TSX: WEF
DUNCAN, BC, March 28 /CNW/ - Western Forest Products Inc. (TSX: WEF)
today announced its results for the fourth quarter and year ended December 31,
2005. The Company will host a teleconference call on Thursday, March 30, 2006
at 10:00 a.m. PST (1:00 p.m. EST) on the Company's results. (See below for
details on participation).
During the fourth quarter of 2005, the Company announced a number of
significant strategic initiatives that are designed to improve its competitive
position in the industry and build value for shareholders.
Q4 2005 Overview
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- Announced a definitive agreement to acquire Cascadia Forest Products
Ltd., a significant coastal lumber producer with 3.6 million cubic
metres of annual allowable cut under crown tenures, for approximately
$120 million plus net working capital. Acquisition financing was
secured from a $295 million fully underwritten equity rights offering.
Also secured $308 million of new long-term debt facilities to redeem
the Company's existing issue of US$221 million of senior secured bonds
and a restated revolving credit facility.
- Announced the acquisition of the Englewood Logging Division, formerly
owned by Canfor Corporation, that includes 945,000 cubic metres of
annual allowable cut under TFL 37 on Vancouver Island.
- Announced the closure of the 275,000 tonne NBSK Squamish pulp mill in
March 2006 and the decision to exit the softwood pulp business.
- EBITDA for the solid wood segment improved to negative $0.8 million
compared to negative $8.1 million in the third quarter and negative
$10.3 million in the fourth quarter of 2004, primarily due to reduced
logging costs.
- Operating loss for the quarter of $84.5 million includes non-recurring
charges totaling $71.4 million (non-cash write-downs of $47.6 million,
and severance and other costs of $23.8 million) relating to the
closure of the Squamish pulp mill.
Commenting on the quarter, Reynold Hert, President and CEO noted, "The
fourth quarter marked a milestone for Western. Over the course of 2005, we had
been working on the implementation of our business strategy, and we believe
the initiatives announced represent the foundation upon which we can build a
globally competitive, softwood lumber company based on our high quality fibre
basket on the B.C. Coast. As we bring together the three businesses of
Western, Cascadia and Englewood, we will be seeking to realize approximately
$70 million of annual synergies within 48 months to create significant value
for our shareholders and the recapitalization of our balance sheet provides us
the necessary liquidity and the window of time to make the structural changes
required. Notwithstanding that, we will be moving quickly to reduce costs and
create a streamlined and efficient business with the assets acquired..." He
further added, "Our results for the fourth quarter principally reflect our
strategic decision to exit a pulp business that had long been an
underperforming segment for the Company".
Subsequent Events
Subsequent to the quarter end, the equity rights offering for
178.8 million subscription receipts closed on March 9, 2006 for cash proceeds
of $295 million that were placed in escrow. Tricap Management Limited
purchased the 58 million subscription receipts not acquired under the equity
rights offering. The proceeds from the equity rights offering will be released
from escrow to Western upon the closing of the acquisition of Cascadia, which
is expected to take place in April, 2006 upon receipt of regulatory approvals.
Proceeds surplus to the funds required for the Cascadia acquisition will be
applied to reduce the revolving credit facility and contribute to cash on
hand.
The Company's US$221 million 15% Secured Bonds were redeemed on
March 10, 2006 from the proceeds of the two new long-term debt facilities
totaling C$308 million. The facilities also provided approximately $13 million
of funding that was applied to reduce the revolving credit facility.
On March 17, 2006 Western closed the acquisition of the Englewood Logging
Division and also entered into a long-term fibre supply agreement for residual
wood chips and pulp logs. Western received $35 million cash on closing in the
form of a price premium prepayment on future chip deliveries. These funds were
also applied to reduce the revolving credit facility.
+ + + + + +
Western Forest Products
Western is an integrated Canadian forest products company and currently
the second largest coastal woodland operator in British Columbia. Principal
activities conducted by Western and its subsidiaries include timber
harvesting, reforestation, sawmilling logs into lumber and wood chips, and
value-added remanufacturing. Over 95% 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 and its products are sold in over 20 countries worldwide.
Following the acquisition of Tree Farm License 37 and Western's previously
announced acquisition of Cascadia Forest Products Ltd. which is subject to
regulatory approval and expected to close in April of 2006, Western expects to
be the largest Coastal woodland operator and lumber producer with an AAC of
approximately 7.7 million cubic meters and lumber capacity in excess of
1.5 billion board feet. The Company exited the softwood pulp business with the
closure of the Squamish pulp mill on March 9, 2006.
Forward Looking Statements
This press release contains statements that are forward-looking in
nature. Those statements appear in a number of places herein and include
statements regarding the intent, belief or current expectations of Western,
primarily with respect to market and general economic conditions, future
costs, expenditures, available harvest levels and future operating performance
of Western. Such statements may be indicated by words such as "estimate",
"expect", "anticipate", "plan", "intend", "believe", "will", "should", "may"
and similar words and phrases. Readers are cautioned that any such forward-
looking statements 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 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
Western's products, industry production levels, the ability of Western to
execute its business plan and misjudgments in the course of preparing forward-
looking statements. The information contained under the "Risk Factors" section
of Western's Annual Information Form, under the "Risk Factors" section of
Western's Form 20-F/A and under the "Risk Factors" section of the final
prospectus identifies important factors that could cause such differences. All
written and oral forward-looking statements 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 as conditions change.
TELECONFERENCE CALL NOTIFICATION: Thursday, March 30, 2006 at 10:00 a.m.
PST/1:00 p.m. EST
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On Thursday, March 30, 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 1-866-249-1964 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 April 13, 2006. To hear a complete replay,
please call 1-877-289-8525 in Canada and the U.S. (toll free), Passcode
21180839 followed by the number sign or in Toronto and Internationally,
416-640-1917, Passcode 21180839 followed by the number sign. This call will
also be webcast from Western's website at www.westernforest.com.
Western Forest Products Inc. - 2005 Fourth 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", "us", "we", or "our"), on a consolidated basis, for our fourth
quarter ended December 31, 2005 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
consolidated financial statements and related notes thereto, for the fourth
quarter and year ended December 31, 2005, and our audited consolidated
financial statements and management's discussion and analysis ("MD&A") for the
period from July 28, 2004 to December 31, 2004 (the "2004 Annual Report")
which are filed on SEDAR at www.sedar.com under our Company's name.
We acquired the solid wood and pulp business of Doman Industries Limited
("Doman") and certain of its subsidiaries (collectively with Doman, the
"Predecessor") on July 27, 2004 in connection with the implementation of the
Predecessor's Plan of Compromise and Arrangement under the Companies'
Creditors Arrangement Act (Canada) and Reorganization under the Canada
Business Corporations Act (the "Plan"). This discussion and analysis also
compares our results for the year ended December 31, 2005 with the pro forma
combined results of the Company and our Predecessor for the year ended
December 31, 2004. The consolidated financial and other information of the
Company issued subsequent to the Plan implementation may not be comparable
with the consolidated financial information and other information issued by
the Predecessor prior to the Plan implementation due to differences in our
corporate and financial structure from that of our Predecessor, the
application of "fresh start" accounting as explained in note 1 of our
unaudited consolidated financial statements as a result of the implementation
of our Predecessor's Plan and differences in certain accounting policies from
those applied by our Predecessor. Accordingly, the discussion and analysis of
our results of operations for 2005 compared to our Pro forma results for 2004
should be reviewed with caution.
Unless otherwise noted, the information in this discussion and analysis
is updated to March 27, 2006. All financial references are in Canadian dollars
unless otherwise noted.
<<
Summary of Selected Results for the Quarter and Year
Three Three Three Year
Months Months Months Year Ended
Ended Ended Ended Ended December
(millions of December September December December 31,
dollars except 31, 30, 31, 31, 2004
per share 2005 2005 2004 2005 Pro
amounts) Company Company Company(1) Company forma(1)
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Sales $ 161.0 $ 156.7 $ 165.8 $ 666.8 $ 759.8
Countervailing &
anti-dumping
duties $ (6.0) $ (8.3) $ (9.2) $ (36.4) $ (45.1)
EBITDA(2) $ (7.1) $ (15.7) $ (15.8) $ (16.4) $ 64.3
Write-down of
property, plant
and equipment
and operating
restructuring
costs $ (70.8) $ 5.9 $ - $ (73.4) $ -
Operating earnings
(loss) $ (84.5) $ (14.9) $ (24.5) $ (118.0) $ 17.1
Interest expense $ (11.8) $ (11.5) $ (11.2) $ (47.1) $ (91.3)
Foreign exchange
gain (loss) on
long-term debt $ (0.1) $ 13.3 $ 12.6 $ 8.3 $ 3.2
Net loss
attributable to
common shares $ (84.6) $ (12.5) $ (19.6) $ (139.6) $ (104.4)
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Per share:
Basic $ (3.30) $ (0.49) $ (0.76) $ (5.45) $ n/a
Diluted $ (3.30) $ (0.49) $ (0.76) $ (5.45) $ n/a
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Cash flow from
Operations $ (11.0) $ 17.8 $ (17.8) $ 6.2 $ n/a
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(1) Year ended December 31, 2004 represents the results of our
Predecessor for the period from January 1, 2004 to July 27, 2004
added to the Company's results for the period from July 28, 2004 to
December 31,2004.
