Increase in EBITDA Reported
TSX: WEF
DUNCAN, BC, Nov. 10 /CNW/ - Western Forest Products Inc. (TSX: WEF) today
announced its results for the third quarter of 2006. The Company achieved
EBITDA of $10.2 million in the quarter compared to $7.7 million in the second
quarter and negative $11.5 million in the third quarter of 2005. Year to date
EBITDA totalled $17.8 million, an increase of $24.1 million compared to the
same period in 2005. The loss from operations narrowed to $0.8 million in the
quarter from a loss of $8.0 million in the second quarter and a loss of
$10.1 million in the third quarter of 2005. The improvement reflects a higher
value mix of products sold and strong cedar prices.
<<
Q3 Progress Highlights
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- Average prices realized on lumber products increased to $739 per
thousand board feet in the third quarter compared to $648 per
thousand board feet in the second quarter due to changes in the mix
of products sold and higher prices for some products. The results for
the quarter also reflect the Cascadia operations for the full quarter
compared to only two months in the second quarter.
- Progressed the integration and consolidation of the acquired Cascadia
and Englewood operations.
- Reduced average unit conversion costs at the legacy Cascadia sawmills
by 16% since acquisition.
- By-product revenues increased 60% to $20.7 million in the third
quarter compared to the second quarter due to higher lumber
production and higher wood chip prices.
- Expect to receive approximately US$110 million in the fourth quarter
as a result of the settlement of the softwood lumber dispute.
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>>
The Company reported a net loss from continuing operations of
$11.4 million or $0.06 per share in the third quarter of 2006 compared to a
net loss from continuing operations of $8.2 million or $0.32 per share (based
on weighted average number of common shares outstanding at that time) in the
comparable period of 2005. The results for the comparable period of 2005
included a foreign exchange gain of $13.3 million on the translation of the
Company's long-term debt and a net gain of $5.9 million associated with the
termination of a fibre-supply agreement and restructuring activities.
Reynold Hert, President and CEO noted, "Our results for the quarter
partly reflect the operational improvements we have begun to make in the
business following the acquisitions earlier this year."
Operations
Cedar lumber prices continue to be well-supported in all markets
including the U.S. The Japanese market has also been relatively robust due to
increased housing starts in 2006 and reductions in supply from competing
regions. Pricing in Japan has been firm, particularly for kiln-dried products.
Conversely, the U.S. dimension lumber market has been influenced by a
reduction in the number of housing starts coupled with over-supplied markets
in the period leading up to the new softwood lumber agreement, which has had
the effect of depressing prices for dimension lumber.
Reynold Hert further noted that, "The acquisition of Cascadia has helped
us weather the recent steep price decline in the U.S. structural dimension
market. The U.S. structural lumber market represents a lower percentage of our
total sales in the combined company and to some extent we are able to redirect
our fibre to produce a higher-value product for other markets."
Outlook
"As we look forward to the end of the year, we expect to remain
challenged by the current environment. However, we are working towards
positioning ourselves for long-term profitability and will remain focused on
executing our strategy of building a coastal lumber company capable of
competing in global markets. This means we will continue to work on reducing
costs, leveraging the synergies between our operations, upgrading our existing
facilities, lowering our cost of capital and divesting of our non-core assets,
including private timberlands," concluded Reynold Hert.
TELECONFERENCE CALL NOTIFICATION: Wednesday, November 15, 2006 at
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10:00 a.m. PST/1:00 p.m. EST
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On Wednesday, November 15, 2006, Western Forest Products Inc. will host a
teleconference call at 10:00 a.m. PST (1:00 p.m. EST). To participate in the
teleconference please dial 1-800-814-4859 in Canada and the U.S. (toll free)
and in Toronto or Internationally, 416-644-3416 before 10:00 a.m. PST
(1:00 p.m. EST). This call will be taped, available one hour after the
teleconference, and on replay until November 29, 2006. To hear a complete
replay, please call 1-877-289-8525 in Canada and the U.S. (toll free),
Passcode 21207838 followed by the number sign or in Toronto and
Internationally, 416-640-1917, Passcode 21207838 followed by the number sign.
This call will also be webcast from Western's website at
www.westernforest.com.
Western Forest Products
Western is an integrated Canadian forest products company and the largest
coastal British Columbia woodland operator and lumber producer with an Annual
Allowable Cut of approximately 7.7 million cubic meters (before temporary AAC
reductions) of timber and lumber capacity in excess of 1.5 billion board feet
from nine sawmills and five remanufacturing plants. Principal activities
conducted by the Company and its subsidiaries include timber harvesting,
reforestation, sawmilling logs into lumber and wood chips, and value-added
remanufacturing. Substantially all of Western's logging is conducted on
government-owned timberlands in British Columbia. All of Western's operations,
employees and corporate facilities are located in the coastal region of
British Columbia, while its products are sold in over 20 countries worldwide.
Forward-Looking Statements and Information
This press release contains forward-looking statements and
forward-looking information within the meaning of applicable securities law.
Those statements and information include statements or information regarding
the intent, belief or current expectations of Western. Such statements or
information may be indicated by words such as "approximately", "achieving",
"estimated", "expect", "anticipate", "plan", "intend", "believe", "will",
"should", "may" and similar words and phrases. Readers are cautioned that any
such forward-looking statements or information are not guarantees and may
involve known and unknown risks and uncertainties, and that the actual results
may differ from those expressed or implied in the forward-looking statements
or information as a result of various factors including, changes in government
regulation, and misjudgments in the course of preparing forward-looking
statements or information. The information contained under the "Risk Factors"
section of Western's Annual Information Form and under the "Risks and
Uncertainties" section of Western's Management's Discussion and Analysis
identifies important factors that could cause such differences. All written
and oral forward-looking statements or information attributable to Western or
persons acting on behalf of Western are expressly qualified in their entirety
by the foregoing cautionary statements. Western does not expect to update
forward-looking statements or information as conditions change.
Western Forest Products Inc. - 2006 Third Quarter Report
Management's Discussion & Analysis
The following discussion and analysis reports and comments on the
financial condition and results of operations of Western Forest Products Inc.
(the "Company", "Western", "us", "we", or "our"), on a consolidated basis, for
our third quarter and nine months ended September 30, 2006 to help security
holders and other readers understand our Company and the key factors
underlying our financial results. You should read this discussion and analysis
in conjunction with our unaudited interim consolidated financial statements
and related notes thereto for the third quarter and nine months ended
September 30, 2006, and our audited annual consolidated financial statements
and management's discussion and analysis ("MD&A") for the year ended
December 31, 2005 (the "2005 Annual Report"), all of which are filed on SEDAR
at www.sedar.com under our Company's name.
Unless otherwise noted, the information in this discussion and analysis
is updated to November 9, 2006. All financial references are in Canadian
dollars unless otherwise noted.
<<
Summary of Selected Quarterly Results
Three Three Three Nine Nine
(millions of Months Months Months Months Months
dollars except Ended Ended Ended Ended Ended
per share September June 30, September September September
amounts) 30, 2006 2006 30, 2005(1) 30, 2006 30, 2005(1)
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Sales $ 279.5 $ 220.0 $ 116.3 $ 617.7 $ 379.4
Countervailing &
anti-dumping
duties $ 6.3 $ 5.6 $ 8.3 $ 15.9 $ 30.4
EBITDA(2) $ 10.2 $ 7.7 $ (11.5) $ 17.8 $ (6.3)
EBITDA margin 3.6% 3.5% (9.9)% 2.9% (1.7)%
Operating loss $ (0.8) $ (8.0) $ (10.1) $ (14.8) $ (28.6)
Interest expense $ (10.9) $ (9.9) $ (11.2) $ (31.9) $ (34.5)
Foreign exchange
gain (loss) on
long-term debt $ (0.3) $ 9.7 $ 13.3 $ 8.5 $ 8.4
Premium and
unamortized
discount on bond
redemption $ - $ - $ - $ (27.9) $ -
Net loss from
continuing
operations $ (11.4) $ (7.5) $ (8.2) $ (65.4) $ (50.0)
Net loss from
discontinued
operations $ (0.8) $ (1.9) $ (4.3) $ (9.8) $ (5.0)
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Net loss $ (12.2) $ (9.4) $ (12.5) $ (75.2) $ (55.0)
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Per share:
Basic and diluted
loss from
continuing
operations $ (0.06) $ (0.05) $ (0.32) $ (0.52) $ (1.95)
Basic and diluted
net loss $ (0.06) $ (0.06) $ (0.49) $ (0.60) $ (2.15)
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Cash flow from
continuing
operations $ 5.3 $ (30.9) $ 19.0 $ (36.3) $ 18.9
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(1) Restated to treat the pulp segment as discontinued operations.
