EBITDA Before Duty Refund Of $10.1 million
TSX: WEF
DUNCAN, BC, March 28, 2007 /CNW/ - Western Forest Products Inc. (TSX: WEF) ("Western") today announced its results for the fourth quarter and year ended December 31, 2006. The Company reported net income from continuing operations of $109.3 million ($0.53 per share) in the fourth quarter and $43.9 million ($0.30 per share) for the full year. These results include the softwood duty refund plus interest of $124.4 million received in the quarter and also reflects progress in integrating the operations of two major acquisitions during the year, offset by severe weather conditions in the fourth quarter.
Q4 Highlights
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- Average prices realized on lumber products increased to $782 per
thousand board feet in the fourth quarter, compared to $739 per
thousand board feet in the third quarter, primarily the result of a
higher-value mix of products sold and a weaker Canadian dollar.
- Redirected lower-value, commodity grade products away from the U.S.
to other markets to mitigate the impact of the export tax introduced
as part of the new softwood lumber agreement.
- Applied US$88.0 million of the softwood lumber duty refund received
to reduce the Company's long-term debt.
- Enhanced flexibility of timberlands operations with removal of
approximately 28,000 hectares of private timberlands from Tree Farm
Licences.
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FINANCIAL SUMMARY
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Quarter ended Year ended
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December 31 December 31
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2006 2005 2006 2005
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EBITDA $ 120.4 (5.3) 138.2 (11.6)
EBITDA excluding duty refund $ 10.1 (5.3) 27.9 (11.6)
Softwood Duty refund plus
interest $ 124.4 - 124.4 -
Net income (loss) from
continuing operations $ 109.3 (10.5) 43.9 (60.5)
Net loss from discontinued
operations $ (1.0) (74.1) (10.8) (79.1)
Net income (loss) $ 108.3 (84.6) 33.1 (139.6)
Net loss before softwood
duty refund $ (16.1) (84.6) (91.3) (139.6)
Per share:
Net income (loss) from
continuing operations $ 0.53 (0.41) 0.30 (2.36)
Net income (loss) $ 0.53 (3.30) 0.23 (5.45)
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Reference is made above to EBITDA, a non-GAAP measure defined as
operating income (loss) plus amortization of property, plant and
equipment and the write-down of property, plant and equipment and
operating restructuring costs. The Company uses EBITDA as a benchmark
measurement of its own operating results and as a benchmark relative to
competitors.
Fourth Quarter Results
The Company reported net income of $108.3 million ($0.53 per share) in the fourth quarter compared to a loss of $84.6 million ($3.30 per share) in the fourth quarter of 2005. The per-share amounts in 2006 reflect the issuance of shares following the Company's rights offering on May 1, 2006. These results include the receipt of the softwood lumber duty refund of $124.4 million (US$109.6 million), of which US$88.0 million was applied against Western's U.S. dollar denominated term-debt. Excluding the softwood duty refund, the Company would have reported a net loss in the quarter of $16.1 million and $91.3 million for the year.
The Company achieved EBITDA of $10.1 million in the fourth quarter of 2006, excluding the softwood duty refund. This compares to $10.2 million in the third quarter and negative $5.3 million in the fourth quarter of 2005. The results are not directly comparable to 2005 as a result of the acquisitions of the Englewood logging division in March 2006 and Cascadia in May 2006. The fourth quarter benefited from a higher value mix of lumber sales, a weaker Canadian dollar, and lower freight and lumber duties/export tax. These improvements were offset by higher logging and conversion costs as a result of the severe storms during the quarter.
Commenting on the results for the quarter, Reynold Hert, President and CEO noted, "We are pleased that in spite of the difficulties our operations experienced during the quarter as a result of the harsh weather, we were still able to maintain our progress and improve our year-on-year results."
Full Year Results
Net income from continuing operations for the year totalled $43.9 million ($0.30 per share) compared to a loss of $60.5 million ($2.36 per share) in 2005.
Excluding the softwood duty refund, EBITDA for the year totalled $27.9 million, compared to negative $11.6 million in 2005. The $39.5 million improvement resulted from higher cedar prices, increases in by-product selling prices, reduced duties into the U.S. and the impact of synergies on the combined operations.
Operations
Log production of 1,585,000 cubic metres in the quarter was lower than planned by approximately 500,000 cubic metres as a result of the severe weather during the quarter. Lumber production was similarly impacted, with a decrease in production in the fourth quarter of 17% to 271 million board feet compared to 326 million board feet in the third quarter. The Company took additional down-time at several of its sawmills as a result of log shortages, and closed its Cowichan Bay sawmill for the month of December to complete the installation of new equipment. Lumber sales volume decreased by approximately 4% in the fourth quarter of 2006 to 278 million board feet, compared to 291 million board feet in the third quarter of 2006.
During the quarter, we announced the permanent closure of the New Westminster sawmill and the re-opening of the Saltair sawmill, both effective February 2007. This move will allow us to remove the excess capacity in mills that handle the small to midsize logs and capitalize on the Saltair sawmill's lower unit costs, additional sorting, and longer lumber-length capabilities.
Subsequent to year-end, the Company received approval to remove approximately 28,000 hectares of its private timberlands from its Tree Farm Licences 6, 19 and 25. As a result, the Company will explore the sale of the higher and better-use component of the lands and review the land best suited for ongoing timberlands operations to determine their highest-value contribution.
Markets
Markets for cedar, non-dimension hemlock and fir, as well as Japanese and other overseas exports, which represent the majority of the Company's lumber sales, should remain attractive through at least the first half of 2007. The Japanese lumber market has been quite stable and has been helped by the decrease in supply from European lumber producers. The recently-announced increase in the Russian log export tax is also expected to help maintain demand and prices for our lumber in Japan.
The United States structural dimension lumber market, which accounts for approximately 25% of the Company's lumber sales by volume (13% by value), is expected to remain weak in 2007 due to the anticipated lower number of housing starts as a result of the existing high inventory levels of unsold homes.