(2) Non-GAAP measure - see page 9 for a discussion of EBITDA.
Overview
Western is in the process of transition as it implements its strategy of
building a margin focused lumber business located on the coast of British
Columbia of sufficient size to compete in global softwood lumber markets.
During the fourth quarter the Company announced its strategic decision to
focus on the lumber business and exit the pulp business with the closure of
the Squamish pulp mill. The Company also announced the proposed acquisitions
of Cascadia Forest Products Ltd. ("Cascadia") and the Englewood Logging
Division, formerly owned by Canfor Corporation. These proposed acquisitions
are key steps in our strategy and will increase our access to high quality
Crown-owned coastal timber, and increase our lumber production capacity.
Since announcing the proposed acquisition of Cascadia on November 10,
2005 we have made progress in raising the financing for the transaction and
the refinancing of our US$221 million 15% Secured Bonds. We filed a Final
Prospectus dated January 31, 2006 with respect to a rights offering to all
shareholders that has raised $295 million. The proceeds will be used to fund
the proposed acquisition of Cascadia, pay down the revolving credit facilities
and provide additional working capital. We will receive the funds on closing
the acquisition of Cascadia, which is expected in April, 2006 on receipt of
regulatory approvals. We also redeemed our US$221 million 15% Secured Bonds on
March 10, 2006 with the proceeds of two term loans of US$187.5 million and
C$90 million obtained from the Brookfield Bridge Lending Fund.
The acquisition of the Englewood Logging Division that was announced on
December 15, 2005 closed on March 17, 2006, other than certain private lands
that should be transferred to us on receipt of consent from the Minister of
Forests and Range. The Division's main asset is Tree Farm Licence 37
("TFL 37") that is located on the north end of Vancouver Island close to our
existing operations and those of Cascadia. TFL 37 currently has an Allowable
Annual Cut ("AAC") of approximately 945,000 cubic metres and is expected to
generate annual synergies of approximately $6 million within 48 months when
fully integrated with our existing operations. TFL 37 is currently under a
Timber Supply Review that may result in its AAC being reduced in 2006. The
$45 million cost of the acquisition will be paid as a set-off against part of
the consideration to be received from entering a long-term agreement to supply
a partnership of Canadian Forest Products Ltd. and Oji Paper Canada Ltd. with
residual wood chips and pulp logs. We also received $35 million cash on the
execution of that agreement on March 17, 2006.
Operating results excluding unusual items improved in the fourth quarter
of 2005 compared to both the third quarter of 2005 and the fourth quarter of
2004 primarily due to lower logging costs. EBITDA for the fourth quarter of
2005 of negative $7.1 million compares to negative $15.7 million in the third
quarter and negative $15.8 million in the fourth quarter of 2004.
The net loss for the fourth quarter of 2005 was $84.6 million ($3.30 per
share) compared to a net loss of $12.5 million ($0.49 per share) in the third
quarter of 2005 and a net loss of $19.6 million ($0.76 per share) in the
fourth quarter of 2004. The results for the quarter reflect the impact of the
closure of the Squamish pulp mill with production ending on January 26, 2006.
The Company recorded a charge in the quarter of $71.4 million in connection
with the closure including $47.6 million with respect to the write-down of
property, plant and equipment and associated supplies inventories and
$23.8 million for severance, environmental and other costs.
The Company used $11.0 million of cash during the quarter to fund our
operations compared to using $17.8 million in the fourth quarter of 2004 and
an inflow of $17.8 million in the third quarter of 2005. The use of funds in
the fourth quarter of 2005 does not reflect any interest on our US$221 million
15% Secured Bonds as the $20 million interest payment for the second half of
2005 was not due until January, 2006. For the comparable period of 2004 the
interest was paid in December. The positive cash flow in the third quarter of
2005 results from lower inventories and receivables caused by the curtailment
of operations due to market conditions.
Fourth Quarter Results Compared to the Third Quarter of 2005
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The following table and discussion indicates the major factors impacting
EBITDA for the current quarter compared to EBITDA as reported in the previous
quarter (EBITDA for the comparative period has been restated to exclude
operating restructuring items):
(millions of dollars)
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EBITDA for the three months ended September 30, 2005,
as previously reported $ (9.8)
Items now excluded from EBITDA:
Gain on termination of saw-log agreement in Q3 (13.1)
Silvertree severance costs in Q3 7.2
----------
EBITDA for the three months ended September 30, 2005,
as redefined (15.7)
Lower production costs 7.2
Lower lumber prices realised (4.0)
Higher log and pulp prices realised 2.4
Change in mix of lumber and logs sold 1.6
Higher log and lumber sales offset by lower pulp sales 2.0
Lower by-product revenues (2.3)
Lower anti-dumping and countervail duty 2.5
Other (0.8)
----------
EBITDA for the three months ended December 31, 2005 $ (7.1)
----------
----------
Results in the fourth quarter were primarily influenced by lower logging
costs. Logging production resumed to more normal levels in the fourth quarter
following the down time taken in the summer with a reduction in the expense
for shutdown costs compared to the third quarter. Stumpage rates also
decreased both in absolute terms and as a result of harvesting less cedar in
the quarter.
Decreases in actual prices realised for lumber were more than offset by
higher volumes of lumber and log sales, higher log and pulp prices and the
change in the mix of lumber to more high-value cedar and hemlock products and
less fir. This was offset to some extent by the sale of a lower log value mix.
Results for the quarter also benefited from the reduction in the anti-
dumping and countervail duty deposit rates that were announced by the United
States Department of Commerce effective from December 12, 2005 from a combined
total of 20.15% to 10.81%.
Fourth Quarter Results Compared to the Fourth Quarter of 2004
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The following table and discussion indicates the major factors impacting
EBITDA for the current quarter compared to EBITDA as reported in the fourth
quarter of 2004:
(millions of dollars)
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EBITDA for the three months ended December 31, 2004 $ (15.8)
----------
Lower pulp log inventory write-downs 7.4
Lower costs, primarily logging 7.3
Lower lumber prices realised (5.5)
Lower log prices realised (3.9)
Change in mix of lumber and logs sold 8.1
Impact of foreign exchange rates (1.0)
Lower by-product revenues (2.1)
Other (1.6)
----------
EBITDA for the three months ended December 31, 2005 $ (7.1)
----------
----------
The results for the fourth quarter of 2005 improved compared to the same
period in 2004 primarily due to lower logging costs and the impact of changes
in pulp log inventories. During 2004, pulp log inventories increased from
approximately 78,000 cubic metres at the end of the third quarter to 189,000
cubic metres at the end of the fourth quarter. This resulted in the lower of
cost and market reserves taken and charged to earnings of $6.6 million in the
fourth quarter as compared to a reduction in the reserve of $0.8 million in
the fourth quarter of 2005. Stumpage and royalty rates also decreased between
the two quarters as a result of declining log prices and the impact of log
mix. This was partially offset by higher costs, particularly for fuel and
transportation.
Lower lumber and log prices and the impact of the stronger Canadian
dollar were largely offset by a shift in the sales mix towards more high value
cedar and hemlock lumber products and higher value logs as a percentage of the
total compared to the same period in 2004.
Solid Wood Segment
Three Three Three Year
Months Months Months Year Ended
Ended Ended Ended Ended December
December September December December 31,
(millions of 31, 30, 31, 31, 2004
dollars except 2005 2005 2004 2005 Pro
where noted) Company Company Company Company forma(1)
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Lumber sales $ 91.3 $ 88.2 $ 87.8 $ 384.3 $ 412.2
Log sales 25.5 22.2 27.7 91.9 140.5
By-product sales 3.6 5.9 5.7 23.6 25.6
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$ 120.4 $ 116.3 $ 121.2 $ 499.8 $ 578.3
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EBITDA $ (0.8) $ (8.1) $ (10.3) $ 4.3 $ 75.0
EBITDA margin (0.7%) (7.0%) (8.5%) 0.9% 13.0%
Operating earnings
(loss) $ (6.1) $ (6.7) $ (18.6) $ (23.3) $ 34.1
Total assets
employed $ 499.2 $ 546.3 $ 594.0 $ 499.2 $ 594.0
Lumber production
- millions of
board feet 127 150 158 648 679
Lumber sales
- millions of
board feet 166 165 158 669 669
Log production -
thousands of cubic
metres 822 465 896 2,933 3,925
Log purchases -
thousands of cubic
metres 87 147 144 626 1,167
Log sales - thousands
of cubic metres 212 172 236 763 1,197
Internal Log
consumption -
thousands of cubic
metres 590 719 768 3,028 3,379
Average lumber
sales revenue per
thousand board
feet $ 549 $ 535 $ 557 $ 574 $ 616
Average log sales
revenue per cubic
metre $ 120 $ 129 $ 118 $ 120 $ 117
(1) Year ended December 31, 2004 represents the results of our
Predecessor for the period from January 1, 2004 to July 27, 2004
added to the Company's results for the period from July 28, 2004 to
December 31, 2004.
