Published:
Fraser Papers Reports Fourth Quarter and Year End Results
Expands Sales of Specialty Papers
(All financial references are in US dollars unless otherwise noted)
Fraser Papers Inc. (TSX: FPS) today reported financial results for the fourth quarter and the year ended December 31, 2006. The Company achieved breakeven EBITDA for the fourth quarter of 2006 and a net loss of $12 million or $0.40 per share after interest, taxes, depreciation and amortization. This compared with a loss of $22 million or $0.75 per share in the fourth quarter of 2005.
QUARTERLY PROGRESS HIGHLIGHTS
During the fourth quarter of 2006, Fraser Papers
- Increased paper shipments over third quarter levels by 21,000 tons or 14% reflecting higher sales of specialty groundwood grades for printing applications;
- Realized product mix improvements in its paper sales that contributed to an incremental $9 million increase in its operating margins;
- Announced and implemented price increases of $20-60 per ton relating to 250,000 tons of annual paper sales that became effective on or before January 1, 2007, reflecting strong demand for the Company's specialty products;
- Was impacted by market related closures at three of its sawmill operations and by maintenance outages at the Company's Thurso and Edmundston pulp operations which more than offset ongoing cost reduction programs; and
- Continued acquisition discussions and, subsequent to year-end, announced an agreement to purchase Katahdin Paper Company, a 430,000 ton per year producer of specialty directory, magazine and catalogue papers, subject to receiving approval by a special committee of the board of directors, the full board of directors and shareholders.
"Despite fourth quarter results that were impacted by sawmill closures and maintenance downtime at two of our pulp and paper facilities, we were successful at improving our product mix by selling higher margin packaging and printing papers which displaced lower margin commodity products. We are confident that we will continue to build upon this progress during 2007 and we remain very focused on capturing the upside that exists at our paper operations from increased throughput and lower costs," said Dominic Gammiero, CEO of Fraser Papers.
FINANCIAL SUMMARY
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Three months ended Years ended
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US$ MILLIONS,
EXCEPT PER
SHARE AMOUNTS Dec 31, 2006 Dec 31, 2005 Dec 31, 2006 Dec 31, 2005
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EBITDA $ - $ (7) $ (7) $ 4
Loss $ (12) $ (22) $ (114) $ (29)
Per share $ (0.40) $ (0.75) $ (3.86) $ (0.98)
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Fourth Quarter Results
Fraser Papers achieved breakeven EBITDA for the fourth quarter of 2006, unchanged from the third quarter, but a $9 million improvement over the same period in 2005, after adjusting for the results from Company's previously owned timberlands operations. Paper shipments increased by 14% or 21,000 tons in the fourth quarter compared to the third quarter reflecting higher sales of groundwood paper for printing applications resulting in a modest reduction in the average realized price of $18/ton paper. Average cash costs for paper production were unchanged. During the quarter, the Company took seven weeks of downtime at each of its Canadian sawmills and four weeks at one of its U.S. sawmills due to weak lumber markets. In addition, a scheduled annual maintenance shut at the Company's pulp mill in Thurso, Quebec resulted in additional costs as more repairs were completed than originally planned and the mill ran into operational issues during the start-up. This shutdown, along with a planned maintenance shutdown at the Company's cogeneration facility in Edmundston, NB, negatively impacted the fourth quarter results by $9 million. Offsetting this impact, the Company received refunds of previously paid lumber duties of $11 million.
For the fourth quarter of 2006, Fraser Papers reported a loss of $12 million or $0.40 per share compared to a loss of $22 million or $0.75 per share in the fourth quarter of 2005. 2005 results included lower EBITDA and a restructuring charge of $8 million, or $0.18 per share after tax.
Full Year Results
For the full year 2006, EBITDA from the Company's Paper segment was a loss of $9 million, $1 million lower than the $8 million EBITDA loss generated in 2005. In addition, the Company's Timber segment generated EBITDA of $2 million, compared to $12 million in 2005. The Company completed the sale of its timber operations in the first quarter of 2006. In addition to the planned maintenance shuts, unscheduled downtime at the Company's pulp and paper operations negatively impacted EBITDA by $8 million in 2006. Total market-related downtime at the Company's sawmills in 2006 amounted to 14 weeks at one Canadian sawmill, 11 weeks at the other Canadian sawmill and four weeks at one U.S. mill. In 2005, the comparable numbers were seven weeks and six weeks for the Canadian sawmills and no downtime at the U.S. sawmills.
On a year-to-date basis, the Company generated a net loss of $114 million, or $3.86 per share versus $29 million, or $0.98 per share in 2005. Results for 2006 include charges of $161 million related to investment write-offs and plant closures, partly offset by a gain of $71 million on the sale of the Company's timberland operations in New Brunswick. In 2005, the Company recorded a $46 million gain on the sale of its timberland operations in Maine and a $41 million asset impairment charge.
BUSINESS INITIATIVES
Margin Improvement and Cost Reduction
The Company continued to improve its mix of products with higher shipments of specialty packaging and printing papers relative to lower margin commodity freesheet grades. Specialty paper shipments rose 10% in the fourth quarter compared with the third quarter and 8% compared to the fourth quarter of 2005. These increases displaced shipments of commodity freesheet grades, which fell 5% in the quarter and 39% compared to the fourth quarter of 2005. During 2006, shipments of specialty products improved 9% while shipments of commodity grades fell 25%.
The achievement in total product mix generated $21 million of additional sales margin during the year, representing the largest contributing factor to the Company's year-over-year margin improvement program in 2006. Full year margin improvement totaled $31 million exceeding the target of $29 million for the year. Margin improvement initiatives generated $9 million in the fourth quarter. Lower fibre usage and the benefits of the Berlin shutdown were the other primary contributors. Unfortunately, these margin improvements served to only partly offset significant cost pressures from energy, chemical costs and the strengthened Canadian dollar. For 2006, these cost pressures negatively affected results by $41 million when compared to 2005.
During the fourth quarter of 2006, average cash costs for the production of paper were unchanged from the third quarter reflecting maintenance costs associated with a scheduled cogeneration boiler outage at the Company's East Papers operation. Excluding the $2 million cost of this outage, the fourth quarter paper cash costs would have been $11 per ton less than the third quarter.
Pulp average cash costs were also higher in the fourth quarter due to the annual maintenance shutdown taken at the Company's hardwood kraft pulp mill in Thurso, Quebec. The impact of the outage on cash costs was $7 million or $119 per tonne. These costs were approximately $3 million or $50 per tonne, higher than planned as additional maintenance work undertaken was followed by a longer than planned ramp-up period to return to full capacity. Excluding the impact of this shutdown, normalized pulp cash costs in the quarter would have been an estimated $485 per tonne, comparable with costs in the third quarter.
Fraser Papers is in the process of improving performance at its paper operations which are currently operating at 95% of production capacity. Similarly, the Company is focused on increasing throughput from its three pulp operations, the Thurso hardwood pulp mill and the sulphite and groundwood pulp mills in Edmundston. This initiative will reduce the unit costs of internal fibre and reduce required purchases of market softwood pulp. Fibre costs currently represent approximately 40% of total paper manufacturing costs.
Market Focus and Competitive Advantage
The Company's existing portfolio of 13 paper machines has the capability of producing a wide range of paper grades for demanding applications with narrow technical specifications and short lead times. The Company seeks to compete in specific freesheet and groundwood market segments where it can attain significant market share, with a focus on specialty packaging and lightweight printing papers. Approximately 65% of the Company's annual production of 660,000 tons are in these strategic market segments today.
The Company currently benefits from a significant share of the markets for pet food bags, thermal transfer papers, pharmaceutical papers and lightweight financial printing papers. The Company supports this business with a focus on providing superior customer service and continuing enhancements in product development.
During 2006, the Company, working closely with new and existing customers, developed 3 8 new products. New products developed over the past 24 months represented 11% of shipments in 2006. Development of new products and a focus on growing sales in targeted segments, has allowed the Company to displace approximately 47,000 tons of lower margin business over the past twelve months.
Acquisition of Katahdin Paper Company LLC
On January 30, 2007, Fraser Papers announced an agreement to purchase the operations of Katahdin Paper Company LLC ("Katahdin") from Brookfield Asset Management Inc. ("Brookfield"). Through this transaction, Fraser will acquire two businesses: a 250,000 ton per year directory paper business with leading share in the North American market and a 180,000 ton per year super-calendered paper business serving customers in the retail insert, catalogue and magazine market. Fraser Papers has managed Katahdin under contract for Brookfield since 2003.
Total cash consideration for the acquisition is estimated to be $80 million, including estimated working capital at closing of $30 million. In addition, Fraser Papers will make royalty payments based on the cumulative free cash flow generated by the super-calendered business.
The acquisition of Katahdin fits the Company's business strategy as it represents an opportunity to grow in paper markets where it can establish a competitive advantage. The Company believes that the agreement is based on an attractive valuation for the directory paper assets that its management has operated for a number of years. The proposed transaction structure also provides for payments contingent on the future performance of the super-calendered business.
As the acquisition of Katahdin is a related-party transaction under Canadian securities regulations, the agreement is subject to the approval of a special committee of the Board of the Directors of Fraser Papers, the full Board of Directors and minority shareholders of the Company. An information circular containing details concerning the transaction, including a formal valuation, will be mailed to shareholders in late March. A special meeting of shareholders will be scheduled toward the end of April.
OUTLOOK
Markets for the Company's specialty packaging and printing papers are expected to remain firm with volumes comparable with the fourth quarter and prices continuing to trend higher in certain segments. The first and second quarters of the calendar year are typically strong for lightweight financial and specialty packaging papers. During the fourth quarter, Fraser announced price increases of $20-60 per ton relating to approximately 250,000 tons of annual paper sales that became effective on or before January 1, 2007. Certain segments of the paper markets including lightweight coated groundwood and commodity freesheet began to soften during the fourth quarter of 2006 reflecting seasonal weakness in demand. The Company took seven days of downtime on one paper machine at its Gorham paper mill during January, 2007.