Outlook
Western made progress in 2006 integrating the acquisitions of Cascadia and Englewood. Initiatives included the realignment of log and lumber flows, the merger of sales offices and certain timber harvesting operations, staff reductions, and the implementation of new business systems. For 2007, Western has established the following strategic priorities:
- Drive the margin focus of the business and achieve the Company's
synergy targets
- Invest in a number of high-pay-back manufacturing improvements to
strengthen operations and enhance the Company's global
competitiveness
- Continue to identify opportunities for rationalization
- Reduce and refinance long-term debt at lower interest rates
- Sell non-core assets
"As we look ahead to the balance of 2007 and beyond, we remain committed to achieving our objective of building a globally competitive, margin focused softwood lumber business." concluded Mr. Hert.
TELECONFERENCE CALL NOTIFICATION: Friday, March 30, 2007 at
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10:00 a.m. PST/1:00 p.m. EST
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On Friday, March 30, 2007, 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 1-800-591-7539 in Canada and the U.S. (toll free) and in Toronto or Internationally, 416-644-3423 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 15, 2007. To hear a complete replay, please call 1-877-289-8525 in Canada and the U.S. (toll free), Passcode 21220367 followed by the number sign or in Toronto and Internationally, 416-640-1917, Passcode 21220367 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 Allowable Annual Cut of approximately 7.7 million cubic meters of timber (before temporary AAC reductions and reductions with respect to the removal of certain private timberlands from Tree Farm Licences) and lumber capacity in excess of 1.5 billion board feet from eight sawmills and four 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. Western's logging is conducted primarily on government owned timberlands in British Columbia. Substantially 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 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", "Western", "us", "we", or "our"), on a consolidated basis, for our fourth quarter and year ended December 31, 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 quarter and year ended December 31, 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 can be found on the System for Electronic Document Analysis and Retrieval (SEDAR), at http://www.sedar.com. Unless otherwise noted, the information in this discussion and analysis is updated to March 23, 2007. All financial references are in Canadian dollars unless otherwise noted.
Summary of Selected Quarterly Results
Three Three Three Twelve Twelve
Months Months Months Months Months
Ended Ended Ended Ended Ended
(millions of December September December December December
dollars except 31, 30, 31, 31, 31,
per share amounts) 2006 2006 2005(1) 2006 2005(1)
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Sales $ 279.1 $ 279.5 $ 120.4 $ 896.8 $ 499.8
Lumber duties
and export tax
expensed $ (3.6) $ (6.3) $ (6.0) $ (19.5) $ (36.4)
EBITDA(2) $ 120.4 $ 10.2 $ (5.3) $ 138.2 $ (11.6)
EBITDA before
lumber duty
refund $ 10.1 $ 10.2 $ (5.3) $ 27.9 $ (11.6)
EBITDA margin
(before lumber
duty refund) 3.6% 3.6% (4.4)% 3.1% (2.3)%
Lumber duty refund $ 110.3 $ - $ - $ 110.3 $ -
Operating income
(loss) $ 108.3 $ (0.8) $ (10.6) $ 93.5 $ (39.2)
Interest expense $ (9.2) $ (10.9) $ (11.5) $ (41.1) $ (46.0)
Foreign exchange
gain (loss) on
long-term debt $ (6.0) $ (0.3) $ (0.1) $ 2.5 $ 8.3
Premium and
unamortized
discount on
bond redemption $ - $ - $ - $ (27.9) $ -
Interest income
on lumber duty
refund $ 14.1 $ - $ - $ 14.1 $ -
Net income (loss)
from continuing
operations $ 109.3 $ (11.4) $ (10.5) $ 43.9 $ (60.5)
Net loss from
discontinued
operations $ (1.0) $ (0.8) $ (74.1) $ (10.8) $ (79.1)
Net income (loss) $ 108.3 $ (12.2) $ (84.6) $ 33.1 $ (139.6)
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Per share:
Basic and diluted
net income (loss)
from continuing
operations $ 0.53 $ (0.06) $ (0.41) $ 0.30 $ (2.36)
Basic and diluted
net income (loss) $ 0.53 $ (0.06) $ (3.30) $ 0.23 $ (5.45)
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Cash flow from
continuing
operations $ 101.1 $ 5.3 $ (5.5) $ 70.1 $ 13.4
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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
The results of operations for the quarter and year ended December 31, 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 recorded net income from continuing operations of $109.3 million ($0.53 per share) in the fourth quarter of 2006 compared to a loss of $11.4 million ($0.06 per share) in the third quarter of 2006, and a loss of $10.5 million ($0.41 per share) in the fourth quarter of 2005. For the full year net income from continuing operations was $43.9 million ($0.30 per share) compared to a loss of $60.5 million ($2.36 per share) in 2005.
The fourth quarter and year benefited from the settlement of the softwood lumber dispute with the United States with the implementation of a new Softwood Lumber Agreement ("SLA") between Canada and the United States effective October 12, 2006. The SLA provides that approximately 82% of the anti-dumping duties ("ADD") and countervailing duties ("CVD") collected by the United States, together with accumulated interest, be refunded to Canadian lumber producers. The remaining 18%, representing U.S.$1 billion, is to be paid to various United States interest groups. During the fourth quarter of 2006 the Company received $124.4 million (U.S.$109.6 million) representing its total ADD and CVD refund plus interest. Operating income includes $110.3 million with respect to the lumber duty refund and interest and other income includes $14.1 million with respect to the interest on the duty refund.
Excluding the lumber duty refund, EBITDA was $10.1 million for the fourth quarter of 2006 and compares to $10.2 million in the third quarter of 2006 and negative $5.3 million in the fourth quarter of 2005. Compared to the third quarter, the fourth quarter benefited from a higher value mix of lumber sales, a weaker Canadian dollar, and lower freight and lumber duties/export tax. During the fourth quarter, the Company paid the new export tax at the 15% rate on its shipments into the United States (see note 7(a)) for a description of the calculation of the export tax). Although this rate is higher than the combined ADD and CVD rate previously paid of 10.8%, because the export tax only applies to the first U.S.$500 of sales value per thousand board feet whereas the ADD and CVD rate applied to the total sales value the effective rate was actually lower at approximately 6.0% due to the high value profile of the Company's products. These benefits were offset by higher unit logging and manufacturing conversion costs caused by fourth quarter weather related production decreases.