The solid wood segment had an operating loss of $6.1 million in the
quarter compared to an operating loss of $6.7 million in the third quarter of
2005 and an operating loss of $18.6 million in the fourth quarter of 2004.
EBITDA for the solid wood segment was negative $0.8 million in the fourth
quarter compared to negative $8.1 million in the third quarter and negative
$10.3 million in the fourth quarter of 2004. The fourth quarter of 2004 was
negatively impacted by the changes in the provision for the lower of cost and
market pulp log inventories as discussed in the comparison of EBITDA above.
Lumber sales of 166 million board feet in the quarter were comparable to
the previous quarter and approximately 5% higher than the same period in 2004.
Lumber production of 127 million board feet was approximately 15% lower than
the previous quarter and 20% lower than the same period of 2004 as we managed
our lumber inventories down with an extended shut down at the Ladysmith
sawmill and the closure of the Silvertree sawmill and curtailment of the
Saltair sawmill both as of October 28, 2005. In total there were 74 fewer
shifts worked in the fourth quarter compared to the previous quarter and 122
fewer shifts in the comparative period of 2004. We will increase the number of
shifts, including moving to three shifts per day at certain sawmills, as
markets and log supply dictate. Sales of by-products were lower in the fourth
quarter of 2005 compared to the third quarter of 2005 and the fourth quarter
of 2004 as a result of the lower sawmill production.
Log production of 0.822 million cubic metres in the quarter compares to
0.465 million cubic metres in the third quarter and 0.896 million cubic metres
in the comparable period of 2004. The increase in production compared to the
third quarter reflects the resumption to normal logging levels following the
previously announced downtime taken at the logging operations during the
summer to reduce log inventories. The higher log production during the quarter
also resulted in higher external log sales compared to the previous quarter.
Log sales in the quarter were lower compared to the same period of 2004 as it
included pulp logs sold to the Port Alice mill prior to its closure in
October, 2004. Average log prices realised during the quarter decreased to
$120 per cubic metre compared to $129 per cubic metre in the previous quarter
primarily due to the mix of logs sold.
During the quarter we were notified that we had been selected as a
mandatory respondent in the anti-dumping duty third administrative review of
certain softwood lumber products from Canada. We were selected, along with
seven other companies, under the United States Department of Commerce's
("USDOC") new "probability proportional to size" sampling methodology. The
review covers the period from May 1, 2004 to April 30, 2005. We are currently
posting anti-dumping duty deposits at the "all others" rate of 2.11% on the
value of our lumber shipments to the United States. Following the third
review, we will post anti-dumping duties at a "company specific" rate that
will be determined for us as a result of this review. We do not expect to
receive the final results of the USDOC third review until December 2006,
consistent with the timing of the USDOC second administrative review
determinations announced in 2005.
Pulp Segment
As announced on December 15, 2005 the Company has decided to exit the
Pulp Segment and close its Squamish pulp mill. The last production shift was
completed on January 26, 2006 and most of the workforce completed their
employment on March 9, 2006. The Company is evaluating possible future uses
for the site. Commencing with the first quarter of 2006, the Pulp Segment will
be classified as a discontinued operation.
Three Three Three Year
Months Months Months Year Ended
Ended Ended Ended Ended December
December September December December 31,
(millions of 31, 30, 31, 31, 2004
dollars except 2005 2005 2004 2005 Pro
where noted) Company Company Company Company forma(1)
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Sales $ 40.6 $ 40.4 $ 44.6 $ 167.0 $ 181.5
EBITDA $ (1.8) $ (4.2) $ (1.8) $ (4.8) $ 0.3
EBITDA margin (4.4%) (10.4%) (4.0%) (2.9%) 0.2%
Operating earnings
(loss) $ (73.9) $ (4.8) $ (2.2) $ (78.8) $ (6.0)
Total assets
employed $ 37.2 $ 82.2 $ 84.6 $ 37.2 $ 84.6
Pulp production -
thousands of
tonnes 71 69 73 279 266
Pulp sales -
thousands of
tonnes 69 71 74 275 262
Average pulp
revenue per
tonne $ 582 $ 573 $ 601 $ 606 $ 693
Average pulp price
delivered to
Northern Europe
- (US$ per
tonne)(2) $ 600 $ 587 $ 600 $ 612 $ 626
Average pulp price
delivered to
Northern Europe
- (C$ equivalent
per tonne)(2) $ 702 $ 712 $ 753 $ 742 $ 816
(1) Year ended December 31, 2004 represents the results of our
Predecessor for the period from January 1, 2004 to July 27, 2004
added to the Company's results for the period from July 28, 2004 to
December 31, 2004.
(2) Benchmark prices sourced from Resource Information Systems, Inc.
Canadian equivalent translated at average exchange rate for the
period
The operating loss from the pulp segment during the quarter of
$73.9 million reflects the charges associated with the closure of the pulp
mill of $71.4 million and compares to a loss of $4.8 million in the third
quarter of 2005 and a loss of $2.2 million in the comparative quarter of 2004.
EBITDA for the pulp segment in the quarter was negative $1.8 million compared
to negative $4.2 million in the third quarter and negative $1.8 million in
fourth quarter of 2004. The improvement in the results for the quarter
compared to the third quarter is primarily attributable to lower fibre costs
as a result of the purchase of lower cost pulp chips from the interior of
British Columbia.
In addition to the charges related to the closure discussed above, the
Company expects to expense a further $4.5 million in the first quarter of 2006
for contract termination and other costs. The Company will also 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 site. These costs will be expensed as incurred.
Other Corporate Items
Interest expense increased to $11.8 million in the quarter from
$11.5 million in the third quarter and $11.2 million in the fourth quarter of
2004 primarily as a result of fluctuations in the Canadian dollar. The Company
recorded a foreign exchange loss in the quarter of $0.1 million on the
translation of its US dollar denominated secured bonds compared to a gain
recorded in the third quarter of $13.3 million and a gain of $12.6 million in
the fourth quarter of 2004.
We recorded an income tax recovery in the fourth quarter of 2005 of
$10.6 million with respect to the draw down of future income taxes payable in
a subsidiary of the Company.
Changes in Financial Position and Liquidity
Three Three Three Year
Months Months Months Year Ended
Ended Ended Ended Ended December
December September December December 31,
(millions of 31, 30, 31, 31, 2004
dollars except 2005 2005 2004 2005 Pro
where noted) Company Company Company Company forma(1)
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Cash flow from
operations $ (11.0) $ 17.8 $ (17.8) $ 6.2 $ (24.3)
Additions to
property, plant
and equipment $ (2.1) $ (3.7) $ (1.4) $ (9.2) $ (8.8)
Additions to
capitalized roads $ 2.1 $ (3.3) $ (3.0) $ (9.1) $ (27.4)
Change in bank
indebtedness $ (0.7) $ (7.0) $ 24.2 $ (6.6) $ 47.7
Total liquidity(2) $ 54.5 $ 71.3 $ 20.9 $ 54.5 $ 20.9
Financial ratios:
Current assets to
current liabilities 1.28 1.67 1.76 1.28 1.76
Debt to shareholders
equity 4.21 2.29 1.78 4.21 1.78
Debt to market
capitalization 9.1 6.24 2.61 9.1 2.61
(1) Year ended December 31, 2004 represents the results of our
Predecessor for the period from January 1, 2004 to July 27, 2004
added to the Company's results for the period from July 28, 2004 to
September 30, 2004.
(2) Total liquidity comprises cash, restricted cash and available credit
under the Company's operating line.
Cash flow from operations in the quarter of negative $11.0 million
compares to positive cash flow of $17.8 million in the third quarter and
negative $17.8 in the fourth quarter of 2004. Cash flow from operations in
each period benefited from the reduction in net working capital due to the
timing of cash flows and planned reductions in logging and lumber inventories.
Net working capital in the fourth quarter of 2005 also benefited from the
timing of the semi-annual payment of the interest on the Company's 15% Secured
Bonds being paid in January 2006 instead of December 2005.
Cash flow from operations before the non-cash changes in working capital
items was negative $42.0 million in the quarter compared to negative
$33.3 million in the third quarter and negative $28.2 million in the fourth
quarter of 2004. The fourth quarter of 2005 includes $23.8 million with
respect to severance and other charges resulting from the closure of the
Squamish pulp mill. These amounts are included in accounts payable and accrued
liabilities at December 31, 2005.
Additions to property, plant and equipment during the quarter of
$2.1 million primarily relate to sawmill improvements. Total expenditures on
logging roads were $5.2 million in the quarter compared to $6.5 million in the
third quarter. The Company reclassified certain costs that had been previously
capitalized and as a result recorded a net decrease in road costs capitalized
in the quarter of $2.1 million.
