TSX: WEF
DUNCAN, BC, June 5 /CNW/ - Western Forest Products Inc. (TSX: WEF) ("Western") today announced its results for the first quarter of 2007. The Company reported net income of $7.2 million ($0.04 per share) and EBITDA of $23.3 million in the first quarter of 2007.
Q1 Highlights
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- Average realized lumber and log prices increased from the fourth
quarter of 2006.
- Received government approval to remove 28,000 hectares of private
lands from tree farm licences.
- Identified $150 million to $180 million of non-core assets to be
sold.
- Net debt at March 31, 2007 decreased to $134.6 million from
$167.7 million at December 31, 2006 and interest cost on U.S. dollar
debt was substantially reduced.
- Permanently closed the New Westminster sawmill and re-started the
Saltair sawmill enhancing capacity utilization and production
flexibility.
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First Quarter Results
The Company reported net income of $7.2 million ($0.04 per share) in the first quarter of 2007 compared to $108.3 million ($0.53 per share) in the fourth quarter of 2006 and a loss of $53.6 million ($1.81 per share) in the first quarter of 2006. The results for the fourth quarter of 2006 include the receipt of the softwood lumber duty refund of $124.4 million (US$109.6 million). Excluding the softwood duty refund, the Company would have reported a net loss of $16.1 million in the fourth quarter and $91.3 million for the 2006 year.
FINANCIAL SUMMARY
Three Three Three
Months Months Months
Ended Ended Ended
(millions of dollars March 31, December 31, March 31,
except per share amounts) 2007 2006 2006
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EBITDA $ 23.3 $ 120.4 $ (0.1)
EBITDA before lumber duty refund $ 23.3 $ 10.1 (0.1)
Lumber duty refund $ - $ 110.3 $ -
Net income (loss) from
continuing operations $ 8.2 $ 109.3 $ (46.5)
Net loss from discontinued
operations $ (1.0) $ (1.0) $ (7.1)
Net income (loss) $ 7.2 $ 108.3 $ (53.6)
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Per share - basic and diluted:
Net income (loss) from
continuing operations $ 0.04 $ 0.53 $ (1.81)
Net income (loss) $ 0.04 $ 0.53 $ (2.09)
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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.
EBITDA increased to $23.3 million in the first quarter of 2007 compared to $10.1 million in the fourth quarter of 2006, excluding the softwood duty refund, and negative $0.1 million in the first quarter of 2006. The first quarter of 2007 benefited from a weaker Canadian dollar, higher realized lumber and log prices, and continued operational improvements. Average realized lumber price increased to $818 per thousand board feet in the first quarter of 2007, compared to $782 per thousand board feet in the fourth quarter of 2006, primarily the result of a weaker Canadian dollar and a higher-value mix of products produced and sold. Average realized log price increased to $86 per cubic metre from $71 per cubic metre in the fourth quarter of 2006 due to strong prices and product mix.
Commenting on the results, Reynold Hert, President and CEO stated, "We are pleased with the improvement in our EBITDA and the generation of net income and positive cash flow from operations. The improvement has been driven by both internal and external factors. We have been increasingly successful in managing our operations to take advantage of market opportunities as they arise notwithstanding the weak U.S. dimension market." Adding a note of caution, Hert further stated, "Our first quarter results benefited from the weaker Canadian dollar, which has since strengthened significantly."
Change in Accounting Policy for Costing Inventories
On January 1, 2007 the Company changed its accounting policy for the costing of log and lumber inventories to better reflect its new management operating philosophy. Under the new policy, costs of production for products produced jointly as a result of the same production process are allocated according to the value of those products. This compares to the former policy which allocated costs based on volumes produced. Given the variety of products produced by the Company from similar raw materials and processes, the new approach better recognizes the contribution to the Company's earnings of the underlying products produced.
This new accounting policy was implemented effective January 1, 2007 on a retrospective basis without restatement of prior periods and results in inventory increasing by $11.9 million to $227.6 million from $215.7 million and the deficit decreasing to $100.1 million from $112.0 million as at December 31, 2006. Prior periods have not been restated as the detailed information required to implement the new policy on a retrospective basis is not available.
Operations
Lumber production in the first quarter decreased to 251 million board feet from 271 million board feet in the fourth quarter of 2006. Lumber production was impacted by the shortage of logs resulting from the continuing impact of the severe weather in the fourth quarter of 2006. The Company was able to harvest its planned log production of 1.6 million cubic metres in the first quarter of 2007, but snow pack at higher elevations prevented access to certain logging areas and resulted in harvesting being directed to less desirable small-diameter logs. As a consequence, production of certain of the Company's higher value lumber products was negatively impacted.
Markets
Markets for cedar, higher value hemlock and fir, and certain other overseas exports, which together represent a significant portion of the Company's lumber sales, should remain attractive through 2007. The Japanese lumber market has been relatively stable partly due to 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 for our lumber in Japan through the second quarter although there are recent indications of a softening in demand. Western's ability to take advantage of these markets will be determined by our log harvest levels and the availability of the necessary logs for purchase. Indications are that log supply will remain fairly tight for these log sorts through the second quarter.
The United States structural dimension lumber market is expected to remain weak in 2007 due to the anticipated lower number of housing starts.
The recent strengthening of the Canadian dollar relative to the U.S. dollar is expected to impact the Company's cash flows. Approximately 55%-65% of the Company's lumber sales are denominated in U.S. dollars and a one-cent change in the value of the Canadian dollar relative to the U.S. dollar impacts annual operating earnings by approximately $6.0 million.
Outlook
Western's results for the first quarter of 2007 reflect continuing improvement in its ability to adapt its operations to changing market conditions. Western's ability to respond to market dynamics should continue to improve as our new business systems and operating metrics become further integrated into management and decision-making processes.
