Touchstone Exploration Inc. press release
Stelco reports results for first quarter 2005
TSX - Toronto Stock Exchange · Oil · Natural Gas · Natural Gas Liquids · Canada
HAMILTON, ON, May 10 /CNW/ - Stelco Inc. (TSX:STE) today reported net earnings of $49 million ($0.48 per common share) in the first quarter ended March 31, 2005. This record level of first quarter earnings for the Company is compared to a net loss of $37 million ($0.36 per common share) in the first quarter of 2004 and net earnings of $1 million ($0.01 per common share) in the fourth quarter of 2004. Net sales revenue in the first quarter was $968 million compared to $769 million for the same period in 2004. This 26% increase was largely attributable to the renewal of customer contracts at substantially higher prices and increased spot market prices due to improved market demand, as well as selling price surcharges implemented to cover higher raw material and energy costs. The cost of sales for the first quarter of 2005 was $821 million compared to $735 million for the same quarter in 2004. This 12% increase was attributable to such factors as the rise in raw material and energy costs, including scrap, coal, coke, natural gas and iron ore; the increased cost of hot roll and rod as raw materials for Stelco's manufactured products business; higher employment costs, particularly in the areas of pensions and health care; higher spending for repairs, maintenance and supplies; and reduced semi-finished steel production in Hamilton. Production in the first quarter of 2005 was 1,256,000 semi-finished tons compared to 1,366,000 semi-finished tons produced during the same period in 2004. Shipments during the first quarter of 2005 totaled 1,200,000 net tons compared to 1,266,000 net tons shipped during the first quarter of 2004. As at March 31, 2005, Stelco's consolidated net liquidity position was $346 million compared to $284 million as at December 31, 2004 and $239 million as at March 31, 2004. The net liquidity position of the applicants involved in proceedings under the Companies' Creditors Arrangement Act was $297 million at March 31, 2005 compared to $237 million at December 31, 2004, and $196 million at March 31, 2004. Net cash of $65 million was generated during the first quarter of 2005, representing a $96 million improvement from the $31 million consumed in the first quarter of 2004. The strength of operating earnings, driven by high selling prices, accounted for the majority of the improvement. Courtney Pratt, Stelco's President and Chief Executive Officer, said, "Stelco continued to benefit from robust market conditions and steel prices during the first quarter. Positive factors shaping our outlook for the balance of the year include the likely continuation of strong steel prices, the stability provided by our contract customer base, and the strong raw materials position we enjoy through our ownership of iron ore mining properties, in-house production of coke, and coal purchase contracts. "I hope that all stakeholders will take advantage of our positive performance to work towards our shared goal of a viable and competitive Stelco rather than allow this opportunity to pass."
Guidance
On March 8, 2005, Stelco provided guidance with respect to 2005 operating earnings. At that time the Corporation advised that 2005 operating earnings were estimated to be in the range of $350 to $400 million. It indicated that this estimate included the impact of a shutdown of the Lake Erie hot strip mill, but did not include any restructuring-related costs or the impact of the possible sale of any of its subsidiary companies. The guidance also included assumptions around a strong first quarter, with spot market prices declining somewhat over the balance of the year. Operating earnings in the first quarter of 2005 were strong at $118 million, in line with the estimate in the guidance provided on March 8, 2005. The Corporation expects solid second quarter performance although operating earnings as anticipated are expected to be lower than record first quarter results. Although the Corporation expects a significant increase in operating earnings in 2005, given the current dynamics of global steel markets and the effect on steel prices, the markets have become more difficult to predict. Issues include fluctuating spot market pricing, raw materials costs and the currently uncertain automotive sector. The Corporation is therefore reviewing its March 8, 2005 guidance for the second half of the year and expects to reaffirm or amend its full year's guidance by the end of May 2005. Stelco advises that operating earnings is a non-GAAP financial measure - for a description of this financial measure please refer to the March 8, 2005 media release and the Corporation's published financial statements which disclose those statement of earnings line items which the Corporation does not include in operating earnings. These forward-looking statements include uncertainties which may cause actual results to differ from results expressed or implied by our second quarter guidance. These statements are not a guarantee of future performance and factors that could affect results include factors disclosed under "Risks and Uncertainties" set out in the Corporation's 2005 First Quarter Management's Discussion and Analysis under "General Development of the Business - Risk Factors" set out in the Corporation's 2004 Annual Information Form filed on SEDAR.
