Touchstone Exploration Inc. press release
Stelco reports results for second quarter 2005
TSX - Toronto Stock Exchange · Oil · Natural Gas · Natural Gas Liquids · Canada
HAMILTON, ON, Aug. 4 /CNW/ - Stelco Inc. (TSX:STE) today reported net earnings of $40 million ($0.39 per common share) for the quarter ended June 30, 2005 compared to net earnings of $42 million ($0.41 per common share) for the second quarter of 2004. Six month net earnings were $89 million ($0.87 per common share) compared to net earnings of $5 million ($0.05 per common share) for the same period in 2004. Second quarter 2005 net earnings would have been lower than reported but for four non-recurring items, which had a positive impact on net earnings for the period. These items were (in pre-tax figures) a $20 million gain on the sale of the plate mill assets, $14 million for the balance of an insurance claim recovery related to a June 2004 blast furnace outage, a $4 million gain on the sale of the Company's interest in Camrose Pipe, and a $4 million gain on the sale of the Welland Pipe U and O pipe mill. Compared to second quarter 2004, second quarter 2005 earnings were negatively affected by decreased shipments and higher costs, particularly at Norambar and the Manufactured Products segment, and reduced Integrated Steel finishing mills production, partly offset by higher selling prices. Net sales revenue in the second quarter was $888 million compared to $881 million for the same period last year. In the first half of 2005, sales amounted to $1,856 million, a 12% increase over the $1,650 million recorded for the first six months of 2004. This increase was attributable to such factors as the renewal of customer contracts at substantially higher prices, improved market demand which had the effect of raising spot prices in the first quarter, and selling price surcharges implemented to cover high raw material and energy costs in the first quarter. Costs for the second quarter of 2005 were $799 million compared to $779 million for the same quarter in 2004. Costs for the first six months of 2005 stood at $1,620 million compared to $1,514 million for the first half of 2004. The increase in costs was attributable to such factors as higher raw material and energy costs, particularly for scrap, coal, iron ore, natural gas and electricity; higher spending for repairs and maintenance and supplies; reduced output required to control steel inventories; and the increased cost of hot roll as raw materials for the Manufactured Products segment of the business. Production in the second quarter of 2005 was 1,297,000 semi-finished tons compared to 1,327,000 semi-finished tons produced during the same period in 2004. Production for the first six months of 2005 was 2,553,000 semi-finished tons compared to 2,693,000 semi-finished tons produced during the first half of 2004. Shipments in the second quarter of 2005 totalled 1,125,000 net tons compared to 1,249,000 net tons during the same period in 2004. Shipments in the first six months of 2005 totalled 2,325,000 net tons, compared to 2,515,000 net tons during the first half of 2004. As at June 30, 2005, the Corporation's net liquidity position was $407 million, consisting of $26 million of cash and cash equivalents, including restricted cash, plus $472 million of available lines of credit, less $91 million of drawings on lines of credit. At December 31, 2004, net liquidity was $284 million, consisting of $43 million of cash and cash equivalents, including restricted cash, plus $456 million of available lines of credit less $215 million of drawings on lines of credit. During the quarter the Corporation generated $43 million of cash primarily due to cash earnings before working capital and proceeds from the sale of its 40% interest in Camrose pipe, partly offset by expenditures for capital assets, primarily consisting of $30 million related to the Lake Erie Phase II hot strip mill upgrade, and working capital changes. In the year earlier period $2 million of cash was generated. The Corporation noted that steel market selling prices have been very volatile and are highly dependent on North American and worldwide steel demand and other factors beyond Stelco's control. For example, the current spot price for hot roll coils, Stelco's largest product category, has declined approximately 26% since April 2005. Stelco also indicated that future financial results will be highly dependent on the strength of North American steel markets and on the direction of commodity raw material and energy input costs. North American steel producers have reduced production levels in the second quarter of 2005, attempting to better balance supply with demand, which ultimately may stabilize steel pricing. Following the seasonal shutdowns, automotive demand is forecast to remain constant through the