List prices for northern bleached hardwood pulp remain at attractive levels worldwide with strong demand from non-integrated paper mills. Higher market prices, the elimination of lower margin export sales and strong demand from domestic customers for high quality hardwood pulp produced at the Company's Thurso pulp mill led to an improvement in mill nets of $82 per tonne in the fourth quarter over the same period one year ago. While additional global capacity, built to supply the Asian and European markets, is expected to come on stream during 2007, the Company expects that demand for Fraser's hardwood pulp in domestic markets will remain firm in the short term.
While housing markets and lumber prices continue to be weak, the most recent press release from the U.S. Federal Reserve provided optimism for firmer economic growth and some tentative signs of stabilization in the U.S. housing market.
Management believes that the acquisition of Katahdin, expected to close at the end of April, is an attractive investment for the Company, providing the opportunity for substantial growth in the complementary directory and super-calendered paper segments, with products having strong brand recognition and providing a broader offering to Fraser Papers' publication customers.
Fraser Papers is focused on improving results from its operations. Priority is being placed on lowering overall fibre costs and maximizing production on its paper machines. There are no scheduled maintenance outages during the first quarter of 2007. The sulphite pulp mill in Edmundston, New Brunswick will take an extended 21 day outage to perform major maintenance on its recovery boiler during the second quarter.
FOURTH QUARTER CONFERENCE CALL
Fraser Papers' fourth quarter investor conference call can be accessed by teleconference on Wednesday, February 7, 2007 at 9:50 a.m. (Eastern time) by dialing 1-888-391-0071 (toll free in North America) or 1-212-676-4915 (International). The call will be archived through March 30, 2007 and can be accessed by dialing 416-626-4100 or 1-800-558-5253 and quoting the reservation number 21324643. The conference call can also be accessed via web cast on the Fraser Papers web site at www.fraserpapers.com.
Fraser Papers is an integrated specialty paper company which produces a broad range of specialty packaging and printing papers. The Company has operations in New Brunswick, Maine, New Hampshire and Quebec. Fraser Papers is listed on the Toronto Stock Exchange under the symbol: FPS. For more information, visit the Fraser Papers web site at www.fraserpapers.com.
Note: This press release contains "forward-looking statements" including statements about the Company's possible future intentions, the possible success of price increase announcements, the Company's expectations and estimations with respect future market conditions, the Company's expectations with respect to its operations or various costs that could impact the business, the possible acquisition of Katahdin and the expected impact of specific events on financial results in future quarters. These statements are based on certain assumptions and reflect the Company's current expectations. These assumptions include the continuation of recent trends with respect to a number of economic factors and assumptions implicitly or explicitly mentioned or referred to in this release. The words "will", "believe", "expect", "anticipate", "intend", "estimate", "outlook", "foresee", "forecast", "are", "may", "could", "continuing", "subsequent", "remain", "can", "seek" and other expressions (including all variations of such words) which are predictions of or could indicate future events and trends and which do not relate to historical matters, identify forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements include general economic conditions, interest rates, availability of equity and debt financing, lower demand for lumber, pulp or paper products, price increases or reductions for any products the Company sells, increases in costs of production, decisions by political or regulatory bodies in Canada or the United States, various determinations to be made by the special committee of the board of directors, the full board of directors and the shareholders of the Company and other risks detailed from time to time in the documents filed by the Company with the securities regulators in Canada. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
MANAGEMENT'S DISCUSSION AND ANALYSIS
February 6, 2007
This Management's Discussion and Analysis should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes thereto for the period ended December 31, 2006 as well as the Management's Discussion and Analysis and the audited financial statements for the year ended December 31, 2005. In this MD&A, "Fraser Papers", "we", "our" and "us" mean Fraser Papers Inc. and all of its subsidiaries while "Company" means Fraser Papers Inc. as a separate corporation. "Brookfield" means Brookfield Asset Management Inc. (a related party by virtue of a significant shareholding in the Company) and all of its subsidiaries.
EBITDA, net debt, net debt to net debt plus equity, and cash costs are non-GAAP measures described in the Definitions section. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. There are no directly comparable GAAP measures to any of these measures. A quantitative reconciliation of each non-GAAP measure to the nearest comparable GAAP measure is provided at the end of this Management's Discussion and Analysis. All financial references are in U.S. dollars unless otherwise noted.
OVERVIEW
Along with the rest of the North American pulp and paper industry, Fraser Papers faced unprecedented high input cost pressures during 2006 from fibre, energy, chemicals and the impact of a strong Canadian dollar. These cost pressures and a difficult business environment have contributed to widespread industry capacity reduction in a number of pulp and paper grades. These capacity reductions are necessary for the industry to return to acceptable levels of profitability. With reduced supply for hardwood and softwood pulp, as well as fine papers, and stable demand, market prices have responded, providing the opportunity for the industry to begin to generate acceptable product margins that reflect the capital invested in the industry.
Offsetting this positive shift in market fundamentals for pulp and paper is the weakness in the US housing markets which has put pressure on lumber prices and contributed to widespread downtime at sawmill operations.
In the past two years, Fraser Papers has responded. We shut our highest cost pulp mill; sold our timberlands at attractive valuations using a portion of the proceeds to pay down debt to a conservative, but sustainable, level; took the necessary charges related to an unprofitable investment position in a former paper division; and began to refocus and improve our core specialty paper business. During this period of change within our industry, we are also looking to grow our business by seeking opportunities where there are potential synergies with our existing business. On January 30, 2007, we announced an agreement to purchase the operations of Katahdin Paper Company LLC ("Katahdin"), a business we have managed since 2003.
These recent actions are consistent with our long term business strategy which involves:
- focusing on products where Fraser Papers has or can develop a sustainable competitive advantage;
- further reducing costs and improving performance at each of our operations;
- repositioning assets to surface additional value to shareholders;
- building the business selectively and opportunistically, based on value; and
- enhancing equity returns by maintaining an appropriate level of financial leverage at the lowest cost.
Results for the recent quarter were breakeven on an EBITDA basis, a significant improvement from the negative $7 million generated in the fourth quarter of 2005 and consistent with the breakeven EBITDA in the third quarter of 2006. These results remain at an unacceptable level. In the fourth quarter, we were setback by a maintenance shutdown at the pulp mill in Thurso, Quebec that went off schedule and over budget by $3 million. In addition, the recent decline in lumber prices forced the sawmills to take market-related downtime. However, we were able to more than offset these poor operating results with the receipt of $11 million in anti-dumping lumber duties. Finally, we have not yet begun to see the benefits of operating initiatives that we have put in place to counter high fibre, energy, and chemical prices as well as the strength of the Canadian dollar.
COST REDUCTION AND MARGIN IMPROVEMENT INITIATIVES
In order to provide adequate results for our shareholders, Fraser Papers is redoubling our focus on achieving better performance across all our operations including throughput, process efficiencies and lowest possible cost structure in order to produce papers that we can sell successfully into growing market segments. Fraser Papers has had a margin improvement program in place for many years which has successfully reduced costs. Over the past 24 to 36 months, rising input costs have more than offset margin improvement initiatives.
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Three months ended Twelve months ended
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Dec 31 Sept 30 Dec 31 Dec 31 Dec 31
2006 2006 2005 2006 2005
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Paper operations ($ per ton)
Average cash cost (1) 884 885 824 881 819
EBITDA Margin 12 27 (6) 3 2
Pulp operations ($ per
tonne)
Average cash cost (1) 604 480 495 528 475
EBITDA Margin (117) 16 (80) (49) (40)
Lumber operations ($ per
Mmbfm)
Average cash cost (1)(2) 349 332 330 336 318
EBITDA Margin 74 (52) (12) 5 15
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(1) See "Definitions" section.
(2) Lumber average cash cost excludes anti-dumping duties refund.
During the fourth quarter of 2006, average cash costs for Paper were unchanged from the third quarter but increased $60 per ton compared to the fourth quarter of last year primarily due to increased input costs. Cash costs in the fourth quarter were negatively affected by a scheduled outage at the cogeneration facility at our East Papers operation. Excluding the cost of the outage, the fourth quarter paper cash costs would have been $11 per ton less than the third quarter.
Average cash costs for pulp were up significantly in the fourth quarter due to the annual maintenance shutdown taken at the pulp mill in Thurso, Quebec. We estimate the impact of the outage on cash costs was $119 per tonne in the quarter reflecting a normalized fourth quarter pulp cash cost of $485 per tonne, marginally higher than the third quarter.
Average cash costs for lumber, which exclude the effect of the anti-dumping duties refunds, increased due to market-related downtime taken in the fourth quarter compared to the third quarter and the fourth quarter of last year. The EBITDA margins in the fourth quarter improved by $126 per Mmbfm over the third quarter due to $11 million of the anti-dumping refunds which represented $164 per Mmbfm. The remaining margin deterioration was due to reduced market pricing and the impact of market downtime on the cash costs.
The margin improvement program for 2006 generated $31 million of improvements which exceeded the target of $29 million for the year. The margin improvement program generated $9 million in the fourth quarter. Improvements were derived primarily from improved sales product mix from strategic sales and marketing initiatives and improved fibre utilization. Unfortunately, these margin improvements served to only partly offset significant cost pressures from energy, chemical costs and the strengthened Canadian dollar. For 2006, these cost pressures negatively affected results by $41 million when compared to 2005.
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2006 Margin
PRE-TAX US$ MILLIONS Improvements 2006 Targets
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Sales Mix Optimization $ 21 $ 14
Volume Improvement - 11
Fibre / Chemical Optimization 4 6
Energy Usage 7 6
Other (1) (8)
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Total $ 31 $ 29
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Closure of Berlin Pulp Mill
In April 2006, Fraser Papers permanently shut its 227,000 tonne per year hardwood kraft pulp mill in Berlin, New Hampshire. Operating costs, which had averaged $540 per tonne of pulp in the first quarter of 2006, were uncompetitive. The closure has enabled a consolidation of Fraser Papers' market pulp sales position with the elimination of lower margin export sales and a resultant improvement in the average realization on sales from the Company's pulp mill in Thurso, Quebec. During the quarter, Fraser Papers sold the assets relating to the Berlin mill including the property, plant and remaining equipment for net proceeds of $3 million. No gain or loss was recorded on the sale.
