TimberWest announces 2009 third quarter results and bank covenant amendments
The Company generated a distributable cash loss for the quarter of
"While there were small increases in US housing starts during Q3, 2009, they are at significantly lower than historical levels with housing starts in
Couverdon had a strong quarter for the sale of non-core higher and better use lands. Total real estate revenues for the quarter were
As previously disclosed, the Company advised it may breach its EBITDA bank covenant as currently constructed in 2010 and that it has been working with its lenders to modify the credit agreement. We are pleased to report that we have reached agreement with the lenders today which will waive the EBITDA covenant for the remaining term of the loan through 2010 and 2011. The maximum availability under the line is set at
This credit amendment provides TimberWest with a more durable solution to its financing needs throughout this extended economic downturn.
While there is not a specific EBITDA test for bank covenant purposes for the third quarter, EBITDA per this calculation was
"Our outlook for the remainder of the year remains weak as we expect the very difficult economic and business conditions to continue," added McElligott. "As a result, the Company will continue to defer private land harvests, conserve cash, and protect its balance sheet. We are also doing everything we can to manage costs and are aggressively pursuing real estate sales opportunities." As previously announced, the Company is deferring the quarterly cash distributions on the Stapled Units and has elected to pay interest on the convertible debentures in kind by the issuance of additional convertible debentures. "We continue to have a very positive view of the mid- and long-term potential for both our timberland and real estate businesses. The fact we own outstanding assets located in one of the most attractive locations in the world means that TimberWest's prospects are strong as economic conditions improve."
QUARTERLY CONFERENCE CALL
TimberWest will hold a conference call at
TO OUR UNITHOLDERS
TimberWest generated modestly better earnings and distributable cash this quarter as compared to last quarter despite extremely weak business conditions. While log prices are not showing any improvement yet, and log sales realizations are under pressure with a strengthening Canadian dollar, we have begun to see stability in prices with log sales volumes firming up for the first time in many quarters. Real estate sales were also higher this quarter at
The Company generated a distributable cash loss for the quarter of
As previously disclosed, the Company advised it may breach its EBITDA bank covenant as currently constructed in 2010 and that it has been working with its lenders to modify the credit agreement. We are pleased to report that we have reached agreement with the lenders today which will waive the EBITDA covenant for the remaining term of the loan through 2010 and 2011. The maximum availability under the line is set at
This credit amendment provides TimberWest with a more durable solution to its financing needs throughout this extended economic downturn.
While there is not a specific EBITDA test for bank covenant purposes for the third quarter, EBITDA per this calculation was
Timberland Operational Results
While there were small increases in US housing starts during Q3, 2009, they are at significantly lower than historical levels. In Asia we are experiencing stronger economies in Korea and
Log production volumes on both private and public lands were 333,578 m(3) for the quarter and 908,329 m(3) year-to-date. Private land volumes were adversely affected this quarter by a protracted fire season. We did however shift production to our northern public land operations, where weather was not an impediment and to take advantage of better hembal markets in Asia. Despite very competitive contract costs, unit production costs remain high because of the absorption of fixed costs over lower harvest volumes.
Our safety record continues to show improvement. The MIR in our timberlands division for its production contractors was 0.44 for the year to date Q3, 2009, based on reportable incidents per 100,000 m(3) of production. This compares to an outcome of 0.65 for the comparable period in 2008.
Couverdon Results
Couverdon had a strong quarter for the sale of non-core higher and better use lands. Total real estate revenues for the quarter were
Couverdon was also successful in getting regulatory approval in principle subdivision on some properties in the Comox and Strathcona Regional Districts during the quarter. This has allowed for the creation of 30 large acreage lots that Couverdon will begin to market as early as Q4 2009. Couverdon is in the process of identifying additional such opportunities for potential sale in 2010 while it continues planning for entitlement changes on its portfolio of core development nodes.
Other Third Quarter 2009 Updates
During the quarter, TimberWest announced its intention to explore a potential sale of selected timberland assets on
TimberWest also appeared in the Supreme Court of B.C. on
Finally, TimberWest continues to evaluate its long term harvest level and expects this work to be completed no later than end of the first quarter of 2010.
Outlook
Our outlook for the remainder of the year remains weak as we expect the very difficult economic and business conditions to continue.
As a result, the Company will continue to defer private land harvests, conserve cash, and protect its balance sheet. As previously announced, the Company is deferring the quarterly cash distributions on the Stapled Units and has elected to pay interest on the convertible debentures in kind by the issuance of additional convertible debentures. We are also doing everything we can to manage costs and are aggressively pursuing real estate sales opportunities.
We continue to have a very positive view of the mid- and long-term potential for both our timberland and real estate businesses. The fact we own outstanding assets located in one of the most attractive locations in the world means that TimberWest's prospects are strong as economic conditions improve.
Thank you again to all of our unitholders for your ongoing support.
On behalf of the Board of Directors, (signed) Paul McElligott President and Chief Executive Officer Vancouver, British Columbia October 22, 2009
MANAGEMENT'S DISCUSSION & ANALYSIS
For the three and nine months ended
Management's Discussion and Analysis supplements, but does not form part of, the unaudited interim consolidated financial statements of TimberWest Forest Corp. ("TimberWest" or "the Company") and the notes thereto for the third quarter of 2009 ("third quarter" or "Q3"). This discussion and analysis provides an overview of significant developments that have affected TimberWest's performance during the third quarter of 2009 relative to the third quarter of 2008, and that have affected the Company's financial position as at
Factors that could affect future operations are also discussed. These factors may be affected by known and unknown risks and uncertainties that may cause the actual future results of the Company to be materially different than those expressed or implied in this discussion. These risks and uncertainties are described herein and in the Management's Discussion and Analysis contained in the Company's 2008 Annual Report.
TimberWest's unaudited interim consolidated financial statements and the accompanying notes included within this interim report include the accounts of TimberWest Forest Corp. and its subsidiaries. The unaudited interim consolidated financial statements and the accompanying notes are prepared in accordance with Canadian generally accepted accounting principles (GAAP) and are expressed in Canadian dollars.
This Management's Discussion and Analysis has been prepared based on information available as at
Additional information relating to TimberWest, including the Company's most recent Annual Information Form and other statutory reports, can be found on the System for Electronic Document Analysis and Retrieval (SEDAR) at http://www.sedar.com.
Forward Looking Statements
The statements which are not historical facts contained in this report are forward-looking statements that involve risks and uncertainties. TimberWest's actual results could differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to general economic conditions, variations in TimberWest's product prices and changes in commodity prices generally, changes in market conditions, variations in harvest levels, changes in log transportation costs, actions of competitors, interest rate and foreign currency fluctuations, regulatory, harvesting fee and trade policy changes and other actions by governmental authorities including real estate zoning approvals, the ability to implement business strategies and pursue business opportunities, labour relations, weather conditions, forest fires, insect infestation, disease and other natural phenomena and other risks and uncertainties described in TimberWest's public filings with securities regulatory authorities.
1. Financial Highlights Selected financial information (in millions of dollars Three months ended Nine months ended except where otherwise September 30 September 30 noted) 2009 2008 2009 2008 ------------------------------------------------------------------------- Sales $ 37.5 $ 38.8 $ 105.9 $ 127.8 Operating loss from continuing operations (2.2) (6.4) (9.9) (6.3) Operating loss from continuing operations - % of sales (6)% (17)% (9)% (5)% Net loss from continuing operations (25.9) (29.8) (63.7) (71.6) EBITDA from continuing operations(1) (0.4) (5.9) (5.9) (3.1) EBITDA(1) (0.5) (5.7) (6.2) (10.8) EBITDA for covenant purposes(1) 2.0 (1.1) 0.8 4.8 Distributable cash from continuing operations(1) (3.7) (6.5) (24.2) (5.7) Distributable cash(1) (3.8) (6.3) (24.5) (13.4) ------------------------------------------------------------------------- Per Stapled Units - basic and diluted (in dollars) EBITDA from continuing operations(1) (0.01) (0.07) (0.08) (0.04) EBITDA(1) (0.01) (0.07) (0.08) (0.14) Distributable cash from continuing operations(1) (0.05) (0.08) (0.31) (0.07) Distributable cash(1) (0.05) (0.08) (0.32) (0.17) ------------------------------------------------------------------------- Timberlands sales 29.6 35.0 91.1 116.2 Real estate sales 7.9 3.8 14.8 11.6 ------------------------------------------------------------------------- Stapled Units (thousands) At period-end 77,777 77,765 77,777 77,765 Basic weighted average 77,777 77,765 77,771 77,757 Diluted weighted average 78,074 77,799 77,923 77,791 ------------------------------------------------------------------------- (1) Distributable cash and earnings before interest, tax, depreciation and amortization ("EBITDA") do not have a standardized meaning prescribed by Canadian generally accepted accounting principles and may not be comparable to similar measures presented by other companies. The Company's definition of EBITDA is provided on page 6 and distributable cash on page 7 of this report. Management believes that the presentation of these measures will enhance an investor's understanding of the Company's operating performance. EBITDA for covenant purposes differs from financial reporting EBITDA in its treatment of real estate sales and other items. For additional information the credit facility agreement can be found on the System for Electronic Document Analysis and Retrieval (SEDAR) at http://www.sedar.com.