balance of the third quarter of 2005. Spot market prices appear to be stabilizing due to lower steel production, and reduced customer inventory levels. The Corporation expects that third quarter 2005 results will be significantly lower than second quarter and that there will be increased drawings on the Stelco Inc. credit facility. In the fourth quarter, as a result of a planned shutdown of the Lake Erie hot strip mill to install components related to the Phase II upgrade, significant shipments of slabs are planned. There is a risk that market demand may not support the projected level of slab sales. While there is currently a court order outstanding that prevents a strike by Local 8782, there is a risk that delivery of the 90-day notice from Local 8782 could result in disruptions to the Corporation's business. Courtney Pratt, Stelco President and Chief Executive Officer, said, "Our results reflect the softening in North American demand and pricing that began in the third quarter of last year and that has continued well into 2005. "We've said that Stelco could not base its future upon steel prices remaining at historically high levels. We've believed from the outset of our restructuring process that the only way to ensure a positive long-term future for the Company is to make it competitive through all stages of the market cycle. "That's what the four-point strategy announced one year ago and the restructuring plan outline filed last month are designed to achieve. I urge all stakeholders to work together at this crucial stage of the restructuring process to ensure that our shared goal of a viable, competitive and successful Stelco can be realized." With respect to the Corporation's recently released restructuring plan outline, Mr. Pratt noted that to date the plan outline has not yet been endorsed by any stakeholder group.
About Stelco Stelco Inc. is a large, diversified steel producer. Stelco is involved in major segments of the steel industry through its integrated steel business, mini-mills, and manufactured products businesses. This news release may contain forward-looking information with respect to the Corporation's business operations, financial performance and conditions. Actual results may differ from expected results for a variety of reasons including factors discussed in the Corporation's Management's Discussion and Analysis section of the Corporation's 2004 Annual Report. To learn more about Stelco and its businesses, please refer to our Web site at www.stelco.ca.
STELCO INC. QUARTER 2, 2005 REPORT TO THE SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") is dated August 4, 2005. The purpose of Stelco Inc.'s ("Stelco" or the "Corporation") MD&A is to provide commentary on the Corporation's financial situation and future prospects, focusing on the Corporation's three reportable segments: Integrated Steel, Mini-mill, and Manufactured Products. The Integrated Steel segment is Stelco's core business. The other two segments are considered non-core. See "Creditor Protection and Restructuring", below for additional comments. The Corporation prepares its consolidated financial statements (the "Consolidated Financial Statements") in accordance with Canadian generally accepted accounting principles ("GAAP"). The following MD&A should be read in conjunction with the MD&A and the annual audited Consolidated Financial Statements contained in the Corporation's 2004 Annual Report, and with the Interim Financial Statements and Notes contained in this report and the Quarter 1, 2005 report. These reports and information together with additional information about Stelco including information found in the Corporation's 2004 Annual Information Form, can be accessed from SEDAR at www.sedar.com. Certain statements in this MD&A may constitute "forward-looking" statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of Stelco, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Forward looking statements typically include words as "may," "will," "expect," "believe," "plan," "intend" or other similar terminology. These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this MD&A. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the risk factors discussed in the Corporation's 2004 Annual MD&A, and in the Corporation's Quarter 1, 2005 report as well as the risks discussed under "Risks and Uncertainties" below. Although the forward-looking statements contained in this MD&A are based upon what management of the Corporation believes are reasonable assumptions, the Corporation cannot assure investors that actual results will be consistent with these forward-looking statements. Forward-looking statements contained in this Q2, 2005 report are made as of the date of this MD&A, and the Corporation assumes no obligation to update or revise them to reflect new events or circumstances.