MARKET FOCUS AND COMPETITIVE ADVANTAGE
Fraser Papers competes in specific market segments where we can deploy our capability in manufacturing lightweight freesheet and groundwood papers for a number of specialty applications. Our focus is on select printing and consumer packaging applications. Typically, these discrete market segments are small relative to the broader North American commodity markets and are a good match for our paper machine capabilities and capacities. The particular markets that we are currently focused on are typically between 100,000 to 1,000,000 tons in size and provide Fraser Papers with the opportunity to have an influential market share. Approximately 65% of our 660,000 tons of annual production are in these markets today. Over time, we seek to grow the volume of business we have in these core paper markets where we feel we can achieve the best margins. These markets utilize food and other consumer packaging paper grades, financial printing and other lightweight freesheet papers, hi-bright groundwood and ultra-lightweight coated groundwood papers.
Fraser Papers achieved 10% growth in its specialty freesheet papers business in the fourth quarter of 2006 as compared with the same period in 2005 specifically through increased volumes of lightweight opaque grades for financial printing applications. In the quarter, shipments of commodity uncoated freesheet grades declined by 39% over 2005 levels as Fraser Papers exited lower margin grades. Over the quarter, increased sales of added value, high-bright specialty groundwood papers also enhanced margins. These product mix improvements were offset by weak coated groundwood market conditions reducing realized prices for Fraser Papers' paper products by $18 per ton for the fourth quarter of 2006 compared with the third quarter. Compared to the fourth quarter of 2005, average price realizations for all paper products have improved $61 per ton or 7%.
ASSET REPOSITIONING INITIATIVES
Gain on sale of New Brunswick Timberlands
On January 31, 2006, Fraser Papers sold its timberland assets in New Brunswick (the "NB Timberlands") to Acadian Timber Income Fund ("Acadian" or the "Fund"). Net proceeds were $125 million, including $94 million in cash and $31 million of securities which are exchangeable for 3.6 million units of the Fund, representing a 30% interest in the equity of the Fund, or a 22% interest in the Fund on a fully diluted basis. The sale of the NB Timberlands assets resulted in a gain of $71 million.
In conjunction with the sale, Fraser Papers entered into agreements with Acadian whereby Fraser Papers retained the right to purchase fibre, in amounts approximately equal to its historical consumption, for a period of up to 20 years at prevailing market prices.
Smart Papers Restructuring
During the first quarter of 2005, Fraser Papers sold a production facility in Park Falls, Wisconsin, a leased distribution facility in West Chicago, Illinois and related net assets (collectively, the "Midwest Operations"). As consideration, Fraser Papers received a 40% common equity interest in an entity which owned Smart Papers LLC and the Midwest Operations.
During the first quarter of 2006, Fraser Papers recorded a charge of $107 million relating to the Chapter 11 filing of Smart Papers LLC and its affiliates ("Smart Papers"). In addition, Fraser Papers recorded an additional charge of $4 million in the fourth quarter due to changes in the estimated reserves related to certain contracts where Fraser Papers had provided financial guarantees. During 2006, Fraser Papers made $16 million of payments against the accruals recognized.
During the third quarter, Fraser Papers completed the sale of a boiler, previously leased to Smart Papers, to a third party. The total proceeds of $4 million will be payable in installments over seven years and include contingent consideration of $1 million. Fraser Papers will recognize such proceeds when receipt is certain. During 2006, Fraser Papers received less than $1 million of proceeds from the sale.
GROWTH INITIATIVES
Acquisition of Katahdin Paper Company LLC
On January 30, 2007, Fraser Papers announced an agreement to acquire Katahdin from Brookfield for $80 million, payable in cash, on closing, subject to an adjustment for working capital. In addition, Fraser Papers will make contingent royalty payments based on the cash flow of the super-calendered business. The transaction is expected to close in April, 2007. Katahdin, which Fraser Papers currently manages under contract for Brookfield, represents an opportunity for Fraser Papers to substantially grow our specialty papers business into two complementary groundwood segments namely, directory and supercalendered papers. We believe the addition of scale, quality and technology that Katahdin's three modern paper machines bring to our existing asset base will improve our competitiveness. The transaction is clearly consistent with our strategy to focus on niche segments in the broader paper markets where we can establish sustainable competitive advantage. With its location in central Maine, Katahdin benefits from access to a healthy fibre basket, skilled labour, infrastructure, and proximity to our customers' press rooms in the North East and Midwest. This acquisition qualifies as a related party transaction under Canadian securities regulations. The board of directors of the Company has established a special committee, comprised entirely of directors independent of Brookfield, to evaluate the potential acquisition of Katahdin. The acquisition will also have to be approved by shareholders who are unrelated to the Company and Brookfield.
FINANCIAL INITIATIVES TO ENHANCE SHAREHOLDER RETURNS
Purchase and repayment of senior notes
During the first six months of 2006, the Company made market purchases totaling $30 million of its 8.75% senior unsecured notes for total cash consideration of $26 million. During the second quarter of 2006, the Company repaid $52 million of notes held by the public and cancelled $14 million of notes held by Fraser Papers.
No further purchases were made in the fourth quarter and Fraser Papers continues to hold $16 million of notes which have not been cancelled but have been netted against long-term debt on the consolidated balance sheet. At December 31, 2006 Fraser Papers' net debt to net debt plus equity stood at 14%, which is amongst the lowest in the paper industry.
SUMMARY OF QUARTERLY RESULTS
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Earnings (loss) per
share (basic and
US$ MILLIONS, EXCEPT PER Net Sales Earnings (loss) diluted)
SHARE AMOUNTS
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2006
4th Quarter $ 187 $ (12) $ (0.40)
3rd Quarter 185 (6) (0.21)
2nd Quarter 208 (18) (0.61)
1st Quarter 216 (78) (2.64)
2005
4th Quarter $ 219 $ (22) $ (0.75)
3rd Quarter 226 (5) (0.16)
2nd Quarter 217 (5) (0.17)
1st Quarter 256 3 0.10
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OPERATING RESULTS
Net sales for the fourth quarter of 2006 were $187 million, as compared to $219 million in the fourth quarter of 2005. The decrease was mainly attributable to the sale of the paperboard operations in 2005, the sale of the NB Timberlands in January, 2006, and the permanent closure of the Berlin pulp mill in April, 2006. After adjusting for these divestitures and the closure, net sales were down by 4% compared to the same quarter of 2005 due to increased internal pulp shipments and lower lumber prices, partly offset by increased uncoated freesheet and pulp pricing.
Compared to the third quarter of 2006, net sales increased marginally due to improved paper shipments, partly offset by market downtime at our lumber operations. Paper operations revenue significantly improved 11% compared to the third quarter of 2006 due to seasonally higher production of financial printing papers.
Following the sale of its NB Timberlands, Fraser Papers has one reportable segment comprised of its integrated paper, pulp, and sawmill operations. The Company's results include the results of its timberlands operations for periods up to January 31, 2006.
Net sales by segment for 2006 and 2005 were as follows:
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Three months ended Twelve months ended
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Dec 31 Sept 30 Dec 31 Dec 31 Dec 31
US$ MILLIONS 2006 2006 2005 2006 2005
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Paper $ 187 $ 185 $ 206 $ 792 $ 874
Timber n/a n/a 19 6 74
Inter-segment - - (6) (2) (30)
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Total $ 187 $ 185 $ 219 $ 796 $ 918
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EBITDA by segment was as follows:
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Three months ended Twelve months ended
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Dec 31 Sept 30 Dec 31 Dec 31 Dec 31
US$ MILLIONS 2006 2006 2005 2006 2005
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Paper $ - $ - $ (9) $ (9) $ (8)
Timber n/a n/a 2 2 12
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Total $ - $ - $ (7) $ (7) $ 4
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In the fourth quarter, EBITDA for the Paper segment was breakeven, unchanged from the third quarter. Fourth quarter results included the benefit of $11 million of anti-dumping duties refunded as a result of the U.S. and Canadian governments reaching an agreement with respect to softwood lumber trade between the two countries. Partly offsetting this was the impact of planned maintenance shutdowns at Thurso and Edmundston which negatively affected EBITDA by $9 million and the weak lumber markets. The shutdown at Thurso was followed by a lengthy and difficult start-up. Overall operating performance at the Company's paper operations improved, benefiting from the scheduled and unplanned outages taken at the Company's East Papers operation in the second quarter.
Realized paper prices declined by 2% in the fourth quarter primarily in the coated groundwood products due to poor market conditions. Prices for Fraser Papers' northern bleached hardwood kraft ("NBHK") pulp rose modestly. Lumber pricing continued to decline leading to widespread industry downtime. Cost pressures continued as the combined effect of higher chemical and energy costs and the continued strength of the Canadian dollar resulted in an estimated $7 million increase in costs, as compared to the fourth quarter of 2005. For the year ended December 31, 2006, these items contributed cost increases of $41 million compared to the same period last year. (See discussion in "Business Segments")
Depreciation expense was $8 million in the quarter, as compared to $9 million in the comparable period in 2005. The decrease in depreciation is mostly due to the divestitures completed in 2005 and 2006.
LIQUIDITY AND CAPITAL RESOURCES
Operating and investing cash flows
During the quarter, cash flow from operations after changes in working capital was an outflow of $14 million as compared to $13 million during the same quarter of 2005. Operating cash flow before changes in working capital in the fourth quarter improved to $1 million compared to an outflow of $16 million in 2005, primarily due to improved operating results. During the fourth quarter, Fraser Papers invested $15 million in working capital in the form of receivables, primarily due to strong shipments of lightweight opaque and specialty groundwood grades in December.