Operating income from continuing operations for the fourth quarter of 2006 increased to $108.3 million compared to an operating loss of $0.8 million recorded in the third quarter of 2006 and an operating loss of $10.6 million in the fourth quarter of 2005. Excluding the lumber duty refund of $110.3 million included in operating income and the write-down of property, plant and equipment and other restructuring items there was operating income in the fourth quarter of 2006 of $0.4 million compared to a loss of $0.1 million in the third quarter and a loss of $11.2 million in the fourth quarter of 2005.
Continuing Operations
Three Three Three Twelve Twelve
Months Months Months Months Months
(millions of Ended Ended Ended Ended Ended
dollars except December September December December December
where noted) 31, 2006 30, 2006 31, 2005 31, 2006 31, 2005
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Lumber sales $ 217.8 $ 214.0 $ 91.3 $ 677.1 $ 384.3
Log sales 44.6 44.8 25.5 162.1 91.9
By-product sales 16.7 20.7 3.6 57.6 23.6
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$ 279.1 $ 279.5 $ 120.4 $ 896.8 $ 499.8
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Lumber production
- millions of
board feet 271 326 127 1,000 648
Lumber sales -
millions of
board feet 278 291 166 976 669
Log production
- thousands of
cubic metres 1,585 1,617 822 5,762 2,933
Log purchases
- thousands of
cubic metres 242 169 87 634 626
Log sales -
thousands of
cubic metres 625 592 212 2,085 763
Internal Log
consumption
- thousands of
cubic metres 1,138 1,350 590 4,170 3,028
Average lumber
sales revenue
per thousand
board feet $ 782 $ 739 $ 549 $ 694 $ 574
Average log sales
revenue per
cubic metre $ 71 $ 76 $ 120 $ 78 $ 120
The Company's operations were negatively impacted by a series of storms with unusually high rainfall and winds that affected the BC Coastal region in the fourth quarter. Log production of 1,585,000 cubic metres in the quarter was approximately 500,000 cubic metres lower than planned as a result and compares to 1,617,000 cubic metres produced in the third quarter of 2006. Log production in the third quarter was also lower than planned as logging was curtailed for extended periods due to forest fire hazards. Lumber production was similarly impacted with production in the fourth quarter decreasing by 17% to 271 million board feet compared to 326 million board feet in the third quarter as the Company took additional down-time at several of its sawmills as a result of the log shortages and closed its Cowichan Bay sawmill for the month of December to complete the installation of new equipment. A $13 million Cowichan Bay sawmill project to install new production line equipment is both on time and on budget and the sawmill re-started operations in January, 2007. Both logging and manufacturing unit costs increased in the fourth quarter as a result of the production shortfalls.
Lumber sales decreased by approximately 4% in the fourth quarter of 2006 to 278 million board feet compared to 291 million board feet in the third quarter of 2006. Lumber sales were impacted to a lesser extent by the weather as the Company managed to sell from inventory on-hand. The average lumber price realized in the fourth quarter increased to $782 per thousand board feet compared to $739 per thousand board feet in the third quarter primarily due to the sale of a higher value mix of products and a weakening of the Canadian dollar to $1.1277 in the fourth quarter compared to $1.1178 in the third quarter.
By-product revenues for the quarter decreased to $16.7 million from $20.7 million in the third quarter due to lower volumes sold primarily as a result of the decreased lumber production. Wood chip prices increased again in the fourth quarter as NBSK Pulp prices, which ultimately set the pricing of by-product wood chips to the Company's customers, increased in the quarter.
Log sales to third parties of 625,000 cubic metres in the fourth quarter of 2006 compared to 592,000 cubic metres in the third quarter of 2006. Log sales were higher despite the lower log production in the quarter due to the sale of the logs that would otherwise have been consumed by the Cowichan Bay sawmill that was closed for the month of December as noted above. The overall log price achieved on external log sales decreased to $71 per cubic metre in the fourth quarter compared to $76 per cubic metre in the third quarter of 2006 and $120 per cubic metre in the fourth quarter of 2005. The decrease compared to both prior periods is due to the increase in the relative mix of lower priced pulp logs sold compared to saw logs. During the fourth quarter of 2006, 36% of the logs sold were pulp logs compared to 2% in the fourth quarter of 2005 when they were consumed by the Company's Squamish pulp mill.
As announced in the fourth quarter, the Company closed its New Westminster sawmill and its associated remanufacturing facility on February 7, 2007 and transferred the majority of its production programs to the Saltair sawmill, which re-opened on February 12, 2007. The re-alignment is expected to result in lower unit operating costs and greater production flexibility. The estimated $16.5 million cost for severance and site remediation was accrued in the fourth quarter and, since the New Westminster mill was acquired as part of the Cascadia operations, has been added to the cost of acquiring Cascadia.
Discontinued Operations
The loss from discontinued operations during the fourth quarter of 2006 of $1.0 million represents the cost of maintaining the site of the Squamish pulp mill that ceased operations in January, 2006. The loss compares to a loss of $0.8 million in the third quarter of 2006 and to a loss of $74.1 million in the fourth quarter of 2005 when the pulp mill was still operating. The loss in the fourth quarter of 2005 included a $71.4 million write-down of property, plant and equipment and operating restructuring items related to the closure of the pulp mill. The Company will incur ongoing costs for supervision, security, property taxes and other costs in future years depending on the Company's plans for the site. These costs will be expensed as incurred.
The Company is continuing to negotiate the sale of the equipment at the site and to work with parties interested in acquiring the site itself.
Other Corporate Items
Selling and administration expense of $12.0 million in the fourth quarter of 2006 compares to $11.4 million in the third quarter of 2006 and $5.8 million in the fourth quarter of 2005.