(2) Non-GAAP measure - see page 6 for a discussion of EBITDA.
>>
Overview
Since Western completed its acquisition of Cascadia Forest Products Ltd.
("Cascadia") on May 1, 2006 and Englewood on March 17, 2006 the Company has
been focusing on implementing its integration plan to bring the organizations
together and realize the synergies, expanded markets and cost reductions. In
addition to the previously announced organizational changes that will reduce
the Company's management staff by approximately 110 staff positions by the
first quarter of 2007, the Company has been focusing on the integration of its
operations. Our corporate and administration groups have been consolidated in
Duncan on Vancouver Island, our logging operations centralized in Campbell
River, also on Vancouver Island, and the sales organizations brought together
in one office in Vancouver. We have been working on consolidating our
timberlands operations with the objective of increasing productivity and
reducing fixed costs per unit logged. We have also been optimizing log flows
from our timberlands to our sawmills to take advantage of the shorter barging
and towing distances available with the increased mill configuration. Sawmill
conversion costs at the Cascadia sawmills have decreased by approximately 16%
since we acquired them as a result of changes to operating procedures.
The results of operations for the quarter and nine months ended
September 30, 2006 include the legacy Cascadia and Englewood operations from
May 1, 2006 and March 17, 2006, respectively and accordingly, the results are
not directly comparable to the prior periods.
Western's operations for the third quarter of 2006 narrowed the loss from
operations to $0.8 million compared to a loss of $8.0 million recorded in the
second quarter. EBITDA also improved to $10.2 million in the third quarter of
2006 compared to $7.7 million in the second quarter of 2006 and negative
$11.5 million in the third quarter of 2005. For the first nine months of 2006,
the Company has generated EBITDA of $17.8 million compared to negative
$6.3 million in the comparable period of 2005. Compared to the second quarter
of 2006, the third quarter results have benefited from higher cedar and fir
prices, the sale of a higher-value range of products, and increasing wood chip
prices driven by higher pulp prices, offset to some extent by higher logging
costs due to the extended summer down-time as a result of the prolonged dry
weather and resulting forest fire hazard.
The Company incurred a net loss from continuing operations for the third
quarter of 2006 of $11.4 million ($0.06 per share), compared to the net loss
from continuing operations of $7.5 million ($0.05 per share) in the second
quarter of 2006 and a net loss from continuing operations of $8.2 million
($0.32 per share) in the third quarter of 2005. The per share amounts are
calculated using the weighted average number of Common and Non-Voting Shares
outstanding during the respective periods and reflect the share issuance on
May 1, 2006. The increase in the loss for the third quarter compared to both
the second quarter of 2006 and the third quarter of 2005 is primarily
attributable to the prior periods reflecting foreign exchange gains of
$9.7 million and $13.3 million, respectively on the translation of the
Company's long-term debt. The Company recorded a foreign exchange translation
loss of $0.3 million in the third quarter of 2006 as the exchange rate between
the United States and Canadian dollars was relatively constant.
<<
Continuing Operations
Three Three Three Nine Nine
Months Months Months Months Months
(millions of Ended Ended Ended Ended Ended
dollars except September June 30, September September September
where noted) 30, 2006 2006 30, 2005 30, 2006 30, 2005
-------------------------------------------------------------------------
Lumber sales $ 214.0 $ 158.1 $ 88.2 $ 459.3 $ 293.0
Log sales 44.8 49.0 22.2 117.5 66.4
By-product sales 20.7 12.9 5.9 40.9 20.0
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$ 279.5 $ 220.0 $ 116.3 $ 617.7 $ 379.4
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Lumber production -
millions of
board feet 326 250 150 729 521
Lumber sales -
millions of
board feet 291 243 165 698 503
Log production -
thousands of
cubic metres 1,617 1,898 465 4,177 2,111
Log purchases -
thousands of
cubic metres 169 143 147 972 539
Log sales - thousands
of cubic metres 592 605 172 1,460 551
Internal Log
consumption -
thousands of
cubic metres 1,350 1,031 719 3,032 2,438
Average lumber sales
revenue per
thousand board
feet $ 739 $ 648 $ 535 $ 658 $ 583
Average log sales
revenue per
cubic metre $ 76 $ 81 $ 129 $ 80 $ 121
>>
Lumber sales increased to 291 million board feet in the third quarter of
2006 compared to 243 million board feet in the second quarter of 2006
primarily as a result of the inclusion of sales from the acquired Cascadia
operations for three months, compared to only two months in the second
quarter. Similarly, lumber production increased to 326 million board feet
compared to 250 million board feet in the second quarter. Lumber sales volumes
of higher-value products were negatively impacted by the continuing lack of
cedar, fir and cypress logs. This shortage was attributable to the combined
impacts of the carryover of lower volumes logged by many operators in late
2005 due to low log prices at the time, delays in harvesting logs in early
2006 due to snow pack at higher elevations, the lower log production in the
logging tenures taken back by the BC Government under Bill 28 and the
curtailment of summer logging due to the increased forest fire hazard. Moving
into the fourth quarter the availability of logs has increased as logging
production has increased. Lumber inventories increased in the third quarter
relative to the second quarter as sales of dimension products destined for the
United States market were impacted by over-supplied markets.
The average lumber price realized in the third quarter increased to
$739 per thousand board feet compared to $648 per thousand board feet in the
second quarter due to higher prices for cedar and fir upper-end products, and
an increase in the relative proportions of higher-value cedar product sold. In
addition, the third quarter includes three months' sales from the acquired
Cascadia operations that have higher average sales realizations as a result of
additional processing activities compared to the legacy Western operations.
Sales prices for dimension products into the United States, which account for
a lower proportion of the combined Company's overall sales, fell sharply
towards the end of the third quarter due to over-supply.
By-product revenues for the quarter increased to $20.7 million from
$12.9 million in the second quarter due to the increased production of lumber
noted above as well as increased wood chip prices. The prices the Company
receives for wood chips are generally based on the pulp mill net prices of our
customers. As pulp prices have increased so too have wood chip prices.
Log production of 1,617,000 cubic metres in the third quarter compares to
1,898,000 cubic metres in the second quarter of 2006. Log production in the
quarter was negatively impacted by the unseasonably hot and dry weather that
prolonged the normal August logging curtailments (due to the forest fire
hazard) into early September. This reduced logging resulted in higher unit
logging costs in the quarter due to the absorption of fixed costs and an
increase in more expensive saw log purchases from third parties.
Log sales to third parties were also impacted by the decreased logging
activity, falling to 592,000 cubic metres in the third quarter compared to
605,000 cubic metres in the second quarter of 2006. The overall log price
achieved on external log sales decreased to $76 per cubic metre in the third
quarter compared to $81 per cubic metre in the second quarter of 2006 and
$129 per cubic metre in the third quarter of 2005 due to the increase in the
relative quantity of pulp logs available and sold as compared to saw logs.
As recently disclosed, the Company anticipates temporary reductions in
its timber harvesting rights in the Haida Gwaii/Queen Charlotte Islands and
the Central Coast of approximately 450,000 cubic metres, or 6% of its overall
annual timber rights, as a result of the temporary reductions announced by the
British Columbia Chief Forester. The reductions affect several coastal logging
operators and, in the case of the Company, were anticipated and have been
factored into the Company's short-term harvesting and mill production plans.