Net debt and Capital Resources
Long term debt of $68 million consists of senior, unsecured notes which bear interest at 8.75% and are due in 2015. The indenture agreement governing the notes contains certain covenants, the more significant of which include restrictions on the incurrence of additional indebtedness, sale of assets and reinvestment of proceeds, mergers, creation of liens, payment of dividends and repurchase of the Company's shares.
During 2006, following the repurchases and repayments of the notes, the Company reduced its total long-term debt by $82 million, resulting in a net debt to net debt plus equity ratio of 14%.
During the fourth quarter, the Company increased it maximum borrowing capacity under its line of credit to $90 million on more favorable terms. The increased line of credit and current cash balances provide liquidity for future growth initiatives, including the acquisition of Katahdin.
CAPITAL INVESTMENTS
Year to date capital investments totaled $12 million, significantly below the $49 million recorded in 2005 when Fraser Papers invested $34 million to buy out a lease related to an electrical cogeneration facility. During the fourth quarter, spending of $3 million was primarily focused on maintenance of the business.
EMPLOYEE BENEFIT PLANS
Employee benefit plans funding was $7 million in the fourth quarter of 2006, a decrease of $2 million from the comparable period in 2005. The decrease is due to a lower funding requirement for the U.S. plans and a better funded position. The Company is currently in discussions with regulatory agencies regarding funding requirements for certain of its pension plans. If regulatory approval is obtained, the Company expects that the funding requirements will be further reduced in 2007. If regulatory approval is not obtained, there may be a one-time, retroactive payment of approximately $4 million, in addition to scheduled funding. (See discussion in "Forward-looking Information")
Benefit plan expense for the quarter was $5 million as compared to $6 million in the comparable quarter in 2005. The expense in 2005 included a one-time charge related to the sale of the paperboard operations of $3 million. Expense for the fourth quarter of 2006 is higher by $2 million due to actuarial losses of prior periods and updated actuarial assumptions. For the full year of 2006, benefit plans expense was $21 million as compared to $13 million in 2005. The prior year expense was net of $4 million of curtailment gains as a result of asset sales. The remainder of the increase is mostly due to actuarial losses of prior periods and updated actuarial assumptions.
Improved returns on plan assets significantly reduced the deficit of the defined benefit obligations over plan assets from $175 million as of December 31, 2005 to $113 million as of December 31, 2006. In 2007, we expect annual funding requirements and pension expense to be lower than 2006. (See discussion in "Forward-looking Information")
CONTRACTUAL OBLIGATIONS
The following table presents the total contractual obligations for which cash flows are fixed or determinable as of December 31, 2006:
---------------------------------------------------------------------------
Less than One to Four to After five
US$ MILLIONS Total one year three years five years years
---------------------------------------------------------------------------
Debt $ 68 $ - $ - $ - $ 68
Operating leases 1 1 - - -
Purchase obligations 50 38 12 - -
---------------------------------------------------------------------------
Total contractual
obligations $ 119 $ 39 $ 12 $ - $ 68
---------------------------------------------------------------------------
Obligations under operating leases include future payments for office facilities and equipment leases. The purchase obligations are commitments for the purchase of energy and raw materials.
The following table presents the total contractual obligations for which cash flows are fixed or determinable as of December 31, 2006:
Norbord Inc. (the former parent company of Fraser Papers) provides guarantees for certain obligations of Fraser Papers under a financial commitments agreement. At December 31, 2006, the maximum potential amount of the obligations guaranteed was estimated to be $7 million. These guarantees have not been included in the table above.
HEDGING ACTIVITIES
From time to time, Fraser Papers will enter into arrangements to fix the future price for certain products or to fix the exchange rate on certain of its Canadian dollar denominated cash flows.
During 2006, Fraser Papers entered into a pulp swap agreement to deliver 24,000 tonnes of market pulp through December 2006 at an average price of $574 per tonne. This swap effectively fixed the selling price on a portion of Fraser Papers' production and was designated as a hedge of a portion of future pulp sales. During the fourth quarter and for the year ended December 31, 2006, Fraser Papers realized losses on these contracts of $1 million and $4 million respectively. There were no outstanding pulp hedges at December 31, 2006.
During 2006, Fraser Papers entered into futures contracts to deliver lumber at fixed prices realizing a gain of $1 million. There were no outstanding lumber futures at December 31, 2006.
The Company enters into forward contracts to fix the exchange rate on its Canadian dollar-denominated net liabilities and certain Canadian dollar cash flows. In 2006, the Company recognized $2 million of gains on these contracts. At December 31, 2006, the unrealized losses on these contracts amounted to less than $1 million. These realized and unrealized gains or losses are offset by realized and unrealized gains or losses on the net monetary liabilities being hedged.
BUSINESS SEGMENTS
As a result of the sale of its NB Timberlands, Fraser Papers has one reportable segment comprised of its integrated paper, pulp, and sawmill operations. During 2005, Fraser Papers reported the results of its Timber operations in a separate segment.
Paper Segment
The Paper segment is comprised of 13 paper machines at two locations, one market pulp facility and four sawmills. Products include specialty packaging and printing papers, commodity freesheet papers, specialty groundwood papers, light weight coated groundwood papers and towel, as well as hardwood pulp and softwood lumber. The Paper segment sales accounted for 100% of Fraser Papers' net sales in the fourth quarter of 2006 and 96% of the net sales in the fourth quarter of 2005. After the sale of the NB Timberlands in January 2006, all of Fraser Papers' remaining operations are in the Paper segment.
The following is a summary of financial information for the Paper segment:
---------------------------------------------------------------------------
Three months ended Twelve months ended
----------------------------------------------------
Dec 31 Sept 30 Dec 31 Dec 31 Dec 31
2006 2006 2005 2006 2005
---------------------------------------------------------------------------
Net sales $ 187 $ 185 $ 206 $ 792 $ 874
EBITDA(1) - - (9) (9) (8)
Depreciation 8 8 9 32 38
Capital investments 3 4 2 12 49
---------------------------------------------------------------------------
(1) See "Definitions" Section.
The Paper segment is broken into three operations: Paper, Pulp and Lumber.
Paper Operations
Paper operations are comprised of the following product groups: specialty packaging, specialty printing, commodity freesheet papers, specialty groundwood, lightweight coated groundwood, and towel.
---------------------------------------------------------------------------
Three months ended Twelve months ended
--------------------------------------------------
Dec 31 Sept 30 Dec 31 Dec 31 Dec 31
2006 2006 2005 2006 2005
---------------------------------------------------------------------------
Sales (US$ millions) 157 141 142 596 563
EBITDA (US$ millions) 2 4 (1) 2 1
EBITDA ($ per ton) 12 27 (6) 3 2
EBITDA margin(2) 1% 3% (1%) 0% 0%
Shipments (000 tons)(1)
Specialty packaging 13 13 11 55 51
Specialty printing 78 71 72 307 281
Commodity freesheet
papers 19 20 31 81 108
Specialty groundwood 36 26 28 117 115
Lightweight coated
groundwood 16 11 16 59 66
Towel 10 10 10 39 38
---------------------------------------------------------------------------
172 151 168 658 659
Average Revenue Realized
($ per ton)(1)
Specialty packaging 1,175 1,198 1,130 1,172 1,136
Specialty printing 973 961 921 948 918
Commodity freesheet
papers 855 856 685 821 700
Specialty groundwood 775 798 702 766 696
Lightweight coated
groundwood 770 808 888 782 872
Towel 773 780 761 774 728
---------------------------------------------------------------------------
Weighted Average ($ per
ton) 903 921 842 893 845
Average Cash Operating
Cost
($ per ton) 884 885 824 881 819
Reference Prices ($ per
ton)(3)
50# offset rolls 833 847 695 815 709
34# no. 5 rolls 938 962 1,020 975 986
22.1# white directory 725 725 675 722 675
---------------------------------------------------------------------------
(1) 2005 volumes exclude divested Midwest and Paperboard operations.
(2) EBITDA Margin is EBITDA as a percentage of Sales.
(3) Reference prices are from Resource Information Systems, Inc. ("RISI").
Market conditions continued to be healthy for most paper products. Demand and pricing for uncoated freesheet stabilized in the fourth quarter; however, there are signs that momentum is slowing. Average benchmark pricing for commodity uncoated freesheet (50# offset rolls) declined by 2%, or $14 per ton, over the previous quarter to a level of $833 per ton. While Fraser Papers' commodity freesheet papers trend with the benchmark grade, Fraser Papers' specialty packaging and printing papers tend to display more stable pricing reflecting the contractual nature of the business and strong customer relationships.
Fraser Papers' marketing strategy is to focus on targeted market segments where the Company can have leadership and influence, matching our technical competencies for lightweight papers and technical specialty grades. Fraser Papers has approximately 82% of its freesheet paper sales that fit this description, and the strategy is to transition the balance into new or existing specialty market segments.
Specialty packaging products are used for food packaging which contain both stain resistant and non-stain resistant packaging papers. Fraser Papers has the ability to meet tight technical standards for applications such as pet food bags and dry mix consumer pouches and bags. Fraser Papers' packaging business has grown 8% for the year 2006 compared to 2005. Specialty packaging revenue realized in the fourth quarter declined over the third quarter due to a mix change reflected by increased volume of non-stain resistant packaging papers.
Specialty printing papers includes products that are characterized by tight technical specifications and niche applications including labelling and thermal point-of-sale receipts as well as lightweight opaque grades for financial printing applications. Growth in this product line has been 9% for the year 2006 compared to 2005.
Commodity freesheet papers are a key focus of efforts to bottom-slice unprofitable grades and customers. The 2006 volume of commodity freesheet grades declined by 25% over 2005 levels as Fraser Papers narrows its focus on specialty packaging and printing paper products in strategic markets.
Groundwood operations had mixed results in the fourth quarter. Demand for Fraser Paper's specialty groundwood shipments improved by 38% from the third quarter, due in part to strong shipments of financial printing papers. Average benchmark pricing for uncoated groundwood (22.1# white directory) was stable over the previous quarter at $725 per ton. Compared to the third quarter, average revenue realized was $23 per ton lower, due primarily to the shipment of 10,000 tons with less than average margins.