Interest expense decreased by $1.7 million to $9.2 million in the fourth quarter of 2006 compared to $10.9 million in the third quarter of 2006 and $11.5 million in the fourth quarter of 2005 as a result of the repayment of U.S.$88.0 million of the U.S. term-debt during the quarter following receipt of the lumber duty refund.
There was a loss on translation of the United States dollar denominated portion of the Company's long-term debt of $6.0 million in the quarter as a result of the weakening of the Canadian dollar. This compares to a loss of $0.3 million in the third quarter of 2006 and $0.1 million in the fourth quarter of 2005.
Income tax expense in the fourth quarter of 2006 relates to current income taxes of $0.5 million payable with respect to the Company's Japanese subsidiary and compares to $0.3 million in the third quarter. The recovery of income taxes in the fourth quarter of 2005 relates to the draw down of deferred income taxes of a subsidiary.
Changes in Financial Position and Liquidity
Three Three Three Twelve Twelve
Months Months Months Months Months
Ended Ended Ended Ended Ended
(millions of December September December December December
dollars except 31, 30, 31, 31, 31,
where noted) 2006 2006 2005(1) 2006 2005(1)
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Cash flow from
continuing
operations $ 100.6 $ 5.3 $ (5.5) $ 69.6 $ 13.4
Cash provided
(used) by
investing
activities $ 7.3 $ (4.6) $ 37.4 $ (191.6) $ 25.3
Cash provided
(used) by
financing
activities $ (96.2) $ - $ (0.7) $ 140.8 $ (6.7)
Additions to
property, plant
and equipment $ (6.3) $ (7.6) $ (2.1) $ (21.6) $ (8.9)
Additions to
capitalized roads $ (3.8) $ (5.1) $ 2.1 $ (15.9) $ (9.1)
Change in
revolving credit
facility $ 3.6 $ - $ (0.7) $ (76.5) $ (6.7)
Total liquidity(1) $ 143.7 $ 129.2 $ 54.5 $ 143.7 $ 54.5
Financial ratios:
Current assets
to current
liabilities 3.08 3.00 1.30 3.08 1.30
Debt to
shareholders
equity 0.48 0.91 2.24 0.48 2.24
Debt to market
capitalization 0.54 0.90 5.29 0.54 5.29
(1) Total liquidity comprises cash and cash equivalents, restricted cash
in working capital reserves and available credit under the Company's
revolving credit facility.
Cash flow from continuing operations in the fourth quarter of 2006 of $100.6 million compares to cash flow of $5.3 million in the third quarter of 2006 and negative $5.5 million in the fourth quarter of 2005. Cash flow in the fourth quarter of 2006 benefited from the receipt of the lumber duty refund and interest thereon of $124.4 million. U.S.$88.0 million (CAD$99.8 million) of the refund was applied against the Company's long-term debt with the balance of U.S.$21.6 million (CAD$24.6 million) retained for working capital purposes. Following the repayment, at December 31, 2006 the Company had long-term debt outstanding of $210.5 million.
On March 8, 2007, as part of the terms amending the U.S. facility, a further U.S.$21.6 million was paid down, resulting in a balance outstanding under the U.S. facility of U.S.$73.7 million. The amendment also reduced the interest rate charged on the U.S. facility to one month LIBOR plus 3% from one month LIBOR plus 8.15% and eliminated annual fees of 0.75% of the balance then outstanding. Interest on the Canadian facility is charged at CIBC Prime plus 5.25% and from March 1, 2007 will be paid in cash on $45.0 million of the balance outstanding with interest on the remainder continuing to be deferred.
Cash flow from continuing operations before the changes in non-cash working capital items and before the lumber duty refund was $7.4 million in the fourth quarter of 2006 and compares to $2.7 million in the third quarter of 2006 and negative $16.4 million in the fourth quarter of 2005.
Additions to property, plant and equipment of $6.3 million in the fourth quarter primarily relate to improvements to the Company's Cowichan Bay and Duke Point sawmills designed to increase productivity and various timberlands equipment replacement purchases. During the quarter the Company received the proceeds from the sale of its former Silvertree sawmill site in the amount of $13.1 million, recording a gain of $1.1 million.
At December 31, 2006 the Company had cash of $41.6 million and availability under its revolving credit facility of $101.9 million.
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 lumber sales in the second and third quarters as construction activity, particularly in the U.S., has historically tended 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, all of which can be found on the System for Electronic Document Analysis and Retrieval (SEDAR), at http://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
Western made progress in 2006 integrating the acquisitions of Cascadia and Englewood. Initiatives included the realignment of log and lumber flows, the merger of sales offices and certain timber harvesting operations, staff reductions, and the implementation of new business systems. For 2007, the Company has established the following strategic priorities:
- Drive the margin focus of the business and achieve the Company's
synergy targets
- Invest in a number of high-pay-back manufacturing improvements to
strengthen operations and enhance the Company's global
competitiveness
- Continue to identify opportunities for rationalization
- Reduce and refinance long-term debt at lower interest rates
- Sell non-core assets
Subsequent to year-end, the Company received approval to remove approximately 28,000 hectares of its private timberlands from its Tree Farm Licences 6, 19 and 25. As a result, the Company will explore the sale of the higher and better-use component of the lands and review the land best suited for ongoing timberlands operations to determine their highest-value contribution.
Markets for cedar, non-dimension hemlock and fir, as well as Japanese and other overseas exports, which represent the majority of the Company's lumber sales, should remain attractive through at least the first half of 2007. The Japanese lumber market has been quite stable and has been helped by the decrease in supply from European lumber producers. The recently-announced increase in the Russian log export tax is also expected to help maintain demand and prices for our lumber in Japan.
The United States structural dimension lumber market, which is expected to account for approximately 25% of the Company's lumber sales by volume (13% by value), is expected to remain weak in 2007 due to the anticipated lower number of housing starts as a result of the existing high inventory levels of unsold homes.
