TimberWest Announces 2008
First
Quarter Results
VANCOUVER, April 30 /PRNewswire-FirstCall/ -- TimberWest continues to
manage its way through a difficult log and lumber market, with a focus of
creating long term value for unitholders. "During the first quarter
the Company again took concerted action to address the challenging market
conditions and a strong Canadian dollar by reducing production
levels," said President and CEO Paul McElligott. "This has had
an expected impact on our near term earnings, but will contribute
significantly to the company's long-term value. Our trees will grow in
size and value over time and we believe they will be worth considerably
more when harvested in the future than if we were to harvest them
today."
Our real estate proceeds increased from a year earlier but remained
modest compared with potential. Considerable work is being done to ramp up
the non-core land sales program for the year.
With the combination of deferred harvest, modest real estate proceeds,
and today's weak pricing environment, distributable cash for the quarter
ended March 31, 2008 was $(3.9) million, or $(0.05) per stapled unit,
compared to $26.9 million, or $0.35 per stapled unit, for the first
quarter of 2007. This represents a year-over-year decline of 71% in
private land log harvest levels and a 64% decline in log sales revenues in
the first quarter of 2008 relative to the first quarter of 2007.
Logging and Lumber Operational Results
Log sales volumes were some 350,000 m(3) in Q1, 2008, an all time low,
and realizations were $81 per m(3) compared to $95 per m(3) for the same
quarter of 2007. This underscores the significant deterioration in North
American log markets, particularly Douglas fir markets, and the spillover
effects in our offshore markets and the 16% appreciation of the Canadian
dollar. Lumber sales volume was 17.0 million board feet in Q1, 2008
compared to 40.8 million board feet in Q1, 2007.
On the cost side, unit production costs are higher than the same period
last year as a result of the lower production volumes. "We continue
to work towards an agreement with the United Steelworkers union to
sub-divide our larger contract operations on private lands, which we
believe will allow us to reduce harvesting costs, provide a more stable
employment base, and improve safety performance," said McElligott.
"Our plan is to award future harvesting work to mid-sized contracting
firms at competitive bid rates."
Real Estate Operational Results
Real estate net proceeds for the quarter were $2.4 million, or $73,000
per acre (for an industrial site) compared to $0.2 million, or $10,000 per
acre for the first quarter of 2007. The pace of our non-core real estate
land sales will accelerate in the months ahead as we have our real estate
plan in place and the department almost fully staffed. While it is too
early to predict the real estate sales proceeds for 2008, we anticipate
that next quarter we will have a better estimate of our near term sales
prospects. We appointed a Director of Sales to our Real Estate business
unit in February and a Director of Business Development in early April, as
well two additional staff support specialists during the quarter.
We continue to make progress on the implementation of our real estate
plan. "We are pleased with the discussions that we have had thus far
with communities and other stakeholders on Vancouver Island as it relates
to our planning and zoning work," said McElligott. "In addition,
we have begun to explore a range of joint venture possibilities on our
land base as we have some great opportunities for partnerships with
high-quality, sophisticated developers with proven track records. There
are a number of parties interested in working with us in this
capacity."
Other First Quarter 2008 Updates
As we announced on February 7, 2008, TimberWest plans to permanently
close its Elk Falls sawmill on May 9, 2008. We expect the closure of the
mill to be self-financing as working capital and equipment value are
expected to more than fund the costs, including approximately $7.2 million
in estimated restructuring costs. During the quarter, we had a bidder
express interest in a potential purchase of the mill. That party has
signed a confidentiality agreement and has been provided with the
necessary due diligence materials to make its purchase decision.
TimberWest has also outlined the conditions that would have to be
satisfied for a sale to occur including timing, employee obligations,
valuation issues regarding sawmill assets and the site itself, and fibre
supply arrangements. While selling this asset and preserving its
associated jobs remains our clear preference, we caution that neither
unitholders nor employees should expect any such transaction will emerge.
In addition to the Elk Falls restructuring costs, the Company expects
additional restructuring charges in 2008 related to contractor issues,
subdivision and chip commitments of an additional $5.0 million.
The March 31, 2008 results include a charge to earnings and
distributable cash of $2.1 million, or $0.03 per unit, as a result of the
implementation of the new Canadian GAAP standard on Inventory which
requires inventory to be recorded at the lower of cost and net realizable
value on an-item-by-item basis defined as end-use-sorts for logs and grade
levels for lumber and a charge of $0.6 million to reflect the write-off of
amounts the Company believes to be uncollectible from one of our
contractors.
Outlook
Our outlook for the near term is very similar to our last quarterly
report. We expect to face very difficult log and lumber markets for 2008
with the ongoing weakness in North American housing, oversupplied offshore
markets, and the strong Canadian dollar. For the second quarter again, we
expect to maintain low harvest levels and sales will likely be about half
our normal levels as we continue to support key customers. While this
certainly impairs our ability to generate cash flow, with all of the
restructuring we have done in the business, our fixed costs are low.
TimberWest is currently in compliance with all of its debt covenants,
however, it is possible that TimberWest may not be able to remain in
compliance with its debt to EBITDA covenant later in 2008. At this time,
we are able to continue to pay distributions, but will continue to monitor
the situation on a quarter-to-quarter basis as we move through this
downturn and will stay focused on growing long term unitholder value.
"Fundamentally, we believe we are pursuing the right value
enhancement strategy for our unitholders as our trees grow in size and
value," added McElligott. "By reducing harvest levels when
margins are low and increasing harvests when margins are high, the net
asset value of the Company will increase."
Looking beyond the immediate market challenges, we expect to see demand
and pricing for log and lumber products in our region improve when housing
activity returns to more normal levels. This view is based upon our
assessment of the positive demographics in the US, which should result in
the return to a strong housing market, our expectations regarding
continuing growth in demand for wood products in Asia, the impact of the
inevitable future supply shortages caused by the mountain pine beetle
infestation in Western Canada, further harvest reductions in eastern
Canada, and escalating Russian log export taxes. When margins improve, we
will go back and harvest the trees that we left behind.
We also continue to believe that our real estate strategy is the right
long term one for unitholders. Planning and zoning will enhance real
estate values significantly on our development lands and over time raise
the value of our portfolio. Our efforts in this area will help communities
achieve sustainable development that brings with it jobs, homes, new
infrastructure, and recreational opportunities for generations to come.