Creditor Protection and Restructuring
On January 29, 2004 (the "Filing Date"), Stelco obtained an order (the "Initial Order") from the Ontario Superior Court of Justice (the "Court") granting it creditor protection under the Companies' Creditors Arrangement Act (the "CCAA"). The Initial Order may be amended throughout the CCAA proceedings on motions from Stelco, its creditors, and other interested stakeholders. On the same date, Stelco made a concurrent petition for recognition of the Initial Order and ancillary relief under Section 304 of the U.S. Bankruptcy Code. The Canadian proceedings include Stelco and its wholly owned subsidiaries, Stelwire Ltd. ("Stelwire"), Stelpipe Ltd. ("Stelpipe"), CHT Steel Company Inc. ("CHT Steel"), and Welland Pipe Ltd. ("Welland Pipe"), which are collectively referred to as the "Applicants." The U.S. proceedings include Stelco, Stelwire, and Stelpipe. Welland Pipe was closed on March 7, 2003 (see Note 9 to the Consolidated Financial Statements). The Corporation's other subsidiaries and joint ventures are not included in the proceedings. During the stay period, the Applicants are authorized to continue operations. Ernst & Young Inc. was appointed by the Court as monitor (the "Monitor") in the Canadian proceedings and has been reporting to the Court from time to time on the Applicants' cash flow and on other developments during the proceedings. The Initial Order and the U.S. proceedings provided for an initial stay period of 30 days, which has subsequently been extended to September 9, 2005, and may potentially be extended to such later dates as the Court may order. The purpose of the Initial Order and stay of proceedings was to provide the Applicants with relief designed to stabilize their operations and business relationships with their customers, suppliers, employees, and creditors. The CCAA proceedings have triggered defaults under substantially all debt obligations of the Applicants (see Notes 7 and 12 to the Consolidated Financial Statements). The Initial Order generally stays actions against the Applicants including steps to collect indebtedness incurred by the Applicants prior to the Filing Date and actions to exercise control over the Applicants' property. The Initial Order grants the Applicants the authority to pay outstanding and future wages, salaries, employee pension contributions and benefit payments, and other obligations to employees; the costs of goods and services, both operating and of a capital nature, provided or supplied after the date of the Initial Order; rent under existing arrangements payable after the date of the filing; and principal, interest, and other payments to holders of security in respect of the property of the Applicants if the amount secured by such security is, in the reasonable opinion of the applicable Applicant, with the concurrence of the Monitor, less than or equal to the fair value of such security, having regard to, among other things, the priority of such security.
Restructuring Plan Outline
During the proceedings, the Corporation has sought input from its stakeholders, with a view to developing a comprehensive restructuring plan to allow the Corporation to exit CCAA in an orderly fashion. On July 15, 2005, Stelco filed with the Court a plan outline describing a proposed restructuring that it believes will ensure a viable company over the long term and fairly balance the interests of stakeholders. On July 18, 2005, the Court granted an order in Stelco's CCAA proceedings extending the stay of proceedings until September 9, 2005. The USW has brought a motion seeking to remove Stelco's exclusive authority to prepare and file a restructuring plan in its CCAA proceedings. The motion has been adjourned until August 16, 2005. Stelco intends to return to Court on or prior to September 9, 2005 to file a formal CCAA plan, to seek a further extension of the stay period, and to seek a meeting order (the "Meeting Order"). The Meeting Order, if granted, will approve the procedures with respect to the calling and conduct of a meeting of affected creditors to consider and vote upon the Company's restructuring plan, as well as the manner in which the materials for such meeting will be distributed.
Highlights of the proposed restructuring plan filed with the Court on July 15, 2005 include:
A plan to retire the Corporation's four principal core business pension plan solvency deficiencies of about $1.3 billion by 2015. It is intended that the pension plans will receive approximately $200 million in upfront contributions and $98 million in cash payments annually thereafter.
Secured operating lenders are proposed to be refinanced at the time of plan implementation.
Unsecured creditors are proposed to receive full recovery on approximately $666 million owed to them by receiving securities including a pro rata share of secured and unsecured convertible notes and new common shares.