During the quarter the Company withdrew $40 million from the working
capital reserve account to fund operations and the semi-annual interest
payable with respect to the second half of 2005 on the US$221 million 15%
Secured Bonds that was paid in full on January 3, 2006.
At December 31, 2005 the Company had a cash balance of $29.6 million, the
working capital reserve of $8.9 million and available credit of $16.0 million
under its revolving credit facility to meet its operational requirements. As
noted above, on January 3, 2006 the Company paid $20.0 from this cash balance
with respect to interest due on its 15% Secured Bonds. On March 10, 2006 the
Company completed its previously announced redemption of its Secured Bonds
including paying all accrued interest thereon. The total redemption amount of
US$252.5 million (Cdn$293.3 million), including accrued interest, was funded
from the proceeds of the new US$187.5 million and C$90 million term loans
obtained from the Brookfield Bridge Lending Fund that were also drawn on
March 10, 2006. The new loan facilities provided approximately $13 million of
additional working capital to the Company. In addition, the closing of the
acquisition of the Englewood Logging Division and the execution of the long-
term fibre supply arrangement with the Partnership resulted in the Company
receiving $35 million cash on March 17, 2006 which has been applied against
the Company's revolving line of credit. Approximately $17 million will be
required in the short-term to fund severance and other obligations with
respect to the closure of the Squamish pulp mill.
In addition to the above noted debt restructuring, the Company completed
its rights offering to all shareholders on March 9, 2006. The rights holders
and Tricap Management Limited, through its standby commitment, paid
$295 million for subscription receipts that will be exchangeable into common
shares (subject to a change of control exchange limitation) upon the
completion of the proposed acquisition of Cascadia. The proceeds will be used
to fund the proposed acquisition of Cascadia, pay down the revolving credit
facilities of both Western and Cascadia and contribute to working capital.
Following the closing the Company estimates that it should have availability
under its amended revolving credit facility in the range of $110-$120 million
and unrestricted cash in the range of $30-$40 million, depending on working
capital movements and operating results until closing.
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 and its Predecessor for the last eight
quarters. Note that in the case of the Predecessor the amounts shown do not
extend beyond the operating earnings (loss) level as a comparison of items
below that level is not meaningful as a result of the Predecessor's different
capital structure.
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 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 which are
described in this quarterly report, our 2004 Annual Report, Annual Information
Form, Form 20-F/A filed with the US Securities and Exchange Commission and our
Final Prospectus dated January 31, 2006. A key risk and uncertainty that we
have been facing is our cash flow and liquidity position. As a result of the
continuing strength of the Canadian dollar, the softwood lumber dispute,
current market conditions and our current capital and operating cost
structure, we have not generated sufficient cash flows from operations to meet
our debt service obligations and to fund the capital requirements and
structural changes of our business.
The Company incurred a net loss for the year ended December 31, 2005 of
$139.6 million and at December 31, 2005, has an accumulated deficit of
$145.1 million. Included in the net loss for the year ended December 31, 2005
is $73.4 million in write-downs of assets and operating restructuring costs
related to the pulp mill and sawmill closures and $7.4 million for operating
losses of the pulp mill which was closed permanently in early 2006.
As at December 31, 2005, we had approximately $319.3 million of
indebtedness outstanding comprised of our Secured Bonds and Revolving Credit
Facility. Our ability to pay our debt obligations depends on our current and
future performance. To a significant extent, our performance will be subject
to general economic, financial, competitive, legislative, regulatory and other
factors, including exchange rate and lumber prices, all of which are beyond
our control. At December 31, 2005, the Company had cash, restricted cash and
available lines of credit totaling $54.5 million to fund future operations.
In response to the losses incurred during 2005, the Company closed and
consolidated certain of its operations so as to lower its cost structure and
improve future operating results. In addition, the Company has entered into an
agreement to acquire Cascadia. The Company is financing the proposed
acquisition and raising additional working capital through an equity rights
offering and a refinancing of its long-term debt and bank indebtedness.
Closing of the Cascadia acquisition is dependent on receiving approvals from
certain governmental authorities.
Market conditions including foreign exchange rates, prices for its
products and other factors will have a significant impact on the ability of
the Company to improve financial performance over the next fiscal year. In
addition to market conditions, future profitable operations on a long-term
basis are also dependent on the Company's ability to successfully integrate
its operations with Cascadia's operations and realize significant synergies
that we believe should help reposition the Company to successfully compete in
global softwood markets. The Company anticipates that the governmental
approvals will be received in April of 2006 and the Cascadia acquisition will
close and the proceeds of the rights offering will be released at that time.
In the event that market conditions are not favourable and the acquisition of
Cascadia and related financings does not close, the Company will need to
consider other strategic alternatives to finance and maintain its operations.
For a full discussion of the risks and uncertainties which affect our
business please see our 2004 Annual Report, Annual Information Form,
Form 20-F/A and our Final Rights Offering Prospectus dated January 31, 2006
which are available on Sedar at www.sedar.com. Any of the risks and
uncertainties described in this quarterly report and in the above noted
documents could have a material adverse affect on our operations and financial
conditions and cash flow and should be carefully considered in evaluating our
business.
Measurement Uncertainty
The Company reviews the carrying values of long-lived assets when events
or changes in circumstances indicate that the carrying value of the assets may
not be recoverable through future operations. During the third quarter, as a
result of continued losses by the Company, the potential impact of its
restructuring activities and the potential impact on operations of a weaker
U.S. dollar and reduced lumber and pulp prices in the market, the Company
commenced an impairment review of all of its long-lived assets.
The impairment review was performed by determining whether projected
undiscounted future cash flows from operations exceed the net carrying amount
of the assets. Key assumptions in performing this review included lumber
prices, pulp prices and the U.S. dollar exchange rate. Other significant
assumptions include the useful life of the assets (for example, curtailment
decisions) and the effect of the ongoing softwood lumber dispute with the U.S.
In determining the appropriate assumptions we have analyzed external data,
including RISI, and sought advice from advisors.
Following the strategic decision to exit the pulp business and close the
Squamish pulp mill the Company reviewed the carrying amounts for these
operations and the estimated costs to exit the business. On the basis of this
review the Company took a fourth quarter charge of $71.4 million including
$47.6 million to write-down the property, plant and equipment and related
supplies inventories to their estimated recoverable amount. Environmental
remediation and other costs are primarily based on the preliminary findings of
work performed by consultants. Actual costs may be significantly different
once investigative drilling and other planned analysis is completed.
With respect to the Solid Wood segment, we closed our Silvertree sawmill
in October and recorded an impairment charge of $8.5 million in the second
quarter of 2005. On the basis of the findings of the impairment review of the
Solid Wood segment, we do not consider that any further write down of these
assets is necessary at December 31, 2005.
Given the inherent imprecision of impairment testing and the sensitivity
of results to the key assumptions used, it is possible that changes in future
conditions may lead management to use different assumptions in the future
which could require a material change in the carrying values of its long-lived
assets.
Outlook and Strategy
The results for the quarter continue to demonstrate the need for us to
pursue our strategy of leading the consolidation of the BC coastal lumber
industry. Costs must be reduced through rationalisation, productivity
improvements and a more integrated approach to the business. The proposed
acquisition of Cascadia and the acquisition of the Englewood Logging Division
together with the recapitalisation of the Company should, over time, better
enable us to make these structural changes. The acquisition of Cascadia is
subject to regulatory review and we are working to provide the government
agencies with the information they require and expect the transaction to close
during April, 2006.
As previously disclosed, we are looking for opportunities to realize
additional value through the sale of our 29,000 hectares of private
timberlands. We have applied to the BC Ministry of Forests and Range to remove
these lands from their associated Tree Farm Licenses and have engaged an
advisor to assist us with the sales process. Proceeds from any sale would
predominantly be used first to pay down the $90 million Canadian term loan
facility and thereafter the US dollar term loan facility, subject to any funds
retained and deposited in the working capital reserve, all in accordance with
the terms of these new facilities.
The strength of the Canadian dollar continues to be a concern. Although
the acquisition of Cascadia is expected to reduce the percentage of our sales
denominated in US dollars from over 60% to approximately 49%, our results will
continue to be significantly impacted by fluctuations in the value of the
dollar, particularly if they occur over short periods of time. We estimate
that a 1% change in the value of the Canadian dollar per US$1.00 will impact
operating earnings by approximately $6 million on a post acquisition basis.
The volume of logs currently available on the Vancouver log market is at
unusually low levels even when considering normal seasonal fluctuations. This
has been caused by a number of factors including low log and lumber prices in
the fourth quarter of 2005 that have resulted in most logging operators
avoiding building inventories heading into the traditional winter slow down.
Cedar log and lumber prices have recovered in the first quarter of 2006,
however many of the major logging operations have been prevented from
significantly increasing cedar output due to heavy snow pack preventing access
to higher elevations. Conversely, even though customer demand for hemlock
lumber is consistent it has not translated into appreciably stronger pricing.
We have the ability to increase our logging production to some extent as we
move further into the spring however the future availability of logs to
purchase on the market is unknown and is very dependent on log prices and
speculative considerations.