Sales decreased
Reconciliation of net loss from continuing operations to EBITDA Three months ended Nine months ended September 30 September 30 (in millions of dollars) 2009 2008 2009 2008 ------------------------------------------------------------------------- Net loss from continuing operations $ (25.9) $ (29.8) $ (63.7) $ (71.6) Add (deduct): Interest on Series A Subordinate Notes owned by unitholders 3.6 21.0 10.5 63.0 Interest on convertible debentures 3.4 - 8.5 - Interest on long-term bank debt 2.5 1.7 7.2 6.1 Interest on short-term bank debt - 0.8 0.5 1.5 Income tax recovery (0.8) (0.6) (9.1) (5.8) Depreciation, depletion and amortization 1.2 0.9 3.0 3.4 Amortization of deferred financing costs 0.4 0.1 1.3 0.3 Change in fair value of financial instruments held for trading 13.1 - 24.7 - Change in fair value of Stapled Unit option plan 0.4 - 0.8 - Financing transaction costs - - 5.5 - Accretion on Series A Subordinate Notes 1.7 - 4.9 - ------------------------------------------------------------------------- EBITDA from continuing operations(1) (0.4) (5.9) (5.9) (3.1) EBITDA from discontinued operations(1,2) (0.1) 0.2 (0.3) (7.7) ------------------------------------------------------------------------- EBITDA(1) $ (0.5) $ (5.7) $ (6.2) $ (10.8) ------------------------------------------------------------------------- (1) EBITDA does not have a standardized meaning prescribed by Canadian generally accepted accounting principles and may not be comparable to similar measures presented by other companies. Management believes that the presentation of this measure will enhance an investor's understanding of the Company's operating performance. (2) The Company permanently closed its Elk Falls sawmill operations on May 9, 2008. 2. Distributable Cash Reconciliation of net loss from continuing operations to distributable cash Three months ended Nine months ended September 30 September 30 (in millions of dollars) 2009 2008 2009 2008 ------------------------------------------------------------------------- Net loss from continuing operations $ (25.9) $ (29.8) $ (63.7) $ (71.6) Interest on Series A Subordinate Notes owned by unitholders 3.6 21.0 10.5 63.0 ------------------------------------------------------------------------- Loss from continuing operations available for distribution (22.3) (8.8) (53.2) (8.6) Accretion on Series A Subordinate Notes 1.7 - 4.9 - Change in fair value of financial instruments held for trading 13.1 - 24.7 - Income tax recovery (0.8) (0.6) (9.1) (5.8) ------------------------------------------------------------------------- Loss from continuing operations available for distribution before accretion, changes in fair value of financial instruments held for trading, and provision for future income taxes (8.3) (9.4) (32.7) (14.4) Add (deduct): Depreciation, depletion and amortization 1.6 1.0 4.3 3.7 Proceeds from sale of property, plant & equipment 6.4 3.7 12.5 10.7 Gain on sale of property, plant and equipment (3.9) (1.4) (5.5) (5.2) Additions to property, plant and equipment (0.3) (0.9) (0.7) (1.7) Financing transaction costs - - (3.5) - Other non-cash items 0.8 0.5 1.4 1.2 ------------------------------------------------------------------------- 4.6 2.9 8.5 8.7 ------------------------------------------------------------------------- Distributable cash from continuing operations (3.7) (6.5) (24.2) (5.7) ------------------------------------------------------------------------- Distributable cash from discontinued operations(1) (0.1) 0.2 (0.3) (7.7) ------------------------------------------------------------------------- Distributable cash $ (3.8) $ (6.3) $ (24.5) $ (13.4) ------------------------------------------------------------------------- (1) The Company permanently closed its Elk Falls sawmill operations on May 9, 2008. Calculation of distributable cash per Stapled Unit Per Stapled Units - Three months ended Nine months ended basic and diluted September 30 September 30 (in dollars) 2009 2008 2009 2008 ------------------------------------------------------------------------- Loss from continuing operations available for distribution before accretion, changes in fair value of financial instruments held for trading, and provision for future income taxes $ (0.11) $ (0.12) $ (0.42) $ (0.19) Distributable cash from continuing operations (0.05) (0.08) (0.31) (0.07) Distributable cash from discontinued operations(1) - - (0.01) (0.10) ------------------------------------------------------------------------- Distributable cash (0.05) (0.08) (0.32) (0.17) Cash distributions paid $ - $ 0.27 $ - $ 0.81 ------------------------------------------------------------------------- (1) The Company permanently closed its Elk Falls sawmill operations on May 9, 2008. Reconciliation of operating cash flow from operations to distributable cash Three months ended Nine months ended September 30 September 30 (in millions of dollars) 2009 2008 2009 2008 ------------------------------------------------------------------------- Cash provided by (used in) continuing operations $ (11.0) $ (29.4) $ (30.3) $ (64.0) Add (deduct): Change in non-cash working capital 1.2 (0.9) (2.6) (13.5) Interest on Series A Subordinate Notes owned by unitholders 3.6 21.0 10.5 63.0 Proceeds from sale of property, plant and equipment 6.4 3.7 12.5 10.7 Additions to property, plant and equipment (0.3) (0.9) (0.7) (1.7) Financing transaction costs - - (3.5) - Change in deferred distribution payable (3.6) - (10.5) - Other non-cash items - - 0.4 (0.2) ------------------------------------------------------------------------- 7.3 22.9 6.1 58.3 ------------------------------------------------------------------------- Distributable cash from continuing operations (3.7) (6.5) (24.2) (5.7) Distributable cash from discontinued operations(1) (0.1) 0.2 (0.3) (7.7) ------------------------------------------------------------------------- Distributable cash $ (3.8) $ (6.3) $ (24.5) $ (13.4) ------------------------------------------------------------------------- (1) The Company permanently closed its Elk Falls sawmill operations on May 9, 2008.
Distributable cash includes consolidated net earnings (loss), plus interest expensed on Series A Subordinate Notes owned by unitholders, plus non-cash items including income taxes, changes in fair values and accretion expense, plus depreciation, depletion and amortization, plus proceeds from the sale of property, plant and equipment net of their gain (loss) on sale, less additions to property, plant and equipment, less financing costs and, from time to time, adjustments for other items deemed appropriate by the Board of Directors. Earnings from continuing operations available for distribution is comprised of consolidated net earnings (loss) from continuing operations plus interest expensed on Series A Subordinate Notes. The Series A Subordinate Notes are owned by the unitholders and interest thereon is paid to the unitholders, therefore, earnings from continuing operations available for distribution to unitholders reflects earnings before this interest charge.
Earnings from continuing operations available for distribution and distributable cash are measures that do not have a standardized meaning prescribed by Canadian GAAP and may not be comparable to similar measures presented by other companies. Management believes that the presentation of these measures will enhance an investor's understanding of the Company's operating performance. Reconciliations of net earnings (loss) and cash flow from continuing operations before changes in working capital, as determined in accordance with Canadian GAAP, and earnings from continuing operations available for distribution and distributable cash are provided in the preceding tables.
The following tables present a quarterly comparison of distributable cash generated over the past five years, in total and on a per Stapled Unit basis:
2009 2008 2007 2006 2005 2004 ------------------------------------------------------------------------- (in millions of dollars) First quarter $ (15.3) $ (3.9) $ 26.9 $ 31.5 $ 23.9 $ 27.7 Second quarter (5.4) (3.2) 13.6 35.5 15.4 43.5 Third quarter (3.8) (6.3) (5.6) 9.3 (1.7) 35.9 Fourth quarter (11.4) 55.4 27.5 29.7 18.1 ------------------------------------------------------------------------- $ (24.5) $ (24.8) $ 90.3 $ 103.8 $ 67.3 $ 125.2 ------------------------------------------------------------------------- Per Stapled Unit(1) (in dollars) First quarter $ (0.20) $ (0.05) $ 0.35 $ 0.41 $ 0.31 $ 0.36 Second quarter (0.07) (0.04) 0.17 0.46 0.20 0.57 Third quarter (0.05) (0.08) (0.07) 0.12 (0.02) 0.47 Fourth quarter (0.15) 0.71 0.35 0.38 0.24 ------------------------------------------------------------------------- ------------------------------------------------------------------------- $ (0.32) $ (0.32) $ 1.16 $ 1.34 $ 0.87 $ 1.64 ------------------------------------------------------------------------- (1) Per Stapled Unit amounts by quarter do not necessarily add to the total of the year and year-to-date due to changes in the weighted average number of Stapled Units outstanding during the year.