Outstanding Share Data
As of March 23, 2007, 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. 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 March 23, 2007, 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 September 30, 2006 to December 31, 2006, the Company paid entities related to BAM $6.6 million and charged $3.0 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
March 23, 2007
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 income (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
-------------------------------------------
4th 3rd 2nd 1st
-------------------------------------------
-------------------------------------------
Average Exchange Rate - Cdn$
to purchase one U.S.$ $ 1.1277 1.1178 1.1292 1.1462
Sales
Lumber $ 217.8 214.0 158.1 87.2
Logs 44.6 44.8 49.0 23.7
By-Products 16.7 20.7 12.9 7.3
-------------------------------------------
$ 279.1 279.5 220.0 118.2
-------------------------------------------
-------------------------------------------
Lumber
Production - millions of
board feet 271 326 250 153
Sales - millions of board
feet 278 291 243 164
Logging
Production - m3 (000's) 1,585 1,617 1,898 662
Purchases - m3 (000's) 242 169 143 100
Sales - m3 (000's) 625 592 605 262
Internal consumption -
m3 (000's) 1,138 1,350 1,031 650
Sales prices
Lumber - per thousand
board feet $ 782 739 648 533
Logs - per cubic metre $ 71 76 81 90
Net income (loss) from
continuing operations $ 109.3 (11.4) (7.5) (46.5)
Discontinued pulp operations
Sales $ - - (0.1) 20.0
Income (loss) $ (1.0) (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 income (loss) $ 108.3 (12.2) (9.4) (53.6)
Net income (loss) per share
from continuing operations $ 0.53 (0.06) (0.05) (1.81)
Net income (loss) per share
- basic and diluted $ 0.53 (0.06) (0.06) (2.09)
Reconciliation of EBITDA to
net income (loss) from
continuing operations:
EBITDA before lumber duty
refund $ 10.1 10.2 7.7 (0.1)
Lumber duty refund 110.3 - - -
-------------------------------------------
EBITDA 120.4 10.2 7.7 (0.1)
Amortization of property,
plant & equipment (9.7) (10.3) (10.8) (5.9)
Restructuring & other items (2.4) (0.7) (4.9) -
Interest expense (9.2) (10.9) (9.9) (11.1)
F/X on long-term debt (6.0) (0.3) 9.7 (0.9)
Premium & unamortized
discount - - - (27.9)
Interest and other income
(expense) 16.7 0.9 0.5 (0.4)
Financial restructuring - - - -
Income taxes (0.5) (0.3) 0.2 (0.2)
-------------------------------------------
Net income (loss) from
continuing operations $ 109.3 (11.4) (7.5) (46.5)
-------------------------------------------
-------------------------------------------
2005
-------------------------------------------
4th 3rd 2nd 1st
-------------------------------------------
-------------------------------------------
Average Exchange Rate - Cdn$
to purchase one U.S.$ 1.1703 1.2122 1.2411 1.2259
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
-------------------------------------------
120.4 116.3 140.5 122.6
-------------------------------------------
-------------------------------------------
Lumber
Production - millions of
board feet 127 150 186 185
Sales - millions of board
feet 166 165 176 162
Logging
Production - m3 (000's) 822 465 1,148 498
Purchases - m3 (000's) 87 147 192 200
Sales - m3 (000's) 212 172 213 166
Internal consumption -
m3 (000's) 590 719 844 875
Sales prices
Lumber - per thousand
board feet 549 535 612 599
Logs - per cubic metre 120 129 122 110
Net income (loss) from
continuing operations (10.5) (8.2) (35.5) (6.3)
Discontinued pulp operations
Sales 40.6 40.4 45.9 40.1
Income (loss) (74.1) (4.3) (1.7) 1.0
Pulp production - tonnes
(000's) 71 69 72 67
Pulp sales - tonnes (000's) 69 71 73 62
Pulp sales price per tonne 582 573 624 651
Net income (loss) (84.6) (12.5) (37.2) (5.3)
Net income (loss) per share
from continuing operations (0.41) (0.32) (1.38) (0.25)
Net income (loss) per share
- basic and diluted (3.30) (0.49) (1.45) (0.21)
Reconciliation of EBITDA to
net income (loss) from
continuing operations:
EBITDA before lumber duty
refund (5.3) (11.5) (1.6) 6.8
Lumber duty refund - - - -
-------------------------------------------
EBITDA (5.3) (11.5) (1.6) 6.8
Amortization of property,
plant & equipment (5.9) (4.5) (9.6) (5.6)
Restructuring & other items 0.6 5.9 (8.5) -
Interest expense (11.5) (11.2) (11.8) (11.5)
F/X on long-term debt (0.1) 13.3 (3.3) (1.6)
Premium & unamortized
discount - - - -
Interest and other income
(expense) 1.1 - (0.5) 5.8
Financial restructuring - - - -
Income taxes 10.6 (0.2) (0.2) (0.2)
-------------------------------------------
Net income (loss) from
continuing operations (10.5) (8.2) (35.5) (6.3)
-------------------------------------------
-------------------------------------------
(1) EBITDA restated to exclude pulp segment now classified as
discontinued operations.