The Company recently completed a review of non-core assets expected to be sold over a two-year period and believes it can generate proceeds of approximately $150 million to $180 million for such assets. Non-core assets comprise 4,000 hectares of higher and better use lands (within the private timberlands), the Squamish pulp mill site, the New Westminster sawmill site, the former log merchandiser site, a gravel pit royalty interest and other sites. The estimated proceeds are based on recently obtained valuations on the HBU properties and mill sites, offers to acquire sites, and Company estimates. These non-core assets do not include, and the anticipated proceeds do not reflect, potential proceeds from 24,000 hectares of private timberlands, which continue to be assessed for future best use. The Company believes its current balance sheet, improving results and non-core asset values should enable it to significantly reduce indebtedness.
The contract with the United Steelworkers union, which represents the majority of the Company's hourly workforce and those of its contractors, expires on June 14, 2007. Forest Industrial Relations Limited, which represents the Company and certain other forest products companies in the coastal region of British Columbia, has been in negotiations with the union for several months. We are unable to determine whether a new contract will be negotiated on a timely basis without labour disruption or the impact of the final agreement on the Company's operations.
TELECONFERENCE CALL NOTIFICATION: Thursday, June 7, 2007 at
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10:00 a.m. PST/1:00 p.m. EST
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On Thursday, June 7, 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 1-800-595-8550 in Canada and the U.S. (toll free) and in Toronto or Internationally, 416-644-3419 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 June 21, 2007. To hear a complete replay, please call 1-877-289-8525 in Canada and the U.S. (toll free), Passcode 21235316 followed by the number sign or in Toronto and Internationally, 416-640-1917, Passcode 21235316 followed by the number sign. This call will also be webcast from Western's website at www.westernforest.com.
Western Forest Products
Western is an integrated Canadian forest products company and the largest coastal British Columbia woodland operator and lumber producer with an annual available harvest of approximately 7.5 million cubic metres of timber of which 7.3 million cubic metres is from Crown lands and 0.2 million cubic metres from private timberlands 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. 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.
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2007 FIRST 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 first quarter ended March 31, 2007 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 ended March 31, 2007, and our audited annual consolidated financial statements and management's discussion and analysis ("MD&A") for the year ended December 31, 2006 (the "2006 Annual Report"), all of which can be found on the System for Electronic Document Analysis and Retrieval (SEDAR), at http://www.sedar.com.
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.
This management's discussion and analysis 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.
Unless otherwise noted, the information in this discussion and analysis is updated to June 5, 2007. All financial references are in millions of Canadian dollars unless otherwise noted.
Summary of Selected Quarterly Results
Three Three Three
Months Months Months
Ended Ended Ended
(millions of dollars March 31, December 31, March 31,
except per share amounts) 2007 2006 2006
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Sales $ 276.3 $ 279.1 $ 118.2
Export tax and lumber duties
expensed $ (4.4) $ (3.6) $ (4.0)
EBITDA $ 23.3 $ 120.4 $ (0.1)
EBITDA before lumber duty refund $ 23.3 $ 10.1 (0.1)
EBITDA margin (before lumber duty
refund) 8.4% 3.6% (0.1)%
Lumber duty refund $ - $ 110.3 $ -
Operating income (loss) $ 13.4 $ 108.3 $ (6.0)
Interest expense $ (6.8) $ (9.2) $ (11.1)
Foreign exchange gain (loss) on
long-term debt $ 0.7 $ (6.0) $ (0.9)
Premium and unamortized discount
on bond redemption $ - $ - $ (27.9)
Interest income on lumber duty
refund $ - $ 14.1 $ -
Net income (loss) from continuing
operations $ 8.2 $ 109.3 $ (46.5)
Net income (loss) from
discontinued operations $ (1.0) $ (1.0) $ (7.1)
Net income (loss) $ 7.2 $ 108.3 $ (53.6)
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Per share - basic and diluted:
Net income (loss) from continuing
operations $ 0.04 $ 0.53 $ (1.81)
Net income (loss) $ 0.04 $ 0.53 $ (2.09)
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Cash flow from continuing
operations $ 28.8 $ 101.1 $ (10.5)
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Overview
The results of operations for the quarter ended March 31, 2007, include the legacy Cascadia and Englewood operations which were acquired on May 1, 2006 and March 17, 2006, respectively, and accordingly, are not directly comparable to the comparative quarter ended March 31, 2006.
The Company recorded net income from continuing operations of $8.2 million ($0.04 per share) in the first quarter of 2007 compared to $109.3 million ($0.53 per share) in the fourth quarter of 2006, and a loss of $46.5 million ($1.81 per share) in the first quarter of 2006. The fourth quarter of 2006 benefited from the inclusion of $124.4 million with respect to the softwood lumber duty refund including interest. EBITDA increased to $23.3 million in the first quarter of 2007, compared to $10.1 million (excluding the lumber duty refund) in the fourth quarter of 2006 and negative $0.1 million in the first quarter of 2006.
The improvement in the Company's results can be attributed to the following key factors:
- Higher overall realized lumber prices - a weaker average Canadian
dollar, firm cedar and Japanese market prices and a higher-value mix
of products produced and sold has resulted in an increase in average
realized lumber prices to $818 per thousand board feet compared to
$782 in the fourth quarter.
- Higher realized log prices - market shortages for certain saw logs,
strong log prices and a higher-value product mix have resulted in
average realized log prices increasing to $86 per cubic metre from
$71 per cubic metre in the fourth quarter.
- Lower pulp log production in the first quarter compared to the fourth
quarter of 2006 - pulp logs generally have a lower value than saw
logs and are written down to market as they are produced.
These improvements in EBITDA more than offset the impact of the decrease in lumber sales volumes.
During the quarter, the Company received approval from the BC Minister of Forests and Range to remove approximately 28,000 hectares of its private land from its Tree Farm Licenses 6, 19, and 25. The removal affords the Company both the opportunity to sell the approximately 4,000 hectares of higher and better use component of the lands, and greater flexibility in operating the remaining 24,000 hectares of private timberlands.