The mild winter in North America has resulted in higher levels of
construction activity and demand for dimension lumber products than would
normally be expected at this time of the year. However, this increased
activity has only caused a modest price increase which is affecting the log
market as described above. The advance in the construction cycle is expected
to result in prices remaining flat in the second quarter as the market
assesses supply and demand trends.
Demand for Western Red Cedar is seasonal with higher demand in the spring
as sales of decking and outdoor furniture increase. The mild winter has
brought that demand forward resulting in higher demand and prices,
particularly compared to the weak prices in the same period in 2005. Demand
and prices are anticipated to fall off in the second half of 2006 as this
seasonal demand slows down.
Prices have increased in the Japanese market over the past two months by
approximately 3-5% on average in US$ terms. Prices are expected to remain firm
through the first half of 2006 as a result of supply constraints, particularly
from Russia and Europe due to the impacts of a particularly severe winter and
Russian lumber being diverted to the Chinese market. Overall, housing starts
are expected to be below 2005's level.
Outstanding Share Data
As of March 27, 2006, 25,631,795 of our Common Shares are issued and
outstanding. In addition, we have issued 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"). We have reserved up to 2,847,262
Common Shares for issuance upon the exercise of the Class C Warrants. We have
also reserved 2,500,000 Common Shares for issuance upon the exercise of
options granted under our incentive stock option plan. As of March 19, 2006 we
have granted 399,590 options under our incentive stock option plan. The
Company completed its rights offering of subscription receipts to all
shareholders on March 9, 2006 raising $295.0 million. On March 16, 2006,
178.8 million subscription receipts were issued and, on the closing of the
proposed acquisition of Cascadia, will be automatically exchanged for an
equivalent number of common shares and the funds released to the Company. The
exchange is subject to a restriction in the event that it would result in a
holder or group of holders exercising control or direction over 50% or more of
the common shares. See note 6(a) to the (Unaudited) Interim Consolidated
Financial Statements for additional information.
Other Matters
Other than as described in this quarterly report, there has been no
change to the information provided in our MD&A for the period from
July 28, 2004 to December 31, 2004, dated March 24, 2005 ("2004 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 2004 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. Information about the operation of our business by our
Predecessor prior to the implementation of the Plan, including our
Predecessor's last Form 20-F, is available at www.sedar.com under the
Predecessor's name, Doman Industries Limited.
On behalf of the Board of Directors
John MacIntyre Reynold Hert
Chairman President and Chief Executive Officer
Duncan, BC
March 27, 2005
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 items. 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, under the "Risk Factors" section of our Form 20-F/A
and under the "Risk Factors" section of our final prospectus dated January 31,
2006 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
Selected Financial Information
(millions of Canadian dollars except per unit sales price and per share
amounts unless noted otherwise)
Quarter
-------------------------------------------
2005
-------------------------------------------
4th 3rd 2nd 1st
-------------------------------------------
-------------------------------------------
Company
-------------------------------------------
Average Exchange
Rate - Cdn $ to
purchase one
U.S. $ $ 1.1703 $ 1.2122 $ 1.2411 $ 1.2259
Net sales
Lumber $ 91.3 $ 88.2 $ 107.5 $ 97.3
Logs 25.5 22.2 26.0 18.2
By-Products 3.6 5.9 7.0 7.1
-------------------------------------------
Solid wood
segment 120.4 116.3 140.5 122.6
Pulp segment 40.6 40.4 45.9 40.1
-------------------------------------------
$ 161.0 $ 156.7 $ 186.4 $ 162.7
-------------------------------------------
-------------------------------------------
Lumber
Lumber production
- millions of
board feet 127 150 186 185
Lumber sales
- millions of
board feet 166 165 176 162
Logging
Log production
- thousands of
cubic metres 822 465 1,148 498
Log purchases
- thousands of
cubic metres 87 147 192 200
Log sales
- thousands of
cubic metres 212 172 213 166
Internal Log
consumption
- thousands of
cubic metres 590 719 844 875
NBSK Pulp
Pulp production
- thousands of
tonnes 71 69 72 67
Pulp sales
- thousands of
tonnes 69 71 73 62
Sales prices
Lumber - per
thousand board
feet $ 549 $ 535 $ 612 $ 599
Logs - per cubic
metre $ 120 $ 129 $ 122 $ 110
Pulp - per tonne $ 582 $ 573 $ 624 $ 651
EBITDA
Solid wood
segment $ (0.8) $ (8.1) $ 2.2 $ 11.0
Pulp segment (1.8) (4.2) (0.7) 1.9
General corporate (4.5) (3.4) (3.8) (4.2)
-------------------------------------------
$ (7.1) $ (15.7) $ (2.3) $ 8.7
-------------------------------------------
-------------------------------------------
Net earnings
(loss) $ (84.6) $ (12.5) $ (37.2) $ (5.3)
Net earnings loss
per share - basic
and diluted $ (3.30) $ (0.49) $ (1.45) $ (0.21)
Reconciliation
of EBITDA to net
earnings (loss)
EBITDA $ (7.1) $ (15.7) $ (2.3) $ 8.7
Amortization of
property, plant
and equipment (6.6) (5.1) (10.3) (6.2)
Restructuring and
other items (70.8) 5.9 (8.5) -
Interest expense (11.8) (11.5) (12.0) (11.8)
Foreign exchange
gain (loss) on
translation of
long-term debt (0.1) 13.3 (3.3) (1.6)
Other income /
expense 1.2 0.8 (0.4) 5.8
Financial
restructuring
costs -
Income taxes 10.6 (0.2) (0.3) (0.3)
Net loss from
discontinued
operations - - -
Provision for
preferred
dividends - - -
-------------------------------------------
Net earnings (loss)
attributable to
common shares $ (84.6) $ (12.5) $ (37.2) $ (5.3)
-------------------------------------------
-------------------------------------------
Quarter
-------------------------------------------------------
2004 2004
---------------------- --------------------------------
4th 3rd 3rd 2nd 1st
---------------------- --------------------------------
(July 28 - (July 1 -
Sept 30) July 27)
---------------------- --------------------------------
Predecessor (restated for sale of
Port Alice pulp mill in May, 2004)
---------------------- --------------------------------
Average Exchange
Rate - Cdn $ to
purchase one
U.S. $ $ 1.2219 $ 1.3227 $ 1.3338 $ 1.3489 $ 1.3190
Net sales
Lumber $ 87.8 $ 85.5 $ 21.4 $ 116.4 $ 101.1
Logs 27.7 31.8 13.5 53.4 14.1
By-Products 5.7 5.2 2.9 6.5 5.3
---------------------- --------------------------------
Solid wood
segment 121.2 122.5 37.8 176.3 120.5
Pulp segment 44.6 35.8 6.4 52.2 42.5
---------------------- --------------------------------
$ 165.8 $ 158.3 $ 44.2 $ 228.5 $ 163.0
---------------------- --------------------------------
---------------------- --------------------------------
Lumber
Lumber production
- millions of
board feet 158 132 59 175 155
Lumber sales
- millions of
board feet 158 135 30 171 175
Logging
Log production
- thousands of
cubic metres 896 681 421 1,158 769
Log purchases
- thousands of
cubic metres 144 231 81 395 316
Log sales
- thousands of
cubic metres 236 291 120 449 100
Internal Log
consumption
- thousands of
cubic metres 768 605 261 936 809
NBSK Pulp
Pulp production
- thousands of
tonnes 73 46 11 72 64
Pulp sales
- thousands of
tonnes 74 52 9 66 61
Sales prices
Lumber - per
thousand board
feet $ 557 $ 633 $ 712 $ 681 $ 577
Logs - per cubic
metre $ 117 $ 109 $ 113 $ 119 $ 141
Pulp - per tonne $ 601 $ 694 $ 734 $ 797 $ 697
EBITDA
Solid wood
segment $ (10.3) $ 19.7 $ 10.9 $ 37.0 $ 17.7
Pulp segment (1.8) 0.5 (10.7) 12.2 0.1
General corporate (3.7) (2.4) (0.7) (2.1) (2.1)
---------------------- --------------------------------
$ (15.8) $ 17.8 $ (0.5) $ 47.1 $ 15.7
---------------------- --------------------------------
---------------------- --------------------------------
Net earnings
(loss) $ (19.6) $ 14.1
Net earnings loss
per share - basic
and diluted $ (0.76) $ 0.55
Reconciliation
of EBITDA to net
earnings (loss)
EBITDA $ (15.8) $ 17.8 $ (0.5) $ 47.1 $ 15.7
Amortization of
property, plant
and equipment (8.7) (5.5) (4.4) (17.1) (11.5)
Restructuring and
other items - - - - -
Interest expense (11.2) (8.6) (8.7) (31.5) (28.9)
Foreign exchange
gain (loss) on
translation of
long-term debt 12.6 14.8 0.6 (16.1) (11.0)
Other income /
expense - (0.1) (5.5) (0.4) 0.1