If the Part 13 orders that gave rise to the temporary reductions extend for
more than four years from the date of issue or the Province's land use
planning process results in these reductions becoming permanent, then the
Company will have the ability to seek compensation from the Province for the
reduced cutting rights thereafter. As anticipated, the Company was also
notified of a permanent reduction of its cutting rights at its Englewood
logging division that will reduce the Annual Allowable Cut to 844,000 cubic
metres from approximately 945,000 cubic metres. The reduction is the result of
the five year timber supply review performed by the Province.
Discontinued Operations
The last production shift at the Squamish pulp mill was on January 26,
2006 and most of the workforce completed their employment with the Company on
March 9, 2006. The Company continues to evaluate possible future uses for the
site including its sale and is currently considering proposals from parties
interested in acquiring the pulp production equipment.
The loss from discontinued operations during the third quarter of 2006 of
$0.8 million compares to a loss of $1.9 million in the second quarter of 2006
and to a loss of $4.3 million in the third quarter of 2005 when the pulp mill
was operating. The Company will incur ongoing costs for supervision, security,
property taxes and other costs in 2006 and future years depending on the
Company's plans for the site. These costs will be expensed as incurred.
Other Corporate Items
Selling and administration expense for the third quarter of 2006 of
$11.4 million compares to $10.3 million in the second quarter of 2006 and
$4.9 million in the third quarter of 2005. The increase is primarily
attributable to the inclusion of three months of the acquired Cascadia
operations in the third quarter compared to two months in the second quarter
of 2006. In addition, increased consulting and transitioning costs with
respect to integration activities are expected to continue through to the end
of the first quarter of 2007.
The Company recorded a charge of $27.9 million during the first quarter
in connection with the redemption of its 15% Secured Bonds with respect to the
107.5% redemption price for the bonds and the accretion of the balance of the
discount that arose on the issue of the bonds in 2004.
<<
Changes in Financial Position and Liquidity
Three Three Three Nine Nine
Months Months Months Months Months
(millions of Ended Ended Ended Ended Ended
dollars except September June 30, September September September
where noted) 30, 2006 2006 30, 2005 30, 2006 30, 2005
-------------------------------------------------------------------------
Cash flow from
continuing
operations $ 5.3 $ (30.9) $ 19.0 $ (36.1) $ 18.9
Cash used in
investing
activities $ (4.6) $ (227.4) $ (6.9) $ (198.9) $ (12.3)
Cash provided (used)
by financing
activities $ - $ 281.6 $ (7.1) $ 242.1 $ (6.0)
Additions to
property, plant
and equipment $ (7.6) $ (6.3) $ (3.7) $ (15.3) $ (6.8)
Additions to
capitalized roads $ (5.1) $ (4.8) $ (3.3) $ (12.1) $ (11.2)
Change in bank
indebtedness $ - $ (8.6) $ (7.1) $ (80.0) $ (6.0)
Total liquidity(1) $ 129.2 $ 116.6 $ 71.3 $ 129.2 $ 71.3
Financial ratios:
Current assets to
current liabilities 2.62 2.90 1.67 2.62 1.67
Debt to shareholders
equity 1.66 1.58 2.30 1.66 2.30
Debt to market
capitalization 1.62 1.35 6.24 1.62 6.24
(1) Total liquidity comprises cash, restricted cash in working capital
reserves and available credit under the Company's revolving credit
facility.
>>
Cash flow from continuing operations in the third quarter of 2006 of
positive $5.3 million compares to negative cash flow of $30.9 million in the
second quarter of 2006 and positive $19.0 million in the third quarter of
2005. Cash flow in each quarter was significantly impacted by changes in
non-cash working capital due to the timing of cash flows. Cash flow from
continuing operations before the changes in non-cash working capital items was
positive $2.7 million in the quarter compared to negative $5.2 million in the
second quarter of 2006 and negative $29.7 million in the third quarter of
2005. The improvement in the third quarter compared to the second quarter of
2006 is attributable to the increase in EBITDA in the quarter.
Cash flow from continuing operations for the nine months ended
September 30, 2006 of negative $36.1 million, compared to positive $18.9
million in the comparable period of 2005, was also significantly impacted by
working capital changes. Cash flow from continuing operations before the
changes in non-cash working capital items was negative $14.8 million for the
nine months compared to negative $40.1 million for the comparable period of
2005. The improvement is primarily due to the $24.1 million increase in EBITDA
during the same period.
Additions to property, plant and equipment of $7.6 million in the third
quarter and $15.3 million for the year to date primarily relate to
improvements to the Company's Cowichan Bay and Duke Point sawmills designed to
increase productivity and various timberlands equipment purchases. In
addition, the Company has centralized its log sorting operations for the
Nootka Sound area of Vancouver Island with an upgraded dryland sort in Gold
River.
Cash flow from investing and financing activities for the nine months
ended September 30, 2006 included the closing of the acquisition of Cascadia.
This resulted in the $295.0 million raised through the issuance of
178.8 million subscription receipts plus interest earned thereon being
released to the Company (see note 6 to the Unaudited Interim Consolidated
Financial Statements). The subscription receipts were converted into 94.2
million Common Shares of the Company and 84.6 million Non-Voting Shares. Of
the amount raised, $220.1 million ($216.3 million net of the cash acquired)
was paid for the acquisition of Cascadia and $76.4 million received by the
Company. These funds have been used to pay off Cascadia's revolving credit
facility of $8.6 million, fund some of the structural changes to the business
and provide additional liquidity. During the quarter the Company received $6.6
million with respect to an adjustment to the purchase price for forestry
liabilities assumed. The adjustment with respect to the difference between the
estimated and actual working capital at closing estimated at $13.0 million is
expected to be received in the fourth quarter, once agreed.
Cash flow from investing activities for the first nine months of 2006
also includes the $35 million non-refundable prepayment of the price premium
received as consideration for entering into a 40-year fibre supply agreement.
The payment was applied to reduce the amount drawn under the Company's
revolving line of credit.
Cash flow from financing activities for the nine months ended
September 30, 2006 includes the redemption of the Company's Secured Bonds. The
bond redemption amount of US$237.6 million (Cdn$275.9 million) plus accrued
interest of US$14.9 million (Cdn$17.3 million) was funded from the proceeds of
the new US$187.5 million and Cdn$90.0 million term loans (total
Cdn$307.8 million) obtained from the Brookfield Bridge Lending Fund. The
redemption of the Secured Bonds also resulted in the release of the $8.9
million of restricted cash held in the Working Capital Reserve. On May 1,
2006, as required, the Company paid down US$4.2 million of the U.S. term loan,
resulting in a balance outstanding at September 30, 2006 of US$183.3 million.
At September 30, 2006 the balance outstanding under the Canadian term loan
totaled $96.7 million and includes the deferral of interest of $6.7 million on
the loan as permitted under the loan agreement.
During the quarter, the Company completed amendments to its revolving
credit facility increasing the maximum amount of the facility to
$150.0 million and extending the term of the agreement until July 12, 2009.
Depending on inventory and accounts receivable levels, the Company estimates
it should be able to draw on the line in the range of $110.0-$150.0 million.
At September 30, 2006 the Company had availability under the facility of
$120.1 million of which $20.9 million had been used to support standby letters
of credit.
Selected Quarterly Information
To assist shareholders and other readers in understanding our business,
we have included as Appendix A to the MD&A a table of the financial results
and operating data for the Company for the last eight quarters.
In a normal operating year, there is some seasonality to the Company's
operations with higher activity in the second and third quarters as
construction activity, particularly in the U.S., tends to be higher. Logging
activity may also vary depending on weather conditions due to rain, snow and
ice in the winter and the threat of forest fires in the summer.
Risks and Uncertainties
Our business is subject to a number of risks and uncertainties, including
those described in our 2005 Annual Report and Annual Information Form, which
are available on SEDAR at www.sedar.com. Any of the risks and uncertainties
described in the above-noted documents could have a material adverse affect on
our operations and financial conditions and cash flow and accordingly should
be carefully considered in evaluating our business.
