Fraser Papers Inc.
TSX : FPS
|
February 05, 2009 20:02 ET
Fraser Papers Announces Financial Results for the Fourth Quarter of 2008
TORONTO, ONTARIO--(Marketwire - Feb. 5, 2009) -
(All financial references are in U.S. dollars unless otherwise noted)
Fraser Papers Inc. (TSX:FPS) ("Fraser Papers" or the "Company") today reported financial results for the fourth quarter and year ended December 31, 2008.
The Company generated an EBITDA loss of $3.3 million in the fourth quarter compared to an EBITDA loss of $12.2 million in the third quarter. Fourth quarter results were negatively impacted by unscheduled maintenance at the Thurso, Quebec pulp mill of $3.0 million. Third quarter results were impacted by scheduled maintenance outages at the Company's East Papers and Gorham operations. Improvements in the results of the paper operations were partly offset by significant declines in demand and pricing for pulp and lumber.
The Company generated a loss (after interest, depreciation and income taxes) of $15.9 million or $0.32 per share in the fourth quarter compared to a loss of $21.3 million or $0.42 per share in the third quarter.
For the twelve months ended December 31, 2008, the Company generated a loss of $71.9 million or $1.48 per share compared to a loss of $43.1 million or $1.47 per share in 2007. Results in 2007 included a pre-tax gain of $38.4 million ($1.08 per share) on the sale of the Company's interest in Acadian Timber Income Fund (TSX:ADN.UN) and pre-tax restructuring charges of $15.9 million ($0.53 per share) related to the permanent closure of two paper machines at the Company's East Papers operations.
HIGHLIGHTS
- During the quarter, the paper operations generated $9.8 million in EBITDA reflecting higher net selling prices from sales of specialty papers and lower operating costs. Net realizations for the quarter improved by $32 per ton or 3% compared to Q3 2008. Manufacturing costs were $114 per ton lower due to no maintenance outages, improved operations and lower input costs, partly offset by the impact of market-related closures in December.
- Specialty paper grades made up 74% of the Company's product mix in 2008 compared to 69% in 2007. This improvement included a 35% increase in shipments of high-bright groundwood papers and an 11% increase in specialty packaging papers.
- Continued improvements in operating performance compared to Q4, 2007 include:
-- 42% reduction in oil consumption as a result of a number of energy initiatives;
-- 8% increase in throughput in the paper operations as a result of better uptime; and
-- 5% improvement in operating efficiency at the Edmundston pulp mill as a result of lower process losses and improved uptime.
- To reduce risk of currency fluctuation on Fraser Papers' financial performance, the Company has bought forward 40% of its estimated 2009 Canadian dollar requirements at an exchange rate of CAD$1.00 equals USD$0.79.
FINANCIAL SUMMARY
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Three Months Ended Years Ended
US$ MILLIONS, EXCEPT ------------------------------------------------------
PER SHARE AMOUNTS Dec 31, 2008 Dec 31, 2007 Dec 31, 2008 Dec 31, 2007
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EBITDA $ (3.3) $ (17.2) $ (33.6) $ (41.9)
Earnings/(loss) $ (15.9) $ (20.3) $ (71.9) $ (43.1)
Per share $ (0.32) $ (0.69) $ (1.48) $ (1.47)
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"We are pleased with the improved results of our paper operations which provided our best EBITDA performance from this business segment since 2006. Our focus on improving throughput and operating efficiency, reducing energy consumption and reducing our fixed costs has positioned us to benefit from lower commodity input costs and a weaker Canadian dollar," said Peter Gordon, President and CEO of Fraser Papers. "As we enter 2009, we believe we are better positioned than many in the paper industry given the specialty nature of the majority of our paper products. The outlook for pulp and lumber is much less certain. However, lower input costs and improved operations at our paper mills should position us to compete in these tough economic times."
RESULTS OF OPERATIONS
EBITDA in the fourth quarter of 2008 was a loss of $3.3 million, compared to an EBITDA loss of $12.2 million in the third quarter of 2008. Third quarter results included $7.2 million related to planned outages at the recovery boiler and cogeneration facility at the Company's East Papers operations and a regular maintenance outage at the Gorham, New Hampshire paper mill. Excluding the impact of the outages, EBITDA improved by $1.7 million compared to the third quarter. A significant improvement in the results of the Company's paper operations for the quarter was partly offset by a dramatic drop in both demand and the market price for the Company's lumber and pulp products.
EBITDA in the current quarter improved over results from one year ago. In the fourth quarter of 2007 EBITDA was negative $17.2 million. Improved paper pricing, operating efficiencies and lower input costs were partly offset by the impact of lower selling prices for pulp and lumber. A weaker Canadian dollar and lower oil prices contributed $10.6 million dollars to EBITDA compared to the fourth quarter of 2007.
MARKET UPDATE AND OPERATING RESULTS
During the fourth quarter of 2008, mill nets for the Company's paper products improved an average of $32 per ton over the third quarter despite a drop in benchmark commodity prices. Net pricing for specialty packaging papers improved $66 per ton while pricing for high-bright groundwood grades improved by $46 compared to the third quarter. Selling prices for specialty printing grades were marginally higher while pricing for commodity papers was lower. Compared to the fourth quarter of 2007, mill net realizations have improved $104 per ton or 11%, as price increases were implemented across most paper grades during 2008.
Total paper shipments were up 4% from the third quarter but were down 15% compared with shipments in the fourth quarter of 2007. Shipments of specialty packaging, printing and high-bright groundwood papers were largely in line with Q4 2007 levels. Commodity freesheet and commodity groundwood shipments were lower by 44%. This was due to a significant drop in demand for commodity papers in the fourth quarter of 2008 as well as the Company's reduced exposure to these markets. Weaker demand for commodity papers led the Company to take unscheduled downtime on two paper machines at its East Papers operations (eight days) and three paper machines at Gorham (10 days) in December. On a year-to-date basis, total shipments were 4% below 2007 due to the weaker demand experienced in the fourth quarter of 2008. The Company has continued to transition more of its capacity towards specialty papers, shipping 74% specialties in 2008 compared to 69% in 2007.
Shipments of northern bleached hardwood kraft pulp from the Company's pulp mill in Thurso, Quebec were 9% below third quarter levels. Compared to the fourth quarter of 2007, shipments were down 24%. The lower shipment levels were due to a significant drop in demand in the fourth quarter which required the Company to take downtime to match its inventories with customer demand. Average mill net realizations for hardwood pulp were lower by $112 per tonne compared to Q3, consistent with a $107 per tonne drop in average reference prices.
Average cash operating costs at Thurso increased compared to the third quarter due to an unplanned maintenance outage to repair a broken pulp line in October which negatively affected EBITDA by $3.0 million. In addition, the mill took market downtime in December. The impact of these shuts was only partly offset by the benefit of a weaker Canadian dollar and lower oil costs.
Lumber markets remained weak during the quarter as U.S. housing starts remained at historically low levels. Lumber prices fell to their lowest levels in eight years as the average Boston delivered reference price fell 20% to $276 per Mfbm. The Boston reference price ended the year at $262 per Mfbm, $261 off its cyclical peak in August 2004. As a result of these low prices, the Company's operating strategy is to run its lumbermills to support the chip requirements of the Edmundston, New Brunswick pulp mill. As a result of the start-up of the Juniper, New Brunswick lumbermill, lumber shipments increased 16% over third quarter levels.
BUSINESS INITIATIVES
Market Focus and Competitive Advantage
Fraser Papers continues to focus on increasing its sales of specialty papers. Specialty papers generally include those papers used in applications requiring narrow technical specifications or unique manufacturing capabilities. Some of these grades are less susceptible to the cyclical demand changes of commodity grades. During 2008, the Company reduced its shipments of commodity papers by 39,000 tons or 27%. As a result, 74% of Fraser Papers' shipments in 2008 were targeted toward specialty applications. Increases in specialty shipments in 2008 were targeted at food packaging grades and high-bright specialty groundwood applications which have displaced higher cost freesheet papers.
Continued success in improving specialty paper sales will be dependent on the Company's ability to develop new products in response to the needs of its customers. During 2008, approximately 18% of the products manufactured were developed in the previous 24 months.
Margin Improvement and Cost Reduction
Despite the recent uncertainty in financial markets and the economy in general, the Company has continued to invest in its core business to support its specialty paper operations. During the third quarter of 2008, the East Papers operations took downtime at the sulphite pulp mill in Edmundston, New Brunswick in order to complete maintenance at its 38 megawatt biomass cogeneration facility and improve operating efficiency at the recovery boiler. Since restart, the sulphite mill has demonstrated a 7% increase in throughput with average daily production of 710 tons per day during the last half of the year, compared to 666 tons per day in the first half. Increased internal sulphite pulp production has reduced the requirement to purchase market pulp.
During 2008, the Company undertook a number of initiatives to reduce oil consumption at all operations. As a result of these initiatives, oil consumption across the Company in the fourth quarter of 2008 was reduced by 42% compared to the same period one year ago, which represents 71,000 barrels in the quarter.
Paper machine productivity levels continue to improve as the Company focuses on operating efficiencies and throughput. Average daily production on the Company's nine operating paper machines was higher by 6% compared to 2007. These improvements have been achieved with across-the-board increases in machine efficiencies, uptime and runnability, improved production scheduling and higher machine speed.
In July, 2008, the Company's board of directors approved the CAD$17.5 million modernization of the Company's lumbermill located in Plaster Rock, New Brunswick. Significant site work has been completed and the project is progressing according to expectations. The construction work is expected to be completed on schedule by the third quarter of 2009.
Fraser Papers is subject to market price fluctuations for many of its input costs and expects to benefit from recent reductions in world commodity prices. In particular, the Company consumes approximately 480,000 barrels of oil and sells approximately 52,000 tonnes of market pulp per year (net of purchases). In addition, the Company has significant operations in Canada and incurs Canadian dollar-denominated expenses of approximately CAD$360 million per year. The Company has fixed the exchange rate on approximately 40% of its estimated Canadian dollar-denominated operating costs for 2009 at CAD$1.00 equals USD$0.79.
Financing
During 2008, the Company completed a number of financings required to fund its continuing operations and pension deficit. In January, 2008, the Company raised $59.7 million in common equity from a rights offering to shareholders. In April, 2008, the Company increased the maximum borrowings under its working capital facility to $115.0 million and extended the term to April 2011. In September, 2008, the Company finalized a one-year, $25 million term facility. These three transactions were supported by Brookfield Asset Management, the Company's largest shareholder.
In addition to these transactions, the Company received a six and one half year, CAD$40 million secured term loan from the province of New Brunswick to support its investment plans in the Province.
EXECUTIVE ANNOUNCEMENT
The Board of Directors approved the appointment of Jeff Dutton, currently Senior Vice President, Operations and Chief Operating Officer, as President and Chief Operating Officer, effective immediately, reporting to Peter Gordon, Chief Executive Officer. Mr. Dutton joined Fraser Papers in June, 2006 as General Manager of the Company's East Papers operations and has been actively involved in improving the Company's operating platform.
OUTLOOK
The Company expects a number of challenging quarters ahead as the effects of a global recession play out in the U.S. economy and in the Company's market segments in particular. Business activity slowed sharply toward the end of last year and led to reduced demand for all Fraser Papers' products. The pulp and lumber markets were particularly impacted with market prices dropping to extremely low levels. Prices for the Company's paper products were more stable, but as order files declined, the Company took downtime across a number of machines, in addition to shutdowns at Thurso and the lumbermills.
The Company's sales are largely focused in the United States, therefore the outlook for a recovery in the Company's business will be partly dependent on the success of the recently announced stimulus package and the availability of liquidity to restore both credit and confidence into the economy and, in particular, into the Company's customers and end markets. Despite taking downtime on paper machines to balance inventories against customer orders in December and January, the Company built inventories in excess of its near-term requirements. Subsequent to the year end, the Company sold approximately 10,500 tons of inventory to an affiliate of Brookfield Asset Management, on customary commercial terms. The proceeds of the sale were used to repay amounts outstanding on the Company's working capital facility. The Company believes that over the longer term, the specialty nature of its paper products will help to position Fraser Papers to benefit from an economic recovery sooner than many other companies.