Financial
restructuring
costs - - (3.1) (5.0) (3.3)
Income taxes 3.5 (4.3) 0.7 (0.4) (0.3)
Net loss from
discontinued
operations - - (1.6) (5.7) (5.1)
Provision for
preferred
dividends - - (0.4) (1.2) (1.2)
---------------------- --------------------------------
Net earnings (loss)
attributable to
common shares $ (19.6) $ 14.1 $ (22.9) $ (30.3) $ (45.6)
---------------------- --------------------------------
---------------------- --------------------------------
Consolidated Balance Sheets
(Expressed in millions of Canadian dollars)
-------------------------------------------------------------------------
December 31, December 31,
2005 2004
--------------------------
(Unaudited) (Audited)
Assets
Current assets
Cash $ 29.6 $ 5.0
Accounts receivable 71.6 78.0
Inventory 126.1 176.7
Restricted cash (note 5) 8.9 2.9
Prepaid expenses 5.5 5.2
--------------------------
241.7 267.8
Restricted assets (note 5) - 21.5
Investments 7.2 7.1
Property, plant and equipment 323.7 395.6
Other assets 2.6 1.4
--------------------------
$ 575.2 $ 693.4
--------------------------
--------------------------
Liabilities and Shareholders' Equity
Current liabilities
Revolving credit facility (note 4) $ 71.4 $ 78.1
Accounts payable and accrued liabilities 117.4 72.2
--------------------------
188.8 150.3
Long-term debt (note 5) 247.9 253.5
Future income taxes - 10.5
Other liabilities 28.0 29.4
--------------------------
464.7 443.7
Shareholders' equity
Common shares 255.2 255.2
Contributed surplus 0.4 -
Deficit (145.1) (5.5)
--------------------------
110.5 249.7
--------------------------
$ 575.2 $ 693.4
--------------------------
--------------------------
Commitments and contingencies (note 6)
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)
October 1 October 1 January 1 July 28
to to to to January 1
December December December December to
31, 31, 31, 31, July 27,
2005 2004 2005 2004 2004
Company Company Company Company Predecessor
-------------------------------------------------------
Sales $ 161.0 $ 165.8 $ 666.8 $ 324.1 $ 435.7
Cost and expenses
Cost of goods sold 139.5 150.9 560.5 263.9 308.0
Anti-dumping and
countervailing
duties 6.0 9.2 36.4 21.1 24.0
Freight expenses 16.5 16.0 63.1 27.9 30.4
Selling and
administration 6.1 5.5 23.2 9.2 11.0
Amortization of
property, plant
and equipment 6.6 8.7 28.2 14.2 33.0
-------------------------------------------------------
174.7 190.3 711.4 336.3 406.4
-------------------------------------------------------
Operating earnings
(loss) before
write-down of
property, plant
and equipment and
operating
restructuring items (13.7) (24.5) (44.6) (12.2) 29.3
Write-down of property,
plant and equipment
and operating
restructuring items
(note 10) (70.8) - (73.4) - -
-------------------------------------------------------
Operating earnings
(loss) (84.5) (24.5) (118.0) (12.2) 29.3
Interest expense (11.8) (11.2) (47.1) (19.9) (71.4)
Foreign exchange gain
(loss) on long-term
debt (0.1) 12.6 8.3 27.4 (24.2)
Other income / expense 1.2 - 7.3 (0.1) (5.9)
Financial restructuring
costs - - - - (11.4)
-------------------------------------------------------
Loss before income
taxes (95.2) (23.1) (149.5) (4.7) (83.6)
Income tax recovery
(expense) 10.6 3.5 9.9 (0.8) (0.1)
-------------------------------------------------------
Net loss from
continuing
operations (84.6) (19.6) (139.6) (5.5) (83.7)
Net loss from
discontinued
operations - - - - (12.4)
-------------------------------------------------------
Net loss $ (84.6) $ (19.6) $ (139.6) $ (5.5) $ (96.1)
-------------------------------------------------------
-------------------------------------------------------
Loss per share:
Basic $ (3.30) $ (0.76) $ (5.45) $ (0.21) $ (2.33)
Diluted $ (3.30) $ (0.76) $ (5.45) $ (0.21) $ (2.33)
Weighted average
number of common
and non-voting
shares
outstanding
(thousands of
shares) 25,632 25,635 25,632 25,635 42,481
Provision for
dividends on
preferred shares
for loss per
share
calculations $ - $ - $ - $ - $ (2.8)
See accompanying notes to the consolidated financial statements
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in millions of Canadian dollars)
October 1 October 1 January 1 July 28
to to to to January 1
December December December December to
31, 31, 31, 31, July 27,
2005 2004 2005 2004 2004
Company Company Company Company Predecessor
-------------------------------------------------------
Cash provided by
(used in):
Operating activities:
Net loss from
continuing
operations $ (84.6) $ (19.6) $ (139.6) $ (5.5) $ (83.7)
Items not involving
cash:
Amortization of
property, plant
and equipment 6.6 8.7 28.2 14.2 33.0
Write-down of
property, plant
and equipment 36.8 - 45.3 - -
Write-down of
supplies inventory 10.8 10.8 - -
Amortization of
deferred charges 0.1 0.1 0.3 0.2 2.3
Foreign currency
translation
(gain) loss 0.1 (12.6) (8.3) (27.5) 24.2
Accretion of debt
discount 0.7 1.1 2.7 1.1 -
(Gain) loss on
property, plant and
equipment disposals 0.1 - (12.7) - 0.5
Future income taxes (10.5) (3.9) (10.5) - -
Other (2.1) (2.0) (1.1) (1.8) (0.2)
-------------------------------------------------------
(42.0) (28.2) (84.9) (19.3) (23.9)
-------------------------------------------------------
Changes in non-cash
working capital
items:
Accounts receivable (14.6) 14.6 6.4 (0.9) (14.2)
Inventory 13.4 10.3 39.8 8.9 (51.7)
Prepaid expenses 3.2 3.0 (0.3) 3.3 (4.0)
Accounts payable and
accrued liabilities 29.0 (17.5) 45.2 (16.1) 95.9
-------------------------------------------------------
31.0 10.4 91.1 (4.8) 26.0
-------------------------------------------------------
Cash provided (used)
by continuing
operations (11.0) (17.8) 6.2 (24.1) 2.1
Cash used by
discontinued
operations - - - - (2.3)
-------------------------------------------------------
(11.0) (17.8) 6.2 (24.1) (0.2)
-------------------------------------------------------
Investing activities:
Additions to
property, plant and
equipment (2.1) (1.4) (9.2) (5.3) (3.5)
Additions to
capitalized roads 2.1 (3.0) (9.1) (6.3) (21.1)
Disposals of property,
plant and equipment (0.3) 2.9 29.4 2.9 1.1
Restricted cash 39.6 (2.9) (6.0) (2.9) -
Bill 28 take back
proceeds and
infrastructure
advance (note 6(c)) - - 21.5 - -
Other (1.9) (0.4) (1.5) (0.4) 1.2
-------------------------------------------------------
37.4 (4.8) (25.0) (12.0) (22.3)
-------------------------------------------------------
Financing activities:
Revolving credit
facility (0.7) 24.2 (6.7) 28.4 19.3
-------------------------------------------------------
(0.7) 24.2 (6.7) 28.4 19.3
-------------------------------------------------------
Increase (decrease)
in cash 25.7 1.6 24.6 (7.7) (3.2)
Cash, beginning of
period 3.9 3.4 5.0 12.7 15.9
-------------------------------------------------------
Cash, end of
period $ 29.6 $ 5.0 $ 29.6 $ 5.0 $ 12.7
-------------------------------------------------------
-------------------------------------------------------
See accompanying notes to the consolidated financial statements
Notes to Unaudited Interim Consolidated Financial Statements
(Tabular amounts expressed in millions of Canadian dollars)
1. Basis of Presentation
Western Forest Products Inc.'s (the "Company") business is timber
harvesting and lumber manufacturing for worldwide markets. The
Company has historically also carried on pulp operations consisting
of producing and marketing pulp. As discussed in note 10, the Company
is exiting the pulp business.
The Company acquired all of its operating assets from Doman
Industries Limited and certain of it subsidiaries ("Doman" or the
"Predecessor") on July 27, 2004. For a full discussion of the
Company's acquisition of Doman's assets and Doman's reorganization,
please see the Company's annual information form filed on Sedar at
www.sedar.com.
The Predecessor's financial information has been presented to provide
additional information for the reader. In reviewing the Predecessor's
financial information, readers are reminded that it does not reflect
the effects of the financial reorganization or the application of its
accounting described in the Company's 2004 annual report.
The Company has incurred a net loss for the year ended December 31,
2005 of $139.6 million and at December 31, 2005, has an accumulated
deficit of $145.1 million. Included in the net loss for the year
ended December 31, 2005 is $73.4 million in write-downs of assets and
restructuring costs related to pulp mill and sawmill closures and
$7.4 million for operating losses of the pulp mill which will be
closed permanently in early 2006 (note 10). At December 31, 2005, the
Company has cash, restricted cash and available lines of credit
totaling $54.5 million to fund future operations.