However, reduced pricing for lightweight coated groundwood continued in the fourth quarter. Average benchmark pricing for coated groundwood (34# no. 5 rolls) declined by 2%, or $24 per ton, over the previous quarter to $938 per ton.
Fraser Papers is undertaking to further improve the operating performance of its paper operations. Specifically, Fraser Papers is seeking to increase the throughput from its sulphite and groundwood pulp mill in Edmundston which will reduce the cost of fibre to the paper machines. Additionally, Fraser Papers is in the process of an in-depth analysis to evaluate opportunities to improve paper machine efficiencies. These initiatives are expected to improve the cash cost of operations for our paper operations. (See discussion in "Forward-looking Information")
Three Months ended December 31, 2006 compared to Three Months ended September 30, 2006
The paper operations generated EBITDA of $2 million in the fourth quarter on sales of $157 million. This was a $2 million EBITDA decrease from the previous quarter which had an EBITDA of $4 million on $141 million of sales. The $2 million decrease in EBITDA compared to the third quarter was due to lower coated groundwood pricing, temporary product mix changes and a scheduled cogeneration boiler outage at East Papers, but these were only partially offset by improved cash costs and the weakening Canadian dollar. The Canadian dollar averaged US$0.88 in the fourth quarter of 2006 compared to US$0.89 in the third quarter of 2006.
Shipments increased by 14% in the fourth quarter compared to the third quarter due to higher demand for specialty printing and groundwood grades.
Three Months ended December 31, 2006 compared to Three Months ended December 31, 2005
The paper operations had an EBITDA of $2 million in the fourth quarter on sales of $157 million. This was a $3 million EBITDA improvement from the previous year's quarter which had an EBITDA loss of $1 million on $142 million of sales. Improved pricing, product mix focus and operating efficiencies significantly improved EBITDA in the quarter; however, the gains were muted by a $2 million cogeneration boiler facility outage, higher energy costs and the strong Canadian dollar. The Canadian dollar averaged US$0.88 in the fourth quarter of 2006 compared to US$0.85 in the fourth quarter of 2005.
Shipments improved by 2% in the fourth quarter compared to the same quarter last year due to the improved specialty printing and groundwood markets.
Twelve Months ended December 31, 2006 compared to Twelve Months ended December 31, 2005
The paper operations generated EBITDA of $2 million for 2006 on sales of $596 million. This was a $1 million improvement from 2005 when Fraser Papers generated EBITDA of $1 million on $563 million of sales. Improved pricing and demand for Fraser Papers' higher margin grades and the focus on margin improvements led to significant EBITDA improvements; however, these were offset by East Papers' maintenance outages in the second quarter of 2006 of $7 million and over $24 million of increased chemical and energy costs and the strong Canadian dollar compared to 2005. The Canadian dollar averaged US$0.88 in 2006 compared to US$0.83 in 2005.
Shipments remained stable in 2006 compared to 2005.
Pulp Operations
The pulp operation is comprised of a NBHK market pulp mill in Thurso, Quebec. In the second quarter of 2006, Fraser Papers closed a NBHK market pulp mill in Berlin, New Hampshire.
---------------------------------------------------------------------------
Three months ended Twelve months ended
-----------------------------------------------
Dec 31 Sept 30 Dec 31 Dec 31 Dec 31
2006 2006 2005 2006 2005
---------------------------------------------------------------------------
Sales (US$millions) 12 16 33 80 132
EBITDA (Thurso) (US$millions) (5) 2 (2) (4) (2)
EBITDA (Berlin) (US$millions) - - (4) (5) (8)
Loss on Pulp Hedge
(US$millions) (2) (1) (1) (4) (5)
---------------------------------------------------------------------------
(7) 1 (7) (13) (15)
Pulp EBITDA ($ per tonne) (117) 16 (80) (49) (40)
EBITDA Margin(1) (58%) 6% (21%) (16%) (11%)
Shipments (000 tonnes)(2) 60 60 87 263 371
Average Revenue Realized
($ per tonne)(2) 530 528 448 505 455
Average cash operating
costs ($ per tonne) 604 480 495 528 475
Reference Price
($ per tonne)(3)
NBHK market pulp 685 675 595 654 599
---------------------------------------------------------------------------
(1) EBITDA Margin is EBITDA as a percentage of Sales.
(2) Pulp volumes and revenues realized include internal sales but exclude
pulp hedges.
(3) Reference prices are from RISI's Pulp and Paper Weekly.
Market conditions continue to improve for the pulp operations, but there are signs of the NBHK market stabilizing. Improved pricing for the NBHK market pulp continued in the fourth quarter. Average benchmark pricing for NBHK improved by 15%, or $90 per tonne, over the fourth quarter of 2005 to $685 per tonne.
Market pulp production in the fourth quarter of 2006 decreased 31% from the comparable quarter in 2005 due to the closure of the Berlin pulp mill. The closure has enabled a consolidation of Fraser Papers' market pulp sales position with significant mix improvements including the elimination of lower margin export sales. The resultant improvement in the average revenue realization is 18% or $82 per tonne over the fourth quarter of 2005 on sales of 60,000 tonnes of pulp.
Following the closure of Berlin pulp mill, Fraser Papers has also redirected a portion of its market pulp to internal use thereby decreasing the exposure to NBHK market pulp prices. Additionally, the closure of the Berlin pulp mill has placed Fraser Papers in a more balanced position for total market pulp volume.
On a stand alone basis, Thurso had a negative EBITDA of $17 per tonne in 2006 compared to Berlin which lost $173 per tonne. The results of pulp operations include losses on pulp hedges of $4 million for the current year and $5 million for last year. These hedges expired at the end of 2006.
Three Months ended December 31, 2006 compared to Three Months ended September 30, 2006
The pulp operations generated EBITDA loss of $7 million in the fourth quarter of 2006 on sales of $12 million. This was an $8 million EBITDA decrease from the previous quarter when the pulp operations generated $1 million EBITDA on $16 million of sales. The $8 million decrease in 2006 EBITDA was due to an annual maintenance outage at the Thurso pulp mill.
Total shipments remained stable in the fourth quarter compared to the third quarter although internal shipments of pulp to Fraser Papers facilities increased 6,000 tonnes in the fourth quarter.
Three Months ended December 31, 2006 compared to Three Months ended December 31, 2005
The pulp operations generated EBITDA loss of $7 million in the fourth quarter of 2006 on sales of $12 million. This compares to the previous year's quarter EBITDA loss of $7 million on sales of $33 million. The fourth quarter of 2006 had improved pricing; however, this was more than offset by Thurso pulp mill's 2006 annual maintenance outage, which in 2005 began in the third quarter, and the strong Canadian dollar and higher energy costs. If we adjust out the impact of the Thurso shutdown and poor start up, the Thurso mill generated $2 million in EBITDA in the fourth quarter compared to an EBITDA loss of $2 million in the fourth quarter of 2005. Cash costs of production increased 22% over the same period in 2005 due to the timing of Thurso's annual outage. Excluding the impact of the outage, Thurso's cash costs increased 5% to $485 per tonne compared to $460 per tonne in 2005 due to higher energy costs and the stronger Canadian dollar. The Canadian dollar averaged US$0.88 in the fourth quarter of 2006 compared to US$0.85 in the fourth quarter of 2005.
Shipments declined by 31% in the fourth quarter of 2006 compared to the comparable period of 2005 due to the closure of the Berlin pulp mill.
Twelve Months ended December 31, 2006 compared to Twelve Months ended December 31, 2005
The pulp operations had an EBITDA loss of $13 million in 2006 on sales of $80 million. This was an improvement of $2 million EBITDA from the previous year which had an EBITDA loss of $15 million on $132 million of sales. The $2 million increase in EBITDA was due to improved pricing and improved cash costs from operations and improved sales mix as a result of the Berlin pulp mill closure offset by the strong Canadian dollar and higher energy costs. Excluding the results of Berlin during its operation and the losses on pulp swaps, the Thurso mill generated an EBITDA loss of $4 million in 2006, primarily due to unanticipated costs associated with the annual maintenance shutdown in the fourth quarter. Cash costs of production increased by 11% over 2005 due to the higher costs for the 2006 annual outage, higher energy costs and the strong Canadian dollar. The Canadian dollar averaged US$0.88 in 2006 compared to US$0.83 in 2005.
Shipments declined by 29% in 2006 compared to 2005 due to the closure of the Berlin pulp mill.
Lumber Operations
Lumber operations are comprised of four sawmills: two in New Brunswick and two in Northern Maine.
---------------------------------------------------------------------------
Three months ended Twelve months ended
-----------------------------------------------
Dec 31 Sept 30 Dec 31 Dec 31 Dec 31
2006 2006 2005 2006 2005
---------------------------------------------------------------------------
Sales (US$millions) 18 28 27 116 137
Anti-dumping duties refund 11 - - 14 -
EBITDA (US$millions) 5 (5) (1) 2 6
EBITDA ($ per Mmfbm) 74 (52) (12) 5 15
EBITDA Margin(2) 28% (19%) (4%) 2% 4%
Shipments (Mmfbm) 67 96 85 377 412
Average Revenue Realized
($ per Mmfbm) 261 283 318 304 333
Average Cash Operating
Cost ($ per Mmfbm)(3) 349 332 330 336 318
Reference Price
($ per Mmfbm)(1)
Boston SPF 2X4 #2&Btr 324 350 384 363 411
---------------------------------------------------------------------------
(1) Reference prices are from Random Lengths Publication.
(2) EBITDA Margin is EBITDA as a percentage of Sales.
(3) Cash operating costs exclude refunds of Anti-Dumping Duties.
Market conditions continued to deteriorate for the lumber operations. In the fourth quarter of 2006, average benchmark lumber prices (Eastern Boston SPF 2X4) were down approximately 16% compared to the fourth quarter of 2005 and down 7% compared to third quarter of 2006.