The market for northern bleached hardwood kraft pulp produced at the Company's Thurso mill continues to be weak. By the fourth quarter, world pulp inventories had increased to unsustainable levels following a sharp decline in global demand from paper producers. It is expected that further capacity reductions will be required in northern Europe and North American to balance supply and demand, as low cost capacity in South America and Southeast Asia continues to operate.
With no clear signs of recovery in the U.S. housing market, lumber prices are expected to remain depressed for the balance of 2009. The Company will continue evaluating opportunities to secure low cost woodchips for the paper operations in Madawaska and will operate its lumbermills in support of its integrated paper operations.
Input costs for energy, chemicals and other raw materials have begun to weaken following a period of inflationary pressure. With a significant number of assets located in Canada, which incur Canadian dollar-denominated costs, the weakness in the Canadian currency has helped to improve the competitiveness of those operations. To eliminate a significant amount of risk related to the future volatility in the Canadian dollar, the Company has bought forward approximately 40% of its 2009 Canadian dollar requirements at an exchange rate of CAD$1.00 equals USD$0.79.
The Company expects to require additional financing during 2009 to fund its operations, pension fund obligations and the maturity of the $25 million term loan facility in September. Given the challenging conditions in the credit markets, the Company expects that it may have to seek support from its shareholders.
Fraser Papers is an integrated specialty paper company that 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 information and forward-looking statements within the meaning of Canadian provincial securities laws. These forward-looking statements include, among others, statements with respect to expectations and estimations with respect to future economic conditions, the Company's market position, various costs that could impact the business, product development and other initiatives at the Company's operations and the expected impact of specific events on financial results in future quarters. The words "believe", "should", "continue", "will", "expect", "outlook", "may", "plan", and other expressions which may be predictions of or 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, performance or achievements of the Company to differ materially from those set forth in the forward-looking statements include general economic conditions, foreign exchange and interest rates, availability of equity and debt financing, supply/demand and prices for any products the Company sells, increases in costs of production, decisions by political or regulatory bodies in Canada or the United States 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 5, 2009
This Management's Discussion and Analysis ("MD&A") should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes thereto for the period ended December 31, 2008, as well as the Management's Discussion and Analysis and the audited financial statements for the year ended December 31, 2007. 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 controlling equity interest in the Company) and all of its subsidiaries. Brookfield owns approximately 70.5% of all outstanding common shares of the Company.
EBITDA, net debt, net debt to net debt plus equity, free cash flow 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 MD&A.
This MD&A contains forward-looking information. See "Forward-Looking Information."
All financial references are in U.S. dollars unless otherwise noted.
STRATEGY
Our business strategy continues to be:
- Focusing on value-added products, with an emphasis toward specialty applications for packaging, printing and groundwood paper grades;
- Receiving recognition for the value proposition that our superior customer service and technical support provide to our customers;
- Continuing innovation and development of new products to support ongoing growth of our business;
- Achieving operating excellence that surpasses industry benchmarks for manufacturing efficiency, energy consumption and fibre costs at all our facilities; and
- Maintaining a culture focused on execution and performance.
In addition to executing this strategy, we will continue to look for opportunities to grow our specialty paper franchise opportunistically, based on value. We have significantly narrowed our operational focus in recent years such that future growth can be specifically targeted to our core business.
Value-added Products
Fraser Papers competes in specific market segments with particular expertise in the manufacture of 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. We focus on markets which are generally between 50,000 to 500,000 tons in size and provide Fraser Papers with the opportunity to have an influential market share. Over time, we seek to grow the volume of business we have in these core paper market segments where we feel we can achieve the best margins. These market segments involve food and other consumer packaging paper grades, financial printing and other lightweight freesheet papers, and specialty high-bright groundwood papers. Fraser Papers has increased the shipments of specialty papers from 69% in 2007 to 74% in 2008.
To better serve our customers' needs, Fraser Papers has the technical capability to produce high quality printing papers as a freesheet or a groundwood product. This enables our customers to receive additional value from Fraser Papers' product offerings.
Superior Customer Service and Technical Support
Fraser Papers' customer service team is continually seeking solutions to customers' needs. We offer vendor managed inventory programs and just-in-time service where quick turnaround solutions are required.
Fraser Papers' technical support team is regularly in our customers' manufacturing locations helping them lower the overall cost of their process that uses our paper, as well as resolving issues unrelated to the paper we sell them.
We work closely with a number of packaging customers to assist them in areas such as improving converting efficiency with new packaging designs and increasing customer production rates to help the customer improve overall performance.
Innovation
Product development continues to be an important component of Fraser Papers' marketing initiatives. Our strategy is to focus on products that bring value from the service and technical features that differentiate us from our competition. We are developing new products in the label and food service markets as well as new technologies for use in our operations in areas of fibre development and pigment optimization.
During the fourth quarter, we developed eight new specialty products for applications in the packaging, financial printing, converting and consumer goods market segments. We achieved our goal of continually developing new products as approximately 18% of the volume in the fourth quarter represents products that were developed in the past 24 months.
Improved Operating Performance
The manufacture of pulp and paper is a capital intensive business requiring significant investment in large machinery and equipment. It is imperative that these assets perform consistently at a high level in order to ensure the lowest possible cost position. To this end, we have undertaken a number of initiatives that will lower our operating costs.
- Improved productivity uptime at our sulphite pulp mill in Edmundston, New Brunswick supports our objective of displacing purchased pulp fibre with lower cost internal pulp. Internal pulp production at Edmundston during the quarter set a record of producing 727 tons per day. This was a 28 ton-per-day improvement from the previous record quarter. For the year 2008, sulphite production averaged 688 tons per day, a 41 ton-per-day improvement from the average in 2007.
- Throughput improvements at our Madawaska, Maine paper mill have increased sales volumes. In 2007, the Madawaska paper mill produced 438,000 tons of paper which included 32,000 tons from two paper machines that were permanently shut in the summer of 2007 or 1,178 tons per day on the remaining six paper machines. In 2008, the mill produced 1,227 tons per day, a 4% relative improvement, through reliability and efficiency improvements.
- The Gorham, New Hampshire paper mill has also improved its throughput. During 2007 and 2008, the Gorham paper mill indefinitely shut two paper machines. The remaining three paper machines increased throughput by 11% from 323 tons per day in 2007 to 359 tons per day in 2008.
- An oil fired boiler and turbine in the Edmundston, New Brunswick pulp mill, which was traditionally used in the winter, was shut in 2007. In 2008, oil consumption at East Papers was lower by 4.3 million gallons, or 51% compared to 2007, reducing our oil consumption to 0.22 barrels per ton of paper produced and representing annual savings of $5.4 million.
- A heat recovery system was installed and commissioned at the end of the first quarter at the Thurso, Quebec pulp mill. In 2008, oil consumption at Thurso was lower by 2.3 million gallons or 11% compared to 2007, representing annual savings of $3.0 million.
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2008 YTD Margin
PRE-TAX US$MILLIONS Improvements
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Improved sales mix $ 13.0
Improved energy and chemical efficiency 11.5
Improved fibre and material utilization 3.3
Labour and other cost reductions 2.4
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Total $ 30.2
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Fraser Papers' margin improvement initiatives focus on year-over-year improvements in EBITDA assuming constant selling prices, exchange rates and commodity prices. Through focusing on things we can control, Fraser Papers' operating performance improved EBITDA by $30.2 million in 2008 when compared to 2007. However, 2008 results were negatively impacted by $10.2 million, primarily due to planned maintenance downtime at the East Papers pulp mill in Edmundston, New Brunswick, and an unscheduled maintenance outage at the Thurso pulp mill. Results were also negatively affected in 2007 by $18.6 million, primarily the result of planned maintenance outages at East Papers and Thurso.
Margin improvements were derived primarily from improved product mix, energy usage and improved chemical and fibre usage efficiencies. We have continued to optimize our manufacturing processes compared to 2007 through improving machine efficiencies, improving production scheduling and speeding up the paper machines. Paper production per operating day on our nine paper machines is up 6% compared to 2007. We believe that a more efficient operating platform will position Fraser Papers to benefit when demand for paper improves.
These initiatives served to only partially offset significant cost pressures from fibre, energy and chemical pricing and Canadian / U.S. foreign exchange, which totaled $52.5 million in 2008 compared to 2007.
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2008 YTD
PRE-TAX US$MILLIONS Uncontrollable Pressures
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Increased fibre pricing $ (14.3)
Increased energy pricing (14.6)
Increased chemical pricing (10.2)
Canadian / U.S. foreign exchange (13.3)
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Total $ (52.4)
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Increased fibre pricing includes the impact of higher costs for logs, chips and purchased pulp. The negative impact of fibre pricing has been partially offset by improved revenue realizations in the pulp operations of $6.4 million.
Increased energy pricing includes the impact of higher costs for oil, biomass and electricity. The Company has invested capital to reduce our reliance on oil, including the energy reduction projects at East Papers and Thurso. The Company recently approved a capital investment for a biomass boiler at the Plaster Rock, New Brunswick lumbermill to eliminate the use of oil required to dry lumber in the kilns. We also completed a scheduled maintenance and turbine overhaul at the Edmundston cogeneration boiler which improves our energy platform.
In the past, certain chemical prices have trended with the price of oil since many chemical products are petroleum-based. Chemical companies implemented significant price increases during 2008. While oil pricing subsided during the fourth quarter of 2008, chemical prices did not. Fraser Papers is working with suppliers to manage the impact of the increases.
Approximately 53% of Fraser Papers' assets are located in Canada but essentially 100% of our sales are transacted in U.S. dollars. From time to time, the Company will enter into arrangements to fix the exchange rate on certain of its Canadian dollar-denominated cash flows (see "Hedging Activities"). The Canadian dollar exchange rate realized in 2008 was USD$0.95 (after giving effect to the Company's hedging program) compared to the realized USD$0.93 in 2007. During the fourth quarter of 2008, the Company realized an exchange rate of USD$0.87 compared to the realized USD$1.01 in the fourth quarter of 2007.
Recapitalization
The Company has maintained a conservative net debt to net debt plus equity ratio of 25% while maintaining adequate liquidity to achieve its business plans as a result of four financings during 2008.
During the first quarter of 2008, the Company issued 20,656,913 common shares under a rights offering for net proceeds of $59.7 million. The proceeds from the offering were used to repay outstanding debt, including $50.0 million which was due on January 31, 2008.
During the second quarter, the Company amended its revolving credit facility to increase the maximum borrowings under the facility to $115.0 million and extend the term of the facility through April, 2011. The increased borrowing capacity will provide the Company with the liquidity it needs to execute its 2009 business plan.
In addition, the Company secured a CAD$40.0 million term loan facility from the province of New Brunswick to support its capital investment plan in the province (see "Liquidity and Capital Resources").
During the third quarter, the Company entered into a $25.0 million one-year term credit facility with a Canadian chartered bank, which bears interest at prevailing market rates.
OVERVIEW
We are executing a comprehensive turnaround of Fraser Papers' financial and operating affairs. We continued our focus on operational improvement, implemented a number of energy and fibre efficiency initiatives and took downtime at our market pulp mill and lumbermills in an effort to reduce costs. Despite these initiatives to improve Fraser Papers' performance and improved shipments and prices of our paper products, weak market pulp and lumber markets led to negative EBITDA in the quarter.