In response to the losses that were being incurred during 2005, the
Company closed and consolidated certain of its operations so as to
lower its cost structure and improve future operating results. In
addition, the Company has entered into an agreement to acquire
Cascadia Forest Products Ltd. ("Cascadia" (note 6(a)). The Company is
financing the proposed acquisition and raising additional working
capital through an equity rights offering and a refinancing of its
long-term debt and revolving credit facility. Closing of the Cascadia
acquisition is dependent on receiving approvals from certain
governmental authorities.
Market conditions including foreign exchange rates, prices for its
products and other factors will have a significant impact on the
ability of the Company to improve financial performance over the next
fiscal year. In addition to market conditions, future profitable
operations on a long-term basis are also dependent on the Company's
ability to successfully integrate its operations with Cascadia's
operations and realize significant synergies that should help
reposition the Company to successfully compete in global softwood
markets. The Company anticipates that the governmental approvals will
be received in April of 2006 and the various agreements for the
acquisition, the equity rights offering and revolving credit facility
will close at that time. In the event that market conditions are not
favourable and the acquisition of Cascadia and related financings
does not close, the Company will need to consider other strategic
alternatives to finance and maintain its operations.
2. 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, 2004 and for the period from July 28,
2004 to December 31, 2004.
3. Adoption of New Accounting Policy
The Canadian Institute of Chartered Accountants Accounting Guideline
15 "Consolidation of Variable Interest Entities" is effective for
fiscal years commencing after November 1, 2004. The Guideline
provides criteria for identifying Variable Interest Entities and
their consolidation. The Company has determined that the Guideline
does not materially impact the Company's Interim Consolidated
Financial Statements.
4. Revolving Credit Facility
On July 27, 2004 the Company established a three-year revolving
credit facility, secured by receivables and inventory, which bears an
interest rate of prime plus 0.75%. The size of this asset backed
facility is determined by the level of outstanding receivables and
inventory, but cannot exceed $100.0 million.
At December 31, 2005, of the $91.2 million of the facility that was
available to the Company, $71.4 million had been drawn down and
$3.8 million was used to support standby letters of credit leaving a
balance of $16.0 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. Interest is
payable semi-annually in arrears on December 31 and June 30 of each
year commencing December 31, 2004. The Company has the right to defer
payment of up to one-half of the interest payable on any interest
payable date for up to five years but not beyond the maturity date of
the Secured Bonds. The Secured Bonds are secured by a first priority
charge over all of the fixed assets of the Company including timber
tenures, sawmills and the value-added lumber remanufacturing plant.
The security ranks subordinate to the security provided under the
working capital facility (see note 4). The Secured Bonds are
redeemable at the option of the Company at any time after July 27,
2005 at their principal amount plus (i) a premium (which decreases
annually to their 2009 maturity date resulting in a redemption price
of: 2005 - 107.50%; 2006 - 105.50%; 2007 - 103.50%; 2008 - 101.50%)
and (ii) any accrued and unpaid interest.
The indenture governing the Secured Bonds contains certain
restrictions regarding, among other things, the ability of the
Company to incur additional indebtedness (with certain exceptions)
and limitations on the payment of dividends and other restricted
payments. Subject to ensuring adequate liquidity, proceeds from asset
sales, a softwood lumber duty settlement and capital market
transactions are generally to be used to redeem Secured Bonds. On
March 24, 2005, the Company established a working capital reserve
account as defined in the Bond Indenture with a permissible ceiling
of up to $50.0 million. Proceeds from asset sales will be credited to
the reserve account and be available for operational requirements, if
needed. At December 31, 2005 the balance in the working capital
reserve account was $8.9 million. On March 10, 2006, the Company
redeemed the Secured Bonds in full together with all accrued interest
(note 6(a)).
6. Commitments and Contingencies
(a) Acquisition of Cascadia Forest Products Ltd. and Associated
Financings
On November 10, 2005 the Company reached a definitive agreement to
acquire Cascadia Forest Products Ltd. ("Cascadia") from Brookfield
Asset Management Inc. ("BAM"), for approximately $120 million,
subject to certain closing adjustments plus Cascadia's net working
capital, all payable in cash on closing. Financing for the
transaction has been secured from Tricap Management Inc. ("Tricap"),
which has provided both equity and debt financing sufficient to fund
the acquisition of Cascadia, refinance the Company's existing 15%
senior secured bonds and provide additional working capital. The
acquisition is expected to close in April of 2006, subject to the
receipt of regulatory approvals. Tricap is related to the Company by
virtue of its 20.05% ownership of the Company's Common Shares. BAM is
related to the Company by virtue of its voting arrangements with
Tricap.
The equity financing will raise a total of $295.0 million by way of a
rights offering of 178.8 million subscription receipts to all
shareholders pursuant to a final prospectus dated January 31, 2006.
Under the terms of the rights offering common shareholders received
one right for each Common Share enabling 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.
The subscription receipts were listed for trading on the Toronto
Stock Exchange on March 10, 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.
At the time of closing the acquisition of Cascadia, each subscription
receipt will be automatically exchanged for one Western Common Share
unless such exchange would result in the holder or group of holders
beneficially owning, or exercising control or direction over, 50% or
more of the Common Shares. Under such circumstances the Company would
permit the exchange of only that portion of the subscription receipts
that would result in the holder or group of holders beneficially
owning, or exercising control or direction over, 49% or more of the
Common Shares. The remaining subscription receipts would be converted
to a new class of non-voting shares once the creation of such class
had been authorized by the Company's shareholders at the next Annual
General Meeting.
The 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%.
The proceeds from the two term facilities were used to redeem the
Company's existing US$221.0 million 15% senior secured notes on
March 10, 2006.
In addition to the above financings, the current revolving credit
lender to the Company and Cascadia has agreed to maintain its
existing working capital facilities in the aggregate amount of
$200.0 million. The lender has also agreed to amend certain of the
terms of the credit facilities that will result in an increase in the
availability under the facilities.
(b) The Forestry Revitalization Plan
Retroactive to March 31, 2003, the Government of British Columbia
(the "Crown" or "Provincial Government") as part of the Forestry
Revitalization Plan (the "FR Plan"), reduced the Crown land portion
of the allowable annual cut ("AAC") from major tenure holders by 20%,
less an exemption for the first 200,000 cubic metres, in exchange for
compensation payable by the Crown. In January 2005, pursuant to terms
of the settlement framework agreement negotiated in late 2004, the
Company received $16.5 million in compensation for the loss of
685,216 cubic metres of AAC and 827 hectares of timber licenses.
Under this agreement, the Company also received an advance payment of
$5.0 million towards compensation for improvements the Company made
to Crown land in the take-back areas ($4.0 million was recorded as a
reduction in capitalized roads and $1.0 million has been recorded in
accounts payable for future site obligations). The amounts were
included as receivables in restricted assets as of December 31, 2004
and these proceeds resulted in no gain or loss due to the fair value
allocations as at July 28, 2004.
Negotiations in 2006 will finalize take-back areas, complete the
compensation payments for improvements and determine if there will be
cost recovery for costs already incurred for planning and inventory.
Included in other income for the year ended December 31, 2005 is
$4.6 million for reimbursements agreed to date with the Provincial
Government for project engineering and other costs incurred by our
Predecessor with respect to certain timber cutting rights taken back
by the Provincial Government. The final settlement agreement is
expected to be reached on the remaining outstanding items in 2006.
(c) Softwood Lumber Duties
The Company has recorded countervailing and anti-dumping duties
assessed on Canadian softwood lumber exports to the United States
totaling $6.0 million for the fourth quarter of 2005. Cumulative
duties from May 22, 2002, when cash deposits were made necessary for
shipments of Canadian lumber into the United States, until
December 31, 2005, total US$104.2 million.
On April 26, 2005 the Company was notified by the United States
Department of Commerce ("USDOC") that it was not entitled to use the
reduced "all others rate" for anti-dumping duty deposits of 3.78%
unless it filed a changed circumstances review request with the USDOC
to confirm that it is the successor in interest to our Predecessor.
The Company subsequently filed an application for an expedited
changed circumstances review and received a positive ruling from the
US Department of Commerce confirming we are entitled to use the "all
others rate" of 3.78% effective from August 19, 2005. For the period
from April 26, 2005 to August 19, 2005 the Company posted anti-
dumping deposits at the higher rate of 11.54%.
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%.
At the date of this report the Company's combined deposit rate is
10.81% (2004 - 21.21%).
During the quarter the Company was notified that it had been selected
as a mandatory respondent in the anti-dumping duty third
administrative review of certain softwood lumber products from
Canada. The Company was selected, along with seven other companies,
under the USDOC new "probability proportional to size" sampling
methodology. The review covers the period from May 1, 2004 to
April 30, 2005. The Company is currently posting anti-dumping duty
deposits at the "all others" rate of 2.11% on the value of our lumber
shipments to the United States. Following the third review, the
Company will post anti-dumping duties at a "company specific" rate
that will be determined for us as a result of this review. The
Company does not expect to receive the final results of the USDOC
third review until December 2006, consistent with the timing of the
USDOC second administrative review determinations announced in 2005.