Outlook and Strategy
The Company anticipates that the fourth quarter will continue to be
challenging due to a number of factors. The United States dimension lumber
market has been influenced by a reduction in the number of housing starts
coupled with over supplied markets in the period leading up to the new
softwood lumber agreement. This had the effect of depressing prices for
dimension lumber which in turn has resulted in the maximum 15% border tax for
U.S. bound products. This period of low demand, over supply, low price and
high tax on dimension lumber is expected to continue through the remainder of
the year. During this period, the Company will be taking down-time at its
Cowichan Bay sawmill in December to complete the tie-in of the capital
modifications that have been ongoing during 2006. The timing of this project
is well suited to market conditions given the slow down in the U.S. market.
Cedar lumber prices continue to be well supported in all markets
including the U.S. The company anticipates that cedar sales will slow over the
winter months as per the normal seasonal trend, however the strategy is to
maintain cedar harvest and production levels to support the remaining demand
in the fourth quarter, as well as in support of cedar sales in the first
quarter of 2007. The Japanese market has also been relatively robust which is
due to increased housing starts in 2005 and restrictions in supply from
competing regions. Pricing has been firm, particularly for kiln dried
products. Strategically, product volume has been moved from U.S. to Japanese
lumber programs in response to market demand. We are anticipating that the
current market trends will continue for the balance of the year.
The new softwood lumber agreement ("SLA") that replaces the existing
United States-imposed countervailing and anti-dumping duties regime with an
export tax, payable to the Canadian Government, came into effect on
October 12, 2006. The SLA will have a significant impact on the Company as it
should result in the return of approximately 82% of the duty deposits paid by
the Company plus accumulated interest. Depending on the timing of the refund
of the duties, currently anticipated to be in late 2006 or early 2007, the
Company expects to receive approximately US$110.0 million. The monies received
will be primarily applied to pay down the Company's long-term debt and
strengthen the Company's financial position. The Company may also choose to
retain up to $25 million for working capital purposes as permitted under the
terms of its credit agreement.
British Columbia's coastal region, the area in which the Company
operates, has elected to be subject to the new export tax only and not the
quota alternative. The export tax rate varies according to the price of lumber
based on the "Random Lengths Framing Lumber Composite Index" ("Index") and
ranges from zero percent when the Index is above US$355 per thousand board
feet to 15% when the Index is under US$315 per thousand board feet. The export
tax only applies to the first US$500 per thousand board feet for any product
sales. In addition, if the monthly volume of exports from the British Columbia
coastal region exceeds a certain "Trigger Volume" as defined in the SLA, a
mechanism will apply to increase the rate of the export tax for that month by
50% (for example the 15% export tax rate would become 22.5% for that month).
Based on the current Index and assuming shipments do not exceed the Trigger
Volume, shipments to the United States will be subject to a 15% export tax in
the fourth quarter.
The Company has not recognised the refund of the duties for accounting
purposes in the third quarter due to both the uncertainty of the timing of the
refund and the new export tax, which is a requirement of the SLA, not yet
having received formal approval by the Canadian Parliament. It is anticipated
that these conditions may be present in the fourth quarter of 2006.
The Company continues to work on the removal of approximately
29,000 hectares of its private timberlands from their respective Tree Farm
Licences as a first stage in exploring their possible sale. Sale proceeds
would also be used primarily to pay down the Company's long-term debt.
The Company is continuing its evaluation of the acquired Cascadia
operations and the opportunities for rationalization across the combined
Company.
Outstanding Share Data
The Company completed its rights offering of subscription receipts to all
shareholders on March 9, 2006, raising $295.0 million. On May 1, 2006,
following the closing of the acquisition of Cascadia, the Company issued
94,210,564 Common Shares in exchange for an equal number of subscription
receipts. As of November 9, 2006, there are 119,842,359 Common Shares and
84,571,206 Non-Voting Shares issued and outstanding.
In addition, the Company has 569,373 Tranche 1 Class C Warrants,
854,146 Tranche 2 Class C Warrants, and 1,423,743 Tranche 3 Class C Warrants
(collectively, the "Class C Warrants") outstanding. As discussed in note 6 (c)
to the Unaudited Interim Consolidated Financial Statements, the exercise price
for the Class C Warrants was amended effective April 5, 2006. The Company has
reserved up to 2,847,262 Common Shares for issuance upon the exercise of the
Class C Warrants. It has also reserved 2,500,000 Common Shares for issuance
upon the exercise of options granted under the Company's incentive stock
option plan. As of November 9, 2006, 2,288,060 options have been granted under
the Company's incentive stock option plan.
Other Matters
As a result of the rights offering of subscription receipts to all
shareholders and their subsequent conversion to Common Shares and Non-Voting
Shares (see note 6 (a) to the Unaudited Interim Consolidated Financial
Statements) Tricap Management Limited ("Tricap") owns 49% of the Company's
Common Shares and 100% of the Non-Voting Shares. By virtue of the Brookfield
Asset Management Inc. ("BAM") voting arrangements with Tricap, BAM is related
to the Company. In addition to the transactions identified elsewhere in this
report, the Company has certain arrangements with entities related to BAM to
acquire and sell logs, lease certain facilities, provide access to roads and
other areas, and acquire other services including insurance, all in the normal
course and at market rates or at cost. During the period from May 1, 2006 to
September 30, 2006, the Company paid entities related to BAM $6.6 million and
charged $3.6 million in connection with these arrangements.
Other than as described in this quarterly report, there has been no
change to the information provided in our MD&A for the year ended December 31,
2005, dated March 27, 2006 ("2005 Annual MD&A") in respect of the following
items: Contractual Obligations (other than ordinary course), Financial
Instruments, Off-balance Sheet Arrangements, Transactions with Related
Parties, Critical Accounting Estimates, Changes in Accounting Policy, and
Risks and Uncertainties. Please see our 2005 Annual MD&A for information on
these items.
Additional information about the Company, including our Annual
Information Form, is available at www.sedar.com under the Company name,
Western Forest Products Inc.
<<
On behalf of the Board of Directors
John MacIntyre Reynold Hert
Chairman President and Chief Executive Officer
Duncan, BC
November 10, 2006
>>
Note:
We have prepared the financial information contained in this discussion
and analysis in accordance with Canadian generally accepted accounting
principles ("GAAP"). Reference is also made to EBITDA. EBITDA is defined as
operating earnings (loss) plus amortization of property, plant and equipment
and the write-down of property, plant and equipment and operating
restructuring costs. We use EBITDA as a benchmark measurement of our own
operating results, and as a benchmark relative to our competitors. We consider
EBITDA to be a meaningful supplement to operating income as a performance
measure primarily because amortization expense and property write-downs are
not actual cash costs, and vary widely from company to company in a manner
that we consider largely independent of the underlying cost efficiency of
their operating facilities. Further, operating restructuring costs are not
expected to occur on a regular basis and may make comparisons of our operating
results between periods more difficult. We also believe EBITDA is commonly
used by securities analysts, investors and other interested parties to
evaluate our financial performance.
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. Furthermore, EBITDA does not reflect the impact of a number of
items that affect our net income (loss). EBITDA is not a measure of financial
performance under GAAP, and should not be considered as an alternative to
measures of performance under GAAP. Moreover, because all companies do not
calculate EBITDA in the same manner, EBITDA as calculated by us may differ
from EBITDA as calculated by other companies.
The foregoing contains statements which constitute forward-looking
statements and forward-looking information within the meaning of applicable
securities laws. Those statements and information appear in a number of places
in this document and include statements and information regarding our intent,
belief or current expectations primarily with respect to market and general
economic conditions, future costs, expenditures, available harvest levels and
our future operating performance. Such statements and information may be
indicated by words such as "estimate", "expect", "anticipates", "plan",
"intend", "believe", "will", "should", "may" and similar words and phrases.
