolidated Financial Statements.
Income Taxes
Application of Canadian GAAP concerning future income taxes requires
projection of tax rates expected to be in effect in years in which tax
benefits will be realized. Changes to the amount and timing of tax rates in
future years can impact the amount of income tax expense or recovery
recognized in an accounting period. The realization of future income tax
assets is dependent on the Corporation's ability to generate sufficient
taxable income in future years to utilize income tax benefits and income tax
loss carry-forwards. Deviations of future profitability from estimates would
result in adjustments to the value of future income tax assets that could have
a significant effect on earnings. See Note 7 to the Consolidated Financial
Statements.
The Corporation had certain future tax assets which existed at March 31,
2006 but were not recognized on the Consolidated Statement of Financial
Position at that date. A portion of these future tax assets were recognized in
the third quarter of 2006 and were applied to reduce unamortized intangible
assets.
Inventory Valuation
Valuation of inventories requires a number of estimates to be made,
including inventory quality, condition and obsolescence. These determinations
require management to exercise judgment. Inventories of raw materials and
supplies are valued at the lower of cost and replacement cost. Finished
products are valued at the lower of cost and net realizable value. Management
must exercise judgment in determining the appropriateness of values used to
determine replacement costs and net realizable values. Cyclical changes in
selling prices and/or input costs can result in material adjustments being
made to the carrying value of finished product inventory. As a result of the
implementation of fresh start accounting on March 31, 2006, the inventory was
revalued to fair value. This revaluation has had an impact on the operating
results for both the second and third quarters of 2006.
Environmental
Stelco discloses environmental obligations when known and accrues the
cost associated with the obligations when they are known and the costs can be
reasonably estimated. Stelco owns a number of manufacturing sites that have
been in existence for a significant period of time and as a result may have
unknown environmental obligations.
Basis of Valuation
The Corporation's assets and liabilities on the Consolidated Statement of
Financial Position as at March 31, 2006 were reported at their estimated fair
value, with the exception of future income taxes (see Note 7 to the
Consolidated Financial Statements) and pensions and other post-employment
benefits (see Note 13 to the Consolidated Financial Statements). The
determination of the fair value of the assets and liabilities of the Successor
was finalized in the third quarter 2006 (see Note 4 to the Consolidated
Financial Statements).
The useful lives of the Corporation's plant, equipment and intangible
assets have been reviewed as part of fresh start reporting. Certain of these
assets have had their useful life adjusted upon completion of this process.
RISK FACTORS
Stelco's business and future performance is subject to a number of risk
factors including, among others liquidity risks, as referred to under
Liquidity and Capital Resources, risks relating to the volatility of the
demand and selling prices for steel, Stelco's energy and raw material costs,
planned capital expenditures, currency fluctuations in the US dollar and
environmental matters. The following discussion is an update to the section
entitled "Risk Factors" in management's discussion and analysis included in
Stelco's 2005 annual report and in Stelco's interim report for the quarters
ended March 31, 2006 and June 30, 2006.
Demand and Pricing
The steel industry is cyclical in nature. The demand and pricing for
North American steel fluctuates based on many factors including the strength
of the economies in North America, particularly the automotive sector,
exchange rates and the influence of steel sourced from offshore. The
Corporation cannot rely on high selling prices being sustainable in the long
term and believes it must take steps to lower its overall costs to compete
effectively.
Costs
Stelco is continuing with its efforts to lower costs in order to ensure
its long-term viability, which includes improved productivity and a leaner
organizational structure. There can be no assurance that cost reduction
initiatives will be sufficient to sustain long-term viability.
Unplanned Repairs or Equipment Outages
There can be no assurance that unplanned downtime at any of Stelco's
facilities will not have a material adverse effect on Stelco. In addition, the
failure of planned outages to be completed as scheduled could have a material
adverse effect on Stelco.
Pension Plans
Stelco and the Province of Ontario entered into a pension agreement that
prescribes the funding arrangements with respect to Stelco's four main pension
plans. Despite the level of contributions required under the pension
agreement, the solvency deficiency could grow as a result of future actuarial
losses and benefit changes.
Steel Industry Consolidation
Stelco could face risks related to cost competitiveness and access to
large customers as a result of the steel industry consolidation.
Supply and Pricing of Raw Material and Energy
Wabush Mines has been experiencing production problems, particularly
earlier in the year, which have and will continue to negatively impact
Stelco's cost of iron ore in 2006. Plans for Wabush are being implemented to
improve production and lower costs.
Employees
In June 2006, the Salaried Transition Assistance Program (STAP) was made
available to active salaried employees who were defined benefit pension plan
members. The STAP provided incentives for early retirement to eligible
employees. Similarly, the Transition Assistance Program (TAP), which provided
incentives for early retirement to eligible employees, was made available to
Hamilton Steel bargaining unit employees as part of the new collective
agreement negotiated in June 2006. In the third quarter of 2006 the TAP was
also offered to Lake Erie Steel bargaining unit employees.
Stelco continues to evaluate 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 necessary, are essential to Stelco's
continued operations.
Labour Matters
Risks relating to possible labour difficulties and resultant loss of
production and revenue have been mitigated by the agreement reached in June
2006 with USW Local 1005 to renew the 2002 Hamilton Steel collective agreement
for a period expiring on July 31, 2010.
OUTLOOK
Demand for steel in the North American market softened towards the end of
the third quarter due to reduced consumption by the automotive sector combined
with high steel inventory levels at our customers, particularly at the steel
service centres. It is expected that the reduced demand will continue through
the fourth quarter and into the first quarter of 2007. As a result of the
lower demand, certain major steel producers in North America, including
Stelco, have elected to reduce production levels in order to better match
demand and supply. In addition to reduced demand, the North American market
continues to support a significant level of imports which may lead to lower
selling prices and lower market share for domestic producers.
The Corporation is taking advantage of the current market slowdown in the
fourth quarter in order to complete a reline and upgrade to the blast furnace
at the Hamilton plant, necessary to increase the life of the furnace and to
improve throughput. In addition, the Corporation will substantially complete
the Phase II expansion of the Lake Erie hot strip mill, which is expected to
increase throughput by 20% over current levels. The Corporation is continuing
to monitor market conditions and will adjust production levels as required.
While changing market dynamics associated with the softening in North
American steel demand make it difficult for the Corporation to predict
revenue, shipments, liquidity, and EDITDA for the fourth quarter of 2006, the
Corporation anticipates that it will not achieve its previously announced
revenue, shipments, production and EDITDA estimates relating to the second
half of 2006. If current market conditions continue, Stelco will face further
reductions in liquidity in the fourth quarter. The Corporation is continuing
to build new customer relationships, negotiate contracts with existing
customers, and lower overall operating costs through the productivity
initiatives noted in the MD&A and by negotiating better terms with suppliers.
<<
-------------------------------------------------------------------------
Forward-Looking Statements
>>
This MD&A and the accompanying message to shareholders contains
"forward-looking information" that is based on Stelco's expectations,
estimates and projections as of the date of this MD&A or as of the date on
which such information is identified to be given. This forward-looking
information includes, among other things, factors relating to the business,
financial position, operations and prospects of Stelco, including: Stelco's
strategies and plans to reduce costs and the anticipated outcome of such
strategies and plans; anticipated productivity levels and profitability;
labour matters related to Stelco's predominantly unionized workforce; pension
matters; consolidation in the steel industry; Stelco's energy and raw material
costs and the availability of such materials; the volatility of selling prices
for steel; international trade matters, including increases in steel imports
into Canada; employee matters, including staffing levels, the retention of the
skills and knowledge of Stelco's employees and the ability to attract and
retain new employees; changes to environmental laws and regulations concerned
with, among other things, emissions into the air, discharges to water or land,
noise control and the generation, handling, storage, transportation and
disposal of toxic substances; new technological developments and Stelco's
ability to make capital expenditures to maintain and enhance its technological
ability; development of new products; planned capital expenditures; and
currency fluctuations in the US dollar and their impact on the Corporation's
US dollar denominated long-term debt, steel pricing and costs. Often, but not
always, forward-looking information can be identified by the use of words and
phrases such as "plans", "expects" or "does not expect", "is expected",
"budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or
"does not anticipate", or "believes", or variations of such words and phrases
or states that certain actions, events or results "may", "could", "would",
"might" or "will" be taken, occur or be achieved.
Forward-looking information involves known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of Stelco to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking information. Actual results, performance and achievements are
likely to differ, and may differ materially, from those expressed or implied
by the forward-looking information contained herein. Such forward-looking
information is based on a number of assumptions which may prove to be
incorrect, including, but not limited to: exchange rates, energy and other
anticipated and unanticipated costs; pension contributions and expenses; the
supply and demand for, deliveries of, and the level and volatility of prices
of steel and raw materials; the continued availability of financing on
appropriate terms; market competition; the impact on Stelco of various
environmental regulations and initiatives; and Stelco's ongoing relations with
its employees and staffing levels. While Stelco anticipates that subsequent
events and developments may cause Stelco's views to change, Stelco
specifically disclaims any obligation to update this forward-looking
information. This forward-looking information should not be relied upon as
representing Stelco's views as of any date subsequent to the date of this
MD&A.
-------------------------------------------------------------------------
Additional Financial Information
Additional information concerning Stelco, including the Corporation's
2005 Annual Information Form, may be viewed on the System for Electronic
Document Analysis and Retrieval at www.sedar.com, and at Stelco's Web site
www.stelco.ca.