3. Highlights and Significant Transactions
Amendments to the bank loan covenants
Subsequent to the end of the third quarter 2009, on
- A waiver of the minimum EBITDA tests for both 2010 and 2011, with the maximum availability under the line set at $220 million for 2010 and $215 million for 2011. So long as the Company generates cumulative minimum EBITDA of $325,000 for Q1, 2011; $650,000 for Q2, 2011; $975,000 for Q3, 2011 and $1.3 million for Q4, 2011 then the maximum availability under the line will be increased to $230 million for 2011. - A permanent repayment provision which specifies that once cumulative real estate proceeds exceed $50 million, 50% of additional proceeds will be applied to permanently reduce the facility size. The remaining 50% can be used by the Company to improve its liquidity. Current cumulative real estate proceeds are $24.5 million. - On a best efforts basis, the Company will seek the required approvals necessary to allow it to pay the 9% interest obligation on its convertible debentures in kind beyond the initial four quarters already announced through to maturity of the credit facility.
All other terms of the revolving credit agreement remain unchanged from the original credit agreement which was filed on SEDAR in
Interest payment on the convertible debentures
As announced on
Preferred share conversions
On
Property taxes
During Q2, 2009 the City of Campbell River increased its tax rate on Class 7 managed forest lands. TimberWest filed a petition with the B.C. Supreme Court on
Financing and liquidity
On
The
The net proceeds of the rights offering and private placement permanently repaid
- Pricing is 600 bps over BA rates, - The facility is secured, - The financial covenants include minimum EBITDA tests, and - The other financial covenants include a tangible net worth test and a loan to book and market value test.
The 2009 costs related to this refinancing were
Cash distribution on the Stapled Units
As announced in November, 2008, the
4. Operating Highlights
Timberlands (in millions of dollars Three months ended Nine months ended except where otherwise September 30 September 30 noted) 2009 2008 2009 2008 ------------------------------------------------------------------------- Log sales Domestic $ 10.9 $ 14.3 $ 34.7 $ 53.7 Export - Asia 14.7 16.8 46.0 50.9 Export - USA 0.7 2.7 4.9 7.9 ------------------------------------------------------------------------- Total log sales $ 26.3 $ 33.8 $ 85.6 $ 112.5 ------------------------------------------------------------------------- Log sales realizations ($/m(3)) Domestic $ 56 $ 64 $ 55 $ 67 Export - Asia 86 94 94 94 Export - USA 45 59 60 61 ------------------------------------------------------------------------- Total log sales realizations $ 69 $ 76 $ 71 $ 76 ------------------------------------------------------------------------- Log sales volume (thousand m(3)) Domestic 194.8 223.3 627.8 804.5 Export - Asia 170.6 178.8 489.8 541.1 Export - USA 16.0 44.9 82.8 129.3 ------------------------------------------------------------------------- Total log sales volume 381.4 447.0 1,200.4 1,474.9 ------------------------------------------------------------------------- Log sales mix (thousand m(3)) Fir 214.0 263.5 753.6 969.3 Hembal 127.2 125.8 308.9 336.5 Cedar 15.0 30.5 59.7 85.5 Other 25.2 27.2 78.2 83.6 ------------------------------------------------------------------------- Total log sales mix 381.4 447.0 1,200.4 1,474.9 ------------------------------------------------------------------------- Log production volume (thousand m(3)) Public tenures 164.3 35.5 199.9 230.3 Private timberlands 169.3 363.4 708.4 1,154.8 ------------------------------------------------------------------------- Total production volume 333.6 398.9 908.3 1,385.1 ------------------------------------------------------------------------- Log production costs ($/m(3)) $ 78 $ 69 $ 75 $ 66 ------------------------------------------------------------------------- Timberland cost of sales ($/m(3)) 77 76 74 70 ------------------------------------------------------------------------- Timberland operating margin (% of log sales) (14)% (2)% (6)% 4% -------------------------------------------------------------------------
Log sales revenues for the three months ended
Real estate
(in millions of dollars Three months ended Nine months ended except where otherwise September 30 September 30 noted) 2009 2008 2009 2008 ------------------------------------------------------------------------- Sales $ 7.9 $ 3.8 $ 14.8 $ 11.5 Price per acre ($/acre) 4,058 5,819 3,754 10,008 Net proceeds 6.4 3.6 12.5 10.6 -------------------------------------------------------------------------
The Company has established a real estate division which sells non-core landholdings, pursues entitlements and markets properties. The real estate division was formally branded during Q1, 2009 when the Company named the division "Couverdon."
During Q3, 2009 the real estate division sold two properties for
During the nine months ended
The reduction in per acre values compared to the prior year is attributable to the lower value mix of properties sold and to a much lesser extent, an overall reduction in the real estate market.
Discontinued Operations
(in millions of dollars Three months ended Nine months ended except where otherwise September 30 September 30 noted) 2009 2008 2009 2008 ------------------------------------------------------------------------- Sales $ - $ 7.0 $ - $ 42.4 Net earnings (loss) (0.1) 0.2 (0.3) (7.7) -------------------------------------------------------------------------
On
5. Financial condition
The following table highlights the significant changes between the consolidated balance sheets as at
(in millions September December Increase of dollars) 30, 2009 31, 2008 /(decrease) ------------------------------------------------------------------------- Cash and cash $ 1.1 $ 30.8 $ (29.7) The decrease in cash is equivalents primarily the result of paying down the revolving credit facility. Refer to section 6 "Liquidity and capital resources" for greater detail. ------------------------------------------------------------------------- Current assets, 33.4 40.3 (6.9) The decrease is excluding cash primarily due to a and cash decrease in inventory, equivalents offset by increased accounts receivable. ------------------------------------------------------------------------- Property, plant 1,213.9 1,222.0 (8.1) The decrease is due to and equipment the sale of seven real estate properties and depreciation recorded in the period, offset by the reclassification of real estate development costs incurred prior to 2009 from prepaids and other assets of $1.3 million. ------------------------------------------------------------------------- Other assets 8.0 7.1 0.9 The increase in other assets is due to the capitalization of financing costs associated with the restructuring of the Company's credit facilities and offset by the change in fair value of the financial instruments. ------------------------------------------------------------------------- Current 22.2 133.7 (111.5) The decrease is due to liabilities the restructuring of the Company's credit facilities and a decline in the Company's accounts payable and accrued liabilities. At December 31, 2008, $108.3 million of the Company's term credit facility was classified as current. Under the amended credit agreement, the term credit facility was repaid and replaced with an amended $250 million revolving credit facility classified as long-term. ------------------------------------------------------------------------- Revolving credit 143.0 189.8 (46.8) The decrease is due to facilities funds received from the convertible debenture issuance enabling the Company to pay down its credit facility. ------------------------------------------------------------------------- Convertible 172.8 - 172.8 The increase is due to debentures the issuance of convertible debentures in Q1 2009, with a face value of $150.0 million. The convertible debentures are recorded at fair value, $172.8 million at September 30, 2009. ------------------------------------------------------------------------- Other long-term 293.2 292.6 0.6 The increase is due to liabilities an increase in the deferred distribution payable on the Series A Subordinate Notes offset by a decrease in the future income tax liability. ------------------------------------------------------------------------- Series A 245.4 240.4 5.0 The increase is due to Subordinate the recognition of Notes owned by accretion and Stapled unitholders Units issued during the period. ------------------------------------------------------------------------- Unitholders' $ 379.8 $ 443.7 $ (63.9) The decrease is due to Equity the net loss for the period. -------------------------------------------------------------------------
6. Liquidity and capital resources
Selected financial information
(in millions of dollars Three months ended Nine months ended except where otherwise September 30 September 30 noted) 2009 2008 2009 2008 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities from continuing operations: Cash used in operations before changes in non-cash working capital $ (9.8) $ (30.3) $ (32.9) $ (77.5) Changes in non-cash working capital (1.2) 0.9 2.6 13.5 ------------------------------------------------------------------------- (11.0) (29.4) (30.3) (64.0) Financing activities: Issuance of Stapled Units on exercise of options - - - 0.1 Credit facilities 5.5 23.4 (155.1) 47.8 Convertible debentures - - 150.0 - Financing transaction costs - - (3.5) - ------------------------------------------------------------------------- 5.5 23.4 (8.6) 47.9 Investing activities: Proceeds from sale of property, plant and equipment 6.4 3.7 12.5 10.7 Additions to property, plant and equipment (0.3) (0.9) (0.7) (1.7) Other assets - (0.1) (1.2) 0.1 ------------------------------------------------------------------------- 6.1 2.7 10.6 9.1 Cash provided by (used in) discontinued operations (0.5) 4.2 (1.4) 6.7 ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents $ 0.1 $ 0.9 $ (29.7) $ (0.3) ------------------------------------------------------------------------- Consolidated debt-to-total capitalization ratio(1) 15:85 22:78 15:85 22:78 ------------------------------------------------------------------------- (1) The consolidated debt-to-total capitalization ratio does not have a standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. Debt includes the senior debt held by a syndicate of banks. Management believes that the presentation of these measures will enhance an investor's understanding of the Company's operating performance.