During the last half of 2008, a worldwide credit crisis developed followed quickly by a meltdown in world equity values and reduced economic activity. As a result, it is expected that many of the world's largest economies are currently in a recession. Fraser Papers' lumber operations have seen a significant reduction in demand over the past 18 months as North American housing starts fell throughout 2007 and 2008. Additionally, in the fourth quarter of 2008, demand for certain of the Company's pulp and paper products also fell significantly. Specifically, demand for commodity grades of pulp and paper, certain label papers, lighter weight printing freesheet papers and high-bright groundwood papers fell as a result of reduced economic activity in the banking and manufacturing sectors. The Company's packaging papers appear to be less affected by the recent economic downturn.
Our specialty paper business at East Papers is benefiting from investments that have increased internal pulp and paper production, reduced energy consumption and developed and enhanced its specialty product offerings. Sulphite pulp production at the Edmundston, New Brunswick facility set a record daily production rate for the quarter surpassing the previous mark by 28 tons per day or 4%. The East Papers operations improved paper production by 49 tons per operating day from 2007. Energy efficiency projects in the paper operations reduced oil consumption by 55,000 barrels compared to the fourth quarter of 2007. With the economic slowdown, commodity paper markets began to decline during the fourth quarter. However, due to Fraser Papers' focus on specialty paper grades, representing 74% of our shipments, paper shipments and net revenue realized increased during the quarter. The Company did take market-related downtime in December of 2008 and January 2009 of approximately 21,000 tons of production to balance inventory needs.
A sharp reduction in global demand for world pulp was experienced in the fourth quarter. Announced worldwide pulp mill closures for 2008 and 2009 are estimated to be in excess of 3 million tonnes of annual capacity. Worldwide hardwood pulp inventories increased to 60 days resulting in significantly reduced pricing. As a result, we were forced to take three weeks of market-related downtime at the Thurso pulp mill during the quarter.
Continued weak housing markets have depressed demand for lumber and other building products. Our lumber operations, which are an essential source of softwood fibre for our core pulp and paper operations in the form of wood chips and biomass fuel, operated at only 56% of capacity and continue to generate negative earnings. Under current market conditions, over 50% of the lumbermills in Eastern Canada are shut, reducing the available supply of woodchips and putting upward pressure on the price of this key input for our business.
Fraser Papers continues to focus on achieving better performance across all operations with improvements in throughput, process efficiencies and the lowest possible cost structure in order to produce paper that we can sell profitably into growing market segments.
SUMMARY OF QUARTERLY RESULTS
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Earnings/(Loss) per
US$MILLIONS, EXCEPT share (basic and
PER SHARE AMOUNTS Net Sales Earnings/(Loss) diluted)
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2008
4th Quarter $ 165.5 $ (15.9) $ (0.32)
3rd Quarter 162.1 (21.3) (0.42)
2nd Quarter 180.3 (15.6) (0.31)
1st Quarter 180.7 (19.1) (0.44)
2007
4th Quarter(1) 186.3 (20.3) (0.69)
3rd Quarter(1) 172.3 24.7 0.84
2nd Quarter(1) 181.7 (37.6) (1.28)
1st Quarter(1) 174.4 (9.9) (0.34)
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(1) Prior year quarters' Earnings/(Loss) adjusted for accounting change
related to inventory (see "Changes in Accounting Policy").
FINANCIAL RESULTS
Net sales for the fourth quarter of 2008 were $165.5 million, which was an increase compared to the net sales of $162.1 million in the third quarter of 2008 due to improved paper shipments and realized revenues.
Loss for the fourth quarter of 2008 was $15.9 million compared to a loss of $21.3 million in the third quarter of 2008. This $5.4 million improvement in relative performance was the result of improved productivity and reduced cost inputs in the fourth quarter offset by an unplanned maintenance outage at the Thurso pulp mill and the weakened pulp and lumber markets during the fourth quarter. The third quarter of 2008 included $7.2 million for major planned maintenance outages.
Net sales for the fourth quarter decreased by $20.8 million compared to net sales of $186.3 million in the fourth quarter of 2007. The decrease was due to lower paper, pulp and lumber shipments as a result of capacity curtailments at the Gorham, New Hampshire paper mill, the Thurso, Quebec pulp mill and the Maine and New Brunswick lumbermills.
The loss of $15.9 million in fourth quarter of 2008 was an improvement of $4.5 million compared to the loss of $20.4 million in the fourth quarter of 2007. Improved paper pricing and improved energy usage were offset by lower pulp and lumber pricing and capacity changes.
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Three months ended Twelve months ended
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Dec 31 Sep 27 Dec 31 Dec 31 Dec 31
2008 2008(4) 2007(3) 2008 2007(3)
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Fraser Papers Inc
EBITDA(1) (US$millions) (3.3) (12.2) (17.2) (33.6) (41.9)
Paper operations
EBITDA(1)(2) (US$millions) 9.8 (8.7) (7.5) (9.7) (19.7)
Less: Impact of outages - (7.2) (3.5) (7.2) (13.6)
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Adjusted EBITDA(2) 9.8 (1.5) (4.0) (2.5) (6.1)
Adjusted EBITDA Margin
($ per ton) 73 (12) (25) (4) (10)
Adjusted Average Cash
Cost(1) ($ per ton) 919 977 963 972 933
Pulp operations
EBITDA(1) (US$millions) (8.7) (2.1) (3.7) (10.7) (0.2)
Less: Impact of outages (3.0) - (5.0) (3.0) (5.0)
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Adjusted EBITDA(2) (5.7) (2.1) 1.3 (7.7) 4.8
Adjusted EBITDA Margin
($ per ton) (136) (46) 28 (37) 21
Adjusted Average Cash
Cost(1) ($ per ton) 553 603 565 588 530
Lumber operations
EBITDA(1) (US$millions) (4.4) (1.4) (6.0) (13.2) (22.0)
EBITDA Margin ($ per Mfbm) (75) (27) (88) (68) (68)
Average Cash Cost(1)
($ per Mfbm) 294 293 356 312 342
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(1) See "Definitions" section.
(2) Adjusted EBITDA has been adjusted for outages.
(3) Prior year's quarterly EBITDA adjusted for accounting change related to
inventory (see "Changes in Accounting Policy").
(4) EBITDA in the 3rd quarter of 2008 has been adjusted to reflect a
reclassification of $0.7 million charge to EBITDA that was previously
presented as other costs excluded from EBITDA.
Fraser Papers generated an EBITDA loss of $3.3 million in the fourth quarter of 2008.
Paper operations in the fourth quarter of 2008 generated EBITDA of $9.8 million compared to negative EBITDA of $8.7 million in the third quarter and $7.5 million in fourth quarter of 2007.
The third quarter of 2008 results included a major planned outage at the Edmundston sulphite pulp mill and cogeneration facility, as well as planned outages at the Madawaska and Gorham paper mills, totaling $7.2 million of additional costs during the quarter. After adjusting EBITDA for the third quarter 2008 planned outages, paper operations generated an EBITDA loss of $1.5 million. The fourth quarter EBITDA was an $11.3 million improvement from the adjusted EBITDA of the third quarter of 2008 due to improved productivity, paper revenues and fibre pricing for the quarter.
The fourth quarter of 2007 results included a major planned outage at the Edmundston cogeneration facility totaling $3.5 million of additional costs. After adjusting the EBITDA for the planned outages, paper operations generated an EBITDA loss of $4.0 million in the fourth quarter of 2007. The fourth quarter of 2008 EBITDA was a $13.8 million improvement from the adjusted EBITDA of the fourth quarter of 2007 due to improved internal pulp production, lower energy prices and the impact of a weaker Canadian dollar.
Pulp operations in the fourth quarter of 2008 generated negative EBITDA of $8.7 million compared to negative EBITDA of $2.1 million in the third quarter. EBITDA declined by $6.6 million due to a $112 per tonne decrease in realized prices, market-related downtime and an unplanned maintenance outage costing $3.0 million. These cost increases were partially offset by lower energy costs and the impact of a weaker Canadian dollar.
EBITDA from pulp operations in the fourth quarter of 2008 declined by $5.0 million compared to the $3.7 million negative EBITDA in the fourth quarter of 2007. The EBITDA in the fourth quarter of 2008 included $3.0 million for an unplanned maintenance outage and the EBITDA in the fourth quarter of 2007 included $5.0 million for a planned maintenance outage. After adjusting for the outages, EBITDA in the fourth quarter of 2008 was $7.0 million lower than the fourth quarter of 2007. The decrease reflected a $91 per tonne reduction in realized pricing and market-related shutdown as a result of weakened pulp markets which were partially offset by lower energy costs and the impact of a weaker Canadian dollar.
Lumber operations' EBITDA loss of $4.4 million declined by $3.0 million compared to the third quarter of 2008 as a result of an approximate 20% reduction in market pricing. The lumber operations' EBITDA improved by $1.6 million compared to the fourth quarter of 2007 mainly due to the effect of the weak Canadian dollar. The Canadian dollar decreased from an effective rate of USD$1.01 in the fourth quarter of 2007 to USD$0.87 in the fourth quarter of 2008 (including the effect of cash flow hedging activities, see "Hedging Activities").
CHANGES IN ACCOUNTING POLICIES
On January 1, 2008, the Company adopted new recommendations of the Canadian Institute of Chartered Accountants ("CICA") related to inventories. Under the new recommendations, spare parts inventory which has a useful life of more than one year must be classified as a long-lived asset and amortized over its estimated useful life. Previously, Fraser Papers classified certain of these spare parts as inventory and charged them to operations when put in use. The change in policy has been applied retroactively. As a result, the Company has reversed certain amounts charged to operations prior to January 1, 2007 and reclassified certain inventory items to property, plant and equipment on the consolidated balance sheets. These adjustments resulted in an increase to property, plant and equipment of $3.2 million, a decrease in inventories of $0.7 million, an increase in future income tax liabilities of $0.4 million and a decrease in opening deficit as at January 1, 2007 of $2.1 million. In addition, the Company has restated its 2007 results of operations in order to reflect this change in policy. These adjustments resulted in a reduction in the consolidated loss of $2.7 million and $0.6 million for 2008 and 2007, respectively, compared to if the Company had not changed its policy.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Accounting Standards Board (AcSB) confirmed in February 2008 that International Financial Reporting Standards (IFRS) will replace Canadian GAAP for publicly accountable enterprises for financial periods beginning on and after January 1, 2011. The Company intends to adopt on January 1, 2011.
Impact of Adoption of IFRS
IFRS are premised on a conceptual framework similar to Canadian GAAP. However, significant differences exist in certain matters of recognition, measurement and disclosure. As the Company continues to evaluate the impact of adoption of IFRS on its processes and accounting policies, we will provide updated disclosure where appropriate. While the adoption of IFRS will not have a material impact on the reported cash flows of the Company, it is expected to have a material impact on the Company's consolidated balance sheet and statement of income.
Property, Plant and Equipment
Under International Accounting Standard (IAS) 16 Property, Plant and Equipment, an entity is required to account for each class of property, plant and equipment using either the cost model or the revaluation model. The cost model is generally consistent with Canadian GAAP where an item of property, plant and equipment is carried at its original cost, less accumulated depreciation and accumulated impairment losses. Under the revaluation model, each item of property, plant and equipment is revalued on a periodic basis and carried at its revalued amount, less any accumulated depreciation and accumulated impairment losses.
Impairments
Under Canadian GAAP, for assets other than financial assets, a write-down to estimated fair value is recognized if the estimated undiscounted future cash flows from an asset or group of assets are less than their carrying value. Under IAS 36, Impairment of Assets, assets must be written down to their recoverable amount, (determined as the higher of a) the estimated fair value less costs to sell or b) value in use), if the recoverable amount is less than the carrying value. Unlike Canadian GAAP, IAS 36 requires the reversal of an impairment loss where the recoverable amount exceeds the previously written down carrying value.
Employee Benefits Plans
Under Canadian GAAP, actuarial gains and losses on employee benefit plans are deferred and amortized over the expected average remaining service life (EARSL) of the employee group. In addition, accrued pension benefit obligations and plan assets for defined benefit pension plans are required to be disclosed in the notes to the consolidated financial statements. Under IAS 19, Employee Benefits, on transition to IFRS, an entity may elect to recognize the obligation in excess of plan assets on the balance sheet as a liability, recognizing unamortized actuarial gains or losses directly in equity. Future actuarial gains and losses could be recorded as a direct charge to equity or amortized over EARSL.