<<
(signed) (signed)
Rodney B. Mott J. Kenneth Rutherford
President and Chief Executive Officer Chief Financial Officer
HAMILTON, ONTARIO
November 9, 2006
CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
-------------------------------------------------------------------------
Six Three Nine
(in millions, Months Months Months
except per Three Months Ended Ended Ended Ended
share amounts) Sept. 30 Sept. 30 Sept. 30 March 31 Sept. 30
(unaudited) 2006 2005(1) 2006(2) 2006(2) 2005(1)
-------------------------------------------------------------------------
(Pre- (Pre- (Pre-
(Successor) decessor) (Successor) decessor) decessor)
Net Sales $ 660 $ 559 $ 1,358 $ 674 $ 1,945
Costs 596 567 1,275 695 1,731
-------------------------------------------------------------------------
64 (8) 83 (21) 214
Amortization of
property, plant
and equipment 25 27 53 27 81
Amortization of
intangible assets - 1 1 1 3
-------------------------------------------------------------------------
Operating earnings
(loss) before the
following: 39 (36) 29 (49) 130
Employee future
benefits -
workforce
reduction costs
(Note 13) 6 - 47 - -
Foreign exchange
(gain) loss on
long-term debt
(Note 9) 1 - (12) - -
Gain on sale of
plate mill assets - - - - (20)
Reorganization
items - 13 - 21 47
Financial expense
Interest on long-
term debt and
debt subject to
compromise 10 10 19 10 31
Other interest -
net 9 3 17 5 8
-------------------------------------------------------------------------
Earnings (loss)
before income tax
from continuing
operations 13 (62) (42) (85) 64
Income tax expense
(recovery) (Note 7)
Current 5 (13) 7 7 17
Future 33 (31) 7 (13) (11)
-------------------------------------------------------------------------
Net earnings (loss)
from continuing
operations (25) (18) (56) (79) 58
Net earnings (loss)
from discontinued
operations (Note 1) - (24) - (43) (11)
-------------------------------------------------------------------------
Net earnings (loss) $ (25) $ (42) $ (56) $ (122) $ 47
-------------------------------------------------------------------------
Earnings (loss) per
common share
(Note 15)
Basic
Continuing
operations $ (0.93) $ (0.18) $ (2.07) $ (0.77) $ 0.57
Net earnings
(loss) $ (0.93) $ (0.41) $ (2.07) $ (1.19) $ 0.46
Fully diluted
Continuing
operations $ (0.93) $ (0.18) $ (2.07) $ (0.77) $ 0.51
Net earnings
(loss) $ (0.93) $ (0.41) $ (2.07) $ (1.19) $ 0.42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
common shares
outstanding -
millions 27.1 102.2 27.1 102.2 102.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Restated to disclose the activities of the Predecessor's continuing
and discontinued operations separately.
(2) The six-month period ended September 30, 2006 is not comparable with
three months ended March 31, 2006 and has therefore been reported
separately.
See accompanying Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF RETAINED DEFICIT
-------------------------------------------------------------------------
Six Three Nine
Months Months Months
Three Months Ended Ended Ended Ended
(in millions) Sept. 30 Sept. 30 Sept. 30 March 31 Sept. 30
(unaudited) 2006 2005 2006(1) 2006(1) 2005
-------------------------------------------------------------------------
(Pre- (Pre- (Pre-
(Successor) decessor) (Successor) decessor) decessor)
Balance at beginning
of period $ (31) $ (299) $ - $ (461) $ (388)
Net earnings (loss) (25) (42) (56) (122) 47
-------------------------------------------------------------------------
Balance at end
of period $ (56) $ (341) $ (56) $ (583) $ (341)
--------------------------------------------------- ----------
--------------------------------------------------- ----------
Fresh start
adjustment 583
----------
Balance at end of
period - post
fresh start $ -
----------
----------
(1) The six-month period ended September 30, 2006 is not comparable with
three months ended March 31, 2006 and has therefore been reported
separately.
See accompanying Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
-------------------------------------------------------------------------
At At At
September 30 March 31 December 31
(in millions) (unaudited) 2006 2006 2005(1)
-------------------------------------------------------------------------
(Successor) (Successor) (Predecessor)
(Note 4)
Assets
Current assets
Cash and cash equivalents $ 8 $ 2 $ 25
Restricted cash (Note 5) 5 34 17
Accounts receivable 348 418 294
Inventories 708 740 783
Prepaid expenses 44 24 29
Future income taxes (Note 7) 28 7 22
Assets held for sale (Note 14) 18 - 351
-------------------------------------------------------------------------
1,159 1,225 1,521
-------------------------------------------------------------------------
Other assets
Property, plant and equipment 1,735 1,757 932
Intangible assets (Note 7) 6 18 72
Future income taxes (Note 7) - - 12
Deferred pension cost - - 112
Other 33 36 21
-------------------------------------------------------------------------
1,774 1,811 1,149
-------------------------------------------------------------------------
Total Assets $ 2,933 $ 3,036 $ 2,670
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Bank and other short-term
indebtedness $ - $ - $ 191
Revolving term loans (Note 8) 35 35 -
Accounts payable and accrued 214 245 232
Employee future benefits (Note 13) 60 60 60
Pension liability (Note 13) 68 67 -
Income and other taxes - 17 8
Long-term debt due within one year
(Note 9) 16 21 23
Liabilities held for sale - - 206
Liabilities subject to compromise - - 630
-------------------------------------------------------------------------
393 445 1,350
-------------------------------------------------------------------------
Other liabilities
Employee future benefits (Note 13) 1,252 1,258 834
Pension liability (Note 13) 357 350 -
Long-term debt (Note 9) 329 346 20
Revolving term loans (Note 8) 390 392 -
Future income taxes (Note 7) 91 76 92
Asset retirement obligation (Note 6) 24 22 15
-------------------------------------------------------------------------
2,443 2,444 961
-------------------------------------------------------------------------
Total Liabilities 2,836 2,889 2,311
-------------------------------------------------------------------------
Shareholders' Equity
Convertible debenture conversion option - - 23
Capital stock (Note 11) 149 144 781
Contributed surplus 1 - 16
Warrants (Note 11) 3 3 -
Retained deficit (56) - (461)
-------------------------------------------------------------------------
Total Shareholders' Equity 97 147 359
-------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 2,933 $ 3,036 $ 2,670
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Due to the application of fresh start reporting (Note 4), the
Consolidated Statement of Financial Position of the Predecessor and
Successor are not directly comparable.
Commitments and contingencies (Note 10).
See accompanying Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
-------------------------------------------------------------------------
Six Three Nine
Months Months Months
Three Months Ended Ended Ended Ended
(in millions) Sept. 30 Sept. 30 Sept. 30 March 31 Sept. 30
(unaudited) 2006 2005(1) 2006(2) 2006(2) 2005(1)
-------------------------------------------------------------------------
(Pre- (Pre- (Pre-
(Successor) decessor) (Successor) decessor) decessor)
Cash provided by
(used for)
Operating activities
Net earnings (loss)
from continuing
operations $ (25) $ (18) $ (56) $ (79) $ 58
Adjustments for
items not
affecting cash
Reorganization
items - 2 (12) (1) 2
Amortization of
property, plant,
and equipment 25 27 53 27 81
Amortization of
intangible assets - 1 1 1 3
Future income
taxes (Note 7) 33 (31) 7 (13) (11)
Employee pension
and other future
benefits 4 17 (13) 28 82
Foreign exchange
(gain) loss on
floating rate
notes (Note 9) 1 - (12) - -
Employee future
benefits -
workforce
reduction costs (6) - 26 - -
Fresh start
inventory
revaluation 11 - 60 - -
Gain on sale of
plate mill assets - - - - (20)
Other (7) 2 4 (4) -
-------------------------------------------------------------------------
36 - 58 (41) 195
-------------------------------------------------------------------------
Changes in operating
elements of
working capital
Accounts receivable 66 - 60 (127) (5)
Inventories (26) (35) (28) 102 (99)
Prepaid expenses (6) (3) (20) 5 (7)
Accounts payable
and accrued (44) (21) (18) 9 (12)
Income and other
taxes - (15) (17) 9 5
-------------------------------------------------------------------------
(10) (74) (23) (2) (118)
-------------------------------------------------------------------------
Discontinued
operations - 27 - - 34
-------------------------------------------------------------------------
26 (47) 35 (43) 111
-------------------------------------------------------------------------
Investing activities
Proceeds from sale
of non-core assets 13 5 13 107 28
Expenditures for
capital assets (21) (42) (62) (49) (104)
Discontinued
operations - (4) - - (13)
-------------------------------------------------------------------------
(8) (41) (49) 58 (89)
-------------------------------------------------------------------------
Financing activities
Increase (decrease)
in bank indebtedness - 118 - (9) (16)
Increase (decrease)
in revolving term
loans (Note 8) (11) - (2) - -
Reduction of long-
term debt (Note 9) (12) (8) (12) (12) (14)
Proceeds from issue
of common shares
(Note 11) - - 5 - -
Discontinued
operations - (12) - - 1
-------------------------------------------------------------------------
(23) 98 (9) (21) (29)
-------------------------------------------------------------------------
Cash, cash equivalents
and restricted cash
Net increase (decrease) (5) 10 (23) (6) (7)
Balance at beginning
of period 18 26 36 42 43
-------------------------------------------------------------------------
Balance at end of
period $ 13 $ 36 $ 13 $ 36 $ 36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consists of:
Cash and cash
equivalents $ 8 $ 20 $ 8 $ 2 $ 20
Restricted cash
(Note 5) 5 16 5 34 16
-------------------------------------------------------------------------
$ 13 $ 36 $ 13 $ 36 $ 36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Restated to disclose the activities of the Predecessor's continuing
and discontinued operations separately.