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 1, 2005 REPORT TO THE SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") is dated May 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 has been identified as the principal component of the core business. The other two segments have been identified as 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. Additional information about Stelco is available in the Corporation's 2004 Annual Information Form, which 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. When used in this MD&A, such statements use such words as "may," "will," "expect," "believe," "plan," "intend" and 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 factors discussed in the MD&A of the Corporation's 2004 Annual 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. These forward-looking statements 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
In early 2004, after a thorough financial and strategic review, Stelco concluded that it faced a serious viability issue. The Corporation incurred significant operating and cash losses in 2003 and believed that it would have exhausted available sources of liquidity before the end of 2004 if it did not obtain legal protection and other benefits provided by a Court-supervised restructuring process. Costs had risen dramatically for inputs such as natural gas, electricity and raw materials, such as coal, coke, and scrap. The cost of employee future benefits - pensions and health care - were also increasing due to improved pension benefits negotiated in contracts with unionized employees, increasing health care costs, lower return on pension plan assets, lower average retirement age at Stelco Hamilton, and the effect of lower interest rates on the discount factors used to determine the Corporation's liabilities under the pension and other benefit plans. In 2003, global steelmaking overcapacity exerted downward pressure on selling prices due to significant and continued import penetration of the Canadian market by steel products offered, in management's opinion, at unfairly low prices over the last several years. The appreciation in the value of the Canadian dollar during 2003 further negatively affected selling prices. Selling prices strengthened significantly during 2004, due in part to increased demand, particularly in China. While selling prices remain high by historical standards and are expected to remain high in the near future, the Corporation cannot rely on these selling prices being sustainable in the longer term and believes it cannot compete effectively in the longer term unless it takes steps to lower its overall costs. In order to help reduce costs the Corporation requires additional funding to complete strategically critical capital projects at its Stelco Hamilton and Stelco Lake Erie business units. The Corporation did not believe it would be able to raise additional funds to complete these projects without a restructuring. As a result, 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 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 July 8, 2005, and potentially to such later dates as the Court may order. The purpose of the Initial Order and stay of proceedings is to provide the Applicants with relief designed to stabilize their operations and business relationships with their customers, suppliers, employees, and creditors. During the proceedings, the Corporation has sought and will continue to seek input from its stakeholders, with a view to developing a comprehensive restructuring plan to allow the Corporation to exit CCAA in an orderly fashion. The restructuring plan will likely include reorganizing the Corporation's capital structure. As part of the restructuring plan, it is expected that a formal CCAA plan of arrangement (the "Plan") will be prepared and submitted to affected creditors, who will vote on the Plan, and to the Court for approval. Under the Plan, claims against the Applicants will be divided into classes, and each class will vote on the Plan as it pertains to that class. No determinations or rulings have been made to date as to the classification of affected 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.
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 the credit facilities under the $350 Million Credit Facility and the DIP Credit Agreement 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. Further information regarding terms of these agreements is contained in Note 1 to the Consolidated Financial Statements.
Claims Process Order
On December 17, 2004 (the "Claims Procedure Date"), the Court made an order (the "Claims Process Order") establishing a process by which certain creditors of the Applicants must prove their claims. The purpose of commencing the claims process was to enable the Applicants and the Monitor to review and process potential claims including supplier, contingent, damage, litigation and other claims so that the Applicants will be in a position to hold meetings of affected creditors in a timely manner to vote on a proposed Plan. In that regard, the claims process set out in the Claims Process Order establishes the amount of certain claims against each Applicant in existence as at the date of the Initial Order (the "Pre-Filing Claims") and claims arising against each Applicant since the date of the Initial Order arising out of the restructuring, repudiation or termination of any contract, lease or other agreement (the "Restructuring Claims"). Any creditor asserting a Pre-Filing Claim or a Restructuring Claim that arose before the Claims Procedure Date (collectively the "Claims") was required to file a Proof of Claim ("Proof of Claim") with the Monitor prior to 5:00 p.m. on January 31, 2005 (the "Claims Bar Date"). A bar date for Restructuring Claims arising on or after the Claims Procedure Date will be established by future order of the Court (the "Restructuring Claims Bar Date"). Creditors were asked to submit their Proofs of Claim to the Monitor. Under the Claims Process Order, if the Monitor in conjunction with the Applicants disagrees with the amount of a creditor's claim, the Monitor may send a notice of disallowance or revision to the creditor within a prescribed time period. If the creditor disagrees with the amount set out in a notice of disallowance or revision, the creditor may dispute the amount and, if the matter is not consensually resolved, a claims officer appointed by the Court will determine the claim amount. On or before the Claims Bar Date, the Monitor received 1,330 Proofs of Claim. The total of Claims received, prior to any disallowances or revisions, was approximately $3.655 billion. The Monitor and the Applicants have reviewed each Proof of Claim filed in accordance with the Claims Procedure Order and expect that the value of the Claims allowed upon completion of the claims process and the resolution of all disputed Claims will be significantly lower than the amount of the Claims filed (see Note 7 to the Consolidated Financial Statements for further details). Creditors that did not file a Proof of Claim with the Monitor on or before the Claims Bar Date or that do not file a Proof of Claim relating to Restructuring Claims on or before the Restructuring Claims Bar Date, as applicable, or such later date as the Monitor and the Applicants may agree to, in writing, or the Court may otherwise order will:
be forever barred from making or enforcing any Claim against the Applicant and that Claim will be forever extinguished; not be entitled to any further notice with respect to the CCAA proceeding; and not be entitled to participate as a creditor in the CCAA proceeding.