Continuing Operations
Three Three Three
Months Months Months
Ended Ended Ended
(millions of dollars March 31, December 31, March 31,
except where noted) 2007 2006 2006
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Lumber sales $ 205.2 $ 217.8 $ 87.2
Log sales 55.6 44.6 23.7
By-product sales 15.5 16.7 7.3
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$ 276.3 $ 279.1 $ 118.2
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Lumber production - millions of
board feet 251 271 153
Lumber sales - millions of board
feet 251 278 164
Log production - thousands of
cubic metres 1,601 1,585 662
Log purchases - thousands of
cubic metres 168 242 100
Log sales - thousands of cubic
metres 650 625 262
Internal log consumption -
thousands of cubic metres 1,101 1,138 650
Average lumber sales revenue per
thousand board feet $ 818 $ 782 $ 533
Average log sales revenue per
cubic metre $ 86 $ 71 $ 90
Lumber production and sales in the first quarter of 2007 were lower than in the fourth quarter of 2006 primarily due to continuing shortages of logs. The storms that occurred during the fourth quarter of 2006 resulted in low log inventories at the start of the year.
As previously noted, the average net lumber price realized in the first quarter increased to $818 per thousand board feet. Average lumber prices realized have increased in each of the past three consecutive quarters following the acquisition of Cascadia in May, 2006. The increase is partly a result of changes in the exchange rate for the Canadian dollar compared to the U.S. dollar as well as firm lumber prices for certain products. In addition, the Company has been able to take advantage of its increased operating flexibility following the acquisition of Cascadia to increase production of higher-value, higher-margin, lumber products and reduce production of lower-value products, particularly structural dimension lumber destined for the U.S. market. Certain products that would have been shipped to the U.S. have either been shipped to other markets, such as China, or not produced at all with the logs being sold for chipping into wood chips to satisfy the high demand, and prices, from pulp mills.
Demand and pricing continued to be firm in the cedar and Japanese markets during the quarter. The U.S. structural dimension market continued to be weak.
Log production of 1,601,000 cubic metres during the quarter compares to 1,585,000 cubic metres in the fourth quarter of 2006. Snow accumulations at higher elevations restricted access to these harvest areas, which predominantly contain larger-diameter logs. As a result, we produced a higher percentage of smaller-diameter logs, falling short of the planned production of larger-diameter, high-quality hemlock/balsam and cedar logs, which reduced our lumber production for the cedar and Japanese markets. We were unable to make up this shortfall through log purchases on the Vancouver log market, as other operators also began the year with low inventories and demand exceeded supply throughout the British Columbia Coastal region during the quarter.
Log sales increased to 650,000 cubic metres at an average selling price of $86 per cubic metre in the first quarter compared to 625,000 cubic metres at $71 per cubic metre in the fourth quarter of 2006. The increase in average sales price reflects the change in the mix of logs sold, with a higher percentage of higher-value cedar shingle logs and a lower percentage of pulp logs, as well as higher log prices for both compared to the fourth quarter.
As previously announced, the New Westminster sawmill and associated remanufacturing facility was closed on February 7, 2007 and the majority of its production programs were transferred to the recently upgraded Saltair sawmill, which re-opened on February 12, 2007. Of the $16.5 million accrued in the fourth quarter for severances and site remediation related to the shutdown, $11.7 million of severance payments were made in the first quarter of 2007. The balance of the accrual primarily relates to the estimated cost for site remediation.
Discontinued Operations
The loss from discontinued operations during the first quarter of 2007 of $1.0 million represents the cost of maintaining the site of the Squamish pulp mill that ceased operations in January of 2006. The loss compares to a loss of $1.0 million in the fourth quarter of 2006 and to a loss of $7.1 million in the first quarter of 2006. 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.
Subsequent to the quarter-end, the Company negotiated the sale of the majority of the pulp mill equipment for proceeds of $5.5 million that will be received over the course of the year as the equipment is removed from the site. The sale will result in a gain of $5.5 million as the equipment had been fully written down. The Company continues to work with various parties interested in acquiring the site itself.
Other Corporate Items
Selling and administration expense decreased to $10.8 million in the first quarter compared to $12.0 million in the fourth quarter of 2006 primarily due to the inclusion in the fourth quarter of costs associated with the integration of Western and Cascadia.
Interest expense decreased to $6.8 million in the first quarter of 2007 compared to $9.2 million in the fourth quarter of 2006, as a result of the repayment of U.S. $88.0 million of the U.S. term-debt during the fourth quarter of 2006 and a further U.S. $21.6 million in March of 2007.
There was a gain on translation of the United States dollar-denominated portion of the Company's long-term debt of $0.7 million in the quarter as a result of the strengthening of the Canadian dollar at the quarter-end. This compares to a loss of $6.0 million in the fourth quarter of 2006.
Income tax expense in the first quarter of 2007 relates to current income taxes of $0.3 million payable with respect to the Company's Japanese subsidiary and compares to $0.5 million in the fourth quarter of 2006.
Changes in Financial Position and Liquidity
Three Three Three
Months Months Months
Ended Ended Ended
(millions of dollars March 31, December 31, March 31,
except where noted) 2007 2006 2006
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Cash flow from continuing
operations $ 28.8 $ 100.6 $ (10.5)
Cash provided (used) by investing
activities $ 8.7 $ 7.3 $ 33.1
Cash provided (used) by financing
activities $ (31.5) $ (96.2) $ (39.5)
Additions to property, plant and
equipment $ (4.1) $ (6.3) $ (1.4)
Additions to capitalized roads $ (3.1) $ (3.8) $ (2.2)
Change in revolving credit
facility $ (3.6) $ 3.6 $ (71.4)
Total liquidity(1) $ 158.5 $ 143.7 $ 68.7
Financial ratios:
Current assets to current
liabilities 1.67 3.17 2.25
Net debt to shareholders equity 0.29 0.37 5.23
Net debt to market capitalization 0.32 0.43 5.30
(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 first quarter of 2007 was $28.8 million compared to $100.6 million in the fourth quarter of 2006. The fourth quarter of 2006 benefited from the inclusion of the softwood lumber refund plus interest of $124.4 million. Cash flow from continuing operations before the change in non-cash working capital items was $18.5 million in the first quarter of 2007 compared to $7.4 million in the fourth quarter of 2006 before the softwood lumber duty refund. The first-quarter cash flow benefited from the same factors that resulted in increased EBITDA including higher overall realized lumber and log prices.