(2) The six-month period ended September 30, 2006 is not comparable with
three months ended March 31, 2006 and has therefore been reported
separately.
See accompanying Notes to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BUSINESS DESCRIPTION AND CCAA HISTORY
Business Description
Stelco Inc. ("Stelco" or the "Corporation") is one of Canada's
largest steel producers. The Corporation operates two integrated
steel plants in Ontario, Canada which produce a variety of steel
products for customers in the automotive, steel service center,
appliance, energy, construction and pipe and tube industries within
North America. In addition, Stelco has ownership interests in three
iron ore properties. Through these ownership interests and related
supply agreements, Stelco has secured approximately 90% of its
requirements for iron ore. Stelco operates its businesses through
partnerships, subsidiaries and joint ventures. Where applicable,
"Stelco" and the "Corporation" refer to Stelco Inc. and its
partnerships, subsidiaries and joint ventures collectively.
CCAA History
On January 29, 2004, Stelco and certain related entities filed for
protection under the Companies' Creditors Arrangement Act ("CCAA")
and obtained an order (the "Initial Order") from the Ontario Superior
Court of Justice granting it creditor protection. On the same date,
Stelco made a concurrent petition for recognition of the Initial
Order and ancillary relief under Section 304 of the U.S. Bankruptcy
Code (the "U.S. Proceedings"). The Canadian proceedings included
Stelco and its wholly owned subsidiaries, Stelpipe Ltd. ("Stelpipe"),
CHT Steel Company Inc. ("CHT Steel"), Welland Pipe Ltd. ("Welland
Pipe"), and Stelwire Ltd. ("Stelwire"), which were collectively
referred to as the "Applicants". The U.S. Proceedings included
Stelco, Stelpipe, and Stelwire. The Corporation's other subsidiaries
and joint ventures were not included in the proceedings. For the
periods prior to emergence from CCAA, collectively, the Applicants
and the Corporation's other subsidiaries and joint ventures are
referred to as the "Predecessor" in the consolidated financial
statements and notes.
At the end of the day on March 31, 2006, the Predecessor implemented
its Third Amended and Restated Plan of Arrangement and Reorganization
(the "CCAA Plan"), as approved by the Court on January 20, 2006, and
emerged from CCAA protection. For the purpose of these
Consolidated Financial Statements the Corporation is referred to as
the "Successor" in respect of the period after implementation of the
CCAA Plan. Also, on March 31, 2006, a plan of arrangement under the
Canada Business Corporation's Act ("the CBCA") that involved the
Corporation (the "CBCA Plan") was implemented. In accordance with the
CBCA Plan, the Predecessor's business was reorganized with specific
assets and liabilities being transferred into separate limited
partnerships. Upon implementation of this reorganization, Stelco
became the parent company and limited partner of these limited
partnerships. Further information on the CCAA Plan and CBCA Plan is
outlined below.
Discontinued Operations
As part of the CCAA, Stelco divested all of its manufactured products
and mini-mill businesses. The impact on earnings for the three months
ended March 31, 2006 was a net loss of $43 million (net of income tax
of $2 million), for the three months ended September 30, 2005 was net
loss of $24 million (net of income tax recoveries of $4 million) and
for the nine months ended September 30, 2005 net loss of $11 million
(net of income tax recoveries of $3 million).
Treatment of Stakeholders Compromised Under the CCAA Plan
Holders of Affected Claims
Under the CCAA Plan, the claims of the unsecured creditors (the
"Affected Creditors") were not satisfied in full by the consideration
distributed under the CCAA Plan. At March 31, 2006, the final
accepted Affected Creditor claims of $547 million were settled in
exchange for the following:
- New Secured Floating Rate Notes ("FRNs") in the US dollar
equivalent of $275 million Canadian;
- 6,364,000 newly issued common shares (the "New Common Shares") of
Stelco (1,100,000 prorated among all Affected Creditors and
5,264,000 prorated based on amounts elected through the share
election process);
- Cash of $108,548,000; and
- Warrants exercisable for an aggregate of 1,418,500 New Common
Shares (the "New Warrants") with an exercise price of $11.00 per
New Common Share and a seven-year term.
Holders of Series A and B voting Common Shares
The Series A and B voting common shares previously outstanding were
exchanged into new redeemable shares at a ratio of 0.000001 for each
such share. Such shares were then redeemed and cancelled on March 31,
2006 for nil consideration.
Agreements
Plan Sponsor Agreement
The New Common Shares of the restructured Stelco were divided among
three groups under the CCAA Plan: the Affected Creditors (as referred
to above), the Province of Ontario (the "Province") and Tricap
Management Limited ("Tricap"), Sunrise Partners Limited Partnership
("Sunrise") and Appaloosa Management LP ("Appaloosa") (collectively
the "Equity Sponsors"). The Province obtained its equity interest as
part of the financing provided to Stelco (Note 9) wherein it received
warrants to purchase 851,100 New Common Shares. The Equity Sponsors
acquired their equity interests for cash pursuant to a Plan Sponsor
Agreement ("the PSA") between the Corporation and the Equity
Sponsors.
Pursuant to the PSA, the Equity Sponsors agreed to purchase
19,736,000 New Common Shares of Stelco at a price of $5.50 per share
for proceeds of $108,548,000. These funds were used for the cash
distribution to Affected Creditors under the Plan as referred to
above.
Pension Plan Funding Agreement
Stelco and the Province along with the Superintendent of Financial
Services of Ontario and certain of the newly formed LPs entered into
a pension funding agreement (the "Pension Agreement") on March 31,
2006 that outlines the funding arrangements with respect to Stelco's
four main pension plans. The purpose of the Pension Agreement is to
transition the four main plans from the Section 5.1 election of
Regulation 909 of the Pension Benefits Act (Ontario) (the "PBA"),
which had exempted the four main plans from funding of the solvency
deficiencies under the plans in exchange for higher pension benefit
guarantee fund payments, to the general regulatory requirements of
the PBA by no later than January 1, 2016. See Notes 9, 11, and 13 for
further details.
CCAA Plan Financing
New financing was raised under the CCAA Plan from the following
sources:
- New ABL Facility (asset based loan) (Note 8) up to $600 million
- New Secured Revolving Term Loan (Note 8) $375 million
- New Province Note (Note 9) $150 million
- Federal Government (cancelled in June 2006) $30 million
2. BASIS OF PRESENTATION
As a result of a substantial realignment of equity and non-equity
interests in the Corporation (Note 4), "fresh start" reporting was
adopted on March 31, 2006. In accordance with the Canadian Institute
of Chartered Accountants ("CICA") Handbook Section 1625 -
"Comprehensive Revaluation of Assets and Liabilities", the
Corporation undertook a comprehensive revaluation of its assets and
liabilities. As required by CICA Handbook Section 1625, the
enterprise value has been allocated based upon management's best
estimate of the relative fair values of the identifiable assets and
liabilities of the Corporation in accordance with the guidance in
CICA Handbook Section 1581 - "Business Combinations". The Corporation
has finalized its initial allocation resulting in the transfer of
amounts between property, plant and equipment, inventories and
intangible assets and future income taxes (see Note 4).
The Consolidated Statement of Financial Position as at March 31, 2006
reflects the accounts of the Successor. While not comparable, the
Consolidated Statement of Earnings (Loss) and the corresponding
Consolidated Statement of Cash Flows reflects the activities of the
Successor and Predecessor for the three months and nine months ended
September 30, 2006 and 2005.
While the Predecessor was under creditor protection (January 29, 2004
- March 31, 2006), the Predecessor applied the guidance in the
American Institute of Certified Public Accountants Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" (SOP 90-7), where it did not conflict with
Canadian generally accepted accounting principles ("Canadian GAAP"),
in the preparation of its consolidated financial statements. As a
result, the Predecessor made adjustments to isolate assets,
liabilities, revenues, and expenses related to the reorganization and
restructuring activities so as to distinguish these events and
transactions from those associated with the ongoing operation of the
business.
The consolidated financial statements of the Successor and
Predecessor companies are expressed in Canadian dollars and are
prepared in accordance with Canadian GAAP using the going concern
concept which assumes that the Corporation will be able to realize
its assets and discharge its liabilities in the normal course of
business for the foreseeable future. These interim financial
statements do not include all of the disclosure required for annual
financial statements and should be read in conjunction with the most
recent annual consolidated financial statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These Consolidated Financial Statements are prepared in accordance
with Canadian GAAP, which require management to make assumptions and
estimates that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ
from those estimates.
The significant policies are summarized below:
Basis of Valuation
The Corporation's assets and liabilities on the Consolidated
Statement of Financial Position as at March 31, 2006 were reported at
their estimated fair value (Note 4), with the exception of future
income taxes, which have been reported in accordance with CICA
Handbook Section 3465 - Income Taxes (Note 7) and pension and other
post-employment benefits, which have been reported in accordance with
CICA Handbook Section 3461 - Employee Future Benefits (Note 13).
The useful lives of the Corporation's plant, equipment and intangible
assets have been reviewed as part of fresh start reporting. Certain
of these assets have had their useful life adjusted upon completion
of this process.