The Company's primary cash requirements during the industry downturn are to fund operations, capital expenditures and interest payments on the Company's debt and equity instruments. The Company took steps to improve its competitiveness by permanently closing its last remaining sawmill in
The Company's consolidated debt-to-total capitalization ratio as at
Financing activities
Cash provided from financing activities in Q3, 2009 was
For the nine months ending
There were no Stapled Units issued on the exercise of options in Q3, 2009 (2008, Q3 - nil). For the nine months ending
As at
Investing activities
Cash provided from investing activities in Q3, 2009 was
For the nine months ended
Capital resources
The Company's capital resources at
Available capital resources and total liquidity at period-end is summarized in the following table:
2009 2009 2009 2008 (in millions of dollars) Q3 Q2 Q1 Q4 ------------------------------------------------------------------------- Borrowing base Revolving credit facility (due February 11, 2012) $ 250.0 $ 250.0 $ 250.0 $ - Convertible debentures (due February 11, 2014) 150.0 150.0 150.0 - Tranche A credit facility - - - 216.7 Tranche B credit facility - - - 108.3 Demand bank facilities - - - - ------------------------------------------------------------------------- Total borrowing base 400.0 400.0 400.0 325.0 Letters of credit 16.4 16.4 16.6 16.8 Amount drawn, net 293.0 287.5 294.0 298.1 ------------------------------------------------------------------------- Available to be drawn 90.6 96.1 89.4 10.1 Cash on hand 1.1 1.0 0.5 30.8 ------------------------------------------------------------------------- Total liquidity $ 91.7 $ 97.1 $ 89.9 $ 40.9 -------------------------------------------------------------------------
As of
Debt
At
Issue June Net September 30, increase 30, (in millions of dollars) 2009 (decrease) 2009 ------------------------------------------------------------------------- Secured revolving credit facility of up to $250.0 million due February 11, 2012 with interest based on Canadian or U.S. Prime rates + 5%, or Canadian BA rates + 6% $ 137.5 $ 5.5 $ 143.0 Convertible debentures with a face value of $150.0 million due February 11, 2014 160.7 12.1(1) 172.8 ------------------------------------------------------------------------- Total long-term debt $ 298.2 $ 17.6 $ 315.8 Less current portion - - - ------------------------------------------------------------------------- $ 298.2 $ 17.6 $ 315.8 ------------------------------------------------------------------------- (1) The convertible debentures are designated as "held-for-trading" for accounting purposes and as such are valued at fair value. The increase in Q3, 2009 over Q2, 2009 is the result of a fair value adjustment of $12.1 million.
Refer to the Company's Interim Consolidated Financial Statements for the three months ended
The Company expects to meet its future cash requirements through a combination of cash generated from its logging operations and real estate sales, existing cash balances and credit facilities, and the refinancing arrangements completed.
Subsequent to the end of the third quarter 2009, on
- A waiver of the minimum EBITDA tests for both 2010 and 2011, with the maximum availability under the line set at $220 million for 2010 and $215 million for 2011. So long as the Company generates cumulative minimum EBITDA of $325,000 for Q1, 2011; $650,000 for Q2, 2011; $975,000 for Q3, 2011 and $1.3 million for Q4, 2011 then the maximum availability under the line will be increased to $230 million for 2011. - A permanent repayment provision which specifies that once cumulative real estate proceeds exceed $50 million, 50% of additional proceeds will be applied to permanently reduce the facility size. The remaining 50% can be used by the Company to improve its liquidity. Current cumulative real estate proceeds are $24.5 million. - On a best efforts basis, the Company will seek the required approvals necessary to allow it to pay the 9% interest obligation on its convertible debentures in kind beyond the initial four quarters already announced through to maturity of the credit facility.
All other terms of the revolving credit agreement remain unchanged from the original credit agreement which was filed on SEDAR in
The Company's continuation as a going concern is ultimately dependent upon its future financial performance, which will be affected by general economic, competitive and other factors, many of which are beyond the Company's control. In the short term, any significant strengthening of the Canadian dollar, or further decline in U.S. housing and
7. Impact of accounting pronouncements affecting future periods
On
TimberWest will adopt IFRS according to requirements outlined by the AcSB, and is in the process of preparing for the adoption of IFRS, including qualitative disclosure throughout 2009 and 2010, on
The Company is in the process of identifying the significant differences between Canadian GAAP and IFRS as it relates to TimberWest and has identified the following areas as having a significant accounting impact on the Company's financial statements and disclosures when IFRS is adopted:
Private timberlands - the Company's private timberlands will be accounted for as a biological asset under IAS 41. In essence, the standing timber on the private timberlands will be valued at fair value at each reporting date. Any changes in fair value, as a result of growth, harvest, and changes in valuation assumptions will be recognized as a gain or loss on the face of the income statement. The land component of the private timberlands will be accounted for as property, plant and equipment.
Upon harvesting, timber from private timberlands will be considered agricultural produce and will be accounted for at fair market value less the estimated costs to sell. This value will be the cost ascribed to the logs as they enter inventory.
Higher and better use lands - the treatment of the Company's HBU lands with respect to IFRS is currently under review.
The Company is examining these and other issues and is developing tools and training for the Company's key users in order to ensure compliance with IFRS requirements.
8. Disclosure controls and internal control over financial reporting
During the quarter ended
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) Unaudited Three months ended Nine months ended (in millions of dollars, September 30 September 30 except per share amounts) 2009 2008 2009 2008 ------------------------------------------------------------------------- Sales $ 37.5 $ 38.8 $ 105.9 $ 127.8 Operating costs and expenses: Cost of sales 35.8 41.3 104.4 121.4 Selling, administrative and other 2.7 3.0 8.4 9.3 Depreciation, depletion and amortization 1.2 0.9 3.0 3.4 ------------------------------------------------------------------------- 39.7 45.2 115.8 134.1 ------------------------------------------------------------------------- Operating loss from continuing operations (2.2) (6.4) (9.9) (6.3) Interest expense: Series A Subordinate Notes owned by unitholders 5.3 21.0 15.4 63.0 Convertible debentures 3.4 - 8.5 - Long-term bank debt 2.5 1.7 7.2 6.1 Short-term bank debt - 0.8 0.5 1.5 ------------------------------------------------------------------------- 11.2 23.5 31.6 70.6 Financing transaction costs - - 5.5 - Amortization of deferred financing costs 0.4 0.1 1.3 0.3 Change in fair value of financial instruments held for trading (notes 10 and 12) 13.1 - 24.7 - Other expense (income) (0.2) 0.4 (0.2) 0.2 ------------------------------------------------------------------------- 24.5 24.0 62.9 71.1 ------------------------------------------------------------------------- Loss before income taxes from continuing operations (26.7) (30.4) (72.8) (77.4) Income tax expense (recovery) (note 6) (0.8) (0.6) (9.1) (5.8) ------------------------------------------------------------------------- Net loss and comprehensive loss from continuing operations (25.9) (29.8) (63.7) (71.6) Net loss and comprehensive loss from discontinued operations (note 5) (0.1) 0.2 (0.3) (7.7) ------------------------------------------------------------------------- Net loss and comprehensive loss $ (26.0) $ (29.6) $ (64.0) $ (79.3) ------------------------------------------------------------------------- Basic and diluted loss from continuing operations per share (note 7) (0.33) (0.38) (0.82) (0.92) Basic and diluted loss from discontinued operations per share (note 7) - - - (0.10) Basic and diluted loss per share (note 7) (0.33) (0.38) (0.82) (1.02) ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT) Three months ended Nine months ended Unaudited September 30 September 30 (in millions of dollars) 2009 2008 2009 2008 ------------------------------------------------------------------------- Retained earnings, beginning of period $ 212.8 $ (34.2) $ 250.8 $ 15.5 Net loss and comprehensive loss for the period (26.0) (29.6) (64.0) (79.3) ------------------------------------------------------------------------- Retained earnings (deficit), end of period $ 186.8 $ (63.8) $ 186.8 $ (63.8) ------------------------------------------------------------------------- See accompanying notes to the unaudited interim consolidated financial statements. CONSOLIDATED BALANCE SHEETS September December 30, 2009 31, 2008 (in millions of dollars) Unaudited ------------------------------------------------------------------------- Assets Current assets: Cash $ 1.1 $ 30.8 Accounts receivable 7.2 4.1 Inventories (note 8) 20.1 29.1 Prepaid expenses and other current assets 4.5 3.7 Future income taxes 1.6 3.3 Discontinued operations - 0.1 ------------------------------------------------------------------------- 34.5 71.1 Property, plant and equipment (note 9) 1,213.9 1,222.0 Other assets (note 10) 8.0 7.1 ------------------------------------------------------------------------- $ 1,256.4 $ 1,300.2 ------------------------------------------------------------------------- Liabilities and Unitholders' Equity Current liabilities: Term credit facilities (note 11) $ - $ 108.3 Accounts payable and accrued liabilities 22.0 23.9 Discontinued operations 0.2 1.5 ------------------------------------------------------------------------- 22.2 133.7 