Readers are cautioned that any such forward-looking statements and information
are not guarantees and may involve known and unknown risks and uncertainties,
and that actual results may differ from those expressed or implied in the
forward-looking statements or information as a result of various factors,
including general economic and business conditions, product selling prices,
raw material and operating costs, changes in foreign currency exchange rates,
changes in government regulation, fluctuations in demand and supply for our
products, industry production levels, our ability to execute our business plan
and misjudgments in the course of preparing forward-looking statements or
information. The information contained under the "Risk Factors" section in our
Annual Information Form and under the "Risks and Uncertainties" section of our
Management's Discussion and Analysis identifies important factors that could
cause such differences. All written and oral forward-looking statements or
information attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the foregoing cautionary statements.
<<
Management's Discussion and Analysis - Appendix A
Summary of Selected Results for the Last Eight Quarters (Unaudited)
2006
-------------------------
3rd 2nd 1st
-------------------------
Average Exchange Rate - Cdn $
to purchase one U.S. $ $ 1.1178 1.1292 1.1462
Sales
Lumber $ 214.0 158.1 87.2
Logs 44.8 49.0 23.7
By-Products 20.7 12.9 7.3
-------------------------
$ 279.5 220.0 118.2
-------------------------
-------------------------
Lumber
Production - millions of
board feet 326 250 153
Sales - millions of board feet 291 243 164
Logging
Production - m3 (000's) 1,617 1,898 662
Purchases - m3 (000's) 169 143 100
Sales - m3 (000's) 592 605 262
Internal consumption -
m3 (000's) 1,350 1,031 650
Sales prices
Lumber - per thousand
board feet $ 739 648 533
Logs - per cubic metre $ 76 81 90
EBITDA(1) $ 10.2 7.7 (0.1)
Net loss from continuing
operations $ (11.4) (7.5) (46.5)
Discontinued pulp operations
Sales $ - (0.1) 20.0
Earnings (loss) $ (0.8) (1.9) (7.1)
Pulp production -
tonnes (000's) - - 18
Pulp sales - tonnes (000's) - - 34
Pulp sales price per tonne $ - - 586
Net loss $ (12.2) (9.4) (53.6)
Net loss per share from
continuing operations $ (0.06) (0.05) (1.81)
Net loss per share - basic
and diluted $ (0.06) (0.06) (2.09)
Reconciliation of EBITDA
to earnings
EBITDA $ 10.2 7.7 (0.1)
Amortization of property,
plant & equipment (10.3) (10.8) (5.9)
Restructuring & other items (0.7) (4.9) -
Interest expense (10.9) (9.9) (11.1)
F/X on long-term debt (0.3) 9.7 (0.9)
Premium & unamortized discount - (27.9)
Other income (expense) 0.9 0.5 (0.4)
Financial restructuring - -
Income taxes (0.3) 0.2 (0.2)
Discontinued operations (0.8) (1.9) (7.1)
Preferred dividends - -
-------------------------
Net loss $ (12.2) (9.4) (53.6)
-------------------------
-------------------------
2005 2004
-----------------------------------------
4th 3rd 2nd 1st 4th
-------------------------------- --------
Average Exchange Rate - Cdn $
to purchase one U.S. $ $ 1.1703 1.2122 1.2411 1.2259 1.2219
Sales
Lumber $ 91.3 88.2 107.5 97.3 87.8
Logs 25.5 22.2 26.0 18.2 27.7
By-Products 3.6 5.9 7.0 7.1 5.7
-----------------------------------------
$ 120.4 116.3 140.5 122.6 121.2
-----------------------------------------
-----------------------------------------
Lumber
Production - millions of
board feet 127 150 186 185 158
Sales - millions of board feet 166 165 176 162 158
Logging
Production - m3 (000's) 822 465 1,148 498 894
Purchases - m3 (000's) 87 147 192 200 144
Sales - m3 (000's) 212 172 213 166 236
Internal consumption -
m3 (000's) 590 719 844 875 768
Sales prices
Lumber - per thousand
board feet $ 549 535 612 599 557
Logs - per cubic metre $ 120 129 122 110 118
EBITDA(1) $ (5.3) (11.5) (1.6) 6.8 (14.0)
Net loss from continuing
operations $ (10.5) (8.2) (35.5) (6.3) (17.1)
Discontinued pulp operations
Sales $ 40.6 40.4 45.9 40.1 44.6
Earnings (loss) $ (74.1) (4.3) (1.7) 1.0 (2.5)
Pulp production -
tonnes (000's) 71 69 72 67 73
Pulp sales - tonnes (000's) 69 71 73 62 74
Pulp sales price per tonne $ 582 573 624 651 601
Net loss $ (84.6) (12.5) (37.2) (5.3) (19.6)
Net loss per share from
continuing operations $ (0.41) (0.32) (1.38) (0.25) (0.67)
Net loss per share - basic
and diluted $ (3.30) (0.49) (1.45) (0.21) (0.76)
Reconciliation of EBITDA
to earnings
EBITDA $ (5.3) (11.5) (1.6) 6.8 (14.0)
Amortization of property,
plant & equipment (5.9) (4.5) (9.6) (5.6) (8.3)
Restructuring & other items 0.6 5.9 (8.5) - -
Interest expense (11.5) (11.2) (11.8) (11.5) (11.0)
F/X on long-term debt (0.1) 13.3 (3.3) (1.6) 12.6
Premium & unamortized discount - - - - -
Other income (expense) 1.1 - (0.5) 5.8 -
Financial restructuring - - - - -
Income taxes 10.6 (0.2) (0.2) (0.2) 3.6
Discontinued operations (74.1) (4.3) (1.7) 1.0 (2.5)
Preferred dividends - - - - -
-----------------------------------------
Net loss $ (84.6) (12.5) (37.2) (5.3) (19.6)
-----------------------------------------
-----------------------------------------
(1) EBITDA restated to exclude pulp segment now classified as
discontinued operations.