Principles of Consolidation
The consolidated financial statements include the accounts of Stelco
Inc., its wholly owned subsidiaries and partnerships, and its
proportionate share of the accounts of its joint ventures.
Foreign Currencies
Monetary assets and liabilities originating in foreign currencies are
translated at quarter-end exchange rates. All other assets and
liabilities originating in foreign currencies are translated at the
quarter-end exchange rate or at historic rates prevailing when the
assets were acquired or the liabilities incurred for transactions
after March 31, 2006. Income and expense items, other than those
related to assets and liabilities translated at historic rates, are
generally translated at the rate in effect at the time the
transaction occurs.
Gains or losses resulting from foreign currency translations are
reflected in the Consolidated Statement of Earnings (Loss).
The temporal method of translation of foreign currency is followed
for foreign subsidiaries, all of which are considered to be
financially and operationally integrated. Translation of foreign
currencies for the foreign subsidiaries using the temporal method is
consistent with the method described above.
Inventories
The recorded cost of inventories on hand at March 31, 2006 was based
on the estimated fair values on March 31, 2006 pursuant to the
reorganization implemented by the Corporation on that date.
Inventories of raw materials and supplies on hand post March 31, 2006
are valued at the lower of cost and replacement cost. Semi-finished
product inventories are valued at actual cost. Finished product
inventories are valued at the lower of cost and net realizable value.
Property, Plant, and Equipment
Property, plant and equipment, including construction in progress,
purchased prior to April 1, 2006 has been recorded at the estimated
fair value on March 31, 2006 pursuant to the financial reorganization
implemented by the Corporation on that date. Property, plant, and
equipment purchased after March 31, 2006 is carried at cost less
accumulated amortization, and includes construction in progress. The
Corporation expenses interest costs directly associated with capital
projects. Amortization is provided using the straight-line method
applied to the cost of the assets at rates based on their estimated
useful life and beginning from the point when production commences
except for the cost of blast furnace relines (see below) and at
certain mining properties where amortization is calculated on a unit-
of-production basis. The following annual amortization rates, which
have been updated to reflect the final results of fresh start
accounting, are in effect:
- Buildings 10 to 25 years
- Equipment 5 to 20 years
- Automotive and mobile equipment 5 to 10 years
- Raw material plants and properties 7 to 30 years
Blast Furnace Relines
The Corporation's blast furnaces periodically require extensive
relining. Costs incurred in the reline of a blast furnace that extend
the useful life of the furnace are capitalized and amortized over
their estimated useful life on a unit-of-production basis. Other
repair and maintenance costs that may be incurred during the reline
are expensed.
Intangible Assets
Intangible assets of the Corporation are computer systems and
applications. Intangible assets purchased prior to April 1, 2006 are
recorded at the estimated fair value on March 31, 2006 pursuant to
the reorganization implemented by the Corporation on that date.
Intangible assets purchased after March 31, 2006 are recorded at
historical cost. Amortization is recorded on a straight-line basis
over an estimated eight-year life beginning from March 31, 2006 or
the purchase date, if after March 31, 2006. See further comments
under Income Taxes.
Impairment of Long-Lived Assets
An impairment loss would be recognized when the carrying value of a
long-lived asset exceeds the total undiscounted cash flows expected
from its use and eventual disposition. The impairment loss would be
calculated as the amount by which the carrying value of the asset
exceeds its fair value.
Employee Future Benefits
The Corporation, its wholly owned business units, wholly owned
subsidiaries, and joint ventures maintain a number of defined benefit
and defined contribution plans providing pension, other retirement
and post-employment benefits to most of its employees.
Pension plan assets are valued at market-related value and are used
to calculate the expected rate of return on plan assets. Market-
related value is the market value of pension plan assets averaged
over a three-year period.
The cost of pension and other post-employment benefits (including
medical benefits, dental care, life insurance and certain compensated
absences) is charged to income annually. The cost is computed on an
actuarial basis using the projected benefit method by estimating the
usage, frequency and cost of services covered and management's best
estimate of the long-term rate of return on plan assets, discount
rates, salary escalation, health care cost trends, retirement age,
mortality and other factors. These assumptions relate to factors that
are of a long-term nature and, consequently, are subject to a degree
of uncertainty. Actual trends and values may differ from those
assumed at this time resulting in changes in the cost of pension and
other post-employment benefits in future periods. The assumptions are
reviewed and updated annually or more frequently where the level of
benefits provided to employees changes. Past service costs (such as
increased benefits provided under labour contract settlements) are
amortized over the estimated average remaining service life ("EARSL")
of the employees at the date of the amendment.
The Corporation has elected under Canadian GAAP to use the corridor
method to amortize actuarial gains and losses (arising from changes
in actuarial assumptions and experience gains and losses) over the
EARSL of active employees. Under the corridor method, amortization is
recorded only if the accumulated net actuarial gains or losses exceed
10% of the greater of the accrued benefit obligation and the value of
the plan assets. These amortizations reflect the concept, as stated
in Canadian GAAP, that the cost of employee future benefits should be
recorded based on long-term assumptions to be consistent with the
nature of the economic benefits derived there from. Short-term
actuarial gains and losses may occur which differ from the long-term
nature of the assumptions used under Canadian GAAP. Under Canadian
GAAP the cost of employee future benefits in any year is not unduly
impacted by such short-term changes in market returns, discount rates
or in the level of benefits provided. Continued trends in these
factors will be reflected by changes in assumptions if these trends
persist, and would affect future costs.
Salaried employees hired after July 31, 1997 participate in the
Corporation's "Opportunity" or similar programs, which include a
flexible credit plan for benefits and a self-directed group RRSP.
These employees do not participate in the defined benefit plans.
These programs are accounted for as defined contribution plans. Costs
of defined contribution plans are expensed as incurred.
Income Taxes
The Corporation follows the liability method of accounting for future
income taxes. Under the liability method, future income tax assets
and liabilities are determined based on "temporary differences"
(differences between the accounting basis and the tax basis of the
assets and liabilities) and are measured using the currently enacted,
or substantively enacted, tax rates and laws expected to apply when
these differences reverse. A valuation allowance is recorded against
any future income tax asset if it is more likely than not that the
asset will not be realized. Income tax expense or benefit is the sum
of the Corporation's provision for current income taxes and the
differences between the opening and ending balances of the future
income tax assets and liabilities. The effect of increases and
decreases to future income tax assets and liabilities arising from
changes in tax rates is recognized in income in the period the
changes occur.
The Corporation had certain future tax assets which existed at
March 31, 2006 but were not recognized on the Consolidated Statement
of Financial Position at that date. A portion of these future tax
assets were recognized in the third quarter of 2006 and were applied
to reduce unamortized intangible assets.
Measurement Uncertainty
The preparation of consolidated financial statements in conformity
with Canadian GAAP requires management to make estimates and
assumptions which affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the stated
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
4. FRESH START REPORTING
As outlined in Note 2, Stelco adopted fresh start reporting on
March 31, 2006. As a result, all assets and liabilities of the
Successor were reported at estimated fair values, except for future
income taxes, which were reported in accordance with the requirements
of CICA Handbook Section 3465, and pension and other post-employment
benefits, which were reported in accordance with CICA Handbook
Section 3461.
The fair values of the assets and liabilities of the Successor were
based on management's best estimates as of March 31, 2006. The
Successor has finalized its valuation of assets and liabilities,
primarily property, plant and equipment, inventories, intangibles and
future income taxes, and reflected adjustments in the Consolidated
Statement of Financial Position as at March 31, 2006. The
adjustments to the Predecessor balances related to predecessor
shareholders, affected creditors and equity sponsors and pensions and
financing were finalized upon emergence from CCAA.
Stelco Inc.