Distributable Cash
-------------------------------------------------------------------------
Three months Three months
ended March ended March
(in millions of dollars) 31, 2008 31, 2007
-------------------------------------------------------------------------
Net earnings (loss) $ (23.3) $ 3.7
Interest on Series A Subordinate Notes
owned by unitholders 21.0 20.9
-------------------------------------------------------------------------
Earnings (loss) available for distribution (2.3) 24.6
Future income tax recovery (4.7) (0.3)
-------------------------------------------------------------------------
Earnings (loss) available for distribution
before provision for future income taxes (7.0) 24.3
Add (deduct):
Depreciation, depletion and amortization 1.3 2.5
Proceeds from sale of property, plant and
equipment 2.4 0.2
Gain on sale of property, plant and
equipment (0.5) (0.1)
Additions to property, plant and equipment (0.5) (0.5)
Other non-cash items 0.4 0.5
-------------------------------------------------------------------------
3.1 2.6
-------------------------------------------------------------------------
Distributable cash $ (3.9) $ 26.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Per Stapled Unit amounts:
-------------------------------------------------------------------------
Three months Three months
ended March ended March
(in dollars) 31, 2008 31, 2007
-------------------------------------------------------------------------
Basic and diluted earnings (loss) available
for distribution before provision for
future income taxes per weighted average
Stapled Unit $ (0.09) $ 0.31
Basic and diluted distributable cash per
weighted average Stapled Unit $ (0.05) $ 0.35
Cash distributions paid per Stapled Unit $ 0.27 $ 0.27
-------------------------------------------------------------------------
The following table provides a reconciliation of cash flow from
operations before changes in working capital to distributable cash:
-------------------------------------------------------------------------
Three months Three months
ended March ended March
(in millions of dollars) 31, 2008 31, 2007
-------------------------------------------------------------------------
Cash flow from operations $ (20.6) $ (6.6)
Add (deduct):
Change in non-cash working capital (6.0) 13.0
Interest on Series A Subordinate Notes
owned by unitholders 21.0 20.9
Proceeds from sale of property, plant
and equipment 2.4 0.2
Additions to property, plant and equipment (0.5) (0.5)
Other non-cash items (0.2) (0.1)
-------------------------------------------------------------------------
16.7 33.5
-------------------------------------------------------------------------
Distributable cash $ (3.9) $ 26.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable cash includes consolidated net earnings (loss), plus
interest expensed on Series A Subordinate Notes owned by unitholders, plus
non-cash income taxes, plus depreciation, depletion and amortization, plus
proceeds from the sale of property, plant and equipment net of their gain
(loss) on sale, less additions to property, plant and equipment and, from
time to time, adjustments for other items deemed appropriate by the Board
of Directors. Earnings available for distribution is comprised of
consolidated net earnings (loss) plus interest expensed on Series A
Subordinate Notes. The Series A Subordinate Notes are owned by the
unitholders and interest thereon is paid to the unitholders, therefore,
earnings available for distribution to unitholders reflects earnings
before this interest charge.
Earnings available for distribution and distributable cash are measures
that do not have a standardized meaning prescribed by GAAP and may not be
comparable to similar measures presented by other companies. Management
believes that the presentation of these measures will enhance an
investor's understanding of the Company's operating performance.
Reconciliations of net earnings (loss) and cash flow from operations
before changes in working capital, as determined in accordance with GAAP,
and earnings available for distribution and distributable cash are
provided in the preceding tables.
The following tables present a quarterly comparison of distributable
cash generated, in total and on a per Stapled Unit basis:
-------------------------------------------------------------------------
2008 2007 2006 2005 2004 2003
-------------------------------------------------------------------------
Distributable Cash
(in millions of
dollars)
First quarter $ (3.9) $ 26.9 $ 31.5 $ 23.9 $ 27.7 $ 25.7
Second quarter 13.6 35.5 15.4 43.5 4.7
Third quarter (5.6) 9.3 (1.7) 35.9 12.0
Fourth quarter 55.4 27.5 29.7 18.1 9.0
-------------------------------------------------------------------------
$ (3.9) $ 90.3 $ 103.8 $ 67.3 $ 125.2 $ 51.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Distributable Cash
per Stapled Unit(1)
(in dollars)
First quarter $ (0.05) $ 0.35 $ 0.41 $ 0.31 $ 0.36 $ 0.34
Second quarter 0.17 0.46 0.20 0.57 0.06
Third quarter (0.07) 0.12 (0.02) 0.47 0.15
Fourth quarter 0.71 0.35 0.38 0.24 0.12
-------------------------------------------------------------------------
$ (0.05) $ 1.16 $ 1.34 $ 0.87 $ 1.64 $ 0.67
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Per Stapled Unit amounts by quarter do not necessarily add to the
total of the year and year-to-date due to changes in the weighted
average number of Stapled Units outstanding during the year.
Financial Highlights
-------------------------------------------------------------------------
Three months Three months
ended March ended March
(in millions of dollars) 31, 2008 31, 2007
-------------------------------------------------------------------------
Sales $ 45.0 $ 112.3
Operating earnings (loss) (4.4) 27.2
Operating earnings (loss) - % of sales (9.8)% 24.2%
Earnings (loss) before interest, taxes,
depreciation and amortization(2) (3.1) 30.3
Earnings (loss) before interest, taxes,
depreciation and amortization per basic and
diluted weighted average Stapled Unit (0.04) 0.39
Net earnings (loss) (23.3) 3.7
Earnings (loss) per basic and diluted common
share (0.30) 0.05
Distributable cash $ (3.9) $ 26.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(2) Earnings (loss) before interest, taxes, depreciation and amortization
is a measure that does not have a standardized meaning prescribed by
GAAP and may not be comparable to similar measures presented by other
companies. Management believes that the presentation of this measure
will enhance an investor's understanding of the Company's operating
performance. A reconciliation of net earnings (loss) as determined in
accordance with GAAP and Earnings (loss) before interest, taxes,
depreciation and amortization is provided in the supplemental
information appended to this interim report.
Sales revenues for the three months ended March 31, 2008 were lower
compared to the first quarter of 2007 with significant decreases in log
and lumber sales volumes and sales realizations. In addition, the stronger
Canadian dollar has negatively affected sales realizations. Since the
first quarter of 2007, the dollar appreciated significantly against the US
dollar.
Unit operating costs were higher in the first quarter of 2008 compared
to the first quarter of 2007, which contributed to the decline in
operating margins.
Highlights and Significant Transactions
Adoption of New Accounting Policies
During the first quarter, the Company adopted new accounting policies
and disclosure requirements issued by the Canadian Institute of Chartered
Accountants ("CICA"). TimberWest changed its policy of
accounting for inventories and adopted enhanced disclosure requirements
for inventories, financial instruments, capital management, and going
concern assessment.
Prior to January 1, 2008, TimberWest accounted for inventories other
than supplies at the lower of average cost and net realizable value on an
aggregate basis for each of logs and for lumber. Effective January 1,
2008, inventories other than supplies are recorded at the lower of average
cost and net realizable value on an item-by-item basis defined as
end-use-sorts for logs and grade levels for lumber. TimberWest adopted the
new accounting policy on a prospective basis and prior years have not been
restated. Accordingly, the opening log inventory and opening retained
earnings as at January 1, 2008 have been written down by $2.0 million. For
the three months ended March 31, 2008, log inventories have been written
down by an additional $1.8 million, which has been expensed to cost of
sales for the period.
The opening lumber inventory and opening retained earnings as at
January 1, 2008 have been written down by $0.8 million. For the three
months ended March 31, 2008, lumber inventories have been written down by
an additional $0.3 million as a result of the new accounting policy to
measure inventories at the lower of average cost and net realizable value
on an item-by-item basis, and this write-down has been expensed to cost of
sales for the period.