Share-Based Payment
The Company issues stock-based awards in the form of stock options that vest evenly over a five-year period. Under Canadian GAAP, the Company recognizes the fair value of the award, determined at the time of the grant, on a straight-line basis over the five-year vesting period. Under IAS 19, the fair value of each option is determined with respect to when it vests as well as when it is issued. As such, the fair value of each vested tranche is considered a separate option grant. The expense associated with each grant is recognized as compensation expense over the term of its respective vesting period. Accordingly, this will result in a faster recognition of the cost of each option issuance than under Canadian GAAP.
First-time Adoption of International Financial Reporting Standards
IFRS 1 First-time Adoption of International Financial Reporting Standards, provides guidance for the initial adoption of IFRS. IFRS 1 generally requires that an entity apply all IFRS effective at the end of its first IFRS reporting period retrospectively. However, IFRS 1 does require certain mandatory exceptions and limited optional exemptions in specified areas of certain standards from this general requirement. The Company is currently evaluating the exceptions and exemptions under IFRS 1 and will provide updated disclosure when available.
LIQUIDITY AND CAPITAL RESOURCES
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Three months ended Twelve months ended
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Dec 31 Sep 27 Dec 31 Dec 31 Dec 31
US$MILLIONS 2008 2008 2007 2008 2007
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Cash flow from operating
activities before changes
in working capital (14.5) (16.0) (28.0) (55.5) (65.4)
Cash flow from operating
activities after changes
in working capital (22.1) (15.6) (30.7) (45.9) (48.2)
Total working capital (1) 115.4 101.7 116.9 115.4 116.9
Net capital investments 6.2 13.5 4.9 27.1 20.3
Net debt 96.4 70.2 85.9 96.4 85.9
Net debt to net debt
plus equity 25% 19% 23% 25% 23%
Maximum revolving
credit facility 115.0 115.0 140.0 115.0 140.0
Revolving credit
facility utilized 86.7 63.6 123.9 86.7 123.9
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(1) Total working capital includes accounts receivable, inventory and
accounts payable and accrued liabilities.
Operating Cash Flows
During the quarter, cash flow from operations before changes in working capital was an outflow of $14.5 million compared to an outflow of $28.0 million during the fourth quarter of 2007. The $13.5 million outflow decrease was primarily the result of improved internal pulp production at the Edmundston sulphite pulp mill, reduced oil usage and pricing, the weaker Canadian dollar and reduced employment benefit plan funding (see "Employee Benefit Plans"); however, these improvements were partially offset by higher chemical pricing.
During the quarter, net change in non cash working capital was an outflow of $7.6 million compared to an outflow of $2.7 million during the fourth quarter of 2007. The increase in cash outflow was primarily as a result of lower accounts payable due to market-related downtime during the quarter.
Accounts receivable were reduced in the fourth quarter of 2008 by $9.4 million compared to a decrease of $23.3 million in the fourth quarter of 2007. The reduced accounts receivable were due to increased collection efforts and lower paper and pulp sales. Inventory increased during the fourth quarter of 2008 by $4.3 million as paper and pulp inventories increased. Accounts payable in the fourth quarter of 2008 decreased by $18.8 million compared to an increase of $0.6 million in the fourth quarter of 2007. The decrease in accounts payable was the result of the planned maintenance outages in the third quarter of 2008 which were paid in the fourth quarter and lower costs associated with certain raw materials.
On January 29, 2009 Fraser Papers announced the sale of approximately 10,500 tons of finished goods paper inventory to Brookfield for proceeds of approximately $11.7 million. Proceeds on the sale were used to repay amounts owing on the Company's revolving credit facility. In addition, the Company has agreed to supply paper to Brookfield through July 31, 2009 at market prices, less a customary merchant's discount of 3.5%. Fraser Papers will provide sales and administrative support to Brookfield.
For the year ended December 31, 2008, cash flow from operations after changes in working capital was an outflow of $45.9 million compared to an outflow of $48.2 million in 2007. The $2.3 million decrease in outflow is a result of improved EBITDA and lower employment benefit plan funding, partially offset by a smaller reduction in working capital than in 2007. Total working capital in 2008 was reduced by $9.6 million compared to a $17.2 million reduction in 2007.
Accounts receivable were reduced in 2008 by $31.2 million compared to a $7.1 million decrease in 2007. The $38.3 million additional reduction from 2007 was largely due to increased emphasis on collection activities and reduced sales volumes of pulp and paper products due to weak demand. Inventory increased in 2008 by $1.3 million compared to an increase of $5.9 million for 2007. Accounts payable in 2008 decreased by $28.4 million compared to an increase of $20.1 million in 2007 as a result of maintenance outages.
The Company's ability to generate positive future cash flows is dependent upon many factors including market pricing for our products. The Company continues to focus on initiatives that will reduce fixed costs, improving efficiencies and optimizing the use of raw materials. We have also increased the selling price for certain of our products during 2008. We believe these initiatives will position Fraser Papers to benefit as costs return to historic levels resulting in improved operating cash flows.
Investing Cash Flows
For 2008, capital investments totaled $27.1 million compared to $20.3 million in 2007. For the quarter, capital investments totaled $6.2 million compared to $4.9 million in the fourth quarter of 2007. Investments during 2008 were made to address productivity issues at the Edmundston sulphite pulp mill, cogeneration facility and recovery boiler and the modernization at the Plaster Rock, New Brunswick lumbermill. Capital investments in 2007 included the planned rebuild of the recovery boiler at the Edmundston pulp facility. Funding for these capital expenditures was supported primarily from available liquidity sources (see "Financing Cash Flows").
In the second quarter of 2008, a CAD$17.5 million capital investment for the modernization of our Plaster Rock, New Brunswick lumbermill was announced that will include the installation of a biomass boiler and upgrades to the lumbermill's sawing and kiln equipment. Spending on the project in 2008 was CAD$2.8 million for major equipment procurement. The remaining investment will occur in 2009 with the expected completion in the summer of 2009. Funding for this project will be supported primarily from available liquidity sources, including a term loan facility with the province of New Brunswick (see "Financing Cash Flows").
Financing Cash Flows
Liquidity requirements in 2008 to fund maturing debt and negative free cash flow were provided from a rights offering in the first quarter, an increase in the Company's revolving credit facility in the second quarter and a $25.0 million term credit facility entered into in the third quarter. Each of these facilities was strongly supported by the Company's largest shareholder. Additionally, the Company secured CAD$20.0 million in borrowings under the New Brunswick term loan facility.
In the first quarter of 2008, the Company completed a rights offering (the "Offering") under which it granted its existing shareholders the right to purchase 20,656,913 shares at a purchase price of CAD$2.90 per share. The Company received $59.7 million in net proceeds under the Offering and repaid indebtedness, including $50.0 million in temporary financing that was due January 31, 2008.
During the second quarter, the Company increased the maximum borrowings under its revolving credit facility with its current lender from $90.0 million to $115.0 million. The term of the amended credit facility was extended to April 2011. Borrowings under the facility will continue to be secured by a first charge against accounts receivable and inventory. The increase in maximum borrowings was supported by Brookfield which has provided a guarantee for up to $25.0 million in borrowings under the facility.
During the third quarter, the Company entered into a term credit facility for $25.0 million. The facility expires in September 2009 and was supported by Brookfield which has provided a guarantee for up to $25.0 million in borrowings under the facility.
As security for the guarantees provided by Brookfield, Fraser Papers has provided Brookfield with a fixed charge on certain property, plant and equipment.
Total borrowings under the revolving credit facility at December 31, 2008 were $48.2 million. In addition, the Company had utilized $38.5 million of the facility in support of letters of credit.
In June 2008, the Company entered into a term loan facility to support its investment plans in the province of New Brunswick. Maximum borrowings under the facility are CAD$40.0 million. The facility can be drawn any time before the due date on December 31, 2014. Quarterly repayments are required under the facility commencing no later than March 2010. Total borrowings under the term loan facility at December 31, 2008 were $16.3 million (CAD$20.0 million).
Net debt as of December 31, 2008 was $96.4 million, resulting in a net debt to net debt plus equity ratio of 25%. The Company believes that its conservative capital structure is appropriate given the long lives of its productive assets. The Company currently has debt of $25.0 million which is due in September, 2009. The Company is exploring its options with respect to refinancing this debt maturity which include additional issuances of debt and/or equity capital. Fraser Papers is dependent upon Brookfield to support certain of its long term debt obligations, including their guarantee of debt maturing in 2009.
Seasonal Cash Flow Requirements
Quarterly results are affected by certain seasonal factors such as market demand and the impact of weather on logging activities.
Market demand varies seasonally for certain products such as financial printing papers. The peak of the financial printing season is in the first and second quarters of the year. Since shipping volume during the peak financial season exceeds our production capacity in certain grades, we build inventory prior to the financial printing season in order to supply our customers' needs. The build of financial printing paper inventory will have a negative effect on cash flows from operations after changes in working capital in the quarter of inventory build, but will have a positive effect in the quarter of inventory reduction.
Weather causes seasonal variation in certain raw materials. During spring, seasonal rainfall creates poor ground conditions in the timberlands which reduce logging activities. In anticipation of this mud season each spring, Fraser Papers will build log inventories to provide adequate supply of fibre until ground conditions improve. The build of inventory will have a negative effect on cash flows from operations after changes in working capital but will have a positive effect in the quarter of inventory reduction.
EMPLOYEE BENEFIT PLANS
The Company has five registered pension plans in three jurisdictions: two plans in the province of New Brunswick, two plans in the province of Quebec and one plan in the United States. In 2008, we filed actuarial valuations for the two plans in New Brunswick and the plan in the United States. In 2009, we are required to file actuarial valuation for one plan in New Brunswick and the plan in the United States. The two plans in the province of Quebec require an actuarial filing no later than December 31, 2009 although the province may require an actuarial valuation at their discretion. The second registered pension plan in the province of New Brunswick requires an actuarial filing no later than December 31, 2010. Pension regulators in various jurisdictions are considering a number changes to their pension filing and funding requirements as a result of the significant reductions in pension asset values over the past number of months. The impact of these possible changes on the pension plan funding requirements has not been determined at this time.
Employee benefit plans funding was $6.8 million in the fourth quarter of 2008, a decrease of $1.5 million from the comparable period in 2007. On a year-to-date basis, funding was $26.0 million, a decrease of $5.2 million from the 2007 funding level of $31.2 million. The decreased funding is primarily due to the impact of a one-time, retroactive payment of $4.2 million in the second quarter of 2007. The Company has applied for funding relief under current pension regulations in New Brunswick. If the Company is successful in its application, future funding requirements for certain pension plans could be lower.
Benefit plan expense for the quarter was $3.3 million which is comparable to the $3.0 million expense in the fourth quarter of 2007. Year-to-date benefit plan expense was $15.2 million compared to the $13.5 million expense in 2007. The increase is due to a settlement expense of $1.2 million related to the partial wind-up of a pension plan related to the sale of our New Brunswick timberlands in 2006.
The assumed return on our pension assets is 8.00% and is based on management's best estimate of the long-term expected rate of return, including consideration of asset mix, equity risk premium and active investment management premium. The weighted-average discount rate for the accrued benefit obligations is 6.18% as compared to 5.42% in 2007, and is based on the market yield of high quality corporate bonds of similar duration to the pension plan liabilities.
Significant changes in assumptions, driven by changes in financial markets, asset performance different from the assumed rate of return, benefit changes, acquisitions, divestitures, changes in the regulatory environment, and the measurement uncertainty incorporated into the actuarial valuation process, could materially affect our future plan assets, accrued benefit obligations, and the expenses and contributions associated with our employee benefit plans.