Consolidated Statement of Financial Position
Third Amended and Restated Plan
of Arrangement and Reorganization
-------------------------------------------------------------------------
Affected
Creditors
At March 31, Predecessor and Equity
(in millions) 2006 Shareholders Sponsors
-------------------------------------------------------------------------
(Predecessor)
Assets
Current assets
Cash and cash equivalents $ 2 $ - $ 108(2)
(108)(1)
Restricted cash (Note 5) 34 - -
Accounts receivable 413 - -
Inventories 680 - -
Prepaid expenses 24 - -
Future income taxes (Note 7) 5 - -
-------------------------------------------------------------------------
1,158 - -
-------------------------------------------------------------------------
Other assets
Property, plant and equipment 962 - -
Intangible assets 73 - -
Deferred pension cost 99 - -
Future income taxes (Note 7) 38 - -
Other 21 - -
-------------------------------------------------------------------------
1,193 - -
-------------------------------------------------------------------------
Total Assets 2,351 - -
-------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Current liabilities
Bank and other short-term
Indebtedness 182 - -
Revolving term loans (Note 8) - - -
Accounts payable and accrued 241 - -
Employee future benefits 60 - -
Pension liability - - -
Income and other taxes 17 - -
Long-term debt due within one
year - existing (Note 9) 18 - -
Future income taxes (Note 7) - - -
Liabilities subject to compromise 640 - (640)(1)
-------------------------------------------------------------------------
1,158 - (640)
-------------------------------------------------------------------------
Other liabilities
Employee future benefits 847 - -
Pension liability - - -
Long-term debt - existing
(Note 9) 14 - -
Long-term debt - New Secured
Floating Rate Notes (Note 9) - - 275(1)
Long-term debt - New Province
Note - (Note 9) - - -
Revolving term loans (Note 8) - - -
Future income taxes (Note 7) 79 - -
Asset retirement obligation
(Note 6) 16 - -
-------------------------------------------------------------------------
956 - 275
-------------------------------------------------------------------------
Total Liabilities 2,114 - (365)
-------------------------------------------------------------------------
Shareholders' Equity
Convertible debentures
conversion option 23 - (23)(1)
Capital stock 781 (781)(1) 36(1)
108(2)
New Warrants (Note 11) - - 2(1)
Province Warrants (Note 11) - - -
Contributed surplus 16 (16)(1) -
Retained deficit (583) 797(1) 242(1)
-------------------------------------------------------------------------
Total Shareholders' Equity 237 - 365
-------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 2,351 $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Third Amended and Restated Plan
of Arrangement and Reorganization
-------------------------------------------------------------------------
Pensions and Fresh Start At March 31,
(in millions) Financing Adjustments 2006
-------------------------------------------------------------------------
(Successor)
Assets
Current assets
Cash and cash equivalents $ (382)(6) $ - $ 2
150(4)
232(5)
Restricted cash (Note 5) - - 34
Accounts receivable - 5(7) 418
Inventories - 60(7) 740
Prepaid expenses - - 24
Future income taxes (Note 7) - 2(8) 7
-------------------------------------------------------------------------
- 67 1,225
-------------------------------------------------------------------------
Other assets
Property, plant and equipment - 795(7) 1,757
Intangible assets - (55)(7) 18
Deferred pension cost - (99)(7) -
Future income taxes (Note 7) - (38)(8) -
Other 13(3) 2(7) 36
-------------------------------------------------------------------------
13 605 1,811
-------------------------------------------------------------------------
Total Assets 13 672 3,036
-------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Current liabilities
Bank and other short-term
Indebtedness (182)(5) - -
Revolving term loans (Note 8) 35(3,5) - 35
Accounts payable and accrued - 4(7) 245
Employee future benefits - - 60
Pension liability - 67(7) 67
Income and other taxes - - 17
Long-term debt due within one
year - existing (Note 9) - 3(7) 21
Future income taxes (Note 7) - - -
Liabilities subject to compromise - - -
-------------------------------------------------------------------------
(147) 74 445
-------------------------------------------------------------------------
Other liabilities
Employee future benefits - 411(7) 1,258
Pension liability (382)(6) 732(7) 350
Long-term debt - existing
(Note 9) - - 14
Long-term debt - New Secured
Floating Rate Notes (Note 9) - - 275
Long-term debt - New Province
Note - (Note 9) 149(4) (92)(7) 57
Revolving term loans (Note 8) 392(3,5) - 392
Future income taxes (Note 7) - (3)(8) 76
Asset retirement obligation
(Note 6) - 6(7) 22
-------------------------------------------------------------------------
159 1,054 2,444
-------------------------------------------------------------------------
Total Liabilities 12 1,128 2,889
-------------------------------------------------------------------------
Shareholders' Equity
Convertible debentures
conversion option - - -
Capital stock - - 144
New Warrants (Note 11) - - 2
Province Warrants (Note 11) 1(4) - 1
Contributed surplus - - -
Retained deficit - (456)(7) -
-------------------------------------------------------------------------
Total Shareholders' Equity 1 (456) 147
-------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 13 $ 672 $ 3,036
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following legend describes the adjustments made to the
Predecessor accounts resulting from the implementation of the Plan
and consummation of the various agreements:
(1) Implementation of the Plan as outlined in Note 1.
The following table reconciles the Predecessor's liabilities
subject to compromise to those that were accepted claims under
the Plan:
At March 31, At March 31, At December
(in millions) 2006 2005 31, 2005
-----------------------------------------------------------------
(Predecessor) (Predecessor) (Predecessor)
Liabilities subject to
compromise
Accepted claims $ 547 $ 532 $ 546
Post-filing interest 83 44 73
Unfiled claims 10 12 11
------------------------------------- ---------------------------
Total liabilities subject
to compromise $ 640 $ 588 $ 630
------------------------------------- ---------------------------
------------------------------------- ---------------------------
Settlement
Cash $ 108
Floating Rate Notes 275
New Common Shares 36
New Warrants 2
-------------------------------------
Total consideration $ 421
-------------------------------------
Excess of claims over
distribution 219
Convertible debenture
conversion option 23
-------------------------------------
Total adjustment to
retained deficit $ 242
-------------------------------------
-------------------------------------
The holders of Series A and B voting common shares received nil
consideration.
(2) Issuance of shares for cash under the Plan Sponsor Agreement
(Note 1).
(3) Payment of financing fees on implementation of the Plan, which
have been deferred and will be amortized over the term of the
related credit facilities (Note 8).
(4) Receipt of cash under the Province Agreement in exchange for a
note payable and issuance of warrants (Note 9).
(5) Repayment of borrowings under the Predecessor's line of credit
and increase in revolving term loans in order to make pension
funding payment.
(6) Initial pension funding made under the Province Agreement.
(7) Comprehensive revaluation of assets and liabilities and
elimination of the deficit.
(8) Future income taxes have been adjusted to reflect the tax effects
of differences between the fair value of identifiable assets and
liabilities and their estimated tax bases and the benefits of any
unused tax losses and other deductions to the extent that these
amounts are more likely than not to be realized. The resulting
future tax amounts have been measured based on the rates
substantively enacted that are expected to apply when the
temporary differences reverse or the unused tax losses or other
deductions are realized.
The Corporation had certain future tax assets which existed at
March 31, 2006 but were not recognized on the Consolidated
Statement of Financial Position at that date. A portion of these
future tax assets were recognized in the third quarter of 2006
and were applied to reduce unamortized intangible assets.
Included under the Fresh Start Adjustment captions are all tax
adjustments required to transition the Predecessor's accounts to
the Successor's accounts at March 31, 2006.
5. RESTRICTED CASH
The Predecessor's restricted cash represented funds being held in
trust with the Monitor under the CCAA proceedings pending direction
from the Ontario Superior Court of Justice for its use. The
composition of these funds is derived as follows:
---------------------------------------------------------------------
At September At March 31, At December
(in millions) 30, 2006 2006 31, 2005
---------------------------------------------------------------------
(Successor) (Successor) (Predecessor)
Proceeds relating to the
sale of Welland Pipe Ltd.,
CHT Steel Inc., and
Stelpipe Ltd. assets $ - $ - $ 17
Proceeds from the sale of
the shares of Norambar Inc.,
Stelwire Ltd., and
Stelfil LtDee - 30 -
Proceeds from the sale of the
shares of AltaSteel Ltd. 5 4 -
---------------------------------------------------------------------
$ 5 $ 34 $ 17
---------------------------------------------------------------------
---------------------------------------------------------------------
During the second quarter of 2006, the Monitor released the proceeds
held in trust pertaining to the sale of the shares of Norambar Inc.,
Stelwire Ltd., and Stelfil LtGee in accordance with the related
purchase and sale agreement. The remaining restricted cash was
released in October 2006 in accordance with the terms of the purchase
and sale agreement related to the sale of the shares of AltaSteel
Ltd.
6. ASSET RETIREMENT OBLIGATIONS
Asset retirement obligations relate to the site restoration and
reclamation of iron ore properties at the Corporation's mining
interests in Wabush, Tilden and Hibbing. The following table provides
the pertinent information associated with these obligations:
---------------------------------------------------------------------
At September At March 31, At December
(in millions) 30, 2006 2006 31, 2005
---------------------------------------------------------------------
(Successor) (Successor) (Predecessor)
Opening balance $ 23 $ - $ 12
Accretion expense 1 - 2
Effect of change in estimates - - 1
Liabilities incurred (settled) - - -
---------------------------------------------------------------------
Ending balance $ 24 $ 22(1) $ 15
---------------------------------------------------------------------
Underlying assumptions:
Undiscounted cash flow
estimates 86 86 86
Credit-adjusted interest
rate 12.00%(2) 12.00%(2) 16.65%
Time frame to settle the
obligations (years) 2013-2050 2013-2050 2013-2050
---------------------------------------------------------------------
(1) Reflects the estimated fair value assigned to this obligation
under fresh start reporting (Note 4).
(2) Reflects the estimated credit-adjusted interest rate of the
Corporation.
7. 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 from continuing operations, as
follows:
Three months Six months
ended ended
September September
(in millions) 30, 2006 30, 2006
---------------------------------------------------------------------
(Successor) (Successor)
Income (loss) before income taxes
from continuing operations $ 13 $ (42)
---------------------------------------------------------------------
Income tax expense (recovery) computed using
statutory income tax rates (2006 - 43%) 6 (18)
---------------------------------------------------------------------
Add (deduct):
Manufacturing and processing credit (1) 4
Resource allowance/depletion (2) (3)
Valuation allowance(1) 28 28
Impact of federal income tax rate reduction 8 -
Foreign exchange gain on US denominated debt - (2)
Impact of intercompany foreign exchange - 4
Other (1) 1
---------------------------------------------------------------------
32 32
---------------------------------------------------------------------
Income tax expense (recovery) $ 38 $ 14
---------------------------------------------------------------------
---------------------------------------------------------------------
The composition of the future income tax provision is as follows:
Three months Six months
ended ended
September September
(in millions) 30, 2006 30, 2006
---------------------------------------------------------------------
(Successor) (Successor)
Initiating and reversing temporary
differences $ (3) $ (21)
Valuation allowance(1) 28 28
Effect of future income tax rate reduction 8 -
---------------------------------------------------------------------
Future income tax expense $ 33 $ 7
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Resulted in a reduction of intangible assets on the Consolidated
Statement of Financial Position by $11 million.