On March 8, 2007, as part of the terms amending the U.S. term-debt, U.S. $21.6 million (Cdn$25.3 million) was paid against the debt, reducing the balance outstanding under the U.S. debt to U.S. $73.7 million. The amendment also reduced the interest rate charged on the U.S. debt to one month LIBOR plus 3% from one month LIBOR plus 8.15% and eliminated the 0.75% annual fees due on the balance then outstanding. On March 29, 2007 a further U.S. $0.2 million was paid against the outstanding principal resulting in a balance outstanding at March 31, 2007 of U.S. $73.5 million.
Interest on the Canadian term-debt continues to be charged at CIBC Prime plus 5.25% and, until March 1, 2007, was being deferred and added to the principal. From March 1, 2007 interest was paid in cash on $45.0 million of the balance outstanding, with interest on the remainder continuing to be deferred. Commencing April 1, 2007 interest is being paid in cash on the total Canadian term-debt. At March 31, 2007 the balance outstanding under the Canadian term-debt was $101.8 million.
Additions to property, plant and equipment of $4.1 million in the first quarter of 2007 primarily relate to upgrades at the Cowichan Bay and Saltair sawmills. The $13 million Cowichan Bay sawmill upgrade was initiated in 2006 to increase lumber capacity and productivity. The modifications to the Saltair sawmill were made to accommodate the lumber programs transferred to it as a result of the closure of the New Westminster sawmill in February, 2007. The capital additions of $6.3 million in the fourth quarter of 2006 primarily relate to improvements to the Company's Cowichan Bay and Duke Point sawmills.
Investing activities includes $12.5 million that was received from Brookfield Asset Management Inc. during the first quarter of 2007 with respect to the finalization of the working capital adjustment on the acquisition of Cascadia. A further $0.7 million was received on account of interest accrued on the working capital adjustment from the May 1, 2006 acquisition date.
Cash flow from investing activities for the first quarter of 2006 included the $35 million non-refundable prepayment of the price premium received as consideration for entering into the 40-year fibre supply agreement. The payment was applied to reduce the amount drawn under the Company's revolving line of credit.
Cash flow from financing activities in the first quarter of 2006 includes $275.9 million with respect to the redemption of the Company's Secured Bonds and the $307.8 million proceeds of the term loans obtained from the Brookfield Bridge Lending Fund that were used to fund the redemption. The redemption of the Secured Bonds also resulted in the release of the $8.9 million of restricted cash held in the Working Capital Reserve.
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.
Changes in Accounting Policies
Inventories
On January 1, 2007 the Company changed its accounting policy for the costing of log and lumber inventories to better reflect its new management operating philosophy. Under the new policy, costs of production for products produced jointly as a result of the same production process are allocated according to the value of those products. This compares to the former policy which allocated costs based on volumes produced. Given the variety of products produced by the Company from similar raw materials and processes, the new approach better recognizes the contribution to the Company's earnings of the underlying products produced.
Under the new policy, log production costs are allocated to logs produced based on their relative market values, except for pulp logs that will continue to be carried at market due to the significant difference between the market value of pulp logs compared to production costs. Previously, the Company carried all saw logs at the same actual unit production cost which was based on the total costs of production divided by the total volume of production. Under the new policy, lumber production costs will now also be allocated to production units based on their relative market values. Lumber was previously carried at an average cost of production which was determined by actual production costs divided by production volumes. For both logs and lumber, inventories are valued at the lower of cost determined under the new policy and net realizable value, which is consistent with the previous policy.
This new accounting policy was implemented effective January 1, 2007 on a retrospective basis without restatement of prior periods and results in inventory increasing by $11.9 million to $227.6 million from $215.7 million and the deficit decreasing to $100.1 million from $112.0 million as at December 31, 2006. Prior periods have not been restated as the detailed information required to implement the new policy on a retrospective basis is not available. The change in policy has increased inventory carrying amounts as higher value cedar and to a lesser extent cypress lumber and log inventories are now carried at higher amounts than they would have been under the previous policy. Conversely, hemlock lumber and log inventories are carried at relatively similar amounts compared to what they were carried at under the previous policy as they were generally already written down to market values.
Financial instruments
During the quarter the Company adopted the following new recommendations of the Canadian Institute of Chartered Accountants ("CICA"):
- Section 1530 - Comprehensive Income
- Section 3251 - Equity
- Section 3855 - Financial instruments - Recognition and Measurement
- Section 3861 - Financial instruments - Disclosure and Presentation;
and
- Section 3865 - Hedges
Section 3855 provides guidance on costs incurred upon issuance of financial liabilities. Transaction costs are now deducted from the financial liability and amortized using the effective interest method over the expected life of the related liability. Accordingly, $4.8 million of unamortized financing costs at December 31, 2006 have been reclassified against long-term debt, reducing other assets to $9.0 million from $13.8 million and reducing long-term debt to $205.7 million from $210.5 million. The remaining CICA handbook sections adopted have not had a material impact on the Company's consolidated financial statements.
Internal Control over Financial Reporting
In 2006, following the acquisitions of Cascadia and Englewood, the Company initiated projects to consolidate and standardize its business systems and processes including its log, lumber, payroll and general ledger accounting systems. This process was largely completed with respect to the log and payroll systems during 2006. The new general ledger accounting system was implemented on January 1, 2007 and replaces three general ledger systems previously used by the Company. In addition to the new general ledger system the Company implemented a new accounting policy with respect to the costing of its inventories and a new chart of accounts covering all of its operations. These system implementations have been accompanied by new processes and procedures. The process is ongoing with respect to the new lumber systems. The Company identified weaknesses in internal controls during the quarter relating to the implementation of the new systems and related accounting processes and procedures. Management has implemented additional manual procedures to compensate for the weaknesses and corrective actions are now being implemented to ensure controls operate effectively for future periods. Other than these system and process changes, the CEO and CFO confirm that there were no changes in the controls which materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Risks and Uncertainties
Our business is subject to a number of risks and uncertainties, including those described in our 2006 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 condition and cash flow and, accordingly, should be carefully considered in evaluating our business.