Consolidated Balance Sheets (Unaudited)
(Expressed in millions of Canadian dollars)
-------------------------------------------------------------------------
September 30, December 31,
2006 2005
-----------------------------
(Restated-
note 12)
Assets
Current assets:
Cash $ 29.9 $ 29.6
Accounts receivable 72.5 50.7
Due from related parties (note 2) 14.3 -
Inventory 208.0 112.3
Restricted cash (note 2) 5.1 8.9
Prepaid expenses 13.4 3.8
Discontinued operations (note 12) 1.5 36.4
-----------------------------
344.7 241.7
Investments 7.4 7.1
Property, plant and equipment 503.1 323.1
Other assets 6.1 2.6
Discontinued operations (note 12) 0.6 0.7
-----------------------------
$ 861.9 $ 575.2
-----------------------------
-----------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit facility (note 4) $ - $ 71.4
Accounts payable and accrued liabilities 107.7 79.3
Discontinued operations (note 12) 7.3 38.1
-----------------------------
115.0 188.8
Long-term debt (note 5) 301.6 247.9
Other liabilities 29.1 19.9
Deferred revenue (notes 1 and 3) 78.9 -
Discontinued operations (note 12) 6.9 8.1
-----------------------------
531.5 464.7
Shareholders' equity (note 6)
Common shares 410.6 255.2
Non-voting shares 139.5 -
Contributed surplus 0.6 0.4
Deficit (220.3) (145.1)
-----------------------------
330.4 110.5
-----------------------------
$ 861.9 $ 575.2
-----------------------------
-----------------------------
Commitments and contingencies (note 7)
See accompanying notes to consolidated financial statements
Approved on behalf of the Board:
"Reynold Hert" Director
"John MacIntyre" Director
Consolidated Statements of Operations (Unaudited)
(Expressed in millions of Canadian dollars except for share and per
share amounts)
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
-------------------------------------------
(Restated- (Restated-
note 12) note 12)
Sales $ 279.5 $ 116.3 $ 617.7 $ 379.4
Cost and expenses
Cost of goods sold 230.7 103.6 505.5 307.3
Anti-dumping and
countervailing duties 6.3 8.3 15.9 30.4
Freight expenses 20.9 11.0 50.5 32.5
Selling and administration 11.4 4.9 28.0 15.5
Amortization of property,
plant and equipment 10.3 4.5 27.0 19.7
-------------------------------------------
279.6 132.3 626.9 405.4
-------------------------------------------
Operating loss before
write-down of property, plant
and equipment and
operating restructuring costs (0.1) (16.0) (9.2) (26.0)
Write-down of property, plant
and equipment and operating
restructuring costs (note 11) (0.7) 5.9 (5.6) (2.6)
-------------------------------------------
Operating loss (0.8) (10.1) (14.8) (28.6)
Interest expense (10.9) (11.2) (31.9) (34.5)
Foreign exchange gain (loss)
on long-term debt (0.3) 13.3 8.5 8.4
Premium and unamortized
discount on bond redemption - - (27.9) -
Other income 0.9 1.0 5.3
-------------------------------------------
Loss before income taxes (11.1) (8.0) (65.1) (49.4)
Income tax expense (0.3) (0.2) (0.3) (0.6)
-------------------------------------------
Net loss from continuing
operations (11.4) (8.2) (65.4) (50.0)
Net loss from discontinued
operations (note 12) (0.8) (4.3) (9.8) (5.0)
-------------------------------------------
Net loss (12.2) (12.5) (75.2) (55.0)
Deficit, beginning of period (208.1) (48.0) (145.1) (5.5)
-------------------------------------------
Deficit, end of period $ (220.3) $ (60.5) $ (220.3) $ (60.5)
-------------------------------------------
-------------------------------------------
Loss per share:
Net loss from continuing
operations - basic and
diluted $ (0.06) $ (0.32) $ (0.52) $ (1.95)
Net loss from discontinued
operations - basic and
diluted $ (0.00) $ (0.17) $ (0.08) $ (0.20)
Net loss-basic and diluted $ (0.06) $ (0.49) $ (0.60) $ (2.15)
Weighted average number of
shares outstanding (thousands
of shares) (note 6) 204,413 25,636 124,957 25,636
See accompanying notes to the consolidated financial statements
Consolidated Statements of Cash Flows (Unaudited)
(Expressed in millions of Canadian dollars)
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
-------------------------------------------
(Restated- (Restated-
note 12) note 12)
Cash provided by (used in):
Operating activities:
Net loss from continuing
operations $ (11.4) $ (8.2) $ (65.4) $ (50.0)
Items not involving cash:
Amortization of property,
plant and equipment 10.3 4.5 27.0 19.7
Write-down of property, plant
and equipment 0.7 - 0.7 8.5
Foreign currency translation
(gain) loss 0.3 (13.3) (8.5) (8.4)
Premium and unamortized discount
on bond redemption - - 27.9 -
Other 2.8 (12.7) 3.5 (9.9)
-------------------------------------------
2.7 (29.7) (14.8) (40.1)
-------------------------------------------
Changes in non-cash working
capital items:
Accounts receivable 8.7 16.8 34.7 18.0
Inventory 2.2 29.0 (11.2) 27.1
Prepaid expenses (0.2) (0.6) (1.7) (1.9)
Accounts payable and accrued
liabilities (8.1) 3.5 (43.1) 15.8
-------------------------------------------
2.6 48.7 (21.3) 59.0
-------------------------------------------
Cash provided (used) by
continuing operations 5.3 19.0 (36.1) 18.9
Cash used by discontinued
operations (note 12) (3.1) (1.2) (6.8) (1.7)
-------------------------------------------
2.2 17.8 (42.9) 17.2
-------------------------------------------
Investing activities:
Additions to property, plant
and equipment (7.6) (3.7) (15.3) (6.8)
Additions to capitalized roads (5.1) (3.3) (12.1) (11.2)
Disposals of property, plant
and equipment 0.9 15.3 1.1 29.7
Restricted cash 1.3 (15.4) 10.2 (45.6)
Acquisition of Cascadia Forest
Products Ltd., net of cash
acquired (note 2) 6.6 - (209.7) -
Englewood Logging Division
(note 3) - - (3.4) -
Price premium prepayment on
long-term fibre agreement
(note 3) - - 35.0 -
Bill 28 take back proceeds and
infrastructure advance - - - 21.5
Other (0.7) 0.1 (4.7) 0.3
Cash provided (used) by
discontinued operations - 0.1 - (0.2)
-------------------------------------------
(4.6) (6.9) (198.9) (12.3)
-------------------------------------------
Financing activities:
Revolving credit facility - (7.1) (80.0) (6.0)
Redemption of 15% Secured
Bonds (note 5) - - (275.9) -
Proceeds from term loans
(note 5) - - 307.8 -
Repayment of term-loans - - (4.7) -
Proceeds from share issuance
(note 6(a)) - - 294.9 -
-------------------------------------------
- (7.1) 242.1 (6.0)
-------------------------------------------
Increase (decrease) in cash (2.4) 3.8 0.3 (1.1)
Cash, beginning of period 32.3 0.1 29.6 5.0
-------------------------------------------
Cash, end of period $ 29.9 $ 3.9 $ 29.9 $ 3.9
-------------------------------------------
-------------------------------------------
Supplementary information:
Non-Cash item - Acquisition of
Englewood Logging Division
(note 3) $ - $ - $ 45.0 $ -
See accompanying notes to the consolidated financial statements
Notes to Unaudited Interim Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars)
Western Forest Products Inc.'s (the "Company") business is timber
harvesting and lumber manufacturing for worldwide markets.
1. Significant Accounting Policies
These interim consolidated financial statements do not include all
disclosures required by Canadian generally accepted accounting
principles for annual financial statements and, accordingly, should
be read in conjunction with the Company's most recent audited annual
consolidated financial statements. These interim consolidated
financial statements follow the same accounting policies and methods
of application used in the Company's consolidated financial
statements as at December 31, 2005 and for the year then ended except
that the Company has adopted a new accounting policy with respect to
a new balance sheet caption "deferred revenue" that arose on entering
into a long-term fibre supply agreement (note 3). Deferred revenue
will be amortized into income on a straight-line basis over the term
of the agreement.
2. Acquisition of Cascadia Forest Products Ltd.
On May 1, 2006 the Company closed its acquisition of all of the
issued and outstanding common shares of Cascadia Forest Products Ltd.
("Cascadia") from a wholly owned subsidiary of Brookfield Asset
Management ("BAM"), for approximately $220.1 million paid in cash on
closing. BAM is related to the Company by virtue of its voting
arrangements with Tricap Management Limited ("Tricap"). Tricap owns
49% of the Company's Common Shares and all of the Company's Non-
Voting Shares. The consideration paid includes certain amounts based
on closing date estimates including an estimate of Cascadia's working
capital on closing of $98.2 million. The purchase price paid will be
subsequently adjusted to the actual amounts. The Company received
$6.6 million from BAM during the quarter and estimates it will
receive a further cash payment of $13.0 million in this respect. Also
on May 1, 2006 Cascadia Forest Products Ltd. along with one of its
wholly owned subsidiaries, Mid-Island Reman Inc., amalgamated with
Western and one of its wholly owned subsidiaries, WFP Western Lumber
Ltd. The amalgamated company continued as Western Forest Products
Inc.
The acquisition has been accounted for by the purchase method,
whereby the purchase consideration has been allocated to the assets
and liabilities acquired based on their fair values on May 1, 2006.
The following fair value allocation is preliminary and is based on
management's best estimates and information known at the time of
preparing these unaudited consolidated financial statements. Any
subsequent revisions to the preliminary fair value allocation may be
material.
(millions of dollars)
---------------------------------------------------------------------
Net assets acquired at fair values:
Current assets $ 154.0
Current liabilities (79.5)
Land 34.3
Timberlands 68.7
Logging roads 20.2
Buildings, plant and equipment 12.2
Other assets 1.2
Long-term liabilities (9.4)
----------
$ 201.7
----------
----------
Consideration paid:
Cash paid on closing, net of cash acquired of
$3.8 million and forestry liabilities adjustments $ 209.7
Estimated adjustment to purchase price for actual
closing working capital (13.0)
Transaction costs 5.0
----------
$ 201.7
----------
----------
The allocation above includes estimated severance and other costs
associated with the integration of Cascadia of $7.7 million. The
Company is continuing the evaluation of the acquired business
operations and the opportunities for rationalization identified
during the pre-acquisition due diligence. The actual amounts incurred
in relation to these activities may differ from these estimates and
any such difference will be factored into the final allocation.