The Company addressed the depressed lumber prices in the fourth quarter by implementing market-related shutdowns for seven weeks at both of its Canadian sawmills and four weeks at one sawmill in Maine. Fraser Papers' sawmills are an important source of wood chips for the East Papers operation. As such, market downtime decisions are made after considering wood chip requirements as well as lumber demand and prices.
Three Months ended December 31, 2006 compared to Three Months ended September 30, 2006
The lumber operations generated $5 million EBITDA in the fourth quarter of 2006 on sales of $18 million. These results include the benefit of duty refunds of $11 million received in the quarter. Excluding the impact of the refunds, EBITDA was $1 million worse than the EBITDA loss of $5 million in the third quarter. Weak market conditions and market-related shutdowns led to the lower results.
Shipments declined by 30% in the fourth quarter compared to the third quarter due to market-related downtime.
Three Months ended December 31, 2006 compared to Three Months ended December 31, 2005
The lumber operations generated $5 million EBITDA in the fourth quarter of 2006 on sales of $18 million. These results include the benefit of duty refunds of $11 million received in the quarter. Excluding the impact of the refunds, EBITDA was $5 million worse than the EBITDA loss of $1 million in the fourth quarter of 2005. Weak market conditions, lower selling prices, market-related shutdowns, and the impact of a strong Canadian dollar contributed to the lower results. The Canadian dollar averaged US$0.88 in the fourth quarter of 2006 compared to US$0.85 in the fourth quarter of 2005.
Shipments declined by 21% in the fourth quarter compared to the fourth quarter of 2005 due to the market-related downtime.
Twelve Months ended December 31, 2006 compared to Twelve Months ended December 31, 2005
The lumber operations generated $2 million EBITDA for 2006 on sales of $116 million. These results include the benefit of duty refunds of $14 million during the year. Excluding the impact of the refunds, EBITDA was $18 million worse than the EBITDA of $6 million generated in 2005. This reduction was due to substantially lower selling prices for lumber, weak market conditions, market-related shutdowns and the strong Canadian dollar. Average benchmark lumber prices (Eastern Boston SPF 2X4) were down approximately 12% in 2006 compared to 2005. The Canadian dollar averaged US$0.88 in 2006 compared to US$0.83 in 2005.
Shipments declined by 8% in 2006 compared to 2005 due to weak markets and the ensuing market-related downtime.
Since the inception of the antidumping duties, the Company paid $16 million of duties with respect to the export of lumber to the U.S. During the second and fourth quarters, the Company received refunds of $3 and $11 million, respectively, related to anti-dumping duties paid in previous years. These refunds were recognized as income in 2006. No additional refunds are expected.
Timber Segment
In 2005, the Timber segment included freehold lands in Maine and New Brunswick.
The Company sold its freehold NB Timberlands on January 31, 2006. Fraser Papers sold its Maine timberlands in the second quarter of 2005. Concurrent with the sale of those assets, Fraser Papers secured its long-term fibre requirements through 20 year fibre supply agreements to purchase, at market prices, substantially the same volumes of wood as its historical usage from those timberlands.
---------------------------------------------------------------------------
Three months ended Twelve months ended
-----------------------------------------
Dec 31 Dec 31 Dec 31 Dec 31
US$ MILLIONS 2006 2005 2006 2005
---------------------------------------------------------------------------
Net sales $ - $ 19 $ 4 $ 74
EBITDA(1) - 2 2 12
Depreciation - - - 1
Capital investments - - - -
---------------------------------------------------------------------------
(1) See "Definitions" Section.
CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES
The critical accounting policies and the accounting estimates used in the preparation of the December 31, 2006 interim financial statements are substantially the same as the ones disclosed in the Annual Report for the year ended December 31, 2005 except as described in Note 3 to the interim financial statements. The impairment and other charges related to the Smart Papers bankruptcy filing and the closure of the Berlin pulp mill are based on significant estimates due to the inherent uncertainty in estimating potential recoveries, closure costs and contingent losses. These estimates may be materially different from actual future cash flows due to a variety of factors.
RISKS AND UNCERTAINTIES
The significant risks and uncertainties faced by Fraser Papers are substantially the same as the ones disclosed in the Annual Report and the Annual Information Form for the year ended December 31, 2005.
FORWARD-LOOKING INFORMATION
This report contains forward-looking information and statements relating but not limited to, anticipated or prospective financial performance, results of operations, business prospects, expected pension funding, anticipated selling prices for products, maximum possible amounts under certain guarantees and Fraser Papers' strategies. Examples of such statements included in this document include, but are not limited to, the expected improvements in results following divestitures and other initiatives, expected changes in significant cash flows, note repurchases, potential recoveries associated with the Berlin pulp mill closure, adjustments in regards to Smart Papers losses, acquisition of Katahdin, strategic and operational intentions and others.
Forward-looking information typically contains statements with words such as "consider", "anticipate", "believe", "expect", "plan", "intend", "likely", "will", "could", "seek", "estimate", "possible", "foresee", "potential" or similar words, or variations of those words suggesting future outcomes. In addition, forward-looking statements may reflect the outlook on future changes in volumes, prices, costs, estimated amounts and timing of cash flows, or other expectations or beliefs, objectives or assumptions about future events or performance. Readers should be aware that these statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements.
The significant risks that impact Fraser's business and future performance are discussed in the Annual Information Form as well as Fraser Papers' Annual Report and other filings with Canadian securities regulatory authorities. The Company cautions that the list of risks and factors discussed in those documents may not be exhaustive. Readers should consider those risks, as well as other uncertainties and factors and potential events. Although Fraser Papers believes it has reasonable basis for making the forward-looking statements included in this report, readers are cautioned not to place undue reliance on such forward-looking information.
Fraser Papers undertakes no obligation, except as required by law, to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.
The "Outlook" sections that follow in this document are based on the Company's views and the actual outcome is uncertain.
OUTLOOK
Markets for the Company's specialty packaging and printing papers are expected to remain firm with volumes comparable with the fourth quarter and prices continuing to trend higher in certain segments. The first and second quarters of the calendar year are typically strong for lightweight financial and specialty packaging papers. During the fourth quarter, Fraser announced price increases of $20-60 per ton relating to approximately 250,000 tons of annual paper sales that became effective on or before January 1, 2007. Certain segments of the paper markets including lightweight coated groundwood and commodity freesheet began to soften during the fourth quarter of 2006 reflecting seasonal weakness in demand. The Company took seven days of downtime on one paper machine at its Gorham paper mill during January, 2007.
List prices for northern bleached hardwood pulp remain at attractive levels worldwide with strong demand from non-integrated paper mills. Higher market prices, the elimination of lower margin export sales and strong demand from domestic customers for high quality hardwood pulp produced at the Company's Thurso pulp mill led to an improvement in mill nets of $82 per tonne in the fourth quarter over the same period one year ago. While additional global capacity, built to supply the Asian and European markets, is expected to come on stream during 2007, the Company expects that demand for Fraser's hardwood pulp in domestic markets will remain firm in the short term.
While housing markets and lumber prices continue to be weak, the most recent press release from the U.S. Federal Reserve provided optimism for firmer economic growth and some tentative signs of stabilization in the U.S. housing market.
Management believes that the acquisition of Katahdin, expected to close at the end of April, is an attractive investment for the Company, providing the opportunity for substantial growth in the complementary directory and super-calendered paper segments, with products having strong brand recognition and providing a broader offering to Fraser Papers' publication customers.
Fraser Papers is focused on improving results from its operations. Priority is being placed on lowering overall fibre costs and maximizing production on its paper machines. There are no scheduled maintenance outages during the first quarter of 2007. The sulphite pulp mill in Edmundston, New Brunswick will take an extended 21 day outage to perform major maintenance on its recovery boiler during the second quarter.
DEFINITIONS
As there is no generally accepted method of calculating the measures outlined below, these measures as calculated by Fraser Papers may not be comparable to similar titled measures reported by other companies.
EBITDA is earnings from continuing operations before interest, taxes, depreciation and amortization, and restructuring charges. EBITDA is presented as a useful indicator of a company's ability to meet debt service and capital expenditure requirements. Fraser Papers interprets EBITDA trends as an indicator of relative operating performance.
Net debt is debt less cash and cash equivalents. Net debt to net debt plus equity is provided as a useful indicator of a company's financial leverage.
Net debt to net debt plus equity is net debt divided by the sum of net debt and shareholders' equity. Net debt to net debt plus equity is provided as a useful indicator of a company's financial leverage.
Cash costs include all cash costs of operations and exclude depreciation and amortization. Cash costs are presented to provide additional information about the cash generating capabilities of the Company's operations. This measure captures the key costs of operations and is a key performance measure that management uses to evaluate costs at the operations.