Cash Distribution
On April 30, 2008, TimberWest announced a distribution of $0.269 per
Stapled Unit, payable July 15, 2008, to unitholders of record on July 1,
2008. From inception to March 31, 2008, the Company has generated
distributable cash of $854.3 million while, including the April 15, 2008
distribution of $21.0 million, the Company has paid out $838.4 million to
unitholders.
Due to the seasonal and cyclical nature of TimberWest's business, cash
flows may fluctuate from quarter to quarter and from year to year. One of
the objectives of TimberWest's cash distribution policy is to make even
distributions to unitholders, which may differ from actual cash generated
during the period. Any difference will be added to or subtracted from
either cash reserves or available credit facilities.
Operating Highlights
-------------------------------------------------------------------------
Three months Three months
ended March ended March
Timberland
Operations:
31, 2008 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Log Sales (in millions of dollars)
Domestic
$ 13.0
$ 38.0
Export -
Asia
13.5 27.1
Export -
US
1.7 13.2
-------------------------------------------------------------------------
Total log
sales
$ 28.2
$ 78.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Log Sales Realizations ($/m(3))
Domestic
67 83
Export -
Asia
100 124
Export -
US
79 90
-------------------------------------------------------------------------
81 95
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Log Sales Volume (thousand m(3))
Domestic
193.8 456.9
Export -
Asia
134.5 218.8
Export -
US
21.4 147.4
-------------------------------------------------------------------------
349.7 823.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Log Sales Mix (thousand m(3))
Fir
228.9 607.5
Hembal
79.1 126.9
Cedar
15.7 42.9
Other
26.0 45.8
-------------------------------------------------------------------------
349.7 823.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Log Production Volume (thousand m(3))
Public
tenures
107.4 116.4
Private
timberlands
276.9 963.4
-------------------------------------------------------------------------
384.3 1,079.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Log Production Costs
($/m(3))
72 61
Timberland operating margin (% of log
sales)
0% 40%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Log sales revenues for the three months ended March 31, 2008, were down
compared to sales revenues for the first quarter of 2007 due to lower log
sales volumes and lower average log realizations as a result of weak log
markets and the strong Canadian dollar. Contributing to the significant
variance in log sales volumes compared to the three months ended March 31,
2007, was higher than normal log sales volume in the first quarter of 2007
due to increased harvest volumes to take advantage of stronger markets.
Production costs per unit for the first quarter of 2008 increased over
the first quarter of 2007 due to approximately 71% reduction in private
land log harvest levels.
-------------------------------------------------------------------------
Three months Three months
ended March ended March
Elk Falls Sawmill: 31, 2008 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales by Product
(in millions of dollars)
Lumber $ 9.8 $ 27.3
Wood chips and residuals 2.9 4.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales Realizations
Lumber ($/mfbm) 579 669
Wood Chips and residuals ($/m(3)) 45 48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales Volume
Lumber (million fbm) 17.0 40.8
Wood Chips and residuals (thousand m(3)) 66.0 90.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Lumber Production Volume (million fbm) 28.4 46.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales realizations for the three months ended March 31, 2008, were
lower relative to sales realizations for the first quarter of 2007 due to
the strong Canadian dollar and weaker lumber markets, the result of
oversupply in all markets. Lower lumber sales volumes during the quarter
were the result of delays in lumber shipments at the end the quarter and
lower production volumes as a result of weak markets.
Wood chips and residuals sales for the three month period ended March
31, 2008 were lower than the comparative period in 2007, reflecting the
reduction in chips produced due to reduced lumber production during the
first quarter of 2008 as a result of market related downtime.
-------------------------------------------------------------------------
Three months Three months
ended March ended March
Real Estate: 31, 2008 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Real Estate Sales (in millions of dollars) $ 2.8 $ 0.3
Real Estate Net Proceeds (in millions
of dollars) 2.4 0.2
Real Estate Net Proceeds ($/acre) 72,547 10,082
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Real estate sales in the first quarter of 2008 comprised one sale of an
industrial property in Campbell River, which was previously an operations
shop site. This sale was part of the on-line auction process that began at
the end of 2007.
-------------------------------------------------------------------------
Three months Three months
ended March ended March
31, 2008 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (Loss) Before Interest, Taxes,
Depreciation and Amortization (EBITDA)(x)
(in millions of dollars)
Net earnings (loss) $ (23.3) $ 3.7
Add (deduct):
Interest on Series A Subordinate Notes
paid to unitholders 21.0 20.9
Interest on long-term debt 2.5 0.1
Interest on short-term debt 0.1 3.4
Income tax recovery (4.7) (0.3)
Depreciation, depletion and amortization 1.2 2.3
Amortization of deferred financing costs 0.1 0.2
-------------------------------------------------------------------------
Earnings (Loss) Before Interest, Taxes,
Depreciation and Amortization $ (3.1) $ 30.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(x) EBITDA does not have a standardized meaning prescribed by Canadian
generally accepted accounting principles and may not be comparable to
similar measures presented by other companies. Management believes
that the presentation of this measure will enhance an investor's
understanding of the Company's operating performance.
Financial Position
-------------------------------------------------------------------------
As at As at
Summary of Financial Position March 31, December 31,
(in millions of dollars) 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents $ 0.1 $ 1.2
Current assets 58.7 64.4
Current liabilities 61.9 40.4
Current liabilities (excluding short-term
debt) 44.9 40.4
Long-term debt 188.0 187.5
Long-term liabilities 155.1 159.6
Series A Subordinate notes owned by
unitholders 698.1 698.1
Unitholder's equity 184.8 210.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents decreased at March 31, 2008, reflecting lower
cash from operations. Trade accounts receivable decreased to $10.2 million
at March 31, 2008, compared to $13.4 million at the end of 2007,
reflecting lower lumber sales volumes in the first quarter of 2008.
Inventories were $40.6 million at March 31, 2008, compared to $41.1
million at the end of 2007. Log inventory was $28.0 million at March 31,
2008, compared to $33.2 million at the end of 2007. Prior to January 1,
2008, TimberWest recorded inventories at a lower of average cost and net
realizable value on an aggregate basis for each of logs and for lumber. On
January 1, 2008 TimberWest changed its policy of accounting for
inventories to record inventories at the lower of average cost and net
realizable value on an item-by-item basis defined as end-use-sorts for
logs and grade levels for lumber. (See Highlights and Significant
Transactions - Adoption of New Accounting Policies) This change in
accounting policy for inventories resulted in a write-down of log
inventories as at March 31, 2008, and is the primary reason for the
decrease in log inventory values compared to the end of 2007. Lumber
inventory was $11.1 million at March 31, 2008 compared to $6.4 million at
the end of 2007. This increase is primarily the result of lower lumber
sales volumes in the first quarter of 2008, due to the timing of lumber
shipments and lower production. Prepaid expenses and other current assets
were $6.0 million at March 31, 2008, compared to $6.6 million at the end
of 2007, reflecting a decrease in non-trade receivables.