Revolving credit facilities (note 11) 143.0 189.8 Convertible debentures (note 12) 172.8 - Long-term silviculture liability 2.8 3.2 Employee future benefits (note 13) 37.1 36.7 Deferred distribution payable (note 14) 28.4 17.8 Stapled Unit option plan (note 16) 0.8 - Future income taxes 224.1 234.9 ------------------------------------------------------------------------- 631.2 616.1 Series A Subordinate Notes owned by unitholders (note 15) 245.4 240.4 ------------------------------------------------------------------------- 876.6 856.5 ------------------------------------------------------------------------- Unitholders' equity Share capital, consisting of common shares (note 15) 191.0 191.0 Contributed surplus 2.0 1.9 Retained earnings 186.8 250.8 ------------------------------------------------------------------------- 379.8 443.7 ------------------------------------------------------------------------- $ 1,256.4 $ 1,300.2 ------------------------------------------------------------------------- Subsequent event (notes 2 and 11) See accompanying notes to the unaudited interim consolidated financial statements. On behalf of the Board of Directors: Paul J. McElligott V. Edward Daughney Director Director CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended Nine months ended Unaudited September 30 September 30 (in millions of dollars) 2009 2008 2009 2008 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net loss from continuing operations $ (25.9) $ (29.8) $ (63.7) $ (71.6) Items not involving cash: Depreciation, depletion and amortization 1.6 1.0 4.3 3.7 Accretion on Series A Subordinate Notes 1.7 - 4.9 - Gain on sale of property, plant and equipment (3.9) (1.4) (5.5) (5.2) Future income tax expense (recovery) (0.8) (0.6) (9.1) (5.8) Change in deferred distribution payable 3.6 - 10.5 - Change in fair value of financial instruments held for trading 13.1 - 24.7 - Other non-cash items 0.8 0.5 1.0 1.4 ------------------------------------------------------------------------- (9.8) (30.3) (32.9) (77.5) Changes in non-cash working capital: Accounts receivable (3.1) 6.1 (3.1) 1.3 Inventories 1.5 (0.1) 9.0 7.0 Prepaid expenses and other working capital (1.2) 0.5 (0.8) 0.9 Accounts payable and accrued liabilities 1.6 (5.6) (2.5) 4.3 ------------------------------------------------------------------------- (1.2) 0.9 2.6 13.5 ------------------------------------------------------------------------- (11.0) (29.4) (30.3) (64.0) ------------------------------------------------------------------------- Financing activities: Issuance of Stapled Units on exercise of options Series A Subordinate Notes - - - 0.1 ------------------------------------------------------------------------- - - - 0.1 Convertible debentures - - 150.0 - Revolving credit facilities 5.5 (84.9) (46.8) (60.5) Term credit facilities - 108.3 (108.3) 108.3 Financing transaction costs - - (3.5) - ------------------------------------------------------------------------- 5.5 23.4 (8.6) 47.9 ------------------------------------------------------------------------- Investing activities: Proceeds from sale of property, plant and equipment 6.4 3.7 12.5 10.7 Additions to property, plant and equipment (0.3) (0.9) (0.7) (1.7) Other assets - (0.1) (1.2) 0.1 ------------------------------------------------------------------------- 6.1 2.7 10.6 9.1 ------------------------------------------------------------------------- Cash provided by (used in) continuing operations 0.6 (3.3) (28.3) (7.0) Cash provided by (used in) discontinued operations (note 5) (0.5) 4.2 (1.4) 6.7 ------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 0.1 0.9 (29.7) (0.3) Cash and cash equivalents, beginning of period 1.0 - 30.8 1.2 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1.1 0.9 $ 1.1 $ 0.9 ------------------------------------------------------------------------- Supplemental information: Interest on Series A Subordinate Notes paid to unitholders $ - $ 21.0 $ - $ 63.0 Interest on the convertible debentures paid $ 3.4 $ - $ 5.2 $ - Other interest paid $ 2.5 $ 1.7 $ 8.7 $ 6.8 Financing costs paid $ - $ - $ 9.0 $ - ------------------------------------------------------------------------- See accompanying notes to the unaudited interim consolidated financial statements. CONSOLIDATED BUSINESS SEGMENTS Unaudited Three months ended September 30, 2009 (in millions Real of dollars) Timberlands Estate Other Total ------------------------------------------------------------------------- Sales $ 29.6 $ 7.9 $ - $ 37.5 Operating earnings (loss) (3.5) 4.5 (3.2) (2.2) Total assets 978.3 263.9 14.2 1,256.4 Additions to property, plant and equipment - 0.2 0.1 0.3 ------------------------------------------------------------------------- Unaudited Nine months ended September 30, 2009 (in millions Real of dollars) Timberlands Estate Other Total ------------------------------------------------------------------------- Sales $ 91.1 $ 14.8 $ - $ 105.9 Operating earnings (loss) (5.0) 5.0 (9.9) (9.9) Total assets 978.3 263.9 14.2 1,256.4 Additions to property, plant and equipment 0.2 0.4 0.1 0.7 -------------------------------------------------------------------------
In 2009, the Company commenced reporting its operating results on a segmented basis in order to disclose the results of its two significant operating segments, timberlands and real estate. Prior to 2009, the Company operated in one operating segment, timberlands, and any real estate sales were incidental to the timberland operations. Effective
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2009 and 2008 (Unaudited and in millions of dollars, except per common share amounts) 1. Significant accounting policies The accompanying unaudited interim consolidated financial statements include the accounts of TimberWest Forest Corp. and its subsidiaries ("the Company"), have been prepared in accordance with Canadian Generally Accepted Accounting Principles and are expressed in Canadian dollars. Not all disclosures required by Canadian Generally Accepted Accounting Principles ("GAAP") for annual financial statements are presented and, accordingly, these interim consolidated financial statements should be read in conjunction with the Company's most recent annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies and methods of application used in the Company's audited annual consolidated financial statements of December 31, 2008, except for the adoption of new accounting policies as described in note 3. 2. Going concern The current economic environment for the global forest products industry is challenging with substantially lower than average prices and high input costs due to low production. TimberWest responded to these conditions by reducing logging production, permanently closing its last sawmill operation, reducing overhead costs, restructuring labour and contractor agreements, and reducing its working capital investment. The Company has forecasted its financial results and cash flows for 2009 using its best estimates of market and operating conditions. These forecasts consider the modification of the interest rate on the Series A Subordinate Notes, with interest deferred for a period of time (note 14), and the refinancing package (note 11) which includes credit amendments to the bank facilities, a $100 million private placement with British Columbia Investment Management Corporation of 9% convertible debentures, and a $50 million 9% convertible debenture rights offering that was completed on February 11, 2009. The Company expects to meet its future cash requirements through a combination of cash generated from its logging operations and real estate sales, existing cash balances and credit facilities, and the refinancing arrangements completed. Subsequent to the end of the third quarter 2009, on October 22, 2009, the Company completed amendments to the bank loan agreement with its syndicate of banks. The key amendments to the revolving credit agreement, which matures on February 10, 2012, include: - A waiver of the minimum EBITDA tests for both 2010 and 2011, with the maximum availability under the line set at $220 million for 2010 and $215 million for 2011. So long as the Company generates cumulative minimum EBITDA of $325,000 for Q1, 2011; $650,000 for Q2, 2011; $975,000 for Q3, 2011 and $1.3 million for Q4, 2011 then the maximum availability under the line will be increased to $230 million for 2011. - A permanent repayment provision which specifies that once cumulative real estate proceeds exceed $50 million, 50% of additional proceeds will be applied to permanently reduce the facility size. The remaining 50% can be used by the Company to improve its liquidity. Current cumulative real estate proceeds are $24.5 million. - On a best efforts basis, the Company will seek the required approvals necessary to allow it to pay the 9% interest obligation on its convertible debentures in kind beyond the initial four quarters already announced through to maturity of the credit facility. All other terms of the revolving credit agreement remain unchanged from the original credit agreement which was filed on SEDAR in February 2009. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is ultimately dependent upon its future financial performance, which will be affected by general economic, competitive and other factors, many of which are beyond the Company's control. In the short term, any significant strengthening of the Canadian dollar, or further decline in U.S. housing and Vancouver Island real estate markets which affects demand or other unexpected adverse developments could adversely impact the Company's liquidity. 3. Adoption of new accounting policies Goodwill and intangible assets, Section 3064 Effective January 1, 2009, the Company adopted the new Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3064, Goodwill and Intangible Assets. This section replaces CICA Handbook Section 3062, Goodwill and Intangible Assets, and establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The new standard also provides guidance for the treatment of various pre-production and start-up costs and requires that these costs be expensed as incurred, with the concurrent withdrawal of CICA Emerging Issues Committee Abstract 27 ("EIC 27"). The adoption of this section had no impact on the Company's accounting on a retrospective basis. 