Equity holders at the time of emergence from Court protection will receive less than 2% of the fully diluted shares outstanding unless they exercise the right to purchase common shares through a $100 million rights offering to be available to such equity holders and/or exercise warrants to purchase 10% of the Corporation on a fully diluted basis. If all rights and warrants were exercised, the Corporation would receive proceeds of $190 million and the percentage holdings of such equity participants would rise to approximately 37% fully diluted. The warrants would have a ten-year term.
The proposed restructuring plan outline has two phases:
Phase One: Immediately upon the Corporation's exit from CCAA, the issuance to unsecured creditors of $566 million of new debt and $100 million of new equity. This phase will also provide for the contribution into the Company's four main pension plans of $100 million in senior secured floating rate notes and up to $100 million in cash from proceeds of the sale of the non-core assets, subject to a pension funding agreement having been reached with the Government of Ontario.
Phase Two: On the condition of a pension funding agreement with the Government of Ontario and the renewal of collective bargaining agreements at Stelco Lake Erie and Stelco Hamilton, $200 million of debt issued in phase one will be converted to equity and the $100 million rights offering is expected to be completed.
The delivery of the restructuring plan outline followed a failed mediation process during the quarter. After two periods of mediation under the direction of the Honourable George Adams, the mediation was terminated by the mediator. The mediator concluded he was not able to usefully add to the discussions among the stakeholders. To date the proposed plan outline has not been finalized and has not yet been endorsed by any stakeholder group, therefore there is no assurance that the Plan will be accepted or will be the same as this proposal. The Consolidated Financial Statements do not reflect any accounting adjustments related to the transactions in the restructuring plan outline.
Credit Facilities
The accommodation agreement (the "Accommodation Agreement"), which provides for the continued access to the Applicants $350 million credit facility (the "$350 Million Credit Facility"), and the $75 million Debtor-In-Possession Credit Agreement (the "DIP Credit Agreement") were amended on December 22, 2004, resulting in the extension of these credit facilities to the earlier of November 20, 2005 and the effective date of a Plan, subject to termination of the credit facilities as a result of the occurrence of an event of default.
Claims Procedure
As established by Court order on December 17, 2004, the Applicants initiated a process for certain creditors to file claims against the Applicants for liabilities incurred prior to January 29, 2004, and those arising between January 29, 2004 and December 17, 2004 as a result of the restructuring, repudiation or termination of any contract, lease or other agreement. The claims bar date for filing of proof of claim was set at January 31, 2005, unless the claim relates to the restructuring, repudiation or termination of any contract, lease or other agreement on or after December 17, 2004, in which case a bar date for these types of claims will be established by a future order of the Court. A dispute mechanism is in place for those claims that cannot be resolved by way of negotiation with the Corporation and/or Monitor. These claims are forwarded to a claims officer providing the claimant filed a dispute notice by the earlier of eight business days following receipt of a dispute package or March 7, 2005. These claims are reviewed and ruled on by the claims officer. Both the Corporation and the claimant have the right to appeal the decision of the claims officer to the Court within five business days of notification of the claims officer's decision. All determinations from the Court regarding appealed claims are final for the purposes of recording claims. See Note 7 to the Consolidated Financial Statements for the Claim Summary as at June 30, 2005.
Non-Core Businesses
The Corporation's 2004 strategic review determined that all of the businesses of the Mini-mill and Manufactured Products segments are non-core. The Corporation initiated a sales process in respect of these business units which was approved by the Court on October 19, 2004, and is currently reviewing offers. Included in the Consolidated Statement of Financial Position are the following amounts related to the non-core businesses, excluding Camrose Pipe which has been sold and is included in discontinued operations (see below):
<< Mini-mill Segment Manufactured Products At June 30 (in millions) Segment (unaudited) 2005 2004 2005 2004 Current assets $ 153 $ 133 $ 171 $ 153 Current liabilities 73 63 50 49 Working capital 80 70 121 104