The finalization of the fresh start reporting increased tax expense
recorded for the three months ended September 30, 2006 by
approximately $36 million comprised of an increase in the valuation
allowance of $28 million and the income tax rate reduction adjustment
of $8 million.
Components of future income tax assets and liabilities are summarized
as follows:
---------------------------------------------------------------------
At September At March 31, At December
(in millions) 30, 2006 2006 31, 2005
---------------------------------------------------------------------
(Successor) (Successor) (Predecessor)
Future income tax assets
Employee future benefits $ 408 $ 448 $ 300
Pension liability 132 142 -
Non-capital loss
carry-forwards 117 151 97
Corporate minimum taxes 15 17 18
Net capital losses 4 6 7
Other 32 22 17
---------------------------------------------------------------------
Total future income tax assets
before valuation allowance $ 708 $ 786 $ 439
Less: valuation allowance (434) (453) (289)
---------------------------------------------------------------------
Total future income tax assets
after valuation allowance $ 274 $ 333 $ 150
---------------------------------------------------------------------
Future income tax liabilities
Plant and equipment -
difference in net book
value and unamortized
capital cost $ 337 $ 382 $ 118
Deferred pension cost - - 37
Investment in joint ventures - - 36
Other - 20 17
---------------------------------------------------------------------
Total future income tax
liabilities 337 402 208
---------------------------------------------------------------------
Net future income tax asset
(liability) $ (63) $ (69) $ (58)
---------------------------------------------------------------------
The future income tax asset (liability) is reflected in the
Consolidated Statement of Financial Position as follows:
---------------------------------------------------------------------
At September At March 31, At December
(in millions) 30, 2006 2006 31, 2005
---------------------------------------------------------------------
(Successor) (Successor) (Predecessor)
Future income tax asset -
current $ 28 $ 7 $ 22
Future income tax asset -
non-current - - 12
Future income tax liability -
non-current (91) (76) (92)
---------------------------------------------------------------------
Net future income tax asset
(liability) $ (63) $ (69) $ (58)
---------------------------------------------------------------------
Future Income Taxes
Future income tax assets are recognized to the extent that
realization is considered more likely than not. The assessment as to
the future realization of future income tax assets, including loss
carry-forwards, is conducted on a company-by-company basis for the
Stelco group of businesses. Realization of future income tax assets
is dependent upon the availability of sufficient taxable income
within the carry-forward periods. The assessment of realization is
based upon the weight of evidence at the respective statement of
financial position date.
The Corporation had certain future tax assets which existed at
March 31, 2006 but were not recognized on the Consolidated Statement
of Financial Position at that date. A portion of these future tax
assets were recognized in the third quarter of 2006 and were applied
to reduce unamortized intangible assets.
8. BANK AND OTHER SHORT-TERM INDEBTEDNESS AND REVOLVING TERM LOANS
---------------------------------------------------------------------
At September At March 31, At December
(in millions) 30, 2006 2006 31, 2005
---------------------------------------------------------------------
(Successor) (Successor) (Predecessor)
Bank and other short-term
indebtedness $ - $ - $ 191
Revolving term loans
Current 35 35 -
Non-current 390 392 -
---------------------------------------------------------------------
Total $ 425 $ 427 $ 191
---------------------------------------------------------------------
---------------------------------------------------------------------
Revolving Term Loans
Asset Based Loan Facility
On March 31, 2006, the $75 million debtor-in-possession short-term
credit facility and the $350 million short-term credit facility were
replaced by a long-term asset based loan facility (the "ABL
facility"). The ABL facility bears interest at the Canadian bankers'
acceptance rate + 2.25%, prime rate + 0.5%, the US Base rate + 0.5%
or London Inter-Bank Overnight Rate ("LIBOR") + 2.25%, depending on
the nature of the loan instrument incurred. The ABL facility is
available until March 31, 2008 and, prior to each March 31
anniversary date, the facility can be extended for a period of two
years if the lender and Stelco mutually agree. The ABL facility is
secured by a first priority security interest in the eligible
inventory and eligible accounts receivable of Stelco. The ABL
facility is additionally secured by a second priority security
interest in all other property and assets of the Corporation, limited
to $300 million, and a fourth priority security interest for the
balance. The available amount of the ABL facility is dependent upon
the value of the underlying collateral of eligible accounts
receivable and eligible inventory and reserves, but will not exceed
$600 million. The ABL facility incurs an annual fee of 0.375% of any
non-use of funds available under the facility. The facility is
subject to certain restrictive covenants. At September 30, 2006, the
available amount of the ABL was $461 million and the amount drawn on
this facility was $390 million.
Secured Revolving Term Loan
On March 31, 2006, as part of the CCAA Plan, the Corporation entered
into a secured revolving term loan facility with a wholly owned
subsidiary of Tricap Management Ltd. (a shareholder of the
Corporation - Note 1), in the amount of $375 million for a term of
seven years. The facility is revolving for three years, after which
time the facility will cease to revolve and any amount outstanding on
that date will be repayable in full at the end of the seventh year.
The secured revolving term loan currently bears interest at bankers'
acceptance rate plus 6.75% until March 31, 2009 after which the loan
bears interest at bankers' acceptance rate plus 7.25%. The secured
revolving term loan is secured by a second priority interest on the
working capital assets of Stelco, except project financings, and a
first priority security interest in the fixed assets of Stelco. The
secured revolving term loan is also secured by all the tangible and
non-tangible assets of certain subsidiaries of Stelco and a pledge of
and security interest in all of the outstanding shares of interests
in certain subsidiaries, partnerships and joint ventures of Stelco.
Stelco intends to repay amounts borrowed under this facility within
one year, therefore these borrowings have been reflected as a current
liability on the Statement of Financial Position. Under this
facility, Stelco is required to pay an annual fee of 3% of the
aggregate commitment of $375 million on each anniversary date of CCAA
Plan implementation. In addition, the facility requires the Company
to pay 3% of the outstanding credit facility in place at March 31,
2009, if it intends to extend the facility.
Included in financial expense for the third quarter of 2006 is
approximately $1 million relating to borrowings under this agreement
($1 million in second quarter of 2006). The interest on borrowings is
calculated in accordance with the applicable lending agreement,
yielding approximately 11% as at September 30, 3006. The majority of
interest is paid prior to the end of each month, therefore a nominal
amount is outstanding at September 30, 2006. At September 30, 2006
there was $35 million outstanding under this loan.
9. LONG-TERM DEBT
---------------------------------------------------------------------
At September At March 31, At December
(in millions) 30, 2006 2006 31, 2005
---------------------------------------------------------------------
(Successor) (Successor) (Predecessor)
Long-term debt of Stelco
subject to compromise $ - $ - $ 412
Term loans associated with
discontinued operations(4) - - 16
Floating rate notes at
LIBOR + 8.50%(1)(5) 263 275 -
1% Province Note(2) 149 149 -
1% Province Note - fair
value adjustment(2) (90) (92) -
Term loan at Canadian prime
rate plus 2.50% matured on
June 10, 2005(3) 3 8 22
Term loan at bankers'
acceptance rate plus 1.50%
maturing on January 31,
2008(6) 20 27 33
---------------------------------------------------------------------
Long-term debt 345 367 483
Less amount subject to
compromise or held for sale - - (440)
Less amount due within one year (16) (21) (23)
---------------------------------------------------------------------
Long-term debt $ 329 $ 346 $ 20
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Floating Rate Notes
As part of the consideration in settlement of the affected claims
of the Predecessor, affected creditors received floating rate
notes ("FRN's") equal to the US dollar equivalent of $275 million
Canadian dollars ($235 million US dollars). The FRN's mature on
March 31, 2016. Interest on the FRN's is payable semi-annually.
At Stelco's option, the FRN's will bear an interest rate of LIBOR
plus 5.50% if paid in cash and LIBOR plus 8.50% if paid in new
FRN's or if interest payments are deferred and accrued in
accordance with the terms of the FRN's. Interest on the FRN'S in
the third quarter of 2006 totalled $7 million ($7 million in the
second quarter of 2006) and is included in financial expense.
Interest has been calculated under the cash payment option
consistent with the semi-annual payment made in September 2006.
For periods after March 31, 2008, the interest rate will be
calculated in the same manner as noted above, with the exception
that under certain conditions, the interest rate will be subject
to a reduction of 0.50%. For periods after March 31, 2011,
interest is payable in cash only. The FRN's are callable at 110%
of face value until March 31, 2008; then callable at 105% of face
value until March 31, 2009; then at 102.5% of face value until
March 31, 2010; and at par thereafter, in each case payable in
cash. The FRN's are secured by a security interest in the assets
of Stelco, subordinated and postponed to the security granted to
the ABL facility and the secured revolving term loan (Note 8) in
all respects including rights to payment and enforcement until
both the ABL facility and secured revolving term loan are repaid
in full.
(2) Province Note
In accordance with the Pension Agreement (see Note 13), the
Province of Ontario provided Stelco with $150 million on
March 31, 2006 in exchange for a note payable (the "Province
Note") and warrants to purchase 851,100 common shares of Stelco.
The Province Note is unsecured and is repayable on December 31,
2015, at Stelco's option, in cash or by delivering an equivalent
value in Stelco common shares. The Province Note is also subject
to a 75% discount if the solvency deficiencies in Stelco's four
main pension plans are eliminated on or before the maturity date.