4. Segmented information Commencing in 2009, the Company identified two reporting segments: Timberlands - The timberland division maximizes value by harvesting logs in a cost-effective manner consistent with sound safety, environmental and sustainable forestry practices and selling these products to targeted customers in both the domestic and higher value export markets Real Estate - Couverdon, the real estate division of TimberWest, has developed a long range strategic plan to realize value from land that has a higher and better use than timberlands. The segments are managed separately. During the first quarter of 2009, the Company branded its real estate division "Couverdon Real Estate." 5. Discontinued operations On May 9, 2008, the Elk Falls sawmill and planer mill in Campbell River, B.C. was permanently closed including the associated shipping operations at Stuart Channel Wharves located in Crofton, B.C. Subsequent to the closure, TimberWest disposed of all the sawmill assets and dismantled the sawmill. Ongoing costs such as property taxes continue to be expensed as incurred. The Company is assessing alternatives for the former sawmill site. ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 2009 2008 2009 2008 ------------------------------------------------------------------------- Sales $ - $ 7.0 $ - $ 42.4 Earnings (loss) before income taxes $ (0.1) $ 0.2 $ (0.3) $ (7.7) Net loss $ (0.1) $ 0.2 $ (0.3) $ (7.7) ------------------------------------------------------------------------- Sales from the logging operations to the sawmill operations have been recorded at fair value in accordance with the Company's internal policies. There were no inter-divisional sales for the three and nine months ended September 30, 2009 (2008 - nil and $13.0 million). ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 2009 2008 2009 2008 ------------------------------------------------------------------------- Cash flow from operating activities $ (0.5) $ 3.8 $ (1.4) $ 6.2 Cash flow from financing activities - - - - Cash flow from investing activities - 0.4 - 0.5 ------------------------------------------------------------------------- Cash provided by operations $ (0.5) $ 4.2 $ (1.4) $ 6.7 ------------------------------------------------------------------------- Cash used in operating activities for Q3 and the nine months ended September 30, 2009 includes the payment of previously accrued liabilities due to the closure of the sawmill. 6. Income taxes ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 2009 2008 2009 2008 ------------------------------------------------------------------------- Current income tax $ - $ - $ - $ - Future income tax recovery (0.8) (0.6) (9.1) (5.8) ------------------------------------------------------------------------- $ (0.8) $ (0.6) $ (9.1) $ (5.8) ------------------------------------------------------------------------- In the first quarter of 2009, British Columbia provincial tax legislation was substantively enacted, resulting in the reduction of the provincial corporate tax rate to 10.5% for the year ending December 31, 2010 and 10% thereafter. This tax rate change resulted in a future income tax recovery of $6.2 million and is included in the future income tax recovery for the nine months ended September 30, 2009. In the first quarter of 2008, British Columbia provincial tax legislation was substantively enacted, resulting in the reduction of the provincial corporate tax rate to 11% as of July 1, 2008. This tax rate change resulted in a future income tax recovery of $4.3 million for the nine months ended September 30, 2008. 7. Earnings (loss) per share ------------------------------------------------------------------------- Three months ended Nine months ended September 30 September 30 2009 2008 2009 2008 ------------------------------------------------------------------------- Net loss from continuing operations $ (25.9) $ (29.8) $ (63.7) $ (71.6) ------------------------------------------------------------------------- Net loss (26.0) (29.6) (64.0) (79.3) ------------------------------------------------------------------------- Basic weighted average number of common shares 77,776,574 77,765,440 77,770,620 77,757,020 Incremental common shares from potential exercise of options 297,447 33,244 152,320 33,673 ------------------------------------------------------------------------- Diluted weighted average number of common shares 78,074,021 77,798,684 77,922,940 77,790,693 ------------------------------------------------------------------------- Basic and diluted net loss from continuing operations per common share (0.33) (0.38) (0.82) (0.92) Basic and diluted net loss from discontinued operations per common share - - - (0.10) ------------------------------------------------------------------------- Basic and diluted net loss per common share (0.33) (0.38) (0.82) (1.02) ------------------------------------------------------------------------- The convertible debentures issued during Q1, 2009 have been considered in the computation of diluted earnings per share and were determined to have been anti-dilutive. 8. Inventories ------------------------------------------------------------------------- September December 30, 2009 31, 2008 ------------------------------------------------------------------------- Logs $ 20.1 $ 29.1 ------------------------------------------------------------------------- The $9.0 million decrease in log inventory from December 31, 2008 is primarily due to lower inventory volumes at the end of September 30, 2009. For the three months ended September 30, 2009, log inventory was written up by $0.2 million which was offset against cost of sales for the period (2008 - log inventories were written down by $0.9 million and expensed against cost of sales). For the nine months ended September 30, 2009, log inventory was written up by $0.6 million which was offset against cost of sales for the period (2008 - log inventories were written down by $1.2 million and expensed against cost of sales). 9. Property, plant and equipment Property, plant and equipment at September 30, 2009, includes private lands with a carrying value of $1,165.5 million (December 31, 2008 - $1,170.9 million). This amount includes a valuation increase adjustment of $373.7 million resulting from the adoption of Section 3465 - Income Taxes of the CICA Handbook, which was mandatory for fiscal years ending on or after January 1, 2000. 10. Other assets ------------------------------------------------------------------------- September December 30, 2009 31, 2008 ------------------------------------------------------------------------- Deferred financing costs $ 3.6 $ 1.4 Financial instruments 3.4 4.7 Other 1.0 1.0 ------------------------------------------------------------------------- $ 8.0 $ 7.1 ------------------------------------------------------------------------- Financial instruments of $3.4 million include the value of two embedded derivatives as outlined below. The Company has the option to defer the distributions payable to its unitholders for a period of up to 18 months in length while the distribution rate is set at 2% (note 15). This option constitutes an embedded derivative and is measured at its fair value. As the Company has elected to defer distributions for the immediate future, the value of this option is $2.8 million (2008 - $4.1 million). The embedded derivative arising from the option to extend the maturity of the Series A Subordinate Notes for a further 10-year period from 2038 to 2048 is measured at its fair value of $0.6 million (2008 - $0.6 million). 11. Credit facilities The Company's credit facilities are as follows: ------------------------------------------------------------------------- September December 30, 2009 31, 2008 ------------------------------------------------------------------------- Secured revolving credit facility of up to $250.0 million due February 11, 2012 with interest based on Canadian or U.S. Prime rates + 5%, or Canadian BA rates + 6% $ 143.0 $ - Unsecured long-term revolving facility (Tranche A) of up to $216.7 million due September 24, 2012 with interest based on Canadian Prime/BA or U.S. LIBOR rates + 0.9%(1) - 189.8 Unsecured term facility (Tranche B) of up to $108.3 million due September 24, 2009 with interest based on Prime rates(1) - 108.3 ------------------------------------------------------------------------- Total long-term debt $ 143.0 $ 298.1 Less current portion - (108.3) ------------------------------------------------------------------------- $ 143.0 $ 189.8 ------------------------------------------------------------------------- (1) The long-term revolving facility of $216.7 million and the term facility of $108.3 million were effectively extinguished with the amended and restated credit facility. On February 11, 2009 the Company raised $150 million by way of a 9% five- year convertible debenture issue (note 12). The net proceeds of the convertible debentures were used by the Company to permanently repay $75 million of indebtedness under its bank credit facilities, with the remainder being used to reduce indebtedness under the Company's revolving credit facilities. The Company and its lenders completed a new $250 million three-year secured revolving credit refinancing arrangement as described in detail below. Under this facility, funds are available to the Company in Canadian and US dollars by way of adjusted Canadian bankers' acceptances plus 6%, or Canadian or U.S. prime rates plus 5% loans and letters of credit. This facility has been underwritten by a syndicate of banks and is due on February 11, 2012. The facility includes financial covenants to maintain: - minimum bank EBITDA for the period January 1, 2009 to June 30, 2009 to negative $16.0 million; - minimum bank EBITDA for the period January 1, 2009 to December 31, 2009 to negative $16.0 million; - minimum bank EBITDA per quarter for the eight quarters of 2010 and 2011 of $8.3 million, $16.2 million, $24.1 million, $32.0 million, $40.7 million, $49.4 million, $58.1 million and $66.8 million, respectively; - consolidated tangible net worth