Proposed Regulatory and First Nations Land Claims Developments
On May 24, 2007 the Forest Minister for British Columbia stated in a press interview that policy changes to improve the competitiveness of the Coastal British Columbia forest industry would be announced within the next few weeks. Amongst the potential policies stated were a faster shift to second growth logging from old growth logging including more intensive management of second growth stands, additional restrictions on exporting old growth logs from public lands, and possible changes to export policies affecting private land logs. The Company is not in a position to analyze the impact of the proposed policy changes on its operations until they are announced.
On May 31, 2007 the government of British Columbia announced that it had initialed a draft Strategic Land Use Agreement ("SLUA") with the Council of the Haida Nation dealing with land use and resource management issues in the Haida Gwaii or Queen Charlotte Islands. Amongst other things, the draft agreement recommends permanent protection for approximately 225,000 hectares of land on the Islands for natural, cultural, spiritual and recreational values and a timber harvest of at least 800,000 cubic metres annually. The SLUA is the result of ongoing negotiations between the Province and the Haida Nation. The provincial government and the Haida intend to hold public meetings and consultations before assembling final recommendations for ratification. As previously disclosed, the Company currently has an Allowable Annual Cut in the Queen Charlotte Islands of 510,000 cubic metres, having been temporarily reduced from 803,000 cubic metres by the provincial Chief Forester. The Company is not able to determine the nature or extent of the final recommendations, whether they will be ratified and the impact on the Company. (See - Risk Factors - First Nations Land Claims in Western's 2006 Annual Information Form for further information on the risk of First Nations Land Claims).
Outlook and Strategy
Western's results for the first quarter of 2007 reflect continuing improvement in its ability to adapt its operations to changing market conditions. Western's ability to respond to market dynamics should continue to improve as our new business systems and operating metrics become further integrated into management and decision-making processes.
The Company recently completed a review of non-core assets expected to be sold over a two-year period and believes it can generate proceeds of approximately $150 million to $180 million for such assets. Non-core assets comprise 4,000 hectares of higher and better use lands (within the private timberlands), the Squamish pulp mill site, the New Westminster sawmill site, the former log merchandiser site, a gravel pit royalty interest and other sites. The estimated proceeds are based on recently obtained valuations on the HBU properties and mill sites, offers to acquire sites, and Company estimates. These non-core assets do not include, and the anticipated proceeds do not reflect, potential proceeds from 24,000 hectares of private timberlands, which continue to be assessed for future best use. The Company believes its current balance sheet, improving results and non-core asset values should enable it to significantly reduce indebtedness.
Markets for cedar, higher value hemlock and fir, and certain other overseas exports, which together represent a significant portion of the Company's lumber sales, should remain attractive through 2007. The Japanese lumber market has been relatively stable partly due to 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 for our lumber in Japan through the second quarter although there are recent indications of a softening in demand. Western's ability to take advantage of these markets will be determined by our log harvest levels and the availability of the necessary logs for purchase. Indications are that log supply will remain fairly tight for these log sorts through the second quarter. The United States structural dimension lumber market has been weak and is expected to remain weak through the remainder of the year.
The recent strengthening of the Canadian dollar relative to the U.S. dollar is expected to impact the Company's cash flows. Approximately 55%-65% of the Company's lumber sales are denominated in U.S. dollars and a one-cent change in the value of the Canadian dollar relative to the U.S. dollar impacts annual operating earnings by approximately $6.0 million.
The contract with the United Steelworkers union, which represents the majority of the Company's hourly workforce and those of its contractors, expires on June 14, 2007. Forest Industrial Relations Limited, which represents the Company and certain other forest products companies in the coastal region of British Columbia, has been in negotiations with the union for several months. We are unable to determine whether a new contract will be negotiated on a timely basis without labour disruption or the impact of the final agreement on the Company's operations.
Outstanding Share Data
As of June 5, 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 10,000,000 Common Shares for issuance upon the exercise of options granted under the Company's incentive stock option plan. As of June 5, 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, 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 December 31, 2006 to March 31, 2007, the Company paid and charged entities related to BAM $3.1 million in connection with these arrangements.
