Touchstone Exploration Inc. press release
Stelco reports results for third quarter 2005
TSX - Toronto Stock Exchange · Oil · Natural Gas · Natural Gas Liquids · Canada
HAMILTON, ON, Nov. 10 /CNW/ - Stelco Inc. (TSX:STE) today reported a net loss of $42 million ($0.41 per common share) for the quarter ended September 30, 2005. This compares to net earnings of $58 million ($0.57 per common share) for the third quarter of 2004 and $40 million ($.39 per share) for the previous quarter. Nine-month net earnings were $47 million ($0.46 per common share) compared to net earnings of $63 million ($0.62 per common share) for the same period in 2004. The results, when compared to third quarter 2004, reflect lower spot market selling prices, decreased shipments, reduced production levels, higher reorganization costs and higher energy costs, partly offset by higher income tax recoveries and lower scrap and coke costs. Also included in the third quarter 2005 is a loss resulting from the sale of substantially all of the assets of Stelpipe Ltd., more than offset by income tax recoveries recognized, related to Stelpipe net operating loss carry forwards. Net sales revenue in the third quarter was $725 million compared to $897 million for the same period last year. During the first nine months of 2005, sales revenue was $2.462 billion compared to $2.446 billion recorded during the first nine months of 2004. The Company produced 1,107,000 net tons of semi-finished steel in the third quarter of 2005 compared to 1,385,000 net tons produced in the third quarter of 2004. Production for the first nine months of this year stood at 3,660,000 net tons compared to the 4,078,000 net tons produced during the same period in 2004. Shipments in the third quarter of 2005 totalled 1,067,000 net tons compared to 1,143,000 net tons shipped during the third quarter of last year. Shipments during the first nine months of this year totalled 3,306,000 net tons compared to 3,564,000 net tons shipped during the first nine months of 2004. At September 30, 2005, the Company's consolidated net liquidity position was $307 million, consisting of $36 million of cash, cash equivalents and restricted cash as well as $469 million in available lines of credit, less $198 million of drawings on lines of credit. At June 30, 2005, net liquidity was $407 million, consisting of $26 million of cash, cash equivalents and restricted cash as well as $472 million in 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, cash equivalents and restricted cash as well as $456 million in available lines of credit, less $215 million of drawings on lines of credit. During the third quarter the Company announced a number of significant developments in its Court-supervised restructuring process. These included the filing of a restructuring plan; a definitive agreement to sell substantially all of the assets of Stelpipe Ltd.; restructuring agreements with the Province of Ontario, the USW, and Tricap Management Limited; and the calling of a meeting of Affected Creditors. During the fourth quarter of 2005, the Company will be taking the first major step in its "Strategic Capital Expenditure Plan". During the quarter, the Lake Erie facility will have a 20-day planned shutdown beginning on November 15, 2005. This is the initial step to increase the output of the Lake Erie hot strip mill and allow for the closure of the 56" mill at Hamilton. It is anticipated that this capital project will be complete in the third quarter of 2006. Spot market prices and shipments are expected to improve in the fourth quarter. However, we expect this to be offset by higher energy costs, the planned shutdown of the Stelco Lake Erie hot strip mill to install components related to the Phase II upgrade, and the associated effect of lowering the value-added mix of sales due to slab sales in the fourth quarter. The strength of the Canadian dollar and the threat of increased import levels remain a concern to the Corporation. In addition, the remaining estimated non-cash loss of $31 million related to the sale of substantially all of the assets of Stelpipe will be recorded in the fourth quarter. Should the criteria of assets held for sale be met with respect to other non-core asset sales that are being pursued, additional non-cash losses to be recorded will be material. Courtney Pratt, Stelco President and Chief Executive Officer, said, "The third quarter results demonstrate the continuing competitive challenge we face and the vital importance of securing a consensual restructuring which will enable us to move forward with our strategic capital program. As we have said throughout this process, this capital program is essential to making Stelco competitive through all stages of the market cycle and ensuring a positive long-term future."
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 3, 2005 REPORT TO THE SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") is dated November 10, 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 previously released 2005 quarterly reports and the October 5, 2005 "Notice of Proceedings and Meetings and Information Circular ("the Circular") with respect to a Plan of Arrangement and Reorganization" (the "Plan"). 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. Definition of terms contained in this MD&A can be found in the Circular. 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 such 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 previously released 2005 quarterly reports and in the Circular as well as the risks discussed under "Risk Factors" 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 Quarter 3, 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. 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 December 5, 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.
Filing of Plan
On September 19, 2005, after extensive discussions with stakeholders, the Board of Directors of Stelco approved a plan of arrangement (the "Plan") and the Stelco/Province Restructuring Agreement discussed further below. On September 20, 2005, Stelco filed motion materials with the Court seeking an Order authorizing it to file the Plan and directing meetings of the Affected Creditors. On October 4, 2005, pursuant to an order of the Court, Stelco was authorized to call and conduct meetings of Affected Creditors to consider and vote on the Plan. Meetings are scheduled to be held on November 15, 2005. For additional information on the Plan, see the October 5, 2005 "Notice of Proceedings and Meetings and Information Circular with Respect to a Plan of Arrangement and Reorganization". A copy of the Circular can be obtained from www.sedar.com or www.mccarthy.ca/en/ccaa.