EBITDA
---------------------------------------------------------------------------
Three months ended Twelve months ended
-----------------------------------------
Dec 31 Dec 31 Dec 31 Dec 31
US$ MILLIONS 2006 2005 2006 2005
---------------------------------------------------------------------------
Earnings (loss) $ (12) $ (22) $ (114) $ (29)
Add: Interest expense, net 1 3 6 9
Less: Income tax expense (recovery) 1 (9) (16) (26)
Less: Gain on sale of NB
Timberlands - - (71) -
Less: Gain on sale of Maine
Timberlands - - - (46)
Add: Losses from Smart Papers - - 111 -
Add: Closure of Berlin pulp mill - - 50 -
Add: Impairment Charges - - - 41
Add: Other 2 12 (5) 16
Add: Depreciation 8 9 32 39
---------------------------------------------------------------------------
EBITDA $ - $ (7) $ (7) $ 4
---------------------------------------------------------------------------
NET DEBT
---------------------------------------------------------------------------
As at
--------------------
Dec 31 Dec 31
US$ MILLIONS 2006 2005
---------------------------------------------------------------------------
Debt $ 68 $ 151
Cash and short term-notes (13) (75)
---------------------------------------------------------------------------
Net Debt $ 55 $ 76
---------------------------------------------------------------------------
CASH COST
---------------------------------------------------------------------------
Three months ended Twelve months ended
-----------------------------------------
Dec 31 Dec 31 Dec 31 Dec 31
US$ MILLIONS 2006 2005 2006 2005
---------------------------------------------------------------------------
Net Sales $ 187 $ 219 $ 796 $ 918
Less: EBITDA - 7 7 (4)
Add: Anti-dumping duties recovery 11 - 14 -
---------------------------------------------------------------------------
CASH COST $ 198 $ 226 $ 817 $ 914
---------------------------------------------------------------------------
FRASER PAPERS INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Interim Consolidated Balance Sheets
As at December 31 2006 2005
---------------------------------------------------------------------------
(US$ millions)
Assets
Current assets:
Cash and cash equivalents $ 13 $ 75
Accounts receivable 106 109
Inventory 118 113
Future income taxes (note 11) 1 10
---------------------------------------------------------------------------
238 307
Property, plant and equipment
Paper 279 340
Timber (note 2) - 19
Other assets 39 122
---------------------------------------------------------------------------
$ 556 $ 788
---------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 86 $ 90
Current portion of long-debt (note 9) - 1
---------------------------------------------------------------------------
86 91
Long-term debt (note 9) 68 150
Other liabilities 51 55
Future income taxes (note 11) 19 46
Shareholders' equity (note 12) 332 446
---------------------------------------------------------------------------
$ 556 $ 788
---------------------------------------------------------------------------
(See accompanying notes
FRASER PAPERS INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Three Months Ended Years Ended
-------------------- -----------------
Dec 31 Dec 31 Dec 31 Dec 31
(US$ millions) 2006 2005 2006 2005
---------------------------------------------------------------------------
Net sales $ 187 $ 219 $ 796 $ 918
Earnings (loss) before the following:
Paper - (9) (9) (8)
Timber - 2 2 12
---------------------------------------------------------------------------
- (7) (7) 4
Gain on sale of NB Timberlands (note 2) - - 71 -
Losses from Smart Papers (note 3) (4) - (111) -
Closure of pulp mill (note 4) - - (50) -
Gain on sale of Maine Timberlands
(note 7) - - - 46
Impairment charges (note 8) - - - (41)
Restructuring charges (note 6) - (8) - (8)
Other (notes 2, 5 and 9) 2 (4) 5 (8)
Interest income 1 - 4 3
Interest expense (2) (3) (10) (12)
---------------------------------------------------------------------------
Loss before depreciation and
income taxes (3) (22) (98) (16)
Depreciation (8) (9) (32) (39)
Income tax (expense) recovery
(note 11) (1) 9 16 26
---------------------------------------------------------------------------
Loss $ (12) $ (22) $ (114) $ (29)
---------------------------------------------------------------------------
Loss per share - basic and diluted $ (0.40) $ (0.75) $ (3.86) $ (0.98)
Deficit
Balance, beginning of period $ (150) $ (26) $ (48) $ (19)
Loss (12) (22) (114) (29)
---------------------------------------------------------------------------
Balance, end of period $ (162) $ (48) $ (162) $ (48)
---------------------------------------------------------------------------
FRASER PAPERS INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Years Ended
--------------------------------------------------------- -----------------
Dec 31 Dec 31 Dec 31 Dec 31
(US$ millions) 2006 2005 2006 2005
---------------------------------------------------------------------------
Cash provided by (used for):
Operating Activities
Loss $ (12) $ (22) $ (114) $ (29)
Items not affecting cash:
Depreciation 8 9 32 39
Future income taxes (note 11) 1 (5) (17) (27)
Losses from Smart Papers (note 3) 4 - 111 -
Gain on sale of NB Timberlands
(note 2) - - (71) -
Closure of pulp mill (note 4) - - 50 -
Gain on sale of Maine Timberlands
(note 7) - - - (46)
Impairment charges (note 8) - - - 41
Employment benefits plan expense
(note 10) 5 6 21 13
Other 4 5 (4) 18
Employment benefit plan funding (7) (9) (37) (34)
Payments related to Smart Papers
(note 3) (2) - (16) -
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1 (16) (45) (25)
Net change in non-cash working
capital balances (15) 3 (21) (20)
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(14) (13) (66) (45)
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Investing Activities
Capital investments (3) (2) (12) (49)
Proceeds on sale of NB Timberlands
(note 2) - - 94 -
Investment in lease (note 3) - - - (15)
Proceeds on sale of Maine
Timberlands (note 7) - - - 78
Proceeds on sale of assets (note 5) - 7 - 7
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(3) 5 82 21
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Financing Activities
Repayment of long-term debt (note 9) - - (52) (75)
Purchase of long-term debt (note 9) - - (26) -
Issuance of long-term debt (note 9) - - - 185
Debenture issue costs - - - (5)
Share repurchases (note 12) - - - (6)
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- - (78) 99
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Increase (decrease) in cash and
cash equivalents $ (17) $ (8) $ (62) $ 75
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(See accompanying notes)
FRASER PAPERS INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(US$ millions)
Note 1. Basis of Presentation
These interim consolidated financial statements have been prepared using the same accounting policies and methods as the consolidated financial statements of Fraser Papers Inc. for the year ended December 31, 2005 except as described in note 3 with respect to the Company's basis of accounting for an equity investment. These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") for interim financial statements and do not contain all of the disclosures required for annual financial statements. As a result, these interim consolidated financial statements should be read in conjunction with the consolidated financial statements of Fraser Papers for the year ended December 31, 2005. These interim consolidated financial statements include any adjustments that are, in the opinion of management, necessary to fairly state the results of interim periods in accordance with GAAP.
Note 2. Sale of NB Timberlands
On January 31, 2006, the Company sold its timberland assets in New Brunswick (the "NB Timberlands") to Acadian Timber Income Fund ("Acadian" or the "Fund"). Acadian was a newly formed income fund which financed the acquisition through an initial public offering of equity securities and the issuance of bank debt. The Company was the promoter of the Fund.
Net proceeds were $125, including $94 in cash and $31 of securities which are exchangeable for 3.6 million units of the Fund, representing a 30% interest in the equity of the Fund, or 22% interest in the Fund on a fully diluted basis. These securities are entitled to the same rights as units of the Fund and are entitled to cash distributions from the Fund.
The Company accounts for its investment using the equity method. At the time of the transaction, the net book value of this investment was nil while the fair value, based on quoted market prices, was estimated to be $31. At December 31, 2006, the net book value of the investment is nil, as the Company has recognized its proportionate share of the earnings of Acadian for the period from February 1, 2006 to December 31, 2006, net of distributions. The investment is estimated to have a fair market value of $29, based on quoted market prices at December 31, 2006.
The sale of the NB Timberlands resulted in a gain of $71. In accordance with GAAP, the gain on the sale was the result of the net cash proceeds of $94 adjusted for the proportionate share of the net liabilities of the Fund (excluding those related to the NB Timberlands) and the net assets contributed to the Fund (net of Fraser Papers' retained interest).
In conjunction with the sale, Fraser Papers entered into agreements with Acadian whereby Fraser Papers will have the right to purchase fibre for a period of up to 20 years at prevailing market prices. The amount of fibre available to Fraser Papers under the agreement will approximate its historical consumption from the Timberlands owned by Acadian.
Certain liabilities of the NB Timberlands were retained by Fraser Papers consisting primarily of employment, pension and post retirement obligations related to past service.
Note 3. Losses from Smart Papers
Smart Papers LLC and its affiliates ("Smart Papers"), a previous equity investment of the Company, filed for creditor protection under Chapter 11 of the United States Bankruptcy Code, in the first quarter of 2006. As a result, in the first quarter Fraser Papers recorded a charge of $107, consisting of an impairment charge against its investment in Smart Papers of $74, a provision of $15 against a receivable from Smart Papers related to the lease of a boiler at one of its locations and estimated accruals of $18 related to financial guarantees. In the fourth quarter, an additional $4 accrual was established due to revisions to the initial estimates.
In 2006, Fraser Papers made $16 of payments against these accruals, of which $2 were made in the fourth quarter.
In the third quarter, Fraser Papers completed the sale of equipment previously leased to Smart Papers. The total proceeds of $4, including contingent consideration of $1, are receivable in instalments over seven years. Fraser Papers will recognize the benefit of these proceeds when the receipt is certain. During the year, Fraser Papers received less than $1 of proceeds from the sale.
During 2005, Fraser Papers accounted for its investment in Smart Papers using the equity method. When Smart Papers filed for protection under Chapter 11 of the Bankruptcy Code, Fraser Papers lost its significant influence over Smart Papers. As a consequence, the Company began accounting for its investment in Smart Papers on a cost basis effective the beginning of 2006.
In 2005, Fraser Papers recognized equity losses from Smart Papers of $8, which are reflected in the Interim Consolidated Statements of Operations and Statements of Cash Flows.
Note 4. Closure of Berlin Pulp Mill
On May 7, 2006, Fraser Papers permanently shut down its pulp mill in Berlin, New Hampshire. As a result of the shutdown, Fraser Papers recorded a charge of $50 consisting of an impairment in property, plant and equipment and other assets of $45 and various accruals related to severance and closure of $5. During the year and the fourth quarter, the Company applied payments and charges of $4 and $1, respectively, against the accruals.
During the fourth quarter of 2006, the Company closed the sale of substantially all remaining assets related to the Berlin pulp mill for net cash proceeds of $3. No gain or loss was recorded on the sale.
Note 5. Sale of Paperboard and Other Assets
In the fourth quarter of 2006, the Company sold non-core assets for total proceeds of $1.
On October 4, 2005, Fraser Papers sold its paperboard assets for proceeds of $5. In addition, the Company sold two other non-core assets for total proceeds of $2. There were no gains recorded on these asset sales.
Note 6. Restructuring Charges
As a result of the sale of its paperboard business in 2005, the Company reduced its workforce by 98 positions at its mill in Edmundston, New Brunswick. The elimination of these positions resulted in a restructuring charge of $8 consisting of severance and early retirement costs of $5 and a non-cash charge for pension and non-pension post retirement benefits of $3.