On behalf of the Board of Directors
John MacIntyre Reynold Hert
Chairman President and Chief Executive Officer
Duncan, BC
June 5, 2007
Management's Discussion and Analysis - Appendix A
Summary of Selected Results for the Last Eight Quarters (Unaudited)
2007 2006
-------------------------------------------------
(millions of
dollars except
per share amounts
and where noted) 1st 4th 3rd 2nd 1st
-------------------------------------------------
Average Exchange
Rate - Cdn $ to
purchase one U.S. $ $1.1725 1.1277 1.1178 1.1292 1.1462
Sales
Lumber $ 205.2 217.8 214.0 158.1 87.2
Logs 55.6 44.6 44.8 49.0 23.7
By-Products 15.5 16.7 20.7 12.9 7.3
-------------------------------------------------
$ 276.3 279.1 279.5 220.0 118.2
-------------------------------------------------
-------------------------------------------------
Lumber
Production - millions
of board feet 251 271 326 250 153
Sales - millions
of board feet 251 278 291 243 164
Logging
Production - m3 (000's) 1,601 1,585 1,617 1,898 662
Purchases - m3 (000's) 168 242 169 143 100
Sales - m3 (000's) 650 625 592 605 262
Internal consumption -
m3 (000's) 1,101 1,138 1,350 1,031 650
Sales prices
Lumber - per thousand
board feet $ 818 782 739 648 533
Logs - per cubic metre $ 86 71 76 81 90
Net income (loss) from
continuing operations $ 8.2 109.3 (11.4) (7.5) (46.5)
Discontinued pulp
operations
Sales $ - - - (0.1) 20.0
Loss $ (1.0) (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) $ 7.2 108.3 (12.2) (9.4) (53.6)
Net income (loss)
per share from
continuing operations $ 0.04 0.53 (0.06) (0.05) (1.81)
Net income (loss)
per share - basic
and diluted $ 0.04 0.53 (0.06) (0.06) (2.09)
Reconciliation of
EBITDA to net income
(loss) from continuing
operations:
EBITDA before lumber
duty refund $ 23.3 10.1 10.2 7.7 (0.1)
Lumber duty refund - 110.3 - - -
-------------------------------------------------
EBITDA 23.3 120.4 10.2 7.7 (0.1)
Amortization of
property, plant &
equipment (9.9) (9.7) (10.3) (10.8) (5.9)
Restructuring &
other items - (2.4) (0.7) (4.9) -
Interest expense (6.8) (9.2) (10.9) (9.9) (11.1)
F/X on long-term debt 0.7 (6.0) (0.3) 9.7 (0.9)
Premium & unamortized
discount - - - - (27.9)
Interest and other
income (expense) 1.2 16.7 0.9 0.5 (0.4)
Income taxes (0.3) (0.5) (0.3) 0.2 (0.2)
-------------------------------------------------
Net income (loss) from
continuing operations $ 8.2 109.3 (11.4) (7.5) (46.5)
-------------------------------------------------
-------------------------------------------------
2005
-----------------------------
(millions of
dollars except
per share amounts
and where noted) 4th 3rd 2nd
-----------------------------
Average Exchange
Rate - Cdn $ to
purchase one U.S. $ 1.1703 1.2122 1.2411
Sales
Lumber 91.3 88.2 107.5
Logs 25.5 22.2 26.0
By-Products 3.6 5.9 7.0
-----------------------------
120.4 116.3 140.5
-----------------------------
-----------------------------
Lumber
Production - millions
of board feet 127 150 186
Sales - millions
of board feet 166 165 176
Logging
Production - m3 (000's) 822 465 1,148
Purchases - m3 (000's) 87 147 192
Sales - m3 (000's) 212 172 213
Internal consumption -
m3 (000's) 590 719 844
Sales prices
Lumber - per thousand
board feet 549 535 612
Logs - per
cubic metre 120 129 122
Net income (loss) from
continuing operations (10.5) (8.2) (35.5)
Discontinued pulp
operations
Sales 40.6 40.4 45.9
Loss (74.1) (4.3) (1.7)
Pulp production -
tonnes (000's) 71 69 72
Pulp sales -
tonnes (000's) 69 71 73
Pulp sales price
per tonne 582 573 624
Net income (loss) (84.6) (12.5) (37.2)
Net income (loss)
per share from
continuing operations (0.41) (0.32) (1.38)
Net income (loss)
per share - basic
and diluted (3.30) (0.49) (1.45)
Reconciliation of
EBITDA to net income
(loss) from continuing
operations:
EBITDA before lumber
duty refund (5.3) (11.5) (1.6)
Lumber duty refund - - -
-----------------------------
EBITDA (5.3) (11.5) (1.6)
Amortization of
property, plant &
equipment (5.9) (4.5) (9.6)
Restructuring &
other items 0.6 5.9 (8.5)
Interest expense (11.5) (11.2) (11.8)
F/X on long-term debt (0.1) 13.3 (3.3)
Premium & unamortized
discount - - -
Interest and other
income (expense) 1.1 - (0.5)
Income taxes 10.6 (0.2) (0.2)
-----------------------------
Net income (loss) from
continuing operations (10.5) (8.2) (35.5)
-----------------------------
-----------------------------
Consolidated Balance Sheets (Unaudited)
(Expressed in millions of Canadian dollars)
-------------------------------------------------------------------------
March 31, December 31,
2007 2006
-------------------------------
(Restated
- note 2)
Assets
Current assets:
Cash and cash equivalents $ 45.1 $ 41.6
Accounts receivable 91.2 102.4
Inventory 225.3 227.6
Prepaid expenses and other assets 10.1 12.4
-------------------------------
371.7 384.0
Property, plant and equipment 500.4 505.4
Other assets 8.7 9.0
-------------------------------
$ 880.8 $ 898.4
-------------------------------
-------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit facility (note 3) $ - $ 3.6
Accounts payable and accrued liabilities 118.6 110.8
Current portion of long-term debt (note 4) 99.8 -
Discontinued operations (note 8) 4.8 6.4
-------------------------------
223.2 120.8
Long-term debt (note 4) 79.9 205.7
Other liabilities 41.6 42.6
Deferred revenue 77.9 78.4
-------------------------------
422.6 447.5
Shareholders' equity
Common shares 410.6 410.6
Non-voting shares 139.6 139.6
Contributed surplus 0.9 0.8
Deficit (92.9) (100.1)
-------------------------------
458.2 450.9
-------------------------------
$ 880.8 $ 898.4
-------------------------------
-------------------------------
Commitments and contingencies (note 5)
See accompanying notes to consolidated financial statements
Approved on behalf of the Board:
"Reynold Hert" Director
"John MacIntyre" Director
Consolidated Statements of Operations, Deficit and Comprehensive Income
for the Three Months Ended March 31 (Unaudited)
(Expressed in millions of Canadian dollars except for share and
per share amounts)
-------------------------------------------------------------------------
2007 2006
-------------------------------
Sales $ 276.3 $ 118.2
Cost and expenses
Cost of goods sold 219.9 95.3
Export tax 4.4 -
Anti-dumping and countervailing duties - 4.0
Freight expenses 17.9 12.7
Selling and administration 10.8 6.3
Amortization of property, plant
and equipment 9.9 5.9
-------------------------------
262.9 124.2
-------------------------------
Operating income (loss) 13.4 (6.0)
Interest expense (6.8) (11.1)