The preliminary allocation includes amounts due from entities related
to BAM of $8.1 million of which $7.1 million was received in the
third quarter. The preliminary allocation also includes $6.4 million
of cash held in escrow that may only be used to pay for silviculture
and forestry liabilities.
3. Acquisition of Englewood Logging Division and New Long-Term Fibre
Supply Agreement
On March 17, 2006 the Company closed its acquisition of the assets of
the Englewood Logging Division, from a partnership between Canadian
Forest Products Ltd. and Oji Paper Canada Ltd. ("the Partnership"),
for $45.0 million plus closing adjustments and other costs of
approximately $3.4 million. The acquisition comprises Tree Farm
License 37 which currently has an annual allowable timber cut of
approximately 844,000 cubic meters, having been reduced on October 1,
2006 from 945,000 cubic metres as part of the five year timber supply
review. The acquisition also includes approximately 6,800 hectares of
fee simple lands, existing capital improvements, equipment and
railway rolling stock. The fee simple lands within Tree farm License
37 are in the process of being transferred to the Company and until
that time the Company may harvest timber on such lands under contract
with the landowner. The Company has assumed certain contracts and
offered employment to all of the employees but has not assumed any
other material pre-closing liabilities relating to the assets.
On March 17, 2006, the Company also executed a 40 year fibre supply
agreement with the Partnership. As consideration for entering the
fibre supply agreement, the Company will receive a price premium that
will be earned as wood chips are delivered under the agreement. A
non-refundable prepayment of the price premium of $35.0 million was
received on March 17, 2006 and applied to reduce the amount drawn
under the Company's revolving line of credit. A further $45 million
price premium will be set-off against the consideration due on the
acquisition of the Englewood Logging Division. The Company has
recorded the price premium as deferred revenue. The Company has
granted a first charge over the acquired assets to secure certain of
its obligations to the Partnership.
4. Revolving Credit Facility
On July 27, 2004 the Company established a three-year revolving
credit facility, secured by receivables and inventory bearing
interest at prime plus 0.75%. The size of this asset backed facility
was determined by the level of outstanding receivables and inventory,
but could not exceed $100.0 million. On July 13, 2006 the revolving
credit facility was amended to: increase the maximum amount that can
be borrowed to $150.0 million with provision for further extensions
up to $200.0 million subject to lender approval; reduce the interest
rate to prime plus 0.50%; extend the term until July 12, 2009; and
certain other amendments. At September 30, 2006, of the
$120.1 million of the facility that was available to the Company,
$20.9 million was used to support standby letters of credit leaving a
balance of $99.3 million available for future use.
5. Long-Term Debt
On July 27, 2004 the Company issued US$221.0 million of 15% Secured
Bonds due in 2009 for proceeds of US$210.0 million. On March 10,
2006, the Company redeemed the Secured Bonds in full together with
all accrued interest from the proceeds of two new term facilities
obtained from Tricap and its designated lender, the Brookfield Bridge
Lending Fund ("BBLF"). The Company is related to BBLF by virtue of
BBLF's relationship to BAM.
The new debt financing consists of two secured term facilities, a
four-year US$187.5 million facility, and a one-year Canadian
$90.0 million facility, which may be extended for a second year at
the Company's option. The secured loan is non-amortizing and is
pre-payable, in whole or in part, at any time. Interest on amounts
drawn under the US facility will be charged at the floating US one-
month LIBOR rate plus 8.15%. Interest on the Canadian facility will
be charged at the Canadian prime rate plus 5.25% and is being
deferred and added to the principal amount outstanding in accordance
with the terms of the facility. During the first quarter the Company
paid BBLF US$1.575 million in commitment fees with respect to the US
term facility. A further Canadian $0.9 million commitment fee with
respect to the Canadian facility was deferred and added to the
principal amount outstanding.
The obligations under the facilities are secured by liens against all
of the Company's properties and assets and include customary
covenants including repayment of the facilities from the proceeds of
asset sales and other non-operating cash inflows, with certain
exceptions. The Company is able to deposit the proceeds of asset
sales, new security issues and any softwood duty settlements into a
working capital reserve in the amount of up to $25 million annually.
The Company paid down US$4.2 million of the US dollar term loan as
required under the loan agreement following receipt of the rights
offering proceeds (see note 6(a)) reducing the amount outstanding at
September 30, 2006 to US$183.3 million. At September 30, 2006 the
principal outstanding under the Canadian term loan was $96.7 million.
6. Shareholders Equity
(a) Rights Offering
The Company raised a total of $295.0 million through a rights
offering of 178.8 million subscription receipts to all shareholders
pursuant to a final prospectus dated January 31, 2006. The proceeds
were used to provide financing for the acquisition of Cascadia Forest
Products Ltd. (see note 2) and to provide funding for some of the
structural changes that need to be made to the combined business and
provide additional liquidity. Under the terms of the rights offering,
common shareholders received one right for each Common Share that
enabled them to subscribe for 6.975 subscription receipts of the
Company with each subscription receipt representing the right to
receive one Common Share at a price of $1.65 per subscription
receipt. The rights were listed for trading on the Toronto Stock
Exchange and were exercisable until March 9, 2006.
Pursuant to the terms of a standby agreement with the Company, Tricap
purchased 51 million common share subscription receipts that had not
been purchased by other rights holders under the rights offering at a
price of $1.65 per subscription receipt to hold a total of
138.2 million subscription receipts.
In accordance with the terms of the Subscription Receipts Agreement,
on May 1, 2006 the Company only permitted 94.2 million of the
178.8 million subscription receipts outstanding to be exchanged for
94.2 million Common Shares. As a result, Tricap holds 119.8 million
of the Company's Common Shares (49%) now issued and outstanding. The
remaining 84.6 million subscription receipts held by Tricap were
converted to 84.6 million Non-Voting Shares following the creation of
this new class of shares at the Company's Annual and Special Meeting
on June 16, 2006.
The $295.0 million funds received on the rights offering were held in
escrow and were not available to the Company until certain conditions
were met, the principal one being the closing of the acquisition of
Cascadia. Accordingly, for financial statement purposes the funds
were not shown on the face of the balance sheet until May 1, 2006,
the date that the acquisition of Cascadia closed (see note 2).
(b) Stock-based Compensation Plan
During the three months ended June 30, 2006, 1,905,000 options with
an exercise price of $1.75 per Common Share, being the trading price
of the shares at the date of grant, were granted and 16,530 options
with an exercise price of $12.10 were cancelled as a result of two
Directors not standing for re-election resulting in 2,288,060 options
being outstanding at September 30, 2006 with a weighted average
exercise price of $2.79 per Common Share.
(c) Class C Warrants
The Company has outstanding 569,373 Tranche 1 Class C Warrants,
854,146 Tranche 2 Class C Warrants and 1,423,743 Tranche 3 Class C
Warrants (collectively, the "Class C Warrants") that were issued as
of July 27, 2004. In accordance with the terms of the Class C Warrant
Indenture, following the completion of the rights offering to all
shareholders, effective April 5, 2006 the Class C Warrants were
re-priced whereby each Class C Warrant now entitles the holder to
purchase one Common Share (subject to certain adjustments) at the
following exercise price: $14.72 (previously $16.28) for Tranche 1
Class C Warrants, $23.54 (previously $26.03) for Tranche 2 Class C
Warrants, and $30.60 (previously $33.83) for the Tranche 3 Class C
Warrants.