At this time, there is no assurance that the Corporation will
receive the 75% discount. The Province Note bears an interest
rate of 1% per annum, payable semi-annually in cash or, at
Stelco's option, by delivering Stelco common shares. Interest
accrued on the Province Note in the third quarter 2006 totalled
$0.8 million ($0.4 million in the second quarter 2006) and is
included in financial expense. The semi-annual interest payment
due in September 2006 was paid in cash. At March 31, 2006, the
$150 million was allocated between the Province Note and the fair
value of the warrants (see Note 11 for terms of the warrants).
Upon the application of fresh start reporting on March 31, 2006,
the Province Note was adjusted to its estimated fair value of
$57 million (see Note 4) and will be accreted up to its face
value over the term of the Note assuming an effective interest
rate of 12%. During the third quarter of 2006 an accretion
expense of $1 million was recorded in interest on long-term debt
on the Consolidated Statement of Earnings (Loss) ($2 million in
the six month period ended September 30, 2006).
(3) The term loan is an obligation of a wholly owned subsidiary of
the Corporation. The loan is currently in default and the assets
remaining in the subsidiary are not sufficient to satisfy this
obligation.
(4) These term loans were assumed by the purchaser upon completion of
the sale of the non-core subsidiaries during the first quarter of
2006.
(5) There was a $1 million loss recorded in the third quarter of 2006
due to the revaluation of the FRN's using the September 30, 2006
US dollar exchange rate, compared to a $13 million gain recorded
in the second quarter of 2006.
(6) The term loan is an obligation of a wholly owned subsidiary of
the Corporation.
10. COMMITMENTS AND CONTINGENCIES
Capital Programs and Other Commitments
Stelco has binding commitments for capital programs totalling
$28 million. Of this amount, $23 million relates to Phase II of the
Lake Erie Steel hot strip mill upgrade.
Pursuant to an outsourcing agreement, the Corporation has committed
approximately $130 million up to and including year 2012.
Contingencies
Georgian Windpower Corporation ("GWC") commenced a lawsuit against
Stelco Inc. during the course of the CCAA proceedings alleging, among
other things, breach of contract by Stelco in connection with
Stelco's termination in April 2005 of a Memorandum of Understanding
and Agreement to Enter into a Land Lease Agreement between Stelco and
GWC. GWC has claimed damages of $350 million. The Corporation is
vigorously defending this action. The result and value of the GWC
claim is not determinable at this time and consequently the
Corporation has not recorded any provisions in the consolidated
financial statements.
11. CAPITAL STOCK
Common Shares
At September At March 31,
30, 2006 2006
---------------------------------------------------------------------
(Successor) (Successor)
Total number of common shares 27,103,921 26,100,000
Total (in millions) $ 149 $ 144
---------------------------------------------------------------------
New Common Shares
The Corporation issued 26,100,000 new common shares upon emergence
from CCAA with a value of $5.50 per share. On April 2, 2006, the
President and Chief Executive Officer purchased 1,000,000 newly
issued common shares for cash consideration of $5.5 million, bringing
the total number of common shares outstanding as of that date to
27,100,000. As a result of the exercise of warrants in the third
quarter 2006, referred to below, there are 27,103,921 common shares
outstanding at September 30, 2006.
Warrants
Upon emergence from CCAA, the Corporation issued a total of 2,269,600
warrants. The holders of liabilities subject to compromise received
1,418,500 warrants with an estimated fair value of $2 million as
partial consideration in exchange for their claim accepted under
CCAA. The Province received 851,100 warrants with an estimated fair
value of $1 million as partial consideration for the province loan
(Note 9). Each warrant entitles the holder to purchase one common
share at an exercise price of $11.00. The total number of common
shares issuable under the exercise of all outstanding warrants
represents approximately 7% of common shares outstanding upon the
exercise of warrants on a diluted basis. The warrants have a term of
seven years and are exercisable at any time after June 26, 2006 up to
their expiration on March 31, 2013. A total of 3,921 warrants were
exercised in the third quarter of 2006.
12. STOCK-BASED COMPENSATION
Incentive Stock Option Plan
Effective April 1, 2006, the Board of Directors approved an Incentive
Stock Option Plan (the "ISOP"). The ISOP is intended to attract and
retain superior directors, officers, advisors, employees and other
persons engaged to provide ongoing services to the Corporation or its
affiliates. The total number of stock options available under the
ISOP is 2,610,000, of which 1,944,000 were issued at an exercise
price of $5.50 per common share. The options vest semi-annually over
a four-year period from the date of the grant (the "Grant Date") in
eight equal installments, subject to acceleration under certain
circumstances. The options expire 10 years after the Grant Date. In
accordance with the provisions of the ISOP, the exercise price of
options granted thereunder is required to be the market value, as
defined in the ISOP, on the Grant Date. During the third quarter of
2006, no options were exercised, forfeited or granted (200,000
options forfeited and 150,000 additional options granted during the
second quarter 2006 at an exercise price of $17.75). The total
options available under the ISOP at September 30, 2006 are 716,000.
Total compensation expense of $0.4 million has been included in costs
for the third quarter of 2006 ($0.4 million in second quarter 2006).
The compensation expense for grants made under the ISOP was
determined at the grant date using the fair value method by applying
the Black-Scholes option-pricing model using the following
assumptions:
---------------------------------------------------------------------
Grant date June 21, 2006 April 1, 2006
Expected volatility 40% 40%
Risk-free interest rate 4.33% 4.00%
Expected life 0-4 years 0-4 years
Expected dividends Nil Nil
---------------------------------------------------------------------
The weighted average exercise price for options outstanding at
September 30, 2006 is $6.47.
13. EMPLOYEE FUTURE BENEFITS
Benefit Plan Cost
The defined benefit costs recognized in the third quarter and first
nine months of 2006 and 2005 are outlined as follows:
-------------------------------------------------------------------------
Six Three Nine
months months months
Three months ended ended ended ended
(in Sept. 30 June 30 Sept. 30 Sept. 30, March 31, Sept. 30,
millions) 2006 2006 2005 2006(1) 2006(1) 2005
-------------------------------------------------------------------------
(Pre- (Pre- (Pre-
(Successor) (Successor) decessor) (Successor) decessor) decessor)
Pensions $ 7 $ 3 $ 38 $ 10 $ 36 $ 115
Other
benefit
plans 17 20 23 37 27 70
-------------------------------------------------------------------------
Total
reported
in costs 24 23 61 47 63 185
-------------------------------------------------------------------------
Curtailments - 14 - 14 - -
Severance - 8 - 8 - -
Voluntary
retirement
incentives 6 19 - 25 - -
-------------------------------------------------------------------------
Total
reported
as
workforce
reduction
costs 6 41 - 47 - -
-------------------------------------------------------------------------
Total net
benefit
plan
costs $ 30 $ 64 $ 61 $ 94 $ 63 $ 185
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The nine-month period ended September 30, 2006 consists of three
quarters, which are not comparable.
(2) The six-month period ended September 30, 2006 is not comparable with
three months ended March 31, 2006 and has therefore been reported
separately.
Substantially all of the Corporation's pension benefit plans are not
fully funded.
Pension Plans
At June 30, Remeasure- Plan Retire- At June 30,
2006 ment Amendments ments 2006
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Affected Plans
Plan assets $ 2,781 $ (142) $ - $ - $ 2,639
Accrued benefit
obligations 3,124 (75) 87 63 3,199
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Funded status (343) (67) (87) (63) (560)
Unamortized net
actuarial (gains)
losses (6) 67 - 39 100
Unamortized past
service costs - - 87 - 87
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Accrued benefit
obligation (349) - - (24) (373)
Unaffected Plans
Accrued benefit
obligation (58) - - - (58)
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Total accrued
benefit obligation (407) - - (24) (431)
-------------------------------------------------------------------------
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Current (68) - - - (68)
Non-current (339) - (24) (363)
-------------------------------------------------------------------------
Total accrued
benefit obligation $ (407) $ - $ - $ (24) $ (431)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other Benefit Plans
At June 30, Remeasure- Plan Retire- At June 30,
2006 ment Amendments ments 2006
-------------------------------------------------------------------------
Affected Plans
Plan assets $ - $ - $ - $ - $ -
Accrued benefit
obligations 1,015 (66) (74) 23 898
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Funded status (1,015) 66 74 (23) (898)
Unamortized net
actuarial (gains)
losses - (66) - 20 (46)
Unamortized past
service costs - - (74) 13 (61)
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Accrued benefit
obligation (1,015) - - 10 (1,005)
Unaffected Plans
Accrued benefit
obligation (296) - - - (296)
-------------------------------------------------------------------------
Total accrued
benefit obligation (1,311) - - 10 (1,301)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current (59) - - - (59)
Non-current (1,252) - - 10 (1,242)
-------------------------------------------------------------------------
Total accrued
benefit obligation $ (1,311) $ - $ - $ 10 $ (1,301)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Assumptions
At June 30, At March 31,
2006 2006
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Discount Rate
Pension plans discount rate 5.50% 5.25%
Other benefit plans - healthcare 5.75% 5.25%
Other benefit plans - compensated absences 5.50% 5.00%
Retirement Age
Salaried employees 59 58
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As a result of the emergence from CCAA on March 31, 2006, the
Corporation was required to undertake a comprehensive revaluation of
its assets and liabilities, which included a remeasurement of all of
the Corporation's pension and other benefit plan obligations under
CICA Handbook Section 3461 - Employee Future Benefits. The results of
the remeasurement, as reported in the first quarter 2006, included
the elimination of previously recorded unamortized net actuarial
losses and unamortized past service costs.