Consolidated Balance Sheets (Unaudited)
(Expressed in millions of Canadian dollars)
-------------------------------------------------------------------------
December 31, December 31,
2006 2005
--------------------------
(Restated-
note 12)
Assets
Current assets:
Cash and cash equivalents $ 41.6 $ 29.6
Accounts receivable (note 2) 102.4 50.7
Inventory 215.7 112.3
Prepaid expenses and other assets (note 2) 11.7 12.7
Discontinued operations (note 12) 0.7 36.4
-------------------------
372.1 241.7
Property, plant and equipment 505.4 319.7
Other assets 13.8 10.4
-------------------------
$ 891.3 $ 571.8
-------------------------
-------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit facility (note 4) $ 3.6 $ 71.4
Accounts payable and accrued liabilities 110.8 75.9
Discontinued operations (note 12) 6.4 38.1
-------------------------
120.8 185.4
Long-term debt (note 5) 210.5 247.9
Other liabilities 42.6 28.0
Deferred revenue (notes 1 and 3) 78.4 -
-------------------------
452.3 461.3
Shareholders' equity (note 6)
Common shares 410.6 255.2
Non-voting shares 139.6 -
Contributed surplus 0.8 0.4
Deficit (112.0) (145.1)
-------------------------
439.0 110.5
-------------------------
$ 891.3 $ 571.8
-------------------------
-------------------------
Commitments and contingencies (note 7)
Subsequent events (notes 2, 3, 4, 5 and 13)
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 Twelve months ended
December 31 December 31
2006 2005 2006 2005
-------------------------------------------
(Restated- (Restated-
note 12) note 12)
Sales $ 279.1 $ 120.4 $ 896.8 $ 499.8
Cost and expenses
Cost of goods sold 235.3 102.3 740.8 409.6
Anti-dumping and
countervailing duties
(note 7(a)) 0.4 6.0 16.3 36.4
Export tax (note 7(a)) 3.2 - 3.2 -
Freight expenses 18.1 11.6 68.6 44.1
Selling and administration 12.0 5.8 40.0 21.3
Amortization of property,
plant and equipment 9.7 5.9 36.7 25.6
-------------------------------------------
278.7 131.6 905.6 537.0
-------------------------------------------
Operating loss before
write-down of property, plant
and equipment and operating
restructuring costs, and
anti-dumping and
countervailing duty refund 0.4 (11.2) (8.8) (37.2)
Anti-dumping and
countervailing duty refund
(note 7(a)) 110.3 - 110.3 -
Write-down of property, plant
and equipment and operating
restructuring costs (note 11) (2.4) 0.6 (8.0) (2.0)
-------------------------------------------
Operating income (loss) 108.3 (10.6) 93.5 (39.2)
Interest expense (9.2) (11.5) (41.1) (46.0)
Foreign exchange gain (loss)
on long-term debt (6.0) (0.1) 2.5 8.3
Premium and unamortized
discount on bond redemption - - (27.9) -
Interest and other income
(note 7(a)) 16.7 1.2 17.7 6.5
-------------------------------------------
Income (loss) before income
taxes 109.8 (21.0) 44.7 (70.4)
Income tax recovery (expense) (0.5) 10.5 (0.8) 9.9
-------------------------------------------
Net income (loss) from
continuing operations 109.3 (10.5) 43.9 (60.5)
Net loss from discontinued
operations (note 12) (1.0) (74.1) (10.8) (79.1)
-------------------------------------------
Net income (loss) 108.3 (84.6) 33.1 (139.6)
Deficit, beginning of period (220.3) (60.5) (145.1) (5.5)
-------------------------------------------
Deficit, end of period $ (112.0) $ (145.1) $ (112.0) $ (145.1)
-------------------------------------------
-------------------------------------------
Income (loss) per share:
Net income (loss) from
continuing operations -
basic and diluted $ 0.53 $ (0.41) $ 0.30 $ (2.36)
Net income (loss) from
discontinued operations -
basic and diluted $ - $ (2.89) $ (0.07) $ (3.09)
Net income (loss) - basic
and diluted $ 0.53 $ (3.30) $ 0.23 $ (5.45)
Weighted average number of
shares outstanding
(thousands of shares)
(note 6) 204,414 25, 636 145,637 25,632
See accompanying notes to the consolidated financial statements
Consolidated Statements of Cash Flows (Unaudited)
(Expressed in millions of Canadian dollars)
-------------------------------------------------------------------------
Three months ended Twelve months ended
December 31 December 31
2006 2005 2006 2005
-------------------------------------------
(Restated- (Restated-
Cash provided by (used in): note 12) note 12)
Operating activities:
Net income (loss) from
continuing operations $ 109.3 $ (10.5) $ 43.9 $ (60.5)
Items not involving cash:
Amortization of property,
plant and equipment 9.7 5.9 36.7 25.6
Write-down of property,
plant and equipment 1.9 - 2.6 8.5
Foreign exchange (gain) loss
on long-term debt 6.0 0.1 (2.5) (8.3)
Premium and unamortized
discount on bond redemption - - 27.9 -
(Gain) loss on disposal of
property, plant and equipment (1.7) 0.1 (1.7) (12.7)
Interest deferred on
long-term debt 2.8 - (0.8) 10.3
Future income tax recovery - (10.5) - (10.5)
Other 3.8 (1.5) 5.7 1.4
-------------------------------------------
131.8 (16.4) 111.8 (46.2)
-------------------------------------------
Changes in non-cash working
capital items:
Accounts receivable (16.9) (11.4) 17.8 6.6
Inventory (6.8) 14.5 (18.0) 41.6
Prepaid expenses 4.8 2.0 3.1 0.1
Accounts payable and
accrued liabilities (12.3) 5.8 (45.1) 11.3
-------------------------------------------
(31.2) 10.9 (42.2) 59.6
-------------------------------------------
Cash provided (used) by
continuing operations 100.6 (5.5) 69.6 13.4
-------------------------------------------
Financing activities:
Proceeds from (repayment of)
revolving credit facility 3.6 (0.7) (76.5) (6.7)
Redemption of 15% Secured
Bonds (note 5) - - (275.9) -
Proceeds from term loans
(note 5) - - 307.8 -
Repayment of term loans (99.8) - (104.5) -
Proceeds from share issuance
(note 6(a)) - - 295.0 -
Other - - (5.1) -
-------------------------------------------
(96.2) (0.7) 140.8 (6.7)
-------------------------------------------
Investing activities:
Additions to property, plant
and equipment (6.3) (2.1) (21.6) (8.9)
Additions to capitalized roads (3.8) 2.1 (15.9) (9.1)
Proceeds on disposals of
property, plant and equipment 13.4 (0.3) 14.5 29.4
Restricted cash 1.8 39.6 12.0 (6.0)
Acquisition of Cascadia
Forest Products Ltd., net
of cash acquired (note 2) - - (214.7) -
Acquisition of 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 2.2 (1.9) 2.5 (1.6)
-------------------------------------------
7.3 37.4 (191.6) 25.3
-------------------------------------------
Cash used in discontinued
operations (note 12) - (5.5) (6.8) (7.4)
-------------------------------------------
Increase in cash and cash
equivalents 11.7 25.7 12.0 24.6
Cash and cash equivalents,
beginning of period 29.9 3.9 29.6 5.0
-------------------------------------------
Cash and cash equivalents,
end of period $ 41.6 $ 29.6 $ 41.6 $ 29.6
-------------------------------------------
-------------------------------------------
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)
The business of Western Forest Products Inc.'s (the Company or
Western) 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. In addition, certain comparative figures have
been restated to reflect the current period's presentation.