During the year, the Company made payments of $2, net of government grants of $2, against the restructuring accruals.
During 2006, the Company reversed $2 of restructuring accruals as a result of renegotiation of severance arrangements relating to a 2004 provision and the completion of paperboard restructuring. These amounts have been partially offset by additional restructuring charges with respect to the elimination of certain positions at its operations in 2006. A net amount of less than $1 has been reflected in the Consolidated Statements of Operations.
Note 7. Sale of Maine Timberlands
On May 19, 2005 Fraser Papers completed the sale of approximately 240,000 acres of timberlands in Maine (the "Maine Timberlands") for net proceeds of $78. The sale resulted in a pre-tax gain of $46. Fraser Papers has entered into an agreement with the purchaser whereby Fraser Papers has the right to purchase fibre from the purchaser for 20 years at prevailing market prices. The amount of fibre available to Fraser Papers under the agreement will approximate its historical usage from the sold lands.
Note 8. Impairment Charge
During 2005, the Company performed an impairment review and considered a number of factors which were determined to be indicators that the carrying amount of its pulp mill in Thurso, Quebec may not be fully recoverable. Based on this review, the Company recorded a pre-tax, non-cash impairment charge of $40 against the assets of this mill.
In addition, the Company recognized an impairment charge of $1 related to its Paperboard operations in Edmundston, New Brunswick as the carrying value of the assets exceeded the expected proceeds from the sale of those assets, which was closed in 2005.
Note 9. Long-Term Debt
On March 15, 2005, the Company issued Notes which bear interest at 8.75% and are due in 2015. The indenture agreement governing the Notes contains certain covenants, the more significant of which include restrictions on the incurrence of additional indebtedness, sale of assets and reinvestment of proceeds, mergers, creation of liens, payment of dividends and repurchase of the Company's shares.
During 2006, the Company purchased $30 in principal amount of Notes in the market. The Notes were purchased for $26, resulting in a gain of $3, net of a write-down in debt issuance costs of $1. The net gain is reflected in the Consolidated Statements of Operations.
In the second quarter of 2006, the Company closed its tender offer to repay up to $66 in principal amount of the Notes. The Company repaid $52 of Notes to the public and cancelled $14 of Notes held by Fraser Papers. A write-down of deferred financing costs of $1, related to the repayments under the tender offer, has been reflected in the Consolidated Statements of Operations and Statements of Cash Flows.
As a result of the market repurchases and the tender offer, the Company holds $16 of Notes. These Notes have not been cancelled but have been netted against long-term debt on the consolidated balance sheet.
In the fourth quarter of 2006, the Company increased its committed revolving credit facility to $90. The facility matures in November 2008 and bears interest at market rates. Borrowings under the facility are secured by a first charge against accounts receivable and inventory. At December 31, 2006, $40 (2005 - $35) of this facility was utilized, all of which was in the form of letters of credit to certain creditors.
During the year, the Company made interest payments of $11 (2005 - $7). No interest payments were made in the fourth quarter (2005 - $nil).
On March 16, 2005, the Company repaid $75 owing to an affiliate of Brookfield Asset Management Inc. ("Brookfield") under a revolving credit facility. The facility was then cancelled.
Note 10. Employee Benefit Costs
Employee benefit costs for defined benefit pensions and post retirement benefits totalled $5 (2005 - $6) for the quarter and $21 for the full year (2005 - $13).
Note 11. Income Taxes
Interim income tax expense is calculated based on expected annual effective tax rates.
Three Months Ended Years Ended
--------------------------------------------------- -----------------------
Dec 31 Dec 31 Dec 31 Dec 31
(US$ millions) 2006 2005 2006 2005
--------------------------------------------------- -----------------------
Current tax recovery (expense) $ - $ 4 $ (1) $ (1)
Future income tax recovery
(expense) (1) 5 17 27
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Income tax recovery (expense) $ (1) $ 9 $ 16 $ 26
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The benefit of tax loss carry-forwards includes the benefit of $143 (2005 - $17) of net operating losses in the United States which expire between 2024 and 2026. A valuation allowance of $72 (2005 - $7) has been provided against the benefit of income tax assets as it is not more likely than not that they will be realized. Included in the valuation allowance is $58 of net operating losses and $21 of capital losses, offset by $7 of net tax liabilities. The Company has $6 (2005 - $21) of loss carry-forwards in Canada which expire in 2012.
Income or income-related taxes of $1 (2005 - $7) were paid during the year. Income tax recoverable of $2 (2005 - $6) is included in accounts receivable, as at December 31, 2006.
Note 12. Shareholders' Equity
2006 2005
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Common shares - 29,509,876 outstanding (2005 - 29,509,876) $ 490 $ 490
Contributed surplus 4 4
Deficit (162) (48)
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$ 332 $ 446
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During 2005, the Company repurchased a total of 602,100 shares at a weighted-average price of CAD$12.79 per share for total consideration of $6. As the purchase price was below the stated value of the common shares, the transactions resulted in a decrease of common stock of $10 and contributed surplus of $4.
Note 13. Commitments and Contingencies
Foreign Exchange Hedges
As at December 31, 2006, the Company has forward foreign exchange contracts of CAD$57 (2005 - CAD$70), which are designated as a hedge against certain Canadian dollar-denominated net monetary liabilities and $21 (2005 - nil), which are designated as hedges against future Canadian dollar cash flows. The Consolidated Statements of Operations include a realized gain of $2 (2005 - $2) on matured forward foreign exchange contracts and an unrealized loss of less than $1 (2005 - less than $1) on outstanding contracts. These realized and unrealized gains or losses are offset by realized and unrealized gains or losses on the net monetary liabilities being hedged.
Commodity Hedges
During 2006, Fraser Papers was party to a pulp swap to deliver 24,000 tonnes of market pulp in 2006 at an average price of $574 per tonne. This swap effectively fixed the selling price on a portion of Fraser Papers' production and was designated as a hedge of a portion of its pulp sales. During the fourth quarter and for the year ended December 31, 2006, Fraser Papers realized losses on these contracts of $1 and $4, respectively (2005 - $1 and $5). There were no outstanding swap agreements at December 31, 2006.
Fraser Papers has entered into lumber futures contracts which effectively fix the selling price for lumber delivered on the expiry date and were designated as a hedge of a portion of future lumber sales. During the year, Fraser Papers realized net gains of $1 (2005 - less than $1) on lumber futures contracts. There were no outstanding contracts at December 31, 2006 (2005 - 13 million board feet).
Softwood Lumber Anti-Dumping Duties
Since the inception of the anti-dumping duties imposed by the United States Department of Commerce, the Company paid $16 on the export of lumber to the U.S. During the quarter and for the year, the Company received refunds and interest of $11 and $14, respectively, related to anti-dumping duties paid in previous years. These refunds were recognized as income. The Company does not expect any further refunds.
Guarantees
Norbord Inc. ("Norbord") provided guarantees for certain obligations of Fraser Papers under a financial commitment agreement (the "FCA"). These guarantees were previously obligations of the paper division of Norbord. At December 31, 2006, the maximum potential amount of the obligations guaranteed was estimated to be $7 (2005 - $13).
Under the FCA, Fraser Papers agreed to provide letters of credit or other acceptable collateral to secure any guarantees outstanding on December 31, 2007. As security for these ongoing financial commitments to Fraser Papers, Norbord has the right, at any time, to require Fraser Papers to provide a fixed first charge security interest over Fraser Papers' manufacturing facilities.
Note 14. Related Party Transactions
Brookfield, and all of its subsidiaries, including Katahdin Paper Company LLC ("Katahdin"), and Norbord, are related parties as a result of Brookfield owning a significant equity position in the Company and Norbord. Acadian is a related party by virtue of the Company's equity holdings in the Fund. Fraser Papers has outsourced the administration of its Crown licences in New Brunswick to the Fund.
Fraser Papers purchases certain of its electricity and wood fibre from Brookfield. During the quarter and the year, Fraser Papers purchased approximately $1 and $10, respectively (2005 - $4 and $18, respectively) of these goods from Brookfield. Included in accounts payable and accrued liabilities is $2 (2005 - $2) related to these purchases.
Brookfield has provided the Company with a facility with a notional amount of $150 to enter into forward foreign exchange contracts as part of the Company's hedging activities. At December 31, 2006, the Company has entered into forward foreign exchange contracts of CAD$57 (2005 - CAD$70) under this facility.
During the quarter and the year, Fraser Papers earned a management fee of $2 and $8 (2005 - $1 and $7) from Katahdin and $2 is included in accounts receivable at December 31, 2006.
During the quarter and year-to-date, Fraser Papers sold $2 and $3, respectively (2005 - less than $1) of goods and services to Katahdin.
As described in Note 2, Fraser Papers entered into a 20 year Fibre Supply Agreement with Acadian. Total purchases of fibre from the Fund since January 31, 2006 amounted to $38, including $9 purchased in the fourth quarter. Fraser Papers provided certain administrative and support services to the Fund during the transitional period following the set-up of the Fund. As Fraser Papers was a sponsor of the Fund, no amounts were charged for these services.
Note 15. Subsequent Event
On January 30, the Company announced that it had entered into an agreement to acquire Katahdin for $80 million, subject to an adjustment for working capital, all payable in cash on closing. In addition, Fraser Papers will make contingent royalty payments based on the cash flow of the super-calendered business. The transaction is expected to close in the second quarter of 2007 and is subject to approval of a committee of directors who are independent of Brookfield, approval of the board of directors, approval of shareholders of Fraser Papers other than Brookfield and regulatory approval.
Note 16. Segmented Information
As a result of the sale of its NB timberlands, Fraser Papers has one reportable segment comprised of its integrated paper, pulp, and sawmill operations.
In determining its reportable segments, Fraser Papers considers that it is an integrated producer of paper and pulp as its principal business. Its sawmill operations are an integral part of its overall business as these facilities provide fibre for the internal production of pulp.
Fraser Papers operates in Canada and the United States.
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