Property, plant and equipment were $1,227.3 million as at March 31,
2008, $2.7 million less than as at December 31, 2007. This decrease
primarily reflects the sale of higher and better use properties and other
capital assets, with a net book value of $2.0 million during the first
quarter of 2008, as well as a provision for depreciation of capital assets
of $1.2 million recorded during the quarter. These items were offset in
part by capital additions of $0.5 million, comprised primarily of logging
roads.
Other assets were $1.9 million at March 31, 2008, comparable to the
balance of $2.0 million at December 31, 2007.
Current liabilities as at March 31, 2008, include borrowings of $17.0
million on the Tranche B short-term unsecured revolving credit facility.
Excluding the short-term credit facility, current liabilities at March 31,
2008 were $44.9 million. This quarterly variance in current liabilities
(excluding short-term debt) can be attributed to a $4.5 million increase
in accounts payable and accrued liabilities primarily attributed to
accruals for property taxes and increased trade payables due to higher
levels of production for the month of March 2008 compared to December
2007.
As at March 31, 2008, the Company had combined borrowings of $205.0
million on its available credit facilities, including borrowings of $188.0
million on its Tranche A $216.7 million long-term unsecured revolving
facility, and $17.0 million on its Tranche B $108.3 million short-term
unsecured revolving facility. In addition, the Company had commitments of
$17.1 million relating to outstanding letters of credit, including $9.3
million issued under its demand bank guarantee facility and $7.8 million
issued under its Tranche A $216.7 million long-term unsecured revolving
facility. TimberWest is currently in compliance with all of its debt
covenants, however, it is possible that TimberWest may not be able to
remain in compliance with its debt to EBITDA covenant later in 2008.
Management will work with TimberWest's lenders to achieve amendments which
will allow TimberWest to continue to carry out its business plan while
maintaining distributions on the Stapled Units.
Other long-term liabilities as at March 31, 2008, included a
silviculture liability of $3.4 million, a $37.5 million liability relating
to employee future benefits and a future income tax liability of $114.2
million. The silviculture liability and the liability relating to employee
future benefits are comparable to balances as at December 31, 2007. The
decrease in the liability for future income taxes from the balance of
$119.2 million at December 31, 2007, is primarily attributable to a $4.3
million future income tax recovery to reflect the effects of changes in
the provincial income tax rates that were substantively enacted during the
first quarter of 2008.
The Series A Subordinate Note component of the Company's Stapled Unit
is presented as a liability on the Company's consolidated balance sheets.
As at March 31, 2008, the carrying value of the Series A Subordinate Note
liability was $698.1 million.
During the three months ended March 31, 2008, no Stapled Unit options
were granted and options to purchase 2,720 Stapled Units were exercised
for proceeds of $35,000. As at April 30, 2008, the Company had 1,147,935
granted and outstanding Stapled Unit option awards and 77,752,863 issued
and outstanding Stapled Units.
Cash Flow and Liquidity
-------------------------------------------------------------------------
As at As at
Selected Cash Flow Items March 31, March 31,
(in millions of dollars) 2008 2007
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Cash provided by (used in) operations
before changes in non-cash working
capital $ (26.6) $ 6.4
Changes in non-cash working capital 6.0 (13.0)
-------------------------------------------------------------------------
(20.6) (6.6)
-------------------------------------------------------------------------
Financing activities:
Issuance of Stapled Units on exercise of
options - 1.3
Credit facilities 17.5 -
-------------------------------------------------------------------------
17.5 1.3
-------------------------------------------------------------------------
Investing activities:
Proceeds from sale of property, plant and
equipment 2.4 0.2
Additions to property, plant and equipment (0.5) (0.5)
Other assets 0.1 0.2
-------------------------------------------------------------------------
2.0 (0.1)
-------------------------------------------------------------------------
Decrease in cash and cash equivalents $ (1.1) $ (5.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the three months ended March 31, 2008, the Company issued 2,720
Stapled Units on the exercise of Stapled Unit options for net proceeds of
$35,000, compared to the issuance of 86,462 Stapled Units on the exercise
of Stapled Unit options for net proceeds of $1.3 million in the
comparative quarter in 2007. During the first quarter of 2008, $17.5
million was borrowed on available credit facilities compared to no
borrowings on available credit facilities during the same period in 2007.
In the first quarter of 2008, the Company received net proceeds of $2.4
million from the sale of property, plant and equipment, primarily from the
sale of higher use properties, and incurred $0.5 million for capital
expenditures, primarily for the construction of logging roads.
As at March 31, 2008, the principal amount of TimberWest's total
debt(3) outstanding was $205.0 million compared to total principal amount
of debt outstanding of $187.5 million as at December 31, 2007. The
Company's consolidated debt-to-total capitalization ratio(3) as at March
31, 2008 was 19:81, compared to 17:83 as at December 31, 2007.
Total debt facilities available to the Company as at March 31, 2008,
were $334.3 million, comprised of $9.3 million available under a demand
bank guarantee facility, $108.3 million available under Tranche B, a
short-term revolving facility due September 24, 2008 and $216.7 million
available under Tranche A, a long-term revolving facility due September
24, 2012. As at March 31, 2008 the Company had commitments of $17.1
million relating to outstanding letters of credit issued to secure various
obligations of the Company, including $9.3 million issued under its demand
bank guarantee facility and $7.8 million issued under Tranche A, the
$216.7 million long-term unsecured revolving facility.
-------------------
(3) Total debt and the debt-to-total capitalization ratio are measures
that do not have a standardized meaning prescribed by GAAP and may
not be comparable to similar measures presented by other companies.
As the Company's Series A Subordinate Notes trade only as part of the
Company's equity instrument, the Stapled Unit, they are not included
in the Company's definition of debt. Management believes that the
presentation of these measures will enhance an investor's
understanding of the Company's financial resources and capital
structure.
Internal Controls over Financial Reporting
During the quarter ended March 31, 2008, the Company did not make any
changes to its internal controls over financial reporting that would have
materially affected, or would reasonably likely materially affect, such
controls.
Notice
The accompanying unaudited interim consolidated financial statements of
TimberWest Forest Corp. (the "Company") have not been reviewed
by the Company's auditors.