Capital Process Order
By order of the Court dated October 19, 2004 as amended (the "Capital Process Order"), the Applicants received Court approval for a process designed to raise capital and to pursue the sale of non-core assets (the "Capital Raising Process"). The Capital Raising Process contemplated, among others, the following possible transactions:
the raising of a minimum of $200 million of new capital in the restructured Stelco in the form of equity, debt and/or other securities; a sale of Stelco or its core business; or the sale of non-core subsidiaries including Stelpipe, Stelwire, Stelfil, AltaSteel, Norambar and the Corporation's 40% interest in Camrose Pipe Company ("Camrose Pipe"); or a combination of the above.
The Capital Raising Process was conducted in two stages. The first stage was the solicitation of preliminary expressions of interest from potential investors while the second stage entailed the completion of due diligence followed by the submission of offers. In the case of the Capital Raising Process for Stelco, its existing bondholders were given the opportunity to present a financing proposal by November 8, 2004, which would have provided at least $200 million to Stelco. In granting the Capital Process Order, the Court stated that Stelco was not prohibited from receiving other unsolicited offers from any party during this initial period. After November 8, 2004, Stelco was able to solicit other proposals for raising capital. Deutsche Bank AG ("DB"), a significant bondholder, approached Stelco to conduct the necessary due diligence within the period prior to November 8, 2004, to assess whether it was prepared to present a term sheet to Stelco with respect to a rights offering to creditors supported by DB or another form of financing. It did present a commitment letter to Stelco and on November 12, 2004, Stelco's Restructuring Committee and its Board of Directors approved DB's commitment letter, subject to the approval of the Court. On November 29, 2004 the Court approved DB's commitment as the "stalking horse" for the Capital Raising Process. On or before the December 31, 2004 deadline under the Capital Process Order, six parties submitted detailed proposals with respect to the Integrated Steel business with certain parties indicating a desire for the entire Company. All six parties were selected to advance to Phase II of the Capital Raising Process by UBS Securities Canada Inc. and UBS Securities LLC (together, "UBS") the Corporation's financial advisors, the Chief Restructuring Officer (the "CRO"), Stelco and the Monitor. The Monitor received comments from certain bidders that the deadline of January 31, 2005 for filing binding offers did not provide enough time for them to complete their due diligence. As a result, the Monitor and the Applicants agreed that it was appropriate in the circumstances to seek an order extending the deadline for filing binding offers for the Integrated Steel business and the Non-Core Subsidiaries from January 31, 2005 to February 14, 2005. On January 17, 2005, the Court amended the Capital Process Order to grant the extension request. Offers were subsequently submitted from three of these parties and were considered together with the DB's previously approved "stalking horse" commitment. The Corporation, together with its advisors, examined the offers in respect of the Integrated Steel business submitted by the bid submission deadline of February 14, 2005. The Monitor also reviewed the offers. In reviewing the offers, the Corporation and its advisors were guided by the principle that the overall objective is to pursue an outcome that will strengthen the Corporation on its emergence from protection under the CCAA. On March 1, 2005, Stelco announced that since none of the offers received in respect of the Integrated Steel business satisfied its requirements for being designated as a prevailing offer under the Capital Process Order, the Corporation decided to pursue a Stelco-driven recapitalization for the Corporation while continuing with the sale of non-core subsidiaries. As a result, DB became entitled to a break fee of $11 million as a trigger event had occurred. The break fee has been paid and expensed in the first quarter 2005. The Corporation believes that further capital raising activity will require it to pursue financing options directly, working closely with various sources of capital, to develop an alternative that will substantially strengthen the Corporation. By Court Order dated March 30, 2005, the Capital Raising Process was discontinued as it related to the Integrated Steel business and Stelco was authorized to raise new capital by way of equity financing or debt and equity financing and to enter into such arrangements as are necessary to raise such new capital. In this regard, Stelco is required to file with the Court an outline of the proposed terms of the new equity or debt and equity financing and the proposed treatment of stakeholders at least five business days prior to committing to an equity financing or debt and equity financing. On April 21, 2005, Stelco reached an agreement with the United Steelworkers of America ("USWA") on their participation in the Corporation's Capital Raising Process, which was then approved by the Court. The Court Order states that Stelco shall not file a CCAA plan outline before May 12, 2005 and that Stelco shall provide and discuss the CCAA plan outline with the USWA prior to its filing and that Stelco shall not seek Court approval of a sale of any of the non-core subsidiaries where the USWA represents employees before May 12, 2005. As part of the agreements, the USWA has added Tricap Management Limited ("Tricap") as a financial advisor under the USWA Non-disclosure Agreement dated September 21, 2004 and Tricap will be allowed to have access to all information received to date by the other USWA financial advisors. The Court Order precludes Tricap from being a financial sponsor of a Plan without the consent of the Corporation or the Court.