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 Inc. (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 Company received
$6.6 million from BAM during the third quarter and a further
$12.5 million together with interest of $0.7 million subsequent to
the year-end with respect to the finalization of the actual amounts.
These amounts were included in accounts receivable at December 31,
2006.
Also on May 1, 2006, Cascadia along with one of its wholly-owned
subsidiaries, Mid-Island Reman Inc., amalgamated with the Company 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 based on management's best
estimates and information known at the time of preparing these
unaudited interim consolidated financial statements. Any subsequent
revisions to the fair value allocation may be material.
(millions of dollars)
---------------------------------------------------------------------
Net assets acquired at fair values:
Current assets $ 153.0
Land 39.2
Timberlands 83.8
Logging roads 19.3
Buildings, plant and equipment 13.9
Other assets 0.7
---------
309.9
---------
Current liabilities (99.8)
Long-term liabilities (7.9)
---------
(107.7)
---------
$ 202.2
---------
---------
Consideration paid:
Cash paid on closing, net of cash acquired of $3.8 million
and forestry liabilities adjustments $ 209.7
Adjustment to purchase price for actual closing working
capital (12.5)
Transaction costs 5.0
---------
$ 202.2
---------
---------
The allocation above includes estimated severance and other costs
associated with the acquired Cascadia operations of $7.7 million and
estimated severance and other costs totaling $16.5 million with
respect to the closure of the New Westminster sawmill that was
included in the acquired assets. The sawmill was closed effective
February 7, 2007. 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 allocation includes amounts due from entities related to BAM of
$7.1 million which was received in the third quarter. The allocation
also includes $6.4 million of cash held in escrow that may only be
used to pay for silviculture and forestry liabilities, of which
$3.2 million was remaining at December 31, 2006 and included in
prepaid expenses and other assets.
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 Licence 37 which currently has an allowable annual timber cut of
approximately 844,000 cubic meters, having been reduced on October 1,
2006 from 945,000 cubic metres as part of the British Columbia
Ministry of Forest and Range 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 Licence 37 were
transferred to the Company subsequent to the year-end and until that
time the Company harvested timber on those lands under contract with
the former 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 into
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 $45.0 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 and 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
effect certain other amendments. At December 31, 2006, of the
$126.7 million of the facility that was available to the Company,
$3.6 million was drawn and $21.2 million was used to support standby
letters of credit, leaving a balance of $101.9 million available for
future use. Subsequent to the year-end, $11.6 million of the amount
that had been used to support standby letters of credit was released.
5. Long-Term Debt
On July 27, 2004, the Company issued U.S.$221.0 million of 15%
Secured Bonds due in 2009 for proceeds of U.S.$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 U.S.$187.5 million facility (CAD$217.8 million), and a one-
year Canadian $90.0 million facility, which has been extended for a
second year. The secured loan is non-amortizing and is pre-payable,
in whole or in part, at any time. Interest on amounts drawn under the
U.S. facility were charged at the floating U.S. one-month LIBOR plus
8.15%. On March 8, 2007, the terms of the U.S. facility were amended
to reduce the interest rate to floating U.S. one-month LIBOR plus 3%.
Interest on the Canadian facility will be charged at the floating
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 of 2006 the Company paid BBLF
U.S.$1.575 million in commitment fees with respect to the U.S. 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 U.S.$4.2 million of the U.S. dollar term loan
as required under the loan agreement following receipt of the rights
offering proceeds (see note 6(a)) and paid down a further
U.S.$88.0 million on November 24, 2006, reducing the amount
outstanding at December 31, 2006, to U.S.$95.3 million
(CAD$111.0 million). On March 8, 2007, as part of the terms amending
the U.S. facility, a further U.S.$21.6 million was paid down
resulting in a balance outstanding of U.S.$73.7 million. At
December 31, 2006 the principal outstanding under the Canadian term
loan was $99.5 million.
6. Shareholders Equity
(a) Rights Offering
During 2006, the Company raised a total of $295.0 million through a
rights offering of 178.8 million subscription receipts pursuant to a
final prospectus dated January 31, 2006. The proceeds were used to
provide financing for the acquisition of Cascadia (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, shareholders received in respect of
each Common Share a right entitling the holder 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 at a price of $1.65 per subscription receipt, 51 million
subscription receipts that had not been purchased by other rights
holders under the rights offering following which it held a total of
138.2 million subscription receipts.
In accordance with the terms of the Subscription Receipts Agreement,
on May 1, 2006, the Company permitted only 94.2 million of the
178.8 million subscription receipts outstanding to be exchanged for
94.2 million Common Shares. As a result, Tricap was permitted to
exchange 53.6 million subscription receipts for Common Shares
resulting in Tricap holding 58.7 million (49%) of the Company's
119.8 million Common Shares 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 holders of the Non-Voting Shares have certain
registration rights, exercisable after May 1, 2009, that enable them
to require the Company to assist them with a public offering of the
Non-Voting Shares or Common Shares for which the Non-Voting Shares
may be exchanged, subject to certain limitations.
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 balance sheet until May 1, 2006, the date that
the acquisition of Cascadia closed (see note 2).
(b) Stock-based Compensation Plan
During the year ended December 31, 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 December 31, 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 so that 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 Tranche 3 Class C
Warrants. The Class C Warrants are non-transferable and have a five-
year term, subject to early termination provisions. For accounting
purposes, no value has been allocated to these warrants due to their
contingent nature.