Consolidated Statements of Operations and Comprehensive Income
Three months Three months
(in millions of dollars) ended March ended March
Unaudited 31, 2008 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales $ 45.0 $ 112.3
Operating costs and expenses:
Cost of sales 45.0 78.2
Selling, administrative and other 3.2 4.6
Depreciation, depletion and amortization 1.2 2.3
-------------------------------------------------------------------------
49.4 85.1
-------------------------------------------------------------------------
Operating earnings (loss) (4.4) 27.2
Interest expense:
Series A Subordinate Notes owned by
unitholders 21.0 20.9
Long-term debt 2.5 0.1
Short-term debt 0.1 3.4
-------------------------------------------------------------------------
23.6 24.4
Amortization of deferred financing costs 0.1 0.2
Other income (0.1) (0.8)
-------------------------------------------------------------------------
23.6 23.8
-------------------------------------------------------------------------
Earnings (loss) before income taxes (28.0) 3.4
Income tax recovery (note 3) (4.7) (0.3)
-------------------------------------------------------------------------
Net earnings (loss) and comprehensive income $ (23.3) $ 3.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net earnings (loss) per
common share (note 4) $ (0.30) $ 0.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Retained Earnings
Three months Three months
(in millions of dollars) ended March ended March
Unaudited 31, 2008 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings, beginning of period, as
previously reported $ 18.3 $ 50.1
Change in accounting policy for inventories
(note 2(a)) (2.8) -
-------------------------------------------------------------------------
Retained earnings, beginning of period, as
restated 15.5 50.1
-------------------------------------------------------------------------
Net earnings (loss) and comprehensive income
for the period (23.3) 3.7
-------------------------------------------------------------------------
Retained earnings (deficit), end of period $ (7.8) $ 53.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to unaudited interim consolidated financial
statements.
Consolidated Balance Sheets
As at
March 31, As at
2008 December 31,
(in millions of dollars) Unaudited 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Assets
Current assets:
Cash $ 0.1 $ 1.2
Accounts receivable 10.2 13.4
Inventories (note 2(a)) 40.6 41.1
Prepaid expenses and other current assets 6.0 6.6
Future income taxes 1.8 2.1
-------------------------------------------------------------------------
58.7 64.4
Property, plant and equipment, net
(note 5) 1,227.3 1,230.0
Other assets (note 6) 1.9 2.0
-------------------------------------------------------------------------
$ 1,287.9 $ 1,296.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Unitholders' Equity
Current liabilities:
Revolving credit facilities $ 17.0 $ -
Accounts payable and accrued liabilities 23.9 19.4
Distribution payable 21.0 21.0
-------------------------------------------------------------------------
61.9 40.4
Revolving credit facilities 188.0 187.5
Long-term silviculture liability 3.4 3.2
Employee future benefits (note 7) 37.5 37.2
Future income taxes 114.2 119.2
-------------------------------------------------------------------------
405.0 387.5
Series A Subordinate Notes owned by
unitholders (note 8) 698.1 698.1
-------------------------------------------------------------------------
1,103.1 1,085.6
-------------------------------------------------------------------------
Unitholders' equity:
Share capital, consisting of common and
preferred shares (note 8) 191.0 191.0
Contributed surplus 1.6 1.5
Retained earnings (deficit) (7.8) 18.3
-------------------------------------------------------------------------
184.8 210.8
-------------------------------------------------------------------------
$ 1,287.9 $ 1,296.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to unaudited interim consolidated financial
statements.
On behalf of the Board of Directors:
Paul J. McElligott V. Edward Daughney
Director Director
Consolidated Statements of Cash Flows
Three months Three months
(in millions of dollars) ended March ended March
Unaudited 31, 2008 31, 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net earnings (loss) $ (23.3) $ 3.7
Items not involving cash:
Depreciation, depletion and amortization 1.3 2.5
Gain on sale of property, plant and
equipment (0.5) (0.1)
Future income tax recovery (4.7) (0.3)
Other non-cash items 0.6 0.6
-------------------------------------------------------------------------
(26.6) 6.4
Changes in non-cash working capital:
Accounts receivable 3.2 (0.4)
Inventories (2.3) (15.1)
Prepaid expenses and other working
capital 0.6 (1.0)
Accounts payable and accrued liabilities 4.5 3.5
-------------------------------------------------------------------------
(20.6) (6.6)
-------------------------------------------------------------------------
Financing activities:
Issuance of Stapled Units on exercise of
options:
Series A Subordinate Notes - 0.8
Share capital - 0.5
-------------------------------------------------------------------------
- 1.3
Revolving credit facilities 17.5 -
-------------------------------------------------------------------------
17.5 1.3
-------------------------------------------------------------------------
Investing activities:
Proceeds from sale of property, plant and
equipment 2.4 0.2
Additions to property, plant and equipment (0.5) (0.5)
Other assets 0.1 0.2
-------------------------------------------------------------------------
2.0 (0.1)
-------------------------------------------------------------------------
Decrease in cash and cash equivalents (1.1) (5.4)
Cash and cash equivalents, beginning of period 1.2 9.3
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 0.1 $ 3.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental information:
Interest on Series A Subordinate Notes
paid to unitholders $ 21.0 $ 20.9
Other interest paid $ 2.6 $ 0.1
Income taxes paid $ - $ -
-------------------------------------------------------------------------
See accompanying notes to unaudited interim consolidated financial
statements.
Notes to Unaudited Interim Consolidated Financial Statements
For the three months ended March 31, 2008 and 2007
Financial figures presented in the tables that follow are in millions of
dollars, except per common share amounts.
1. Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements
include the accounts of TimberWest Forest Corp. and its subsidiaries
("the Company"), have been prepared in accordance with Canadian
generally accepted accounting principles and are expressed in
Canadian dollars. Not all disclosures required by Canadian generally
accepted accounting principles for annual financial statements are
presented and, accordingly, these interim consolidated financial
statements should be read in conjunction with the Company's most
recent annual consolidated financial statements. These interim
consolidated financial statements follow the same accounting policies
and methods of application used in the Company's audited annual
consolidated financial statements of December 31, 2007, except for
the adoption of new accounting policies as described in note 2.
2. Adoption of New Accounting Policies
(a) Inventories, Section 3031
In June 2007, the CICA issued Section 3031, Inventories, that
supersedes Section 3030 and applies to interim and annual periods
beginning on or after January 1, 2008. This section establishes
increased guidance on the measurement of inventory and enhances
disclosure requirements. The changes in measurement requirements
include measuring inventories at the lower of cost and net realizable
value, increased guidelines on the grouping of inventories including
requirement for the Company to use a consistent cost formula for
inventory of a similar nature and use, the allocation of overhead
based on normal capacity, the use of specific cost method for
inventories that are not ordinarily interchangeable or goods and
services produced for specific purposes, and the reversal of previous
write-downs to net realizable value when the value of inventories
increase subsequent to the write-downs.
Prior to January 1, 2008, TimberWest accounted for log and lumber
inventories other than supplies at the lower of average cost and net
realizable value on an aggregate basis for each of logs and for
lumber. Supplies were recorded at the lower of cost and replacement
value.
TimberWest adopted Section 3031 on January 1, 2008 on a prospective
basis and prior periods are not restated. Accordingly, inventories
other than supplies are recorded at the lower of average cost and net
realizable value on an item-by-item basis defined as end-use-sorts
for logs and grade levels for lumber. The opening log inventory and
opening retained earnings as at January 1, 2008 have been written
down by $2.0 million. For the three months ended March 31, 2008, log
inventories have been written down by an additional $1.8 million,
which has been expensed to cost of sales for the period.
The opening lumber inventory and opening retained earnings as at
January 1, 2008 have been written down by $0.8 million. For the three
months ended March 31, 2008, lumber inventories have been written
down by an additional $0.3 million, which has been expensed to cost
of sales for the period.