The Company and other Canadian forest product companies, the Federal
Government and Canadian Provincial Governments ("Canadian Interests")
categorically deny the US allegations and strongly disagree with the
final countervailing and antidumping determinations made. Canadian
Interests continue to aggressively defend the Canadian industry in
this US trade dispute and have appealed the US decisions to NAFTA
panels and the WTO.
A NAFTA Panel has ruled that the US authorities have not been able to
provide the NAFTA Panel with substantive evidence to support their
ruling of "threat of injury". The NAFTA Panel requested that they
reverse their ruling on "threat of injury" with which they
reluctantly complied. US interests appealed this ruling to an
Extraordinary Challenge Committee ("ECC") Panel. On August 10, 2005
the ECC Panel upheld this finding by the NAFTA Panel. However, the US
authorities have not complied with this ruling and US industry and
trade groups have indicated that they may even challenge the
constitutional validity of NAFTA in US courts.
The final amount of countervailing and anti-dumping duties that may
be assessed on the Company's Canadian softwood lumber exports to the
U.S. cannot be determined at this time and will depend on appeals of
the final determinations to any reviewing courts, NAFTA or WTO
panels. Notwithstanding the final rates established in the
investigations, the final liability for the assessment of
countervailing and anti-dumping duties will not be determined until
each annual administrative review process is complete, including
appeals. A fuller discussion of the softwood lumber duty issue can be
found in our 2004 Annual Report, 2004 Annual Information Form and
Form 20-F/A, or in our final prospectus dated January 31, 2006.
(d) 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.
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.
7. Segmented Information
The Company is an integrated Canadian forest products company
operating in two industry segments. The Solid Wood Segment comprises
the Company's timber harvesting, reforestation, sawmilling, value-
added lumber remanufacturing and lumber marketing operations. The
Pulp Segment comprises the Company's NBSK pulp manufacturing and
sales operations. On December 15, 2005, the Company announced it was
exiting the pulp segment and closing its pulp mill (note 10 (a)).
Sales to other segment are accounted for at prices which approximate
market value.
---------------------------------------------------------------------
Quarter ended December 31, 2005
----------------------------------------------
Solid wood Pulp Corporate Total
---------------------------------------------------------------------
Sales to external
customers $ 120.4 40.6 - 161.0
Sales to other segment $ 6.4 - - 6.4
Operating Loss $ (6.1) (73.9) (4.5) (84.5)
Amortization of
property, plant
and equipment $ (5.9) (0.7) - (6.6)
Write-down of property,
plant and equipment
and other
restructuring items $ 0.6 (71.4) - (70.8)
Capital expenditures $ - - - -
Year ended December 31, 2005
----------------------------------------------
Solid wood Pulp Corporate Total
---------------------------------------------------------------------
Sales to external
customers $ 499.8 167.0 - 666.8
Sales to other segment $ 27.5 - - 27.5
Operating Loss $ (23.3) (78.8) (15.9) (118.0)
Amortization of
property, plant and
equipment $ (25.6) (2.6) - (28.2)
Write-down of property,
plant and equipment
and other
restructuring items $ (2.0) (71.4) - (73.4)
Capital expenditures $ (17.9) (0.4) - (18.3)
8. Pension Expense
The Company has defined benefit pension plans which cover
substantially all salaried employees. The 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. The Company recorded expense of $0.9 million in
the three months ended December 31, 2005 with respect to these
defined benefit plans and a further $2.5 million with respect to the
contributions to the hourly paid employee union pension plans
($3.5 million and $9.4 million, respectively for the year to date).
9. Financial Instruments
The Company has significant exposures to individual customers
including one customer which comprised 12% of the Company's sales for
the twelve months ended December 31, 2005. The accounts receivable
balance from the same customer comprised 26% of the Company's
outstanding receivables at December 31, 2005 and was insured through
the Export Development Corporation as to approximately 87% of the
balance outstanding. The Company's general practice is to make sales
on a cash basis, without credit terms, or to insure them for 90% of
their sales value with the Export Development Corporation.
10. Write-down of Property, Plant and Equipment and Operating
Restructuring Items
October 1, January 1,
to to
December 31, December 31,
2005 2005
---------------------------
Closure of Squamish
pulp mill(a):
Write-down of supplies inventory $ 10.8 $ 10.8
Write-down of property, plant
and equipment 36.8 36.8
Severance and other 23.8 23.8
---------------------------
71.4 71.4
---------------------------
Closure of Silvertree sawmill(b):
Write-down of property, plant
and equipment - 8.5
Severance and other (0.6) 6.6
---------------------------
(0.6) 15.1
---------------------------
Gain on termination of saw log
supply agreement(c) - (13.1)
---------------------------
$ 70.8 $ 73.4
---------------------------
---------------------------
(a) On December 15, 2005 the Company announced the closure of its
Squamish, BC pulp mill. The Company wrote down the pulp mill to
its estimated recoverable value and recorded a charge of
$10.8 million on parts and supplies inventory and $36.6 million
on property, plant and equipment and recorded an additional
charge of $23.8 million with respect to severance and other
costs associated with the closure of the pulp mill. At
December 31, 2005, $23.8 million is included in accounts
payable and accrued liabilities. In addition to the above, the
Company will record a charge of approximately $4.5 million in
the first quarter of 2006 with respect to the cancellation of
certain long-term contracts as a result of the closure. The
Company will also 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 (note 11). These costs will be expensed as incurred.
(b) On August 4, 2005 the Company announced the restructuring of
its sawmill operations. The Silvertree sawmill was closed at
the end of October, and the buildings will be dismantled and
production transferred to other facilities. The Company wrote
down the Silvertree sawmill to its estimated recoverable value
and took a charge of $8.5 million and recorded an additional
charge of $6.6 million with respect to severance associated
with the closure of the Silvertree sawmill. The Company sold
the site subsequent to the year end for $13.5 million with
final proceeds and closing subject to completion of
environmental remediation.
(c) The Company terminated its saw-log supply arrangement with
TimberWest Forest Corp in September 2005 and received cash
proceeds of $15.0 million which were deposited into the Working
Capital Reserve account. The company recorded a gain of
$13.1 million on the termination.
11. Measurement Uncertainty
The Company reviews the carrying values of long-lived assets when
events or changes in circumstances indicate that the carrying value
of the assets may not be recoverable through future operations.
During the year, as a result of continued losses by the Company, the
potential impact of its restructuring activities and the potential
impact on operations of a weaker U.S. dollar and reduced lumber and
pulp prices in the market, the Company commenced an impairment review
of all of its long-lived assets.
The impairment review was performed by determining whether projected
undiscounted future cash flows from operations exceed the net
carrying amount of the assets. Key assumptions in performing this
review include lumber prices, pulp prices and the U.S. dollar
exchange rate. Other significant assumptions include the useful life
of the assets (for example, curtailment decisions) and the effect of
the ongoing softwood lumber dispute with the U.S. In determining the
appropriate assumptions we have analyzed external data, including
RISI, and sought advice from external advisors.
Following the strategic decision to exit the pulp business and close
the Squamish pulp mill the Company reviewed the carrying amounts for
the operations and the estimated costs to exit the business. On the
basis of this review the Company took a fourth quarter charge of
$71.4 million including $47.6 million to write-down the property,
plant and equipment and related supplies inventory to their estimated
recoverable amounts. Environmental remediation and other costs are
primarily based on the preliminary findings of work performed by
external consultants. Actual costs may be significantly different
once investigative drilling and other planned analysis is completed.
With respect to the solid wood segment, the Company closed its
Silvertree sawmill in October and recorded an impairment charge of
$8.5 million in the second quarter. On the basis of the findings of
the impairment review of the Solid Wood segment, the Company does not
consider that any further write down of these assets is necessary at
December 31, 2005.
Given the inherent imprecision of such impairment testing and the
sensitivity of results to the key assumptions used, it is possible
that changes in future conditions may lead management to use
different assumptions in the future which could require a material
change in the carrying values of its long-lived assets.
12. Subsequent Events
On March 17, 2006 the Company closed its previously announced
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 of approximately $2.7 million. The acquisition comprises
Tree Farm License 37 which currently has an annual allowable timber
cut of approximately 945,000 cubic meters and includes approximately
6,800 hectares of fee simple lands, existing capital improvements,
equipment and railway rolling stock. Transfer of the fee simple lands
within Tree farm License 37 is postponed pending receipt of a
required consent of the Minister of Forests and Range 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. The Company
has granted a first charge over the acquired assets to secure
obligations to the Partnership.
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 $35.0 million non-refundable prepayment of the price premium 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 will
record the price premium as deferred revenue and amortize it into
income over the term of the agreement.
Head Office
435 Trunk Road
Duncan, British Columbia
Canada, V9L 2P9, Financial Statements on the Internet
E (250) 748-3711 www.westernforest.com
Fax: (250) 748-6045 www.sedar.com
E-mail: info(at)westernforest.com
>>