Sensitivity to a 1% increase or decrease in the rate of return on plan assets and the discount rate used to determine our pension obligations is estimated as follows:
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Impact Dec. 31, 2008 Impact on 2008
Unfunded Liability Pension Expense
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Return on assets $3.4 million increase $3.4 million increase
Discount rate $55.8 million increase $4.7 million increase
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Recent changes in world equity markets and borrowing rates will affect the funded status, funding requirements and pension expense associated with Fraser Papers' defined benefit employee pension plans. Based on current pension regulations in Quebec, New Brunswick and in the United States, the Company expects its employee benefit plans expense in 2009 will increase by approximately $13.8 million to $29.0 million and its employee benefit plan funding will increase by approximately $4.6 million to $30.6 million as a result of losses in pension assets and no gain from the discount rate. For expected future year funding requirements, please refer to the table under Contractual Obligations.
CONTRACTUAL OBLIGATIONS
The following table presents the total contractual obligations for which cash flows are fixed or determinable as of December 31, 2008:
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Less than One to Four to After five
US$MILLIONS Total one year three years five years years
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Debt $ 89.5 $ 25.0 $ 51.9 $ 12.6 $ -
Operating leases 1.0 0.4 0.5 0.1 -
Purchase obligations 21.8 21.8 - - -
Employee benefit
obligations 218.3 30.8 77.1 48.9 61.5
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Total contractual
obligations $ 330.6 $ 78.0 $ 129.5 $ 61.6 $ 61.5
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Obligations under operating leases include future payments for office facilities and equipment leases. The purchase obligations are commitments for the purchase of energy and chemical supplies. Employee benefit obligations include deficit funding requirements through 2022.
Brookfield has provided guarantees to the Company's lenders in support of its revolving credit facility and one-year term loan. The maximum amount of the guarantees is $50.0 million. The Company agreed to pay Brookfield a guarantee fee equal to an annualized rate of 2.0% of the maximum amount of the guarantee and provided Brookfield with a guarantee that it will repay Brookfield any amounts paid by Brookfield to the Company's lenders. As security, the Company has provided Brookfield with a fixed charge on certain of its property, plant and equipment.
Norbord Inc. (the former parent company of Fraser Papers) has provided guarantees for certain obligations of Fraser Papers under a financial commitments agreement. At December 31, 2008, the maximum potential amount of the obligations guaranteed was estimated to be $1.0 million. These obligations will be fully repaid during the first quarter of 2009. These guarantees have not been included in the table above.
HEDGING ACTIVITIES
From time to time, the Company 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.
The Company enters into forward contracts to fix the exchange rate on its Canadian dollar-denominated net liabilities and certain Canadian dollar-denominated cash flows.
As of December 31, 2008, the Company had $41.0 million in foreign exchange contracts outstanding as fair value hedges against certain Canadian dollar-denominated net monetary liabilities. For 2008, the Company realized $7.6 million of losses on these contracts and at December 31, 2008, there were $0.1 million in unrealized losses on these contracts. The gains or losses on fair value hedges are offset by net losses or net gains on the net liabilities being hedged.
As of December 31, 2008, the Company had $91.5 million in net forward foreign exchange contracts outstanding as a hedge against future net Canadian dollar cash flows. These contracts have varying maturity dates in 2009. During 2008, the Company realized $4.0 million of losses related to foreign exchange contracts used to hedge Canadian dollar cash flows. At December 31, 2008, the unrealized gains on outstanding contracts amounted to $3.4 million. After giving effect to the realized losses on these hedges, the average realized exchange rate during the quarter was CAD$1.00 equals USD$0.87 compared to the published average rate of CAD$1.00 equals USD$0.83. For the full year of 2008, the average realized exchange rate was CAD$1.00 equals USD$0.95 compared to the published average rate of CAD$1.00 equals USD$0.94.
Realized and unrealized gains or losses on Canadian dollar-denominated net liabilities hedges and realized gains or losses on cash flow hedges are recorded in the consolidated statements of operations and deficit, in the same manner as the realized and unrealized gains or losses on the net monetary liabilities and realized gains or losses on cash flows being hedged. Unrealized gains or losses on cash flow hedges are recorded in consolidated statements of other comprehensive income until such time that the Canadian dollar-denominated cash flows being hedged are realized.
The Company enters into lumber forward contracts to fix the lumber price for a portion of its future production. For the twelve months ended December 31, 2008, Fraser Papers had entered into lumber futures contracts representing 30.8 million board feet of lumber. Some of these contracts were realized in the fourth quarter of 2008, while others mature in the first quarter of 2009. Accordingly, a $0.7 million realized gain has been reported in the consolidated statements of operations for the twelve month period ended December 31, 2008. Unrealized gains of $0.7 million were recognized in other comprehensive income for the twelve months ended December 31, 2008.
OPERATING RESULTS
Fraser Papers operates one business segment comprised of 11 paper machines at two locations, one market pulp facility, two internal pulp facilities and four lumbermills.
Products include paper (including specialty packaging and printing papers, commodity freesheet papers, specialty high-bright groundwood papers, commodity groundwood papers and towel), as well as hardwood pulp and softwood lumber.
Paper Operations
We own and operate a paper mill in Gorham, New Hampshire and an integrated pulp and paper facility in Edmundston, New Brunswick / Madawaska, Maine (East Papers).
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Three months ended Twelve months ended
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Dec 31 Sep 27 Dec 31 Dec 31 Dec 31
2008 2008(4) 2007(3) 2008 2007(3)
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Sales (US$millions) 137.9 129.9 147.6 564.2 552.8
EBITDA (US$millions) 9.8 (8.7) (7.5) (9.7) (19.7)
EBITDA ($ per ton) 73 (67) (47) (17) (34)
EBITDA margin(1) 7% (7%) (5%) (2%) (4%)
Shipments (000 tons)
Specialty packaging 19 17 19 80 72
Specialty printing 50 50 57 205 234
Commodity freesheet
papers 9 8 17 47 68
Specialty high-bright
groundwood 30 28 26 131 97
Commodity groundwood 16 15 28 60 78
Towel 10 11 11 41 39
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134 129 158 564 588
Average Revenue Realized
($ per ton)
Specialty packaging 1,277 1,211 1,141 1,207 1,148
Specialty printing 1,087 1,061 995 1,050 987
Commodity freesheet
papers 924 960 874 910 853
Specialty high-bright
groundwood 940 894 852 889 859
Commodity groundwood 766 757 727 798 717
Towel 963 899 842 896 800
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Weighted Average
($ per ton) 1,022 990 918 985 922
Average Cash Operating
Cost ($ per ton) 919 1,033 985 985 956
Reference Prices
($ per ton)(2)
50# offset rolls 941 946 853 912 832
22.1# white directory 755 755 740 750 740
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(1) EBITDA Margin is EBITDA as a percentage of Sales.
(2) Reference prices are from RISI, Inc. ("RISI").
(3) Prior year's quarterly EBITDA adjusted for accounting change related to
inventory (see "Changes in Accounting Policies").
(4) EBITDA in the 3rd quarter of 2008 has been adjusted to reflect a
reclassification of $0.7 million charge to EBITDA that was previously
presented as other costs excluded from EBITDA.
During the fourth quarter, pricing conditions improved for most of our specialty paper grades. Commodity freesheet pricing declined during the fourth quarter. Demand for uncoated freesheet began to decline in the fourth quarter due to the weakening economy and consequently, average benchmark pricing for commodity uncoated freesheet (50# offset rolls) decreased by 1% or $5 per ton over the previous quarter. On a year over year basis, the 50# offset benchmark pricing increased by 10% or $88 per ton over the same quarter in 2007. Pricing for commodity groundwood papers stabilized after a 9% decrease in the third quarter on weaker demand related to a reduction in magazine advertising and higher postal rates.
Our business strategy is to target market segments where we can achieve a meaningful or leadership position and where we can match our technical competencies with the demand for lightweight specialty freesheet and groundwood papers. In the fourth quarter of 2008, we had approximately 74% of our paper sales that fit this description, and the strategy is to transition the balance into new or existing specialty packaging, printing or groundwood segments.
Specialty packaging products are typically used for food applications and include both stain resistant and non-stain resistant qualities. Fraser Papers has the ability to meet narrow technical standards for applications such as pet food bags and dry mix consumer pouches and bags. Packaging volumes increased by 2,000 tons compared to the third quarter of 2008 following the summer seasonal slowdown of the pet food packaging business. For the year, specialty packaging volumes increased by 8,000 tons due to a number new products and applications. Specialty packaging pricing in the fourth quarter of 2008 increased by $66 per ton compared to the third quarter of 2008 and by $59 per ton for the full year compared to 2007 due to general market price increases and growth in the high value packaging segments.
Specialty printing papers include coated and uncoated freesheet products that are characterized by narrow technical specifications and niche applications including labelling and thermal point-of-sale receipts as well as lightweight opaque grades for financial printing applications. Fraser Papers' specialty printing papers shipment volumes were consistent with the third quarter of 2008. On a year-to-date basis, specialty printing volumes were 205,000 tons representing a decrease from 234,000 tons in 2007. A portion of the decrease was attributable to certain applications switching to our high brightness groundwood papers that offer better value and the balance reflects the permanent shutdown of 70,000 tons of capacity at East Papers in 2007. Fraser Papers' technical capabilities, which provide the opportunity to manufacture both freesheet and groundwood papers from the same facility, have allowed us to assist our customer base in this transition.
In the fourth quarter, the shipments of commodity freesheet increased 1,000 tons from the third quarter of 2008. We continue to narrow our focus towards higher margin specialty packaging and printing paper products in strategic markets. For 2008, commodity freesheet volume, which represents only 8% of total shipments, has decreased by 31% compared to 2007.
Specialty high-bright groundwood papers include products that are used for financial printing and other publishing applications where high performance and superior print quality are required. Compared to the third quarter of 2008, Fraser Papers' shipments of specialty groundwood products increased 2,000 tons. On a year-to-date basis, specialty high-bright groundwood shipments were 131,000 tons which is a 35% increase from 2007 shipments of 97,000 tons. This increase is indicative of certain applications migrating from freesheet products to high-bright groundwood products and new product applications.
Compared with 2007, Fraser Papers' shipments of commodity groundwood products in 2008 decreased by 18,000 tons as we increased the volumes of specialty high-bright groundwood grades.
Three months ended December 31, 2008 compared to three months ended September 27, 2008
The paper operations generated EBITDA of $9.8 million in the fourth quarter on sales of $137.9 million. This compares to negative EBITDA of $8.7 million in the third quarter of 2008 on sales of $129.9 million. Selling prices improved by $32 per ton as Fraser Papers realized the effect of price increase from the third quarter. The increase in EBITDA was as a result of third quarter planned maintenance outages at the Edmundston pulp mill and the Madawaska and Gorham paper mills of $7.2 million and improved oil and fibre pricing and higher internal pulp production levels.
Shipments increased by 4% during the quarter due to new specialty packaging and high-bright groundwood business.
Three months ended December 31, 2008 compared to three months ended December 31, 2007
The paper operations generated EBITDA of $9.8 million in the fourth quarter on sales of $137.9 million. This compares to negative EBITDA of $7.5 million in the fourth quarter of 2007 on sales of $147.6 million. Higher selling prices of $104 per ton and reduced fibre and energy pricing lowered costs contributing to improved margins. In addition, 2007 included a planned $3.5 million co-generation facility outage.
Shipments decreased during the quarter due to the temporary closure of two paper machines in Gorham, New Hampshire, partially offset by improved productivity from the remaining paper machines. Shipments in December 2008 were 32% below December 2007 as demand weakened significantly late in the fourth quarter of 2008.