Foreign exchange gain (loss) on
long-term debt 0.7 (0.9)
Premium and unamortized discount on
bond redemption - (27.9)
Interest and other income (expense) 1.2 (0.4)
-------------------------------
Income (loss) before income taxes 8.5 (46.3)
Income tax expense (0.3) (0.2)
-------------------------------
Net income (loss) from continuing
operations 8.2 (46.5)
Net loss from discontinued operations
(note 8) (1.0) (7.1)
-------------------------------
Net income (loss) and comprehensive
income (loss) 7.2 (53.6)
Deficit, beginning of period (112.0) (145.1)
Change in accounting policy for costing
inventories (note 2) 11.9 -
-------------------------------
Deficit, beginning of year as restated (100.1) (145.1)
-------------------------------
Deficit, end of period $ (92.9) $ (198.7)
-------------------------------
-------------------------------
Net income (loss) per share -
basic and diluted:
From continuing operations $ 0.04 $ (1.81)
From discontinued operations $ 0.00 $ (0.28)
-------------------------------
Net income (loss) $ 0.04 $ (2.09)
-------------------------------
-------------------------------
Weighted average number of shares
outstanding (thousands of shares) 204,414 25,632
See accompanying notes to the consolidated financial statements
Consolidated Statements of Cash Flows for the Three Months Ended
March 31 (Unaudited)
(Expressed in millions of Canadian dollars)
-------------------------------------------------------------------------
2007 2006
-------------------------------
Cash provided by (used in):
Operating activities:
Net income (loss) from continuing
operations $ 8.2 $ (46.5)
Items not involving cash:
Amortization of property, plant
and equipment 9.9 5.9
Foreign exchange (gain) loss on
long-term debt (0.7) 0.9
Interest deferred (repaid) on
long-term debt 2.3 (9.8)
Premium and unamortized discount on
bond redemption - 27.9
Other (1.2) (0.4)
-------------------------------
18.5 (22.0)
-------------------------------
Changes in non-cash working capital items:
Accounts receivable (0.6) 5.2
Inventory 2.3 19.3
Prepaid expenses 1.5 (0.3)
Accounts payable and accrued liabilities 7.1 (12.7)
-------------------------------
10.3 11.5
-------------------------------
Cash provided (used) by continuing
operations 28.8 (10.5)
-------------------------------
Investing activities:
Additions to property, plant and equipment (4.1) (1.4)
Additions to capitalized roads (3.1) (2.2)
Disposals of property, plant and equipment 1.8 -
Receipt of working capital adjustment
to purchase price paid for - -
Cascadia Forest Products 12.5 -
Restricted cash 0.6 8.9
Englewood Logging Division - (3.0)
Price premium prepayment on long-term
fibre agreement - 35.0
Other 1.0 (4.2)
-------------------------------
8.7 33.1
-------------------------------
Financing activities:
Revolving credit facility (3.6) (71.4)
Redemption of 15% Secured Bonds - (275.9)
Proceeds from term loans - 307.8
Repayment of term loans (25.5) -
Other (2.4) -
-------------------------------
(31.5) (39.5)
-------------------------------
Cash used by discontinued operations
(note 8) (2.5) (0.9)
-------------------------------
Increase (decrease) in cash and cash
equivalents 3.5 (17.8)
Cash and cash equivalents, beginning
of period 41.6 29.6
-------------------------------
Cash and cash equivalents, end of period $ 45.1 $ 11.8
-------------------------------
-------------------------------
Supplementary information:
Non-Cash item - Acquisition of
Englewood Logging Division $ - $ 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. (the Company or Western)
is timber harvesting and lumber manufacturing for worldwide markets.
Western's operations are located in the coastal region of British
Columbia.
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, 2006 and for the year then ended except
that the Company has adopted new accounting policies with respect to
financial instruments and inventory costing as described below.
2. Adoption of New Accounting Policies
(a) Financial Instruments
Effective January 1, 2007 the Company adopted the new recommendations
of the Canadian Institute of Chartered Accountants ("CICA") Handbook
Sections 1530, Comprehensive Income, Section 3251, Equity, Section
3855, Financial Instruments - Recognition and Measurement, Section
3861 Financial Instruments - Disclosure and Presentation, and Section
3865, Hedges. Other than the reclassification of transaction costs
discussed below, the adoption of these new recommendations has not
impacted the Company's financial statements.
Section 1530, Comprehensive Income, requires that changes in equity
from transactions and other events and circumstances from non-owner
sources be recorded and reported in the statement of comprehensive
income. Comprehensive income is comprised of the traditional concept
of 'net income' as well as the income effect of derivative
instruments ('other comprehensive income'). Section 3251, Equity,
requires that the accumulation of other comprehensive income be
presented as a component of the equity section. Section 3855,
Financial Instruments - Recognition and Measurement and Section 3861,
Financial Instruments - Disclosure and Presentation requires that all
financial instruments be recognized on the balance sheet using the
appropriate measurement model and disclosed in the notes to the
financial statements. Section 3865, Hedges, requires that all
financial assets and liabilities be presented in accordance with the
recommendations of the financial instruments recommendations except
where the derivative instrument has been designated as a hedge by
management.
Section 3855 provides guidance on costs incurred upon issuance of
financial liabilities. Transaction costs are now deducted from the
financial liability and amortized using the effective interest method
over the expected life of the related liability. Accordingly,
$4.8 million of unamortized financing costs at December 31, 2006 have
been reclassified against long-term debt reducing other assets to
$9.0 million from $13.8 million and reducing long-term debt to
$205.7 million from $210.5 million.
(b) Inventory Costing
On January 1, 2007 the Company changed its accounting policy for the
costing of log and lumber inventories to better reflect its new
management operating philosophy. Under the new policy, costs of
production for products produced jointly as a result of the same
production process are allocated according to the value of those
products. This compares to the former policy which allocated costs
based on volumes produced.