Purpose of the Plan
The purpose of the Plan is, among other things, to restructure Stelco into a viable and competitive industry participant able to deal with the pricing and input cost volatility of the steel industry as well as other competitive factors. Stelco considers the implementation of its four point strategy (the "Four Point Strategy") adopted in July 2004 as critical to its survival as a viable and competitive steel producer. The objective of the Plan is to allow the Applicants to emerge from CCAA Proceedings in a manner that will permit Stelco to implement the Four Point Strategy, while also balancing the interests of all stakeholders of the Applicants in a fair and reasonable manner in the circumstances. To achieve viability, a number of key areas need to be addressed, including:
Strategic Capital Expenditures
The Four Point Strategy identified a number of strategic capital expenditures that Stelco believes will significantly reduce costs and result in creating a more competitive, viable Stelco over the long term. The major planned capital expenditures include: completion of the Stelco Lake Erie hot strip mill upgrade, to allow the closure of Stelco Hamilton's 1950's vintage 56" hot strip mill; new pickling facilities, to allow the closure of Stelco Hamilton's 1950's and 1960's vintage pickling facilities and repatriation of external pickling; and co-generation at both Stelco Lake Erie and Stelco Hamilton, to use Stelco's self-generated excess gas stream to produce electricity and reduce power purchases. Stelco estimates that the capital expenditure program will cost approximately $425 million (of which it is expected that approximately $125 million related to the Stelco Lake Erie hot strip mill upgrade will be spent prior to the end of 2005) and anticipates approximately $145 million of cost reductions annually by 2009. These improvements are entirely cost driven and therefore do not rely on new markets or specific pricing of steel to achieve the anticipated returns.
Cost Reductions
Stelco has identified a number of specific cost reduction initiatives. These include its strategic capital expenditure program described above, managed attrition and improvements in maintenance planning, which will reduce repair and maintenance costs and increase throughput by reducing equipment downtime.
Plan Outline
Proposed treatment of stakeholders
In proposing the Plan, the Applicants considered, among other things, the legal entitlements of stakeholders in the absence of the CCAA proceedings, their expected economic recovery if no Plan were approved and the proposed treatment of stakeholders under the Plan. Since the estimated value of the securities to be given to Affected Creditors under the Plan is less than their Affected Claims, there is no residual value in the Applicants available for the existing Common Shareholders. The Applicants believe that the Plan fairly balances all stakeholder interests.
Affected Creditors
All Affected Claims of each Applicant are unsecured. The creditors holding such claims have been grouped into one class (the "Affected Creditors"). If the Plan is implemented, each Affected Creditor will receive in satisfaction of its Affected Claims, its pro rata share of the following based on the amount of its Proven Claim:
New Secured Convertible Notes in the aggregate principal amount of $225 million (10 year maturity, 9.5% coupon);
New Convertible 5% Notes in the aggregate principal amount of $300 million (5 year maturity);
1.1 million New Common Shares; and
New Rights to subscribe for New Secured Convertible Notes at the new rights subscription price to generate proceeds up to $75 million.
Under the Plan, claims against the Applicants for any post filing interest or costs in respect of Affected Claims will be released. The actual level of recovery to be realized by Affected Creditors under the Plan cannot be accurately determined at this time as it depends on a number of factors including the trading prices, after the distribution record date, of the securities issued to them under the Plan. However, the estimated recovery on Affected Claims plus post filing interest to December 31, 2005, is approximately 66% (excluding any recovery from the New Rights). The Monitor believes that if a Plan is not approved and the assets of the Applicants are realized, Affected Creditors would recover between 17% to 33% of their proven claims inclusive of post-filing interest thereon to December 31, 2005.
Shareholders
There are a total of 102,249,198 existing outstanding common shares as of September 30, 2005. Under the Plan, the existing common shares have no economic value since Affected Creditors will not receive full recovery. The Plan has allocated no value to the common shares.
Pension Plans
There are no proposed changes to the level of pension benefits currently being paid to pensioners, or to the pension benefits being earned by active members as part of the implementation of the Plan. The changes that are to be made relate to improving the funded status of Stelco's four main pension plans (i.e. Stelco Hamilton hourly and salary and Stelco Lake Erie hourly and salary plans) as discussed below. Under current law, Stelco's four main pension plans are funded on a going concern basis only, pursuant to the Section 5.1 Election, of the Pension Benefits Act (the "PBA"). This will change upon implementation of the Plan. Pension funding arrangements to be incorporated pursuant to the Province Pension Funding Agreement will require an upfront lump sum cash contribution allocated among Stelco's four main pension plans in a total amount of $400 million upon the implementation of the Plan. The Province of Ontario (the "Province") has agreed to provide Stelco with an advance by way of a note (the "New Province Note") in the amount of $100 million to assist with this funding requirement. After the implementation date of the Plan, the Section 5.1 Election will no longer be in effect for Stelco and annual cash contributions to be allocated among Stelco's four main pension plans will equal $60 million per annum from 2006 to 2010, and commencing in 2011 and continuing through 2015, total annual cash contributions will increase to $70 million per annum. In addition, commencing in 2008, additional cash contributions will be paid if Stelco generates cash flow in excess of a specific formula and will be capped until 2011 at pre-determined levels. These funding requirements will replace the normal funding requirements under the Pension Benefits Act ("PBA"). Changes in actuarial assumptions and/or investment returns will not affect funding during this ten year period. Commencing in 2016, funding of Stelco's four main pension plans will be in accordance with the PBA. Benefit improvements, if any, during this ten year period will be funded separately, in accordance with the PBA.
Employees
The Applicants' salaried and bargaining-unit employees are generally unaffected by the Plan except that their positions will be improved by the accelerated pension solvency funding described above. The Plan does not require any concessions in terms of salaries, wages or pension and other benefits.
Secured Creditors
The Plan does not affect Creditors with secured claims. The claims of the Operating Lenders pursuant to the Credit Facility and the DIP Credit Facility will be paid in full on or prior to the implementation date of the Plan. It is a condition to implementation of the Plan that Stelco has arranged for an asset based loan facility (the "New ABL Facility") for up to $600 million (see below).