In the second quarter 2006, there was:
- a contract settlement reached with USW Local 1005 which contained
pension and benefit improvements, including an annual pension
indexing tied to a cost of living adjustment;
- announced reductions in the other benefit programs, which
substantially impacted the active salary workforce (and salaried
retirees);
- a Salaried Transition Assistance Program ("STAP"), which provided
incentives for early retirement or resignation to employees who
were members of the two principal salary defined benefit pension
plans. The program closed on June 30, 2006;
- a Transition Assistance Program ("TAP"), which provided incentives
for early retirement to Hamilton Steel bargaining unit employees
as part of the contract settlement reached with USW Local 1005.
The program closed on July 14, 2006.
The STAP resulted in a severance expense of $19 million in the second
quarter 2006 which, when combined with other terminations in the
period of $8 million, resulted in a total cost of $27 million. The
TAP resulted in a voluntary retirement incentive cost of $6 million
which was recognized in the third quarter 2006.
These events had an impact on three of the Corporation's four
principal pension and other benefit plans (the Hamilton Steel
bargaining unit plans and the salary plans covering the Lake Erie
Steel salary workforce and the combined Corporate and Hamilton Steel
salary workforce). The Lake Erie Steel bargaining unit plans are not
impacted by these changes as they are covered under a separate labour
agreement.
As a result of the significant reduction of the salary workforce
arising from the STAP program and the impact of certain reductions in
the salary other benefit programs there was a net curtailment expense
recognized in the second quarter 2006 of $14 million.
Two plan amendments (the Hamilton Steel bargaining unit pension
indexing adjustment, net of a reduction in the salary early
retirement pension benefit) resulted in net pension unamortized past
service cost of $87 million. While this amount did not impact second
quarter 2006 earnings, the amount will be amortized over the expected
average remaining service life ("EARSL") of the active employees. The
amortization resulted in an increase in pension expense of $4 million
in the third quarter 2006.
Other benefit plan amendments which primarily reflect an extensive
reduction to the salary health care benefits resulted in an
unamortized past service gain of $74 million. Similar to the pension
impact noted above, this amount did not impact second quarter 2006
earnings and will be amortized over EARSL. Amortization of this gain
resulted in a reduction in other benefit plan expense of $3 million
in the third quarter 2006.
As a result of the significant plan amendments, there was a
requirement to remeasure the affected plans described above as at
June 30, 2006. The remeasurement required a review and update of all
significant assumptions underlying these plans, including the
discount rate, retirement age, and expected long term rate of return
on pension plan assets. The change in assumptions is tabled in this
note. In the case of the pension plans the actual negative returns
experienced since the last remeasurement in March 2006 compared to
the expected rate of return exceeded the favourable impact of the
0.25% increase in the pension discount rate, resulting in a net
pension unamortized actuarial loss of $67 million. The effect of
employee reductions both prior to and including the TAP program for
the Hamilton bargaining unit plan added an additional $39 million to
the actuarial loss.
In the case of the other benefit plans, the increase in the discount
rate by 0.5% resulted in an unamortized actuarial gain of
$66 million. The effect of employee reductions, both prior to and
including the STAP and TAP, resulted in an unamortized actuarial loss
of $20 million.
Pension Plan Funding Arrangements
As a condition of the CCAA Plan, Stelco and the Province entered into
the Pension Agreement, effective on March 31, 2006, which contains
the following principal terms:
- Stelco was obligated to make an initial up-front payment of
$400 million to its four main pension plans less any contributions
to plans already made in 2006. As a result, Stelco made a
$382 million payment to the plans on March 31, 2006;
- Stelco will fund its four main pension plans in the following
amounts in the years subsequent to December 31, 2005:
Years 1 - 5: $65 million per year ($32.5 million in 2006),
payable monthly, commencing July 1, 2006; and
Years 6 - 10: $70 million per year, payable monthly;
- Stelco will make additional pension plan payments to fund any
solvency deficiency in the Stelco four main pension plans if
Stelco generates free cash flow in excess of certain minimum
thresholds as set out in the Pension Agreement, subject to Stelco
having more than a minimum liquidity amount; and
- Stelco will not be required to make any adjustments to its pension
funding based on annual actuarial valuations up to December 31,
2015 provided that any future benefit improvements which will be
required to be funded in accordance with the Pension Benefits Act
and will be in addition to the funding payments outlined above.
While the Pension Agreement with the Province has a prescribed
funding obligation as outlined above, pension plan enhancements, such
as the recently negotiated hourly pension indexing, are excluded from
this arrangement. Accordingly, the hourly pension indexing is subject
to additional cash funding under the Pension Benefits Act, totalling
an estimated $121 million over the next eight years.
14. ASSETS HELD FOR SALE
In August 2006 the Corporation entered into an agreement to sell a
parcel of non-core, surplus land in Hamilton and a building located
on the property for cash proceeds of $17.5 million. Completion of the
sale is subject to a number of conditions. The book value of these
assets under the fresh start revaluation, which is equal to the
expected net proceeds, has been classified as assets held for sale,
as at September 30, 2006.
15. EARNINGS (LOSS) PER COMMON SHARE
Interest on the convertible debentures is recorded in the
Consolidated Statement of Earnings (Loss) as interest on long-term
debt and debt subject to compromise. This amount, net of tax, is
added back to net earnings (loss) from continuing operations and net
earnings (loss) in order to calculate fully diluted earnings (loss)
from continuing operations and fully diluted earnings (loss) per
common share. Fully diluted earnings (loss) per common share is
calculated by applying the treasury stock method for the potential
exercise of stock options, and assuming the dilutive effect of the
conversion of all outstanding convertible debentures at the $4.50 per
share conversion price applicable to those debentures.
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Six Three Nine
Months Months Months
Three Months Ended Ended Ended Ended
Sept. 30 Sept. 30 Sept. 30 March 31 Sept. 30
(in millions) 2006 2005 2006(2) 2006(2) 2005
-------------------------------------------------------------------------
(Pre-
(Successor) decessor) (Successor) (Predecessor)
Basic net earnings
(loss) from
continuing
operations $ (25) $ (18) $ (56) $ (79) $ 58
Convertible
debentures -
interest expense
net of tax - 1 - 1 4
-------------------------------------------------------------------------
Fully diluted net
earnings (loss)
from continuing
Operations $ (25) $ (17) $ (56) $ (78) $ 62
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic net earnings
(loss) (25) (42) (56) (122) 47
Convertible
debentures -
interest expense
net of tax - 1 1 4
-------------------------------------------------------------------------
Fully diluted net
earnings (loss) $ (25) $ (41) $ (56) $ (121) $ 51
-------------------------------------------------------------------------
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Weighted average
number of common
shares outstanding
- basic 27,102,278 27,101,145 102,249,199
102,249,198 102,249,198
Incremental
number of
common shares
assumed to be
issued on the
exercise of
Stock options 1,302,281 - 1,278,196 - 84,254
Incremental
number of
common shares
assumed to be
issued on the
exercise of
warrants 1,062,276 - 1,013,294 - -
Common shares
issued on the
assumed
conversion of
convertible - 20,000,000 - 20,000,000 20,000,000
-------------------------------------------------------------------------
Weighted average
number of common
shares outstanding
- fully diluted 29,466,835 29,392,635 122,333,453
122,249,198 122,249,198
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options to
purchase common
shares not
included in the
above
calculation(1) - 5,001,680 - 4,986,012 4,751,680
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Exercise prices were greater than the average market price of the
common shares during the periods.
(2) The six-month period ended September 30, 2006 is not comparable with
three months ended March 31, 2006 and has therefore been reported
separately.
During the three months and six months ended September 30, 2006 a
basic net loss from continuing operations and a basic net loss was
incurred, therefore options and warrants related information have not
been used to calculate fully diluted earnings per share from
continuing operations and fully diluted earnings per share as both
are anti-dilutive where applicable.
16. SEGMENTED INFORMATION
The following provides segmented information by geographic area.
Sales are allocated to the country in which the third party customer
receives the product:
-------------------------------------------------------------------------
Six Three Nine
Months Months Months
Three Months Ended Ended Ended Ended
Sept. 30 Sept. 30 Sept. 30 March 31 Sept. 30
(in millions) 2006 2005 2006(1) 2006(1) 2005
-------------------------------------------------------------------------
(Pre- (Pre- (Pre-
(Successor) decessor) (Successor) decessor) decessor)
Geographic segments
Net sales
Canada $ 564 $ 506 $ 1,196 $ 609 $ 1,754
United States 90 50 151 60 177
Other 6 3 11 5 14
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Net Sales $ 660 $ 559 $ 1,358 $ 674 $ 1,945
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The six-month period ended September 30, 2006 is not comparable with
three months ended March 31, 2006 and has therefore been reported
separately.
---------------------------------------------------------------------
At Sept. At March At December
(in millions) 30, 2006 31, 2006 31, 2005
---------------------------------------------------------------------
(Successor) (Successor) (Predecessor)
Capital assets - net
Canada $ 1,373 $ 1,398 $ 947
United States 368 377 57
---------------------------------------------------------------------
Capital assets - net $ 1,741 $ 1,775 $ 1,004
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%SEDAR: 00001549E