Under the new policy, log production costs are allocated to logs
produced based on their relative market values, except for pulp logs
that will continue to be carried at market due to the significant
difference between the market value of pulp logs compared to
production costs. Previously, the Company carried all saw logs at the
same actual unit production cost which was based on the total costs
of production divided by the total volume of production. Under the
new policy, lumber production costs will now also be allocated to
production units based on their relative market values. Lumber was
previously carried at an average cost of production, which was
determined by actual production costs divided by production volumes.
For both logs and lumber, inventories are valued at the lower of cost
determined under the new policy and net realizable value, which is
consistent with the previous policy.
This new accounting policy was implemented effective January 1, 2007
on a retrospective basis without restatement of prior periods and
results in inventory increasing by $11.9 million to $227.6 million
from $215.7 million and the deficit decreasing to $100.1 million from
$112.0 million as at December 31, 2006. Prior periods have not been
restated as the detailed information required to implement the new
policy on a retrospective basis is not available.
3. Revolving Credit Facility
The Company has a three-year revolving credit facility, secured by
receivables and inventory and bearing interest at prime plus 0.5%
that expires on July 12, 2009. The size of this asset-backed facility
is determined by the level of outstanding receivables and inventory,
but cannot exceed $150.0 million with provision for further
extensions up to $200.0 million, subject to lender approval. At
March 31, 2007, of the $123.1 million of the facility that was
available to the Company, $9.7 million was used to support standby
letters of credit, leaving a balance of $113.4 million available for
future use.
4. Long-Term Debt
---------------------------------------------------------------------
As at As at
March 31, December 31,
(millions of dollars) 2007 2006
---------------------------------------------------------------------
Current portion of long-term debt:
Canadian facility $ 101.8 $ -
Associated transaction costs (2.0) -
-----------------------------
$ 99.8 $ -
-----------------------------
-----------------------------
Long-term portion of long-term debt:
U.S. facility (U.S. $73.5 million;
2006 U.S. $95.3 million) $ 84.8 $ 111.0
Canadian facility - 99.5
-----------------------------
84.8 210.5
Associated transaction costs (4.9) (4.8)
-----------------------------
$ 79.9 $ 205.7
-----------------------------
-----------------------------
On March 7, 2007, the Company renegotiated its U.S. dollar
denominated term-debt with the Brookfield Bridge Lending Fund
("BBLF"), paying down U.S. $21.6 million to reduce the principal
outstanding from U.S. $95.3 million to U.S. $73.7 million and
reducing the interest rate from floating one-month LIBOR plus 8.15%
to floating one-month LIBOR plus 3%. On March 29, 2007 a further
U.S. $0.2 million was paid against the outstanding principal
resulting in a balance outstanding at March 31, 2007 of
U.S. $73.5 million.
The Company also exercised its option to extend the maturity date of
the Canadian term-debt with BBLF to March 10, 2008 on payment of an
extension fee of $2.0 million. The Company began paying cash interest
on $45.0 million of the Canadian term-debt effective March 1, 2007
and on the total Canadian term-debt effective April 1, 2007.
Previously interest was being deferred and added to the principal
outstanding as permitted by the agreement. At March 31, 2007 the
principal outstanding under the Canadian term-debt was
$101.8 million.
BBLF is related to the Company by virtue of a common relationship
with Brookfield Asset Management ("BAM").
5. Commitments and Contingencies
(a) 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.
(b) Indemnity Agreement
The Company has an 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 purchase by the
Company of certain assets from that third party. The Guarantee is
limited to $100 million. As security for its performance under this
indemnity 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 there under at that time, the Company may
request that the debenture be discharged.
(c) 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.
(d) Allowable Annual Cut Reductions
Allowable annual cuts ("AAC") continue to be revised pursuant to
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 Company has considered the Part 13 orders and the temporary AAC
reductions and has factored them 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.
(e) 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 licenses. 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 finalize
compensation payments for improvements.
6. Pension Expense
The Company has defined benefit and defined contribution pension
plans and other pension arrangements that cover substantially all
salaried and certain hourly employees. 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 March 31, 2007 the Company recorded pension expense with
respect to continuing operations of $6.4 million (2006 -
$ 2.5 million) and nil (2006 - $0.3 million) with respect to
discontinued operations with respect to these benefit plans.
7. 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 8 -
discontinued operations).
8. 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 continues to incur ongoing costs for
supervision, security, property taxes and other costs. These costs
will be expensed as incurred.
Subsequent to the quarter end, the Company negotiated the sale of the
majority of the pulp mill equipment for proceeds of $5.5 million that
will be realised over the course of the year as the equipment is
removed from the site. The sale will result in gain of $5.5 million
as the equipment had been fully written down. The Company continues
to work with parties interested in acquiring the site itself. The
following table provides additional information with respect to the
discontinued operations:
Three months ended March 31
---------------------------------------------------------------------
(millions of dollars) 2007 2006
---------------------------------------------------------------------
Sales $ - $ 20.0
-----------------------------
Net loss from discontinued operations
before
Income taxes $ (1.0) $ (7.1)
-----------------------------
Income taxes - -
-----------------------------
Net loss from discontinued operations $ (1.0) $ (7.1)
-----------------------------
-----------------------------
Cash used in:
Operating activities $ (2.5) $ (0.9)
Investing activities - -
-----------------------------
Cash used by discontinued operations $ (2.5) $ (0.9)
-----------------------------
-----------------------------
Included in the net loss from discontinued operations for the three
months ended March 31, 2006 is $4.5 million with respect to the cost
to terminate certain long-term contracts.
9. Private Lands
On January 31, 2007, the Company received approval from the BC
Minister of Forests and Range to remove approximately 28,000 hectares
of its private lands from its Tree Farm Licenses ("TFL's") 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. On May 9, 2007 the AAC for TFL's 6, 19 and 25 was reduced
by 202,100 cubic metres to account for the removal of the private
lands from the TFL's. This volume is now harvestable separately from
the TFL's.