Twelve months ended December 31, 2008 compared to twelve months ended December 31, 2007
In 2008, the paper operations had negative EBITDA of $9.7 million on sales of $564.2 million. This compares to negative EBITDA of $19.7 million in 2007 on sales of $552.8 million. Adjusting for the major planned maintenance outages in 2008 of $7.2 million, the paper operations generated negative EBITDA of $2.5 million in 2008. Adjusting for the major outages in 2007 of $13.6 million, the paper operations generated negative EBITDA of $6.1 million in 2007. The $3.6 million increase in adjusted EBITDA was due to higher mill net realizations, increased internal pulp and paper productivity and reduced energy consumption.
Shipments in 2008 were 24,000 tons lower than last year as improved paper machine productivity partially offset the capacity closures equivalent to 70,000 of annual production.
Pulp Operations
We own and operate a NBHK market pulp mill in Thurso, Quebec.
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Three months ended Twelve months ended
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Dec 31 Sep 27 Dec 31 Dec 31 Dec 31
2008 2008(4) 2007 2008 2007
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Sales (US$millions) 13.5 17.9 20.8 75.0 72.9
EBITDA (US$millions) (8.7) (2.1) (3.7) (10.7) (0.2)
Pulp EBITDA ($ per tonne) (207) (46) (67) (51) (1)
EBITDA Margin(1) (64%) (12%) (18%) (14%) 0%
Shipments (000 tonnes)(2) 42 46 55 209 234
Average Revenue Realized
($ per tonne)(2) 491 603 582 584 555
Average Cash Operating
Costs ($ per tonne) 624 603 656 602 551
Reference Price
($ per tonne)(3)
NBHK market pulp 714 821 768 788 719
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) EBITDA Margin is EBITDA as a percentage of Sales.
(2) Pulp volumes and average revenues realized include internal sales.
(3) Reference prices are from RISI's Pulp and Paper Weekly.
(4) EBITDA in the 3rd quarter of 2008 has been adjusted to reflect a
reclassification of $0.7 million charge to EBITDA that was previously
presented as other costs excluded from EBITDA.
World pulp demand grew by 4% in the first half of 2008; however, due to the slowing economy, demand in the second half of 2008 declined by 9%. As a result, hardwood pulp inventories grew to 60 days compared to 35 days which indicate a balanced market. Market prices for NBHK pulp declined by 13%, or $107 per tonne, during the fourth quarter compared to the third quarter of 2008 with average benchmark pricing decreasing to $714 per tonne. The average benchmark price declined by 7% or $54 per tonne compared to the fourth quarter of 2007.
We direct a portion of our market pulp for internal use. Fraser Papers also purchases softwood kraft pulp from third parties to supplement internal production. As a result of market-related downtime late in the fourth quarter at Thurso, net pulp sales amounted to only 8,000 tonnes in the quarter. For 2008, net pulp sales were 52,000 tonnes.
Three months ended December 31, 2008 compared to three months ended September 27, 2008
The pulp operations generated negative EBITDA of $8.7 million in the fourth quarter of 2008 on sales of $13.5 million. This was a $6.6 million EBITDA reduction from the previous quarter when the pulp operations generated negative EBITDA of $2.1 million on $17.9 million of sales. During the fourth quarter, the pulp mill took unscheduled maintenance downtime costing $3.0 million to repair a pipe in the bleach plant. The pulp mill was also closed for three weeks in December in order to balance inventories with customer orders. In addition, revenue realizations of 19% or $112 per tonne as worldwide selling prices dropped precipitously in the fourth quarter.
Three months ended December 31, 2008 compared to three months ended December 31, 2007
The pulp operations generated negative EBITDA of $8.7 million in the fourth quarter of 2008 on sales of $13.5 million. This was a $5.0 million decrease in EBITDA from the previous year's quarter when the pulp operations generated negative EBITDA of $3.7 million on $20.8 million of sales. In addition to the unplanned and market-related downtime, realized revenue decreased by 16% or $91 per tonne.
Shipments decreased by 24% in the fourth quarter of 2008 compared to the fourth quarter of 2007 due to weak demand.
Twelve months ended December 31, 2008 compared to twelve months ended December 31, 2007
The pulp operations generated negative EBITDA of $10.7 million in 2008 on sales of $75.0 million. This compares to the previous year's negative EBITDA of $0.2 million on sales of $72.9 million. Revenues increased by $2.1 million due to higher average pricing with the full year benchmark pricing higher by 10%. The EBITDA decrease of $10.5 million is primarily due to cash costs increasing 9% to $602 per tonne compared to $551 per tonne in 2007. Increased oil pricing and wood fibre costs as well unplanned and market related downtime were partially offset lower oil consumption and the effect of the weaker Canadian dollar.
Shipments declined by 25,000 tonnes primarily from the poor pulp market conditions experienced in the second half of 2008 and market-related downtime.
Lumber Operations
Our lumber operations are comprised of four lumbermills located in Plaster Rock, New Brunswick; Juniper, New Brunswick; Ashland, Maine; and Masardis, Maine.
----------------------------------------------------------------------------
Three months ended Twelve months ended
-------------------------------------------------
Dec 31 Sep 27 Dec 31 Dec 31 Dec 31
2008 2008(3) 2007 2008 2007
----------------------------------------------------------------------------
Sales (US$millions) 14.1 14.3 17.9 49.4 89.0
EBITDA (US$millions) (4.4) (1.4) (6.0) (13.2) (22.0)
EBITDA ($ per Mfbm) (75) (27) (88) (68) (68)
EBITDA Margin(2) (31%) (10%) (34%) (27%) (25%)
Shipments (MMfbm) 59 51 68 193 324
Average Revenue Realized
($ per Mfbm) 227 281 264 252 273
Average Cash Operating
Cost ($ per Mfbm) 294 293 356 312 342
Reference Price
($ per Mfbm)(1)
Boston SPF 2X4 #2&Btr 276 347 307 301 324
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Reference prices are from Random Lengths Publication.
(2) EBITDA Margin is EBITDA as a percentage of Sales.
(3) EBITDA in the 3rd quarter of 2008 has been adjusted to reflect a
reclassification of $0.7 million charge to EBITDA that was previously
presented as other costs excluded from EBITDA.
Market conditions deteriorated significantly for our lumber operations during the fourth quarter which coincided with the general economic downturn. Average benchmark lumber prices (Eastern Boston SPF 2X4) decreased 20% or $71 per Mfbm from the third quarter. Consequently, Fraser Papers' net revenue realized decreased 19% compared to the third quarter.
Market conditions weakened with the continued softness in U.S. housing activity where annual construction starts have fallen from their peak of an annualized 2.3 million in January 2006 to an annualized 0.55 million in December 2008; a 76% decline.
In the fourth quarter, we took market-related downtime for 13 weeks at the Ashland, Maine lumbermill and 2 weeks each at the Plaster Rock, New Brunswick and the Masardis, Maine lumbermills. The lumbermill in Juniper New Brunswick operated for the entire quarter. We continue to evaluate our lumbermill operating schedule in reference to the availability of cost effective woodchips for its pulp operations in Edmundston New Brunswick.
Three months ended December 31, 2008 compared to three months ended September 27, 2008
The lumber operations generated negative EBITDA of $4.4 million in the fourth quarter of 2008 on sales of $14.1 million. This compares to negative EBITDA in the third quarter of 2008 of $1.4 million on sales of $14.3 million. EBITDA decreased by $3.0 million over the third quarter as realized revenues decreased by 19% or $54 per Mfbm.
As a result of operating the Juniper lumbermill, shipments in the fourth quarter of 2008 increased by 8 MMfbm from the third quarter of 2008.
Three months ended December 31, 2008 compared to three months ended December 31, 2007
The lumber operations generated negative EBITDA of $4.4 million in the fourth quarter of 2008 on sales of $14.1 million. This compares to negative EBITDA in the fourth quarter of 2007 of $6.0 million on sales of $17.9 million. EBITDA improved by $1.6 million over the fourth quarter of 2007 due to the weakened Canadian dollar. The effective Canadian dollar exchange rate realized in the fourth quarter of 2008 was USD$0.87 (after giving effect to the Company's hedging program) compared to the realized USD$1.01 in the fourth quarter of 2007.
Shipments in the fourth quarter of 2008 were 9 MMfbm lower than the fourth quarter of 2007 as a result of downtime at the Ashland, Maine and Plaster Rock, New Brunswick lumbermills.
Twelve months ended December 31, 2008 compared to twelve months ended December 31, 2007
The lumber operations generated negative EBITDA of $13.2 million in 2008 on sales of $49.4 million. This compared to negative EBITDA of $22.0 million in 2007 on sales of $89.0 million. Weak market conditions (with benchmark prices reduced by 7%) and lower selling prices continued; however, cash costs have been reduced by $30 per Mfbm.
Shipments declined by 40% in 2008, compared to 2007, due to market-related downtime.
CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES
The critical accounting policies and the accounting estimates used in the preparation of the December 31, 2008 interim financial statements are substantially the same as the ones disclosed in the Annual Report for the year ended December 31, 2007, except as described in Note 2 to the interim financial statements. The impairment related to the closure of two paper machines at the Madawaska mill in 2007 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 those disclosed in the Annual Report and the Annual Information Form for the year ended December 31, 2007.
Many of Fraser Papers' raw material inputs and supplies are purchased on the open market and as such are subject to market price fluctuations. With the recent reductions in the prices for global commodities, we expect to benefit from these reductions. In particular, Fraser Papers consumes approximately 480,000 barrels of oil per year and purchases approximately 71,000 tonnes of market pulp per year.
Approximately 53% of Fraser Papers' assets are located in Canada while essentially 100% of the sales are U.S. dollar-denominated. Fraser Papers incurs approximately CAD$360 million per year of Canadian dollar-denominated expenses, and we expect to benefit from the recent weakening of the Canadian currency.
Recent events in world capital markets have made it difficult for many companies to obtain or renew debt financing. Without the continued support of Brookfield, there can be no certainty that the Company will be able to secure alternative sources of financing with terms that are satisfactory to the Company.
CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), on a timely basis so that appropriate decisions can be made regarding public disclosure. An evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures was conducted as of December 31, 2008, by management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that Fraser Papers' disclosure controls and procedures as defined in National Instrument 52-109, Certification of Disclosure in Issuers Annual and Interim Filings, are effective.
Under the supervision of the CEO and CFO, the Company has designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The CEO and CFO considered the need to disclose in this MD&A any change in the Company's internal controls over financial reporting that has occurred during the year that has materially affected, or is reasonably likely to materially affect the Company's internal controls and have not identified any such changes. An evaluation of the effectiveness of the design and operation of the Company's internal controls over financial reporting was conducted as of December 31, 2008, by management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that Fraser Papers' internal controls over financial reporting as defined in National Instrument 52-109, Certification of Disclosure in Issuers Annual and Interim Filings, are effective and have not identified any material weakness related to design.
FORWARD-LOOKING INFORMATION
This report contains forward-looking information and statements relating but not limited to, anticipated or prospective financial performance, results of operations, future investment in our operations, anticipated growth in target markets and profit margins, strategic focus with respect to product development, manufacturing capabilities, operating performance, energy reduction and sourcing economical inputs, expectations and estimations of future market conditions, including housing starts and home inventories, reduced oil consumption resulting from energy-reduction initiatives, components, total cost and source of funding for the lumbermill modernization, evolving criteria and demand for certain paper grades, seasonal inventory build-up, reduction and the impact on financial results, future pension funding requirements, hedging activities, the Company's liquidity position, maximum possible amounts under certain guarantees, and the expected impact of specific events on financial results in future quarters.
Forward-looking information typically contains statements with words such as "continue", "ongoing", "grow", "achieve", "maintain", "will", "look", "future", "target", "can", "seek", "feel", "estimate", "plan", "when", "believe", "result", "possible", "could", "towards", "begin", "likely", "impact", "pursue", "anticipate", "remain", 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 Papers' business and future performance are discussed in the Annual Information Form as well as the Annual Report and other filings with Canadian securities regulatory authorities. Fraser Papers 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 Fraser Papers' views and the actual outcome is uncertain.