at the end of each quarter in excess of $700 million; - consolidated debt is less than 40% of capitalization; - consolidated debt is less than 40% of the market value of the Company's private timberlands and higher use properties. Bank EBITDA calculations include proceeds of real estate sales and other items. At September 30, 2009 the Company is in compliance with the terms of its credit facility. The 2009 transaction costs related to this refinancing were $3.5 million (2008 - $1.1 million) and have been deferred and capitalized on the balance sheet as they relate to debt refinancing held at amortized cost. Subsequent to the end of the third quarter 2009, on October 22, 2009, the Company completed amendments to the bank loan agreement with its syndicate of banks. The key amendments to the revolving credit agreement, which matures on February 10, 2012, include: - A waiver of the minimum EBITDA tests for both 2010 and 2011, with the maximum availability under the line set at $220 million for 2010 and $215 million for 2011. So long as the Company generates cumulative minimum EBITDA of $325,000 for Q1, 2011; $650,000 for Q2, 2011; $975,000 for Q3, 2011 and $1.3 million for Q4, 2011 then the maximum availability under the line will be increased to $230 million for 2011. - A permanent repayment provision which specifies that once cumulative real estate proceeds exceed $50 million, 50% of additional proceeds will be applied to permanently reduce the facility size. The remaining 50% can be used by the Company to improve its liquidity. Current cumulative real estate proceeds are $24.5 million. - On a best efforts basis, the Company will seek the required approvals necessary to allow it to pay the 9% interest obligation on its convertible debentures in kind beyond the initial four quarters already announced through to maturity of the credit facility. All other terms of the revolving credit agreement remain unchanged from the original credit agreement which was filed on SEDAR in February 2009. 12. Convertible debentures On February 11, 2009, the Company raised $150 million by way of a 9% five-year convertible debenture issue. The $150 million of convertible debentures was raised through a $100 million private placement with two wholly-owned subsidiaries of British Columbia Investment Management Corporation and through a $50 million rights offering to unitholders. The convertible debentures mature on February 11, 2014 and are convertible into Stapled Units at $3.50. The convertible debentures pay interest quarterly at 9% with the first interest payment made on April 15, 2009. For the three months ended September 30, 2009 the Company recorded interest expense of $3.4 million. Interest was paid 'in-kind' on October 15, 2009 by issuing convertible debentures with a face value of $3.4 million. For the nine months ended September 30, 2009 the Company recorded interest expense of $8.5 million. The Company has elected to designate this obligation as 'held-for- trading' and it is to be revalued at fair value at each reporting date. Changes in fair value from one period to the next are recognized against net income in the period. Transaction costs of $5.5 million were incurred and expensed to the statement of operations in 2009. No debentures were converted in Q3, 2009. For the nine months ended September 30, 2009 debentures with a face value of $38,500 were converted into 11,134 Stapled Units. In Q3 2009, a $0.5 million fair value loss was recognized against net income with respect to the convertible debentures paid in kind. 13. Employee future benefits ------------------------------------------------------------------------- September December 30, 2009 31, 2008 ------------------------------------------------------------------------- Pension benefits $ 9.4 $ 9.4 Non-pension benefits 27.7 27.3 ------------------------------------------------------------------------- $ 37.1 $ 36.7 ------------------------------------------------------------------------- The Company, through its subsidiaries, maintains pension plans that include defined benefit and defined contribution segments available to all salaried employees and a small number of hourly retirees not covered by union pension plans. For the three months ended September 30, 2009, the Company recorded an expense of $0.4 million for pension benefit costs (2008 - $0.5 million) and made cash payments of $0.3 million to fund current service costs (2008 - $0.3 million). For the nine months ended September 30, 2009, the Company recorded an expense of $1.2 million for pension benefit costs (2008 - $1.5 million) and made cash payments of $1.2 million to fund current service costs (2008 - $1.3 million). The Company also provides non-pension benefits consisting of group life insurance and medical benefits to eligible retired employees, which the Company funds on an as-incurred basis. For the three months ended September 30, 2009, the Company recorded an expense of $0.6 million for non-pension benefit costs (2008 - $0.8 million) and made cash payments of $0.2 million to fund current benefit costs (2008 - $0.4 million). For the nine months ended September 30, 2009, the Company recorded an expense of $1.9 million for non-pension benefit costs (2008 - $2.5 million) and made cash payments of $1.4 million to fund current benefit costs (2008 - $1.5 million). 14. Deferred distribution payable ------------------------------------------------------------------------- September December 30, 2009 31, 2008 ------------------------------------------------------------------------- October 15, 2009 distribution (2%) with a face value of $3.5 million due by April 15, 2011 $ 3.1 $ - July 15, 2009 distribution (2%) with a face value of $3.5 million due by January 15, 2011 3.2 - April 15, 2009 distribution (2%) with a face value of $3.5 million due by October 15, 2010 3.3 - January 15, 2009 distribution (12%) with a face value of $21.0 million due by April 15, 2011 18.8 17.8 ------------------------------------------------------------------------- $ 28.4 $ 17.8 ------------------------------------------------------------------------- The Company can defer distributions on its Series A Subordinate Notes after December 31, 2008 for up to 18 months while the distribution rate is set at 2% (note 15) and defer the January 15, 2009 distribution for up to 27 months. As a result of these deferrals, the deferred distribution payable is accounted for at its fair value and the obligation is revalued at each reporting date. 15. Stapled units ------------------------------------------------------------------------- Stapled Unit Components ---------------------------------- Series A Subord- inate Preferred Common Number Notes Shares Shares ------------------------------------------------------------------------- Nine months ended September 30, 2008: Balance, December 31, 2007 77,750,143 $ 698.1 $ 190.1 $ 31.4 Issuance of Stapled Units on exercise of options 15,297 0.1 - - ------------------------------------------------------------------------- Balance, September 30, 2008 77,765,440 $ 698.2 $ 190.1 $ 31.4 ------------------------------------------------------------------------- Nine months ended September 30, 2009: Balance, December 31, 2008 77,765,440 $ 240.4 $ 190.1 $ 31.4 Issuance of Stapled Units on conversion of debentures 11,134 0.1 - - Issuance of Stapled Units on exercise of options - - - - Accretion on Series A Subordinate Notes - 4.9 - - Conversion of preferred shares into common shares - - (190.1) 190.1 ------------------------------------------------------------------------- Balance, September 30, 2009 77,776,574 $ 245.4 $ - $ 221.5 ------------------------------------------------------------------------- ------------------------------------------------------------- Stapled Unit Components ------------------------------- Total Total Issue Share Stapled Costs Capital Units ------------------------------------------------------------- Nine months ended September 30, 2008: Balance, December 31, 2007 $ (30.5) $ 191.0 $ 889.1 Issuance of Stapled Units on exercise of options - - 0.1 -------------------------------------------------------------- Balance, September 30, 2008 $ (30.5) $ 191.0 $ 889.2 -------------------------------------------------------------- Nine months ended September 30, 2009: Balance, December 31, 2008 $ (30.5) $ 191.0 $ 431.4 Issuance of Stapled Units on conversion of debentures - - 0.1 Issuance of Stapled Units on exercise of options - - - Accretion on Series A Subordinate Notes - - 4.9 Conversion of preferred shares into common shares - - - ------------------------------------------------------------- Balance, September 30, 2009 $ (30.5) $ 191.0 $ 436.4 ------------------------------------------------------------- The Company issues equity by way of Stapled Units, each Stapled Unit consisting of approximately $8.98 face amount of Series A Subordinate Notes and one common share. The securities comprising a Stapled Unit trade together as Stapled Units and cannot be transferred except with each other as part of a Stapled Unit until the date of maturity of the Series A Subordinate Notes or the payment of the principal amount of the Series A Subordinate Notes following an event of default and expiration of a remedies blockage period. On December 19, 2008 the holders of the Stapled Units approved a series of note amendments that came into effect on December 31, 2008. The note amendments are as follows: (i) the rate of interest on the Series A Subordinate Notes payable was changed from a fixed 12% per annum to a variable rate between 2% and 12% per annum to be set from time to time based on the Company's distributable cash; (ii) the period over which the Company can defer payments of interest on the notes was reduced from 27 months to 18 months, and the Company may only exercise this deferral right in respect of interest payments for periods where the applicable interest rate on the subordinate notes is 2%; and (iii) replaces the Company's right to elect to pay interest on the subordinate notes by delivering common shares or preferred shares of the Company with the right to elect to pay interest on the notes by delivering Stapled Units. Each Series A Subordinate Note has