7. Commitments and Contingencies
(a) Softwood Lumber Duties
On May 16, 2002 the United States International Trade Commission
published its final written determination on injury in the
countervailing duty ("CVD") and antidumping duty ("ADD")
investigations and stated that Canadian softwood lumber threatens
material injury to the United States lumber industry. As a result,
effective May 22, 2002, cash deposits were required for shipments at
the rates determined by the United States Department of Commerce
("USDOC").
Effective December 12, 2005, the USDOC implemented new deposit rates
based on its second Administrative review period (April 1, 2003 to
March 31, 2004 for the countervailing duty case; and May 1, 2003 to
April 30, 2004 for the antidumping duty case) and reduced the CVD
deposit rate to 8.70% and the all others antidumping rate to 2.11%.
Effective January 23, 2006, the USDOC further amended the anti-
dumping rate to 2.10% reducing the combined duty deposit rate of the
Company to 10.80%.
The Company has recorded CVD and ADD assessed on Canadian softwood
lumber exports to the United States totaling $6.3 million (2005 -
$8.3 million) for the third quarter of 2006 and $15.9 million (2005 -
$30.4 million) for the year to date. Cumulative duties from May 22,
2002 until September 30, 2006, total US$117.8 million.
Effective October 12, 2006 the Canadian and United States Governments
implemented a softwood lumber agreement ("SLA") that replaces the
existing USDOC imposed CVD and ADD regime with an export tax, payable
to the Canadian Government which, in the case of the Company, varies
according to the price of lumber and shipments to the United States.
The SLA also provides for the return of approximately 82% of the duty
deposits paid by the Company plus accumulated interest. Depending on
the timing of the refund of the duties, currently anticipated to be
in late 2006 or early 2007, the Company expects to receive
approximately US$110.0 million, net. Although the SLA has become
effective, the implementation of the new export tax still requires
formal approval by the Canadian Parliament.
(b) Litigation and Claims
In the normal course of its business activities, the Company may be
subject to a number of claims and legal actions that may be made by
customers, suppliers and others in respect of which either provision
has been made or for which no material liability is expected.
The Company has a number of claims filed against it from logging
contractors with respect to various operating issues. Certain of the
claims are pending arbitration, mediation or appeal, while others
have not yet reached this formal stage. Where the Company is not able
to determine the outcome of these disputes no amounts have been
accrued in these financial statements.
A lumber broker for our Predecessor, commenced an action in New York
in 2001 alleging that our Predecessor was in breach of U.S.
anti-trust legislation. The court dismissed the complaint however the
lumber broker is appealing the decision. Management believes the
claim is without merit and will vigorously defend it.
(c) Indemnity Agreement
As a result of the amalgamation of the Company with Cascadia, the
Company has assumed Cascadia's obligation to indemnify an entity
related to BAM if that entity incurs liability under a guarantee (the
"Guarantee") provided by it to a third party relating to the
obligations of Cascadia arising out of the purchase by Cascadia of
certain of its assets from the third party prior to the acquisition
of Cascadia by the Company. The Guarantee is limited to $100 million.
As security for its performance under this indemnity and as a result
of the amalgamation, the Company has issued a debenture in favour of
the related entity in the amount of $100 million which results in a
charge over all of the Company's real property and grants a security
interest over all of the Company's present and after-acquired
personal property. In the absence of any claims, the Guarantee
terminates on May 30, 2011 and if there is no liability accruing to
the guarantor thereunder at that time, the Company may request that
the debenture be discharged.
(d) Long-Term Fibre Supply Agreements
The Company has a number of long-term commitments to supply fibre to
third parties. Certain of these agreements have minimum volume
requirements and may, in the case of a failure to supply the minimum
volume, require the Company to source the deficiency from third
parties at additional cost to the Company or pay the party to the
fibre supply agreement a penalty calculated based on the provisions
contained in the agreements. Based on chip and pulp log volumes
supplied for the year-to-date, the Company anticipates satisfying
these annual fibre commitments for 2006. Our delivery of saw logs
under one of our log supply agreements has been less than the
contracted amount due to log shortages. Depending on the
circumstances shortfalls may be carried over into subsequent periods.
8. Pension Expense
The Company has defined benefit and defined contribution pension
plans that cover substantially all salaried employees. The defined
benefit plans provide pensions based on length of service and final
average earnings. The Company also has health care plans covering
certain hourly and retired salaried employees. In the three months
ended September 30, 2006 the Company recorded expense with respect to
continuing operations of $3.1 million (2005 - $3.5 million) and $nil
(2005 - $0.6 million) with respect to discontinued operations with
respect to these benefit plans.
9. Financial Instruments
The Company has significant exposures to individual customers
including one customer which comprised 11% of the Company's sales for
the nine months ended September 30, 2006. This exposure will diminish
in relative terms with the increase in the Company's sales as a
result of the acquisition of Cascadia. The accounts receivable
balance from the same customer comprised 21% of the Company's
outstanding receivables at September 30, 2006 and was insured through
the Export Development Corporation as to approximately 90% of the
balance outstanding. The Company's general practice has been to make
sales on a cash basis, without credit terms, or to insure them for
approximately 90% of their sales value with the Export Development
Corporation. Legacy Cascadia's practice was to insure sales to Japan
that were not secured. The Company is continuing to review its policy
for insuring sales.
10. Segmented Information
The Company is an integrated Canadian forest products company
operating in one industry segment comprising the Company's timber
harvesting, reforestation, sawmilling, value-added lumber
remanufacturing and lumber marketing operations. Until January 26,
2006 the Company also operated in the Pulp Segment that comprised the
Company's NBSK pulp manufacturing and sales operations (note 12 -
discontinued operations).
11. Operating Restructuring Costs
Operating restructuring costs for the nine months ended September 30,
2006 comprises severance and other costs associated with the closure
of the Company's log merchandiser facility, the write-down to
estimated recoverable value of surplus land sold subsequent to the
quarter end, severance costs with respect to legacy Western employees
and the restructuring of certain timberlands operations. The gain in
the third quarter of 2005 relates to the termination of a fibre
supply agreement partially offset by severance relating to the
closure of the Silvertree sawmill. The results for the first nine-
months of 2005 also include the write-down relating to the closure of
the Silvertree sawmill of $8.5 million.
12. Discontinued Operations
On December 15, 2005 the Company announced the closure of its
Squamish, BC pulp mill and its exit from the pulp business. On
January 26, 2006 production at the pulp mill ceased and on March 9,
2006 the majority of the workforce completed their employment with
the Company. The Company is reviewing alternative uses for the site.
The Company will incur ongoing costs for supervision, security,
property taxes and other costs (including demolition costs less any
recoveries for asset sales, if the Company decides to remove certain
plant and equipment) in 2006 and future years depending on the
Company's plans for the plant site. These costs will be expensed as
incurred.
The following table provides additional information with respect to
the discontinued operations:
Three months ended Nine months ended
Sept 30 Sept 30
---------------------------------------------------------------------
(millions of dollars
except where noted) 2006 2005 2006 2005
---------------------------------------------------------------------
Sales $ - $ 40.4 $ 19.9 $ 126.4
------------------------------------------
------------------------------------------
Net loss from discontinued
operations before income
taxes $ (0.8) $ (4.3) $ (9.8) $ (4.8)
Income taxes - - - (0.2)
------------------------------------------
Net loss from discontinued
operations after income
taxes $ (0.8) $ (4.3) $ (9.8) $ (5.0)
------------------------------------------
------------------------------------------
Cash used in:
Operating activities $ (3.1) $ (1.2) $ (6.8) $ (1.7)
Investing activities - 0.1 - (0.2)
------------------------------------------
Decrease in cash from
discontinued operations $ (3.1) $ (1.1) $ (6.8) $ (1.9)
------------------------------------------
------------------------------------------
Included in the net loss from discontinued operations for the nine
months ended September 30, 2006 is $4.5 million with respect to the
cost to terminate certain long-term contracts.
Head Office
435 Trunk Road
Duncan, British Columbia
Canada V9L 2P9
E (250) 748-3711
Fax: (250) 748-6045
E-mail: info(at)westernforest.com
Financial Statements on the Internet
www.westernforest.com
www.sedar.com
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