Supplies continue to be recorded at the lower of cost and replacement
value according to the new accounting policy.
(b) Financial Instruments - Disclosures and Presentation, Sections
3862 and 3863
The CICA issued Section 3862 on disclosures, and Section 3863 on
presentation. The two new Sections replace Section 3861, and set out
additional financial instruments disclosure requirements while
carrying forward unchanged its presentation requirements. These
sections are applicable to interim and annual financial statements
relating to fiscal years beginning on or after October 1, 2007.
TimberWest adopted Section 3862 and 3863 effective January 1, 2008
and provides qualitative and quantitative disclosures related to the
nature and extent of risks arising from financial instruments.
(c) Capital Disclosures, Section 1535
The Company adopted Section 1535, Capital Disclosures, effective
January 1, 2008. This section requires additional disclosures
relating to capital management strategies to enable users of its
financial statements to evaluate the Company's objectives, policies
and processes for managing capital.
(d) Assessing Going Concern, Section 1400
In June 2007, Section 1400 was amended to include requirements for
management to assess and disclose an entity's ability to continue as
a going concern. This section applies to interim and annual periods
beginning on or after January 1, 2008.
TimberWest has adopted this amendment on January 1, 2008 and is not
aware of any material uncertainties related to events or conditions
that may cast significant doubt upon the Company's ability to
continue as a going concern.
3. Income Taxes
---------------------------------------------------------------------
Three months Three months
ended March ended March
31, 2008 31, 2007
---------------------------------------------------------------------
Current income tax expense $ - $ -
Future income tax recovery (4.7) (0.3)
---------------------------------------------------------------------
$ (4.7) $ (0.3)
---------------------------------------------------------------------
---------------------------------------------------------------------
In the first quarter of 2008, British Columbia provincial tax
legislation was substantively enacted, resulting in the reduction of
the provincial corporate tax rate to 11% as of July 1, 2008. This
rate change resulted in a future income tax recovery of $4.3 million
for the three months ended March 31, 2008.
4. Earnings (loss) per Share
---------------------------------------------------------------------
Three months Three months
ended March ended March
31, 2008 31, 2007
---------------------------------------------------------------------
Net earnings (loss) $ (23.3) $ 3.7
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic weighted average number of common
shares 77,751,368 77,674,672
Incremental common shares from potential
exercise of options 37,573 153,651
---------------------------------------------------------------------
Diluted weighted average number of
common shares 77,788,941 77,828,323
---------------------------------------------------------------------
---------------------------------------------------------------------
Basic and diluted net earnings (loss)
per common share $ (0.30) $ 0.05
---------------------------------------------------------------------
---------------------------------------------------------------------
5. Property, Plant and Equipment
Property, plant and equipment at March 31, 2008, includes private
timberlands with a carrying value of $1,172.3 million. This amount
includes a valuation increase adjustment of $376.4 million recorded
in the year ended December 31, 2000, resulting from the adoption of
Section 3465 - Income Taxes of the CICA Handbook, which was mandatory
for fiscal years ending on or after January 1, 2000.
During the first quarter of 2008, the Company sold 14 hectares
(2007 - 7 hectares) of land with a net book value of $1.5 million
(2007 - $0.2 million) for a gain of $0.5 million
(2007 - $0.1 million).
6. Other Assets
---------------------------------------------------------------------
As at As at
March 31, December 31,
2008 2007
---------------------------------------------------------------------
Deferred debt issue costs $ 0.4 $ 0.5
Receivable on sale of property, plant
and equipment 0.5 0.5
Other 1.0 1.0
---------------------------------------------------------------------
$ 1.9 $ 2.0
---------------------------------------------------------------------
---------------------------------------------------------------------
7. Employee Benefits
---------------------------------------------------------------------
As at As at
March 31, December 31,
2008 2007
---------------------------------------------------------------------
Pension benefits $ 8.8 $ 8.8
Non-pension post-retirement benefits 28.7 28.4
---------------------------------------------------------------------
$ 37.5 $ 37.2
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company, through its subsidiaries, maintains pension plans that
include defined benefit and defined contribution segments available
to all salaried employees and a small number of hourly employees not
covered by union pension plans. For the three months ended March 31,
2008, the Company recorded an expense of $0.5 million for pension
benefit costs (2007 - $0.6 million) and made cash payments of
$0.5 million to fund current service costs (2007 - $0.8 million).
The Company also provides non-pension benefits consisting of group
life insurance and medical benefits to eligible retired employees,
which the Company funds on an as-incurred basis. For the three months
ended March 31, 2008, the Company recorded an expense of $0.8 million
for non-pension benefit costs (2007 - $1.0 million) and made cash
payments of $0.5 million to fund current benefit costs
(2007 - $0.5 million).
8. Stapled Units
---------------------------------------------------------------------
Stapled Unit Components
------------------------------------------
Share Capital
(consisting
Series A of common
Subordinate and preferred
Number Notes shares) Total
-------------------------------------------------------------------------
Three months
ended March
31, 2007:
Balance,
December
31, 2006 77,635,254 $ 697.0 $ 190.4 $ 887.4
Issuance of
Stapled Units
on exercise of
options 86,462 0.8 0.5 1.3
-------------------------------------------------------------------------
Balance, March
31, 2007 77,721,716 $ 697.8 $ 190.9 $ 888.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months
ended March
31, 2008:
Balance,
December 31,
2007 77,750,143 698.1 191.0 889.1
Issuance of
Stapled Units
on exercise
of options 2,720 - - -
-------------------------------------------------------------------------
Balance, March
31, 2008 77,752,863 $ 698.1 $ 191.0 $ 889.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company issues equity by way of Stapled Units, each Stapled Unit
consisting of approximately $8.98 face amount of Series A Subordinate
Notes, 100 preferred shares and one common share. The securities
comprising a Stapled Unit trade together as Stapled Units and cannot
be transferred except with each other as part of a Stapled Unit until
the date of maturity of the Series A Subordinate Notes or the payment
of the principal amount of the Series A Subordinate Notes following
an event of default and expiration of a remedies blockage period.
Each Series A Subordinate Note has been issued with a face amount of
$8.978806569, entitling the holder to an interest payment per unit of
$1.077456788 per annum (12%). The Series A Subordinate Notes are
unsecured and subordinate to all credit facilities and debentures.
The principal amount of the Series A Subordinate Notes plus accrued
and unpaid interest thereon are due on August 31, 2038, unless such
date is extended by the Company at the time of the issuance of
additional Subordinate Notes to a date not later than the earlier of:
(i) the date of maturity of such additional Subordinate Notes; and
(ii) August 31, 2048, and will be payable by cash or, at the option
of the Company, by delivery of common shares to the Subordinate Note
Trustee for the benefit of the holders of the Subordinate Notes.
The Company may elect to pay the interest on the Series A Subordinate
Notes held by unitholders in common or preferred shares of the
Company, and may elect to pay the principal amount of the Series A
Subordinate Notes held by unitholders in common shares of the
Company.
9. Stock-based Compensation Plans
Under the Company's Stapled Unit Option Plan, the Company may grant
options for the purchase of Stapled Units to directors, officers or
employees who are in active service or employment of the Company or
of any of its subsidiaries. During the quarter ended March 31, 2008,
no Stapled Unit options were granted. (2007 - 289,370 Stapled Unit
options were granted at an average exercise price of $16.26).
The Company has applied the fair value method of accounting for
Stapled Unit option grants awarded on or after January 1, 2003. The
fair value of each option granted was estimated on the date of grant
using the Black-Scholes option pricing model with the weighted
average assumptions below. As no Stapled Unit options were granted
for the three months ended March 31, 2008, no weighted average
assumptions are shown for 2008.
---------------------------------------------------------------------
2008 2007
---------------------------------------------------------------------
Risk-free interest rate - 4.0%
Expected life (years) - 5.0
Expected volatility - 21.4%
Dividend yield - 6.5%
Number of options granted - 289,370
Fair value of each option granted - $1.80
---------------------------------------------------------------------
No Stapled Unit options were granted between January 1, 2008 and
March 31, 2008. The compensation cost for the 289,370 Stapled Unit
options that were granted in the same period in 2007 was $521,000.
The compensation cost of Stapled Unit option awards is amortized
against earnings over the three-year vesting period of the underlying
options, or for employees eligible to retire, at the grant date
rather than over the vesting period. An expense of $64,000 has been
recognized in net earnings for the three months ended March 31, 2008
(2007 - $234,000), with a corresponding credit to contributed
surplus.
Under the Company's Distribution Equivalent Plan, the Company awards
Stapled Unit option holders an amount equal to actual distributions
paid on the Company's Stapled Units. Awards granted under the
Distribution Equivalent Plan vest under the same terms that apply to
the corresponding options and can only be exercised at the time of
exercise of the corresponding options. The Company applies the
principles of the fair value-based method of accounting for
stock-based compensation to awards granted under this plan.
Awards are accrued on a basis equal to actual distributions paid on
the Company's issued and outstanding Stapled Units and are charged to
earnings as the underlying Stapled Unit options vest. For the three
months ended March 31, 2008, $0.3 million has been accrued for awards
granted under this plan (2007 - $0.2 million) and $0.3 million has
been amortized against earnings for the quarter
(2007 - $0.3 million).
During the three months ended March 31, 2008, a total of 2,720
Stapled Unit options with an average exercise price of $11.90 were
exercised and 1,500 Stapled Unit options with an average price of
$16.26 were cancelled (2007 - 86,462 Stapled Unit options with an
average exercise price of $13.84 were exercised).
10. Financial Instruments
(a) Accounting for financial instruments
TimberWest has classified its cash and cash equivalents as held-for-
trading and recorded them at fair value. Accounts receivable, and
receivables on the sale of property, plant and equipment, are
classified as loans and receivables and measured at amortized cost.
The Company's drawings on available credit facilities, accounts
payable and accrued liabilities, distribution payable, including
interest payable, are classified as other liabilities, all of which
are measured at amortized cost.
The Company measures its Series A Subordinate Notes owned by
unitholders at amortized cost using the effective interest method.
The effective interest method establishes the rate which equates the
estimated future cash flows with the net carrying amount of the
financial liability. The embedded derivative arising from the option
to extend the Series A Subordinate Notes for a further 10 year period
is measured at fair value.
The carrying values of accounts receivable, accounts payable and
accrued liabilities and distribution payable approximate their fair
values due to the short term to maturity of these instruments.
The carrying values of receivables on the sale of property, plant and
equipment are estimated to approximate their fair values due to their
short term to maturity.
The carrying values of drawings on available credit facilities
approximate their fair values, as they bear floating interest rates
that approximate market rates and have a short term to maturity.
The carrying value of accrued liabilities for future silviculture
costs approximate their fair value as determined based on the present
value of future cash flows associated with these liabilities.
At March 31, 2008, the Company's Series A Subordinate Notes owned by
unitholders had a carrying value of $698.1 million measured at the
amortized cost using the effective interest method. The Series A
Subordinate Notes are a component of the Company's Stapled Units,
which include one common share, 100 preferred shares and
approximately $8.98 face amount of the 12% Series A Subordinate
Notes. The Stapled Units are listed on the Toronto Stock Exchange.
The embedded derivative arising from the option to extend the Series
A Subordinate notes for a further 10 year period from 2038 to 2048 is
measured at fair value. The fair value of this option is determined
by an independent financial institution and it is insignificant to
TimberWest's consolidated financial statements.
(b) Nature and extent of risks arising from financial instruments
TimberWest is exposed to the following risks as a result of holding
financial instruments: credit risk, market risk, and liquidity risk.
The following is a description of the risks and how the Company
manages its exposure to them.
(i) Credit risk:
Credit risk refers to the risk that a counterparty will default
on its contractual obligations resulting in financial loss to
the Company. The Company is exposed to credit risk on accounts
receivable from customers. To mitigate and manage its credit
risk, the Company regularly reviews customer credit limits,
monitors the financial status of customers, and assesses the
collectibility of accounts receivable. In certain offshore
markets, the Company requires bank letters of credit. The
maximum exposure to credit risk as at March 31, 2008 is the
carrying value of the Company's accounts receivable. As at
March 31, 2008, approximately 93% of accounts receivable is
current or outstanding for less than 30 days.
(ii) Market risk:
Market risk refers to the risk of loss that may arise from
changes in market factors such as interest rates, and foreign
exchange rates.
Interest rate risk refers to the risk that the fair value or
future cash flows of a financial instrument will fluctuate due
to changes in market interest rates.
TimberWest has two credit facilities as at March 31, 2008: the
first facility, Tranche A, is long-term financing in the amount
of $216.7 million, due on September 24, 2012; the second
facility, Tranche B, is short-term financing in the amount of
$108.3 million, due on September 24, 2008. Under both
facilities, funds are available to the Company in both Canadian
and US dollars by way of adjusted prime rate-based loans,
bankers' acceptances, LIBOR plus 0.9% loans and letters of
credit or guarantee.
The Company normally enters into Bankers' Acceptance for less
than 30-day periods for both credit facilities and could
therefore be exposed to fluctuations in interest rates
fluctuations at the Bankers' Acceptance expiration.
For the three months ended March 31, 2008, with other variables
unchanged, an interest rate change of 1% per annum related to
both of the credit facilities would affect net earnings by
approximately $0.5 million.
Foreign exchange risk refers to the risk that the fair value or
future cash flow of a financial instrument will fluctuate
because of changes in foreign exchange rate.
TimberWest sells a substantial volume of product outside of
Canada (55% of sales for the three months ended 2008), all in
US dollars. As such, the relative strength of the Canadian
dollar versus its US counterpart has an effect on sales and
earnings. Results can be adversely affected by a strengthening
Canadian dollar. The relative strength of the Japanese yen and
the European euro also affect the Company's competitiveness in
the markets where it sells its products. TimberWest does not
hedge its foreign exchange risk.
Cash, accounts receivable, and accounts payable are denominated
in US and Canadian dollars. As at March 31, 2008, with other
variables unchanged, the effect of a $0.01 US change per
Canadian dollar on cash, accounts receivable, and accounts
payable would be less than $0.1 million.
(iii) Liquidity risk:
Liquidity risk refers to the risk that TimberWest may be unable
to generate or obtain sufficient cash or cash equivalents in a
timely and cost-effective manner to meet its commitments as
they come due.
The Company manages liquidity risk by continuously monitoring
and reviewing both actual and forecasted cash flows to maintain
adequate cash and cash equivalent balances.
The following table provides a summary of the contractual
undiscounted cash flow requirements for financial liabilities
as at March 31, 2008. This table details payments due in each
of the next five years and thereafter for the Company's
revolving credit facilities and outstanding letters of credit:
(in millions of
dollars) 2008 2009 2010 2011 2012 2013+ Total
Reflected on the
consolidated
balance sheets:
Revolving credit
facilities $ 17.0 $ - $ - $ - $188.0 $ - $205.0
-------------------------------------------------------------------------
Not reflected on
the consolidated
balance sheets:
Outstanding
letters of
credit 16.6 0.5 - - - - 17.1
-------------------------------------------------------------------------
$ 33.6 $ 0.5 $ - $ - $188.0 $ - $222.1
-------------------------------------------------------------------------
Letters of credit are committed in perpetuity, renew annually and the
liability will diminish over time.
11. Capital Management
TimberWest's objectives for managing capital are to safeguard its
ability to continue as a going concern, to provide a sufficient
return to its unitholders, and to meet external capital requirements
on its debt and credit facilities.
The Company manages its capital by monitoring its consolidated debt-
to-total capitalization ratio. Debt is the total amount of borrowings
on its revolving credit facilities on the balance sheet. Total
capitalization is calculated as sum of Series A Subordinate Notes,
plus unitholders' equity which includes share capital, contributed
surplus, and retained earnings. As the Company's Series A Subordinate
Notes trade only as part of the Company's equity instrument, the
Stapled Unit, they are not included in the Company's definition of
debt.
TimberWest's consolidated debt-to-total capitalization ratio as at
March 31, 2008 was 19:81, compared to 17:83 as at December 31, 2007.
12. Comparative figures
Certain comparative figures have been reclassified to conform to the
current year presentation.
Three months Three months
Supplemental Information ended March ended March
Unaudited 31, 2008 31, 2007
---------------------------------------------------------------------
---------------------------------------------------------------------
Sales by Product
(in millions of dollars)
Log sales
Domestic $ 13.0 $ 38.0
Export - Asia 13.5 27.1
Export - US 1.7 13.2
---------------------------------------------------------------------
Total log sales 28.2 78.3
Lumber 9.8 27.3
Wood chips and other 4.2 6.4
Real estate 2.8 0.3
---------------------------------------------------------------------
$ 45.0 $ 112.3
---------------------------------------------------------------------
---------------------------------------------------------------------
Sales Volume
Logs (thousand m(3))
Domestic 193.8 456.9
Export - Asia 134.5 218.8
Export - US 21.4 147.4
---------------------------------------------------------------------
349.7 823.1
---------------------------------------------------------------------
---------------------------------------------------------------------
Lumber (million fbm) 17.0 40.8
---------------------------------------------------------------------
---------------------------------------------------------------------
Log Sales Mix (thousand m(3))
Fir 228.9 607.5
Hembal 79.1 126.9
Cedar 15.7 42.9
Other 26.0 45.8
---------------------------------------------------------------------
349.7 823.1
---------------------------------------------------------------------
---------------------------------------------------------------------
Production Volume
Logs (thousand m(3))
Public tenures 107.4 116.4
Private timberlands 276.9 963.4
---------------------------------------------------------------------
384.3 1,079.8
---------------------------------------------------------------------
---------------------------------------------------------------------
Lumber (million fbm) 28.4 46.6
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings (Loss) Before Interest, Taxes,
Depreciation and Amortization (EBITDA)(x)
(in millions of dollars)
Net earnings (loss) $ (23.3) $ 3.7
Add (deduct):
Interest on Series A Subordinate
Notes paid to unitholders 21.0 20.9
Interest on long-term debt 2.5 0.1
Interest on short-term debt 0.1 3.4
Income tax recovery (4.7) (0.3)
Depreciation, depletion and
amortization 1.2 2.3
Amortization of deferred financing
costs 0.1 0.2
---------------------------------------------------------------------
Earnings (Loss) Before Interest, Taxes,
Depreciation and Amortization $ (3.1) $ 30.3
---------------------------------------------------------------------
---------------------------------------------------------------------
(x)EBITDA does not have a standardized meaning prescribed by
Canadian generally accepted accounting principles and may not be
comparable to similar measures presented by other companies.
Management believes that the presentation of this measure will
enhance an investor's understanding of the Company's operating
performance.
About TimberWest
TimberWest Forest Corp. is uniquely positioned as Western Canada's
largest private land management company. The Company owns in fee simple
approximately 322,000 hectares or 796,000 acres of private land, including
75 kilometres of waterfront, that over the previous five calendar years,
have provided an annual average timber harvest of 2.565 million m(3) of
logs and have an approximate annual growth rate of 8.0 m(3) per hectare
per year on the productive land base. These lands are located on Vancouver
Island and the majority of the land base supports the growth of Douglas
fir, a premium tree species sought after for structural purposes.
TimberWest runs fully-contracted harvesting operations. With almost 80% of
the Company's annual private land logging now being done in second-growth
stands, TimberWest leads the Coastal industry in the growing and
harvesting of second-growth timber.
TimberWest also owns renewable Crown harvest rights to 0.7 million m(3)
of logs per year and operates a sawmill located near Campbell River, BC.
In addition, approximately 54,000 hectares, or 134,000 acres
(approximately 17% of the Company's landholdings) of the Company's lands
have been identified as having greater value as real estate properties and
will progressively be made available for higher uses over the next ten to
fifteen years. Five land classifications have been developed for the
Company's 39,000 acres of core development lands. An additional 41,000
acres adjacent to our core development lands have yet to be classified for
specific development opportunities, and some 54,000 acres of non-core
higher and better use lands will be sold "as is" over time with
little additional planning or zoning work undertaken. The Company reviews
its land base on a periodic basis to update the size of its portfolio of
higher use properties.
The Company's independent auditor, KPMG Performance Registrar Inc.,
periodically certifies that the forest management practices on both the
Company's private and public timberlands continue to meet all Sustainable
Forestry Initiative (SFI(R)) requirements. SFI requirements specify that
forest harvesting is integrated with environmental and conservation goals
for soil, wildlife, water quality protection, conservation of
biodiversity, protection of special sites and aesthetics in a manner that
ensures a sustainable harvest over the long-term.
Stapled Units of TimberWest Forest Corp. are traded on the Toronto Stock
Exchange under the symbol: TWF.UN.
Visit us at our web site:
www.timberwest.com
Source: TimberWest Forest Corp.
|