7. Commitments and Contingencies
(a) Lumber Duties and Export Tax
Effective October 12, 2006, the Canadian and United States
Governments implemented a softwood lumber agreement (SLA) that
replaces the United States imposed anti-dumping duty (ADD) and
countervailing duty (CVD) regime with an export tax, payable to the
Canadian Federal Government. The SLA provides that approximately 82%
of the ADD and CVD duties collected by the U.S., together with
accumulated interest, be refunded to Canadian lumber producers. The
remaining 18%, representing U.S.$1 billion, is to be paid to various
U.S. interest groups. During the fourth quarter of 2006, the Company
received $124.4 million (U.S.$109.6 million) representing its total
ADD and CVD refund. Operating income includes $110.3 million with
respect to the refund and interest and other income includes
$14.1 million with respect to the interest on the duty refund.
The SLA has a term of seven years with provision for an extension of
two years and for early termination by either Government after two
years. 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 U.S.$355 per thousand board feet to 15% when the Index
is under U.S.$315 per thousand board feet. The export tax only
applies to the first U.S.$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 "surge" 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). During the fourth quarter of
2006, the Company was subject to a 15% export tax and has recorded an
expense of $3.2 million, in this respect.
(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.
(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 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 periodic
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 2007.
(e) Allowable Annual Cut Reductions
During the year a number of the Company's tenures were affected by
reductions to the allowable annual cut (AAC). While apportionment of
the temporary AAC reductions to specific licensees is outstanding, it
is anticipated that the Company's tenures on the Haida Gwaii / Queen
Charlotte Islands and the Central Coast will see a total AAC
reduction of approximately 450,000 cubic meters. This volume is
equivalent to approximately 6% of the Company's annual timber harvest
rights.
The reductions follow earlier announced provincial orders-in-council
that temporarily put various coastal areas off limits to forest
development through Part 13 of the Forest Act. The AAC reductions
were made to ensure that harvest rates remain at a sustainable level
until land use planning is completed in the areas affected by the
Part 13 orders.
The Part 13 orders and the temporary AAC reductions were anticipated
and have been factored into the Company's short-term harvesting and
mill production plans. If the Part 13 orders 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.
(f) The Forest Revitalization Plan
In January 2005, pursuant to terms of a settlement framework
agreement negotiated in late 2004, the Company received $16.5 million
in compensation for the loss of 685,216 cubic meters of AAC and 827
hectares of timber licences. Under this agreement, the Company also
received an advance payment of $5.0 million towards compensation for
improvements the Company and its predecessor made to Crown land in
the take-back areas ($4.0 million was recorded as a reduction in
capitalized roads and $1.0 million was recorded in accounts payable
for future site obligations). Negotiations are continuing to finalise
compensation payments for improvements.
8. Pension Expense
The Company has defined benefit and defined contribution pension
plans that cover substantially all salaried and certain hourly
employees. The defined benefit plans provide pensions based on length
of service and final average earnings. The funded and unfunded
defined benefit pension plans were closed to new entrants effective
July 1, 2006. All new salaried employees are now provided with
pension benefits through a defined contribution plan. The Company
also contributes to hourly paid employee union pension plans and has
health care plans covering certain hourly and retired salaried
employees. In the three months ended December 31, 2006 the Company
recorded expense with respect to continuing operations of
$6.1 million (2005 - $2.7 million) and $nil million (2005 -
$0.4 million) with respect to discontinued operations with respect to
these benefit plans.
9. Financial Instruments
The Company has significant exposure to individual customers
including one customer which represented 9% (2005 - 12%) of the
Company's sales for the year ended December 31, 2006. The accounts
receivable balance from the same customer represented 14% of the
Company's outstanding accounts receivable at December 31, 2006; and
was insured through the Export Development Corporation as to
approximately 90% 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. 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. Write-Down of Property, Plant and Equipment and Operating
Restructuring Costs
The write-down of property, plant and equipment and operating
restructuring costs for the year ended December 31, 2006 comprises
severance and other costs associated with the closure of the
Company's log merchandiser facility, the write-off of assets no
longer being used in the Company's operations, the write-down of
surplus land sold in the fourth quarter, severance costs and the
restructuring of certain timberlands operations. For the year ended
December 31, 2005 the balance comprises the write-down of property,
plant and equipment and severance costs associated with the closure
of the Company's Silvertree sawmill totaling $15.1 million partly
offset by the $13.1 million gain recorded on the termination of a
fibre supply agreement.
12. Discontinued Operations
On December 15, 2005 the Company announced the closure of its
Squamish 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 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 Twelve months ended
Dec. 31 Dec. 31
---------------------------------------------------------------------
(millions of dollars) 2006 2005 2006 2005
---------------------------------------------------------------------
Sales $ - $ 40.6 $ 19.9 $ 167.0
------------------------------------------
------------------------------------------
Net loss from discontinued
operations before income
taxes $ (1.0) $ (74.1) $ (10.8) $ (79.1)
Income taxes - - - -
------------------------------------------
Net loss from discontinued
operations $ (1.0) $ (74.1) $ (10.8) $ (79.1)
------------------------------------------
------------------------------------------
Cash used in:
Operating activities $ (1.1) $ (5.5) $ (7.9) $ (7.2)
Investing activities - - - (0.2)
------------------------------------------
Cash used by
discontinued operations $ (1.1) $ (5.5) $ (7.9) $ (7.4)
------------------------------------------
------------------------------------------
Included in the net loss from discontinued operations for the year
ended December 31, 2006 is $4.5 million with respect to the cost to
terminate certain long-term contracts.
13. Subsequent Event
On January 31, 2007, the Company received approval from the British
Columbia Minister of Forests and Range to remove approximately 28,000
hectares of its private lands from its Tree Farm Licences 6, 19 and
25. The approval was subject to a number of conditions including the
grant by the Company of right-of-way access on a number of the
properties and the Company's agreement to continue for a three-year
period its current practice of not exporting logs from these private
lands. This change has no immediate effect on the financial
statements.
Head Office
435 Trunk Road
Duncan, British Columbia Financial Statements on the Internet
Canada V9L 2P9 www.westernforest.com
Telephone: (250) 748-3711 www.sedar.com
Fax: (250) 748-6045
E-mail: info@westernforest.com