been issued with a face amount of $8.978806569, entitling the holder to an interest payment per unit of between $0.179576131 and $1.077456788 per annum (2-12%). The Series A Subordinate Notes are unsecured and subordinate to all credit facilities (see note 11) and convertible debentures (note 12). The principal amount of the Series A Subordinate Notes plus accrued and unpaid interest thereon are due on August 31, 2038, unless such date is extended by the Company at the time of the issuance of additional subordinate notes to a date not later than the earlier of: (i) the date of maturity of such additional subordinate notes; and (ii) August 31, 2048, and will be payable by cash or, at the option of the Company, by delivery of common shares to the Subordinate Note Trustee for the benefit of the holders of the subordinate notes. In accordance with Canadian GAAP, the note amendments had the effect of extinguishing the previous debt associated with the Series A Subordinate Notes and triggered a revaluation of debt on the extinguishment date at December 31, 2008. As a result of this revaluation the Company recorded a 'Gain on modification of Series A Subordinate Notes' of $461.6 million on the Consolidated Statement of Operation and Comprehensive Income (loss) with a corresponding write-down to the Series A Subordinate Notes on December 31, 2008. The write-down had no tax consequence to the holders of the notes. The revalued Series A Subordinate Notes have been measured by the Company under Canadian GAAP at amortized cost under CICA Section 3855 'Financial Instruments.' As such, the balance of the Series A Subordinate Notes will be accreted using the effective interest rate method to face value of $698.2 million on maturity. For the three and nine months ending September 30, 2009, accretion recognized in the statement of operations was $1.7 million and $4.9 million respectively. For the three and nine months ending September 30, 2009, interest accrued and payable to the holders of the Series A Subordinate Notes was $3.6 million and $10.5 million respectively, for total interest expense of $5.3 million and $15.4 million. At December 31, 2008, transaction costs of $0.9 million had been deferred and offset against the Series A Subordinate Notes and are being amortized using the effective rate method over the life of the Series A Subordinate Notes until maturity. On May 7, 2009 the Company's preferred shares were converted into common shares and consolidated in order to simplify TimberWest's capital structure and eliminate administrative burdens and related expenses associated with maintaining the preferred shares. Each TimberWest Stapled Unit contains one Series A Subordinate Note and one common share. The conversion and consolidation was approved by the unitholders on May 6, 2009 and were approved by the Toronto Stock Exchange ("TSX"). The option to defer interest distributions to the holders of the Stapled Units for up to 18 months is an embedded derivative under Canadian GAAP and is revalued at each reporting date. As at September 30, 2009 the fair value of this option is $2.8 million (December 31, 2008 - $4.1 million) and is accounted for as Other Assets (note 10). The option to extend the maturity date on the Series A Subordinate Notes from August 31, 2038 to August 31, 2048 is an embedded derivative under Canadian GAAP and is revalued at each reporting date. As at September 30, 2009 the fair value of this option is $0.6 million (December 31, 2008 - $0.6 million) and is accounted for as Other Assets (note 10). 16. Stapled Unit option plan Under the Company's Stapled Unit Option Plan, the Company may grant options for the purchase of Stapled Units to directors, officers or employees who are in active service or employment of the Company or of any of its subsidiaries. During the quarter ended September 30, 2009, 22,500 Stapled Unit options granted at an average exercise price of $3.71 (Q3, 2008 - no Stapled Unit options were granted). For the nine months ended September 30, 2009, there were 1,719,327 Stapled Unit options granted at an average exercise price of $3.01 (2008 - no Stapled Unit options were granted in the first nine months of the year). The option to acquire a Stapled Unit effectively provides the option holder with an option on the Series A Subordinated Note component and an option on the equity component of the Stapled Unit. An option to acquire a debt instrument is accounted for under the intrinsic value method whereby the compensation cost is determined each period based on the fair value of the debt instrument compared to the exercise price of the option to acquire the debt instrument. The fair value of the equity component is based on the fair value of the option as determined using an option pricing model. Historically, the Company has determined that the intrinsic value of the option to acquire the Series A Subordinate Notes has not been material and the fair value of the option has been recorded in equity as contributed surplus based on the fair value as determined by the Black Scholes option pricing model. With the recent changes to the Series A Subordinate Note terms including modifying the interest rate to a variable rate from 2% to 12% which is ultimately based on distributable cash levels and the current market value of the Stapled Unit which is below the face value of the Series A Subordinate Note, the Company has determined that the value of the Stapled Unit option is now in the debt component and that the equity option value is immaterial. As a result, the accounting for the options issued in the period has been done using the intrinsic value method. On this basis the compensation cost for the 1,719,327 Stapled Unit options granted between January 1, 2009 and September 30, 2009, based on an intrinsic value method of accounting, for the three and nine months ended September 30, 2009 was $0.4 million and $0.8 million respectively. A corresponding amount was expensed in the period with a corresponding credit to the Stapled Unit option plan liability (2008 - no Stapled Unit options were granted in the first nine months of the year). Under the Company's Distribution Equivalent Plan, the Company awards Stapled Unit option holders an amount equal to actual distributions paid on the Company's Stapled Units. Awards granted under the Distribution Equivalent Plan vest under the same terms that apply to the corresponding options and can only be exercised at the time of exercise of the corresponding options. Awards are accrued on a basis equal to actual distributions paid on the Company's issued and outstanding Stapled Units and are charged to earnings as the underlying Stapled Unit options vest. For the three and nine months ended September 30, 2009, no amount was accrued as no distributions were paid (2008 - $0.2 million and $0.8 million, respectively). For the three and nine months ended September 30, 2009, nil and $0.1 million, respectively has been amortized against earnings (2008 - $0.3 million and $0.9 million, respectively). During the three months ended September 30, 2009, no Stapled Unit options were exercised, no Stapled Unit options were cancelled, and no Stapled Unit options expired (2008 - 14,760 Stapled Unit options with an average exercise price of $15.22 expired, and no Stapled Unit options were exercised or cancelled). During the nine months ended September 30, 2009, no Stapled Unit options were exercised, 47,500 Stapled Unit options with an average exercise price of $12.72 were cancelled, and 223,103 Stapled Unit options with an average exercise price of $13.08 expired (2008 - 15,297 Stapled Unit options with an average exercise price of $12.15 were exercised and 9,678 Stapled Unit options with an average price of $15.94 were cancelled and 14,760 Stapled Unit options with an average exercise price of $15.22 expired). 17. Financial instruments Accounting for financial instruments These interim consolidated financial statements follow the same accounting policies and methods of application used in the Company's audited annual consolidated financial statements of December 31, 2008. On February 11, 2009, the Company issued convertible debentures (note 12). The Company has designated these as held-for-trading and the carrying values are accounted for at fair value. The convertible debentures are revalued at fair value at each reporting date and changes in fair value from one period to the next are recognized against net income in the period. Transaction costs of nil and $5.5 million were incurred and expensed to the statement of operations in the period three and nine months ending September 30, 2009, respectively. 18. Contingencies and commitments During Q2, 2009 the City of Campbell River increased its tax rate on Class 7 managed forest lands. TimberWest filed a petition with the B.C. Supreme Court on June 9, 2009 to challenge this tax increase and a court hearing date was held in September. A ruling on this matter is anticipated later this year. TimberWest has paid the full assessed taxes. For the nine months ending September 30, 2009 the Company expensed $0.9 million in relation to the tax increase with the remaining capitalized on the Consolidated Balance Sheets which will be expensed over the remainder of the year. Any recovery based on the decision from the Courts would be recorded as a property tax recovery on the Consolidated Statements of Operations and Comprehensive Income at that time. 19. Comparative figures Certain comparative figures have been reclassified to conform to the current year presentation.
About TimberWest
TimberWest Forest Corp. is uniquely positioned as western Canada's largest private timber and land management company. The Company owns in fee simple approximately 322,000 hectares or 796,000 acres of private land and is in the business of selling timber products and real estate.
Stapled Units of TimberWest Forest Corp. are traded on the
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For further information: Investor Relations Contact, Bev Park, Executive Vice President and Chief Financial Officer, Telephone: (604) 654-4600, Facsimile: (604) 654-4662, Email: [email protected]
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