OUTLOOK
The Company expects a number of challenging quarters ahead as the effects of a global recession play out in the U.S. economy and in the Company's market segments in particular. Business activity slowed sharply toward the end of last year and led to reduced demand for all Fraser Papers' products. The pulp and lumber markets were particularly impacted with market prices dropping to extremely low levels. Prices for the Company's paper products were more stable, but as order files declined, the Company took downtime across a number of machines, in addition to shutdowns at Thurso and the lumbermills.
The Company's sales are largely focused in the United States, therefore the outlook for a recovery in the Company's business will be partly dependent on the success of the recently announced stimulus package and the availability of liquidity to restore both credit and confidence into the economy and, in particular, into the Company's customers and end markets. Despite taking downtime on paper machines to balance inventories against customer orders in December and January, the Company built inventories in excess of its near-term requirements. Subsequent to the year end, the Company sold approximately 10,500 tons of inventory to an affiliate of Brookfield Asset Management, on customary commercial terms. The proceeds of the sale were used to repay amounts outstanding on the Company's working capital facility. The Company believes that over the longer term, the specialty nature of its paper products will help to position Fraser Papers to benefit from an economic recovery sooner than many other companies.
The market for northern bleached hardwood kraft pulp produced at the Company's Thurso mill continues to be weak. By the fourth quarter, world pulp inventories had increased to unsustainable levels following a sharp decline in global demand from paper producers. It is expected that further capacity reductions will be required in northern Europe and North American to balance supply and demand, as low cost capacity in South America and Southeast Asia continues to operate.
With no clear signs of recovery in the U.S. housing market, lumber prices are expected to remain depressed for the balance of 2009. The Company will continue evaluating opportunities to secure low cost woodchips for the paper operations in Madawaska and will operate its lumbermills in support of its integrated paper operations.
Input costs for energy, chemicals and other raw materials have begun to weaken following a period of inflationary pressure. With a significant number of assets located in Canada, which incur Canadian dollar-denominated costs, the weakness in the Canadian currency has helped to improve the competitiveness of those operations. To eliminate a significant amount of risk related to the future volatility in the Canadian dollar, the Company has bought forward approximately 40% of its 2009 Canadian dollar requirements at an exchange rate of CAD$1.00 equals USD$0.79.
The Company expects to require additional financing during 2009 to fund its operations, pension fund obligations and the maturity of the $25 million term loan facility in September. Given the challenging conditions in the credit markets, the Company expects that it may have to seek support from its shareholders.
DEFINITIONS
As there is no generally accepted method of calculating the measures outlined below, these measures as calculated by Fraser Papers may not be comparable to similar titled measures reported by other companies.
EBITDA is earnings from continuing operations before interest, taxes, depreciation and amortization, and restructuring charges. EBITDA is presented as a useful indicator of a company's ability to meet debt service and capital expenditure requirements. Fraser Papers interprets EBITDA trends as an indicator of relative operating performance.
Free Cash Flow is the company's cash flow from operating activities minus capital investments.
Net debt is debt less cash and cash equivalents. Net debt to net debt plus equity is provided as a useful indicator of a company's financial leverage.
Net debt to net debt plus equity is net debt divided by the sum of net debt and shareholders' equity. Net debt to net debt plus equity is provided as a useful indicator of a company's financial leverage.
Cash costs include all cash costs of operations and exclude depreciation and amortization. Cash costs are presented to provide additional information about the cash generating capabilities of Fraser Papers' operations. This measure captures the key costs of operations and is a key performance measure that management uses to evaluate costs at the operations.
EBITDA
----------------------------------------------------------------------------
Three months ended Twelve months ended
--------------------------------------------------
Dec 31 Sep 27 Dec 31 Dec 31 Dec 31
US$MILLIONS 2008 2008(1) 2007 2008 2007
----------------------------------------------------------------------------
Profit / (Loss) $ (15.9) $ (21.3) $ (20.3) $ (71.9) $ (43.1)
Add: Interest expense,
net 1.3 0.9 1.8 3.6 6.8
Less: Income tax
(recovery)/expense (0.3) 0.1 (5.0) (0.1) (13.4)
Less: Gain on sale of
Acadian - - - - (38.4)
Add: Restructuring
charges - - (0.6) - 15.9
Add: Other - - (0.3) - (0.8)
Add: Depreciation 11.6 8.1 7.2 34.8 31.1
----------------------------------------------------------------------------
EBITDA $ (3.3) $ (12.2) $ (17.2) $ (33.6) $ (41.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) EBITDA in the 3rd quarter of 2008 has been adjusted to reflect a
reclassification of $0.7 million charge to EBITDA that was previously
presented as other costs excluded from EBITDA.
NET DEBT
----------------------------------------------------------------------------
As at
----------------------
Dec 31 Dec 31
US$MILLIONS 2008 2007
----------------------------------------------------------------------------
Long-term debt $ 64.0 $ -
Add: Current Debt 25.0 -
Add: Bank indebtedness 7.4 4.3
Add: Borrowings under credit facility - 81.6
----------------------------------------------------------------------------
NET DEBT $ 96.4 $ 85.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NET DEBT TO NET DEBT PLUS EQUITY
----------------------------------------------------------------------------
As at
----------------------
Dec 31 Dec 31
US$MILLIONS 2008 2007
----------------------------------------------------------------------------
Net debt $ 96.4 $ 85.9
Add: Shareholders' equity 284.3 292.9
----------------------------------------------------------------------------
Net debt plus equity 380.7 378.8
Net debt $ 96.4 $ 85.9
Divided by: Net debt plus equity 380.7 378.8
----------------------------------------------------------------------------
NET DEBT TO NET DEBT PLUS EQUITY 25% 23%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FREE CASH FLOW
----------------------------------------------------------------------------
Three months ended Twelve months ended
------------------------------------------------
Dec 31 Sep 27 Dec 31 Dec 31 Dec 31
US$MILLIONS 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash flow from
operating activities $ (22.1) $ (15.6) $ (30.7) $ (45.9) $ (48.2)
Less: Capital investments (6.2) (13.5) (4.9) (27.1) (20.3)
----------------------------------------------------------------------------
FREE CASH FLOW $ (28.3) $ (29.1) $ (35.6) $ (73.0) $ (68.5)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CASH COST
----------------------------------------------------------------------------
Three months ended Twelve months ended
-------------------------------------------------
Dec 31 Sep 27 Dec 31 Dec 31 Dec 31
US$MILLIONS 2008 2008(1) 2007 2008 2007
----------------------------------------------------------------------------
Net sales $ 165.5 $ 162.1 $ 186.3 $ 688.6 $ 714.7
Less: EBITDA 3.3 12.2 17.2 33.6 41.9
----------------------------------------------------------------------------
CASH COST $ 168.8 $ 174.3 $ 203.5 $ 722.2 $ 756.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) EBITDA in the 3rd quarter of 2008 has been adjusted to reflect a
reclassification of $0.7 million charge to EBITDA that was previously
presented as other costs excluded from EBITDA.
NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS
Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.
The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.
FRASER PAPERS INC.
INTERIM CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008
(unaudited)
----------------------------------------------------------------------------
As at As at
US$MILLIONS Dec 31, 2008 Dec 31, 2007
----------------------------------------------------------------------------
(restated - note 2)
Assets
Current assets:
Accounts receivable $ 67.9 $ 99.1
Inventory 125.5 124.2
Future income taxes 0.3 0.2
----------------------------------------------------------------------------
193.7 223.5
Property, plant and equipment 256.0 266.2
Other assets 60.9 56.5
----------------------------------------------------------------------------
$ 510.6 $ 546.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness $ 7.4 $ 4.3
Accounts payable and accrued liabilities 78.0 106.4
Current debt (note 4) 25.0 81.6
----------------------------------------------------------------------------
110.4 192.3
Long-term debt (note 4) 64.0 -
Other liabilities 48.4 56.1
Future income taxes 3.5 4.9
Shareholders' equity (note 7) 284.3 292.9
----------------------------------------------------------------------------
$ 510.6 $ 546.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(See accompanying notes to financial statements)
FRASER PAPERS INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
DECEMBER 31, 2008
(unaudited)
----------------------------------------------------------------------------
Three Months Ended Year Ended
--------------------------------------
Dec 31 Dec 31 Dec 31 Dec 31
US$MILLIONS, EXCEPT PER SHARE AMOUNTS 2008 2007 2008 2007
----------------------------------------------------------------------------
(restated - (restated -
note 2) note 2)
Net sales $ 165.5 $ 186.3 $ 688.6 $ 714.7
Cost of goods sold 165.3 200.9 700.0 739.5
Selling, general and administration
costs (note 5) 3.5 2.6 22.2 17.1
----------------------------------------------------------------------------
Loss before the following: $ (3.3) $ (17.2) $ (33.6) $ (41.9)
Gain on sale of equity investee
(note 13) - - - 38.4
Restructuring charges (note 12) - 0.6 - (15.9)
Other - 0.3 - 0.8
Interest income 0.1 0.1 0.5 0.5
Interest expense (1.4) (1.9) (4.1) (7.3)
----------------------------------------------------------------------------
Loss before depreciation and
income taxes (4.6) (18.1) (37.2) (25.4)
Depreciation (11.6) (7.2) (34.8) (31.1)
Income tax recovery (note 6) 0.3 5.0 0.1 13.4
----------------------------------------------------------------------------
Loss $ (15.9) $ (20.3) $ (71.9) $ (43.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Loss per share (basic and fully
diluted) $ (0.32) $ (0.69) $ (1.48) $ (1.47)
Weighted average number of
shares (thousands) 50,167 29,510 48,445 29,510
Deficit
Balance, beginning of period $ (259.0) $ (182.7) $ (203.0) $(162.0)
Change in accounting policy (note 2) - - - 2.1
Loss (15.9) (20.3) (71.9) (43.1)
----------------------------------------------------------------------------
Balance, end of period $ (274.9) $ (203.0) $ (274.9) $(203.0)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(See accompanying notes to financial statements)
FRASER PAPERS INC.
INTERIM CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
AND ACCUMULATED OTHER COMPREHENSIVE INCOME DECEMBER 31, 2008
(unaudited)
----------------------------------------------------------------------------
Three Months Ended Year Ended
------------------------------------------
Dec 31 Dec 31 Dec 31 Dec 31
US$MILLIONS 2008 2007 2008 2007
----------------------------------------------------------------------------
(restated - (restated -
note 2) note 2)
Loss $ (15.9) $ (20.3) $ (71.9) $ (43.1)
Changes in unrealized net
gains (losses)on cash flow
hedges 3.3 (0.5) 3.0 0.6
Changes in unrealized net gains
(losses)on lumber hedges (0.1) - 0.7 -
Tax impact of above (1.2) 0.2 (1.3) (0.2)
----------------------------------------------------------------------------
Other comprehensive income (loss) 2.0 (0.3) 2.4 0.4
----------------------------------------------------------------------------
Comprehensive loss $ (13.9) $ (20.6) $ (69.5) $ (42.7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated other
comprehensive income
Balance, beginning of period 0.6 0.5 0.2 (0.2)
Other comprehensive income
(loss) for the period 2.0 (0.3) 2.4 0.4
----------------------------------------------------------------------------
Balance, end of period $ 2.6 $ 0.2 $ 2.6 $ 0.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(See accompanying notes to financial statements)
FRASER PAPERS INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 2008
(unaudited)
----------------------------------------------------------------------------
Three Months Ended Year Ended
------------------------------------------
Dec 31 Dec 31 Dec 31 Dec 31
US$MILLIONS 2008 2007 2008 2007
----------------------------------------------------------------------------
(restated - (restated -
note 2) note 2)
Cash provided by (used for):
Operating Activities
Loss $ (15.9) $ (20.3) $ (71.9) $ (43.1)
Items not affecting cash:
Depreciation 11.6 7.2 34.8 31.1
Future income taxes (note 6) (0.2) (5.3) (0.5) (14.8)
Gain on sale of equity
investee (note 13) - - - (38.4)
Restructuring charges (note 12) - (0.6) - 15.9
Employment benefit plan
expense (note 5) 3.3 3.0 15.2 13.5
Other items (6.5) (3.7) (7.1) 1.6
Employment benefit plan
funding (note 5) (6.8) (8.3) (26.0) (31.2)
----------------------------------------------------------------------------
(14.5) (28.0) (55.5) (65.4)
Net change in non-cash working
capital balances (7.6) (2.7) 9.6 17.2
----------------------------------------------------------------------------
(22.1) (30.7) (45.9) (48.2)
----------------------------------------------------------------------------
Investing Activities
Capital investments (6.2) (4.9) (27.1) (20.3)
Proceeds on sale of equity
investee (note 13) - 38.4 - 38.4
----------------------------------------------------------------------------
(6.2) 33.5 (27.1) 18.1
----------------------------------------------------------------------------
Financing Activities
Proceeds from rights offering
(note 4) - - 59.7 -
Repayment of long-term debt
(note 4) - - (50.0) (68.5)
Borrowing under term loan
facility (note 4) 4.1 - 18.6 -
Net borrowings under term
credit facility (note 4) - - 25.0 -
Net borrowings (repayments) under
revolving credit facility (note 4) 25.9 (10.2) 16.6 81.6
----------------------------------------------------------------------------
30.0 (10.2) 69.9 13.1
----------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents $ 1.7 $ (7.4) $ (3.1) $ (17.0)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(See accompanying notes to financial statements)
FRASER PAPERS INC.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
US$MILLIONS, EXCEPT PER SHARE AMOUNTS
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 for the year ended December 31, 2007, except for changes in accounting policies, which are described below. 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, 2007. 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. Changes in Accounting Policies
Effective January 1, 2008, the Company adopted new recommendations of the Canadian Institute of Chartered Accountants (CICA) under CICA Handbook Section 1535, Capital Disclosures; Section 3031, Inventories; Section 3862, Financial Instruments - Disclosure; and Section 3863, Financial Instruments - Presentation.
Inventories
On January 1, 2008, Fraser Papers adopted new accounting recommendations of the CICA related to inventories. Under the new recommendations, spare parts inventory that has a useful life of more than one year must be classified as a long-lived asset and amortized over its estimated useful life. Previously, Fraser Papers classified certain of these spare parts as inventory and charged them to operations when put in use. The change in policy has been applied retroactively. As a result, the Company has reversed certain amounts charged to operations prior to January 1, 2007 and reclassified certain inventory items to property, plant and equipment on the consolidated balance sheets. These adjustments as at January 1, 2007 resulted in an increase to property, plant and equipment of $3.2, a decrease in inventories of $0.7, an increase in future income taxes liabilities of $0.4 and a decrease in opening deficit as at January 1, 2007 of $2.1. In addition, the Company has restated its 2007 results of operations in order to reflect this change in policy. These adjustments resulted in a decrease in the consolidated loss for the year ended December 31, 2008 of $2.7 or $0.06 per share (2007 - $0.6 or $0.01 per share), compared to if the Company had not changed its policy. Additional disclosures required by the new recommendations are provided in note 3.
Financial Instruments
On January 1, 2008, Fraser Papers adopted new accounting recommendations of the CICA related to disclosing information about financial instruments and risk management. These disclosures have been described in note 8.
Capital Disclosures
On January 1, 2008, Fraser Papers adopted new accounting recommendations of the CICA related to disclosing information about how an entity manages its capital. These disclosures have been described in note 9.
Note 3. Inventory
During the quarter, Fraser Papers recorded a charge of $8.1 (2007 - $5.8) in the consolidated statement of operations to reduce the carrying value of certain of its inventories to lower of original cost or net realizable value. No reversals of prior charges were recorded in fourth quarter of 2008 or 2007.
On January 29, 2009 Fraser Papers announced the sale of approximately 10,500 tons of finished goods paper inventory to Brookfield for proceeds of approximately $11.7. Proceeds on the sale were used to repay amounts owing on the Company's revolving credit facility. In addition, the Company has agreed to supply paper to Brookfield through July 31, 2009, at market prices less a merchant's discount of 3.5%. Fraser Papers will provide sales and administrative support to Brookfield.
Note 4. Long-term Debt
In January 2008, the Company completed a rights offering to its shareholders (the "Offering") under which it received net proceeds of $59.7. The proceeds were used to repay outstanding indebtedness including $50.0 in temporary financing, which was due January 31, 2008. Additional disclosure about the Offering is provided in note 7.
In April 2008, the Company amended its existing revolving credit facility to extend the term of the facility and increase the maximum borrowings under the facility to $115.0. The amended facility bears interest at market rates and is due in April 2011. Borrowings under the facility are secured by a first charge against accounts receivable and inventory of Fraser Papers. At December 31, 2008, $86.7 (2007 - $123.9) of the facility was utilized, $48.2 (2007 - $31.6) for operating bank loans and the balance in support of letters of credit.
In June 2008, the Company entered into a term loan facility with the province of New Brunswick for up to CAD$40.0. The facility bears interest at a fixed rate of 4.7% and is due in December 2014. Borrowings under the facility will be used to fund capital expenditures at the Company's operations in New Brunswick and are secured by a first charge on property, plant and equipment located in New Brunswick. Principal payments under the loan will be made in quarterly installments over the term of the loan with a lump sum payment on maturity. The first principal repayment is due no later than March, 2010. At December 31, 2008, $16.3 (CAD$20.0) had been drawn under this facility.
In September 2008, the Company entered into a term credit facility for $25.0. Brookfield has provided a guarantee to the lenders in support of this credit facility and is required to meet certain financial covenants. The facility bears interest at market rates and is due in September 2009. At December 31, 2008, the facility was fully drawn.
The effective interest rate on long-term debt was 3.4% at December 31, 2008 (2007 - 7.5%).
During the quarter and the year ended December 31, 2008, the Company made interest payments of $0.9 and $3.0, respectively (2007 - $2.8 and $8.9).
Note 5. Employee Benefit Costs
During the quarter, employee benefit expense for defined benefit pensions and post retirement benefits totaled $2.3 (2007 - $2.4). For the year ended December 31, 2008, employee benefit expenses for defined benefit pensions and post retirement benefits totaled $11.7 (2007 - $10.8). In the first quarter of 2008, the Company received regulatory approval relating to a partial wind-up of pension plan obligations as a result of a disposition of timberland assets in New Brunswick in 2006 and recorded a settlement expense of $1.2 in selling, general and administrative costs.
Employee defined benefit plan funding amounted to $5.8 (2007 - $7.7) during the quarter and $22.5 (2007 - $28.5) for the year ended December 31, 2008.
During the quarter and for the year ended December 31, 2008, contributions to Fraser Papers' defined contribution pension plans were $1.0 and $3.5, respectively (2007 - $0.6 and $2.7, respectively).
Note 6. Income Taxes
Interim income tax expense is calculated based on expected annual effective tax rates.
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Three Months Ended Year Ended
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Dec 31 Dec 31 Dec 31 Dec 31
2008 2007 2008 2007
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Current tax (expense) recovery $ 0.1 $ (0.3) $ (0.4) $ (1.4)
Future income tax recovery 0.2 5.3 0.5 14.8
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Income tax recovery $ 0.3 $ 5.0 $ 0.1 $ 13.4
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During the quarter and for the year ended December 31, 2008, payments of $0.1 and $0.6, respectively, were made for income and income-related taxes (2007 - $1.8 and $2.3, respectively).
Note 7. Shareholders' Equity
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As at Dec 31 As at Dec 31
2008 2007
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Common shares - 50,166,789
(2007 - 29,509,876) shares outstanding $ 549.7 $ 490.0
Contributed surplus 6.9 5.7
Accumulated other comprehensive income 2.6 0.2
Deficit (274.9) (203.0)
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$ 284.3 $ 292.9
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In the fourth quarter of 2007, the Company filed a final short form prospectus with securities regulators in Canada relating to the Offering. Under the Offering, the Company distributed rights to existing shareholders to purchase 20,656,913 shares, at a purchase price of CAD$2.90. On January 24, 2008 the Company issued 20,656,913 shares and received net proceeds of $59.7.
During the year ended December 31, 2008, Fraser Papers issued 1,445,000 stock options with exercise prices between CAD$2.22 and CAD $3.10, to certain officers of the Company. These options have a 10 year life and vest evenly over five years. The Company cancelled 335,000 stock options during the quarter and 360,000 during the year ended December 31, 2008, respectively.
Note 8. Financial Instruments and Risk Management
Foreign Currency Rate Risk
Fraser Papers holds certain assets and liabilities in Canadian dollars and incurs a significant portion of its costs in Canadian dollars. From time to time Fraser Papers enters into forward foreign exchange contracts to hedge the impact of foreign exchange rate changes on these assets, liabilities and costs. Fraser Papers does not use derivative financial instruments for speculative purposes.
As at December 31, 2008, the Company had outstanding forward foreign exchange contracts of $41.0 (2007 - $30.2), which are designated as a fair value hedge against certain Canadian dollar-denominated net monetary liabilities. The consolidated statements of operations for the year ended December 31, 2008 include a realized loss of $7.6 (2007 - gain of $8.0) on matured forward foreign exchange contracts and an unrealized loss of $0.1 (2007 - gain of $0.2) on outstanding contracts. These realized and unrealized gains or losses are offset by realized and unrealized losses or gains on the net monetary liabilities being hedged.
As at December 31, 2008, the Company had forward foreign exchange contracts of $91.5 (2007 - $42.4) as a hedge of anticipated future Canadian dollar cash outflows and no contracts (2007 - $60.0) as a hedge of anticipated future Canadian dollar cash inflows. These contracts have varying maturity dates in 2009. The consolidated statements of operations for the year ended December 31, 2008 include a realized loss of $4.0 (2007 - gain of $2.5) on matured forward foreign exchange contracts. An unrealized gain of $3.4 (2007 - $0.4) is recorded in other comprehensive income. These contracts effectively fix the exchange rate at which certain anticipated future Canadian dollar-denominated cash flows will be incurred.
Credit Risk
Fraser Papers does not have a trade receivable balance larger than $5.8 from any individual customer as at December 31, 2008 (2007 - $7.9). The Company reviews a customer's credit rating before extending or increasing credit and conducts regular reviews of existing customers' credit performance. The consolidated statements of operations for the year ended December 31, 2008 includes bad debt expense of $0.2 (2007 - nil). The allowance for doubtful accounts as at December 31, 2008 was $0.4 (2007 - $0.2).
Earnings Sensitivity
Fluctuations in market prices expose the Company to potential negative effects from market risk, which is composed of changes in currency exchange rates (currency risk), changes in interest rates (interest rate risk) and changes in the selling prices of the Company's products (price risk).
Currency Risk
With production facilities in Canada, a significant portion of the Company's operating costs are sourced in Canadian dollars. For the year ended December 31, 2008, a US$0.01 change in the foreign exchange rate would have impacted pre-tax loss, before the impact of the Company's hedging program, by $3.6.
Interest Rate Risk
Interest rates on the Company's borrowings are subject to change and could affect the profitability of the Company. The Company currently manages its interest rate risk by maintaining three borrowing facilities to support its liquidity requirements. One of these facilities attracts interest at a fixed rate of 4.7% while the others attract interest at floating rates. Interest rate swaps are an available alternative to further reduce the Company's exposure to fluctuations in interest rates. For the year ended December 31, 2008, a 100 basis point change in market interest rates would have impacted pre-tax loss by $0.5.
Price Risk
Markets for some of Fraser Papers' products are highly cyclical in nature. From time to time, Fraser Papers enters into commodity futures contracts which serve to hedge a portion of Fraser Papers' future sales against changes in the selling price for these products. Fraser Papers does not use derivative financial instruments for speculative purposes.
The Company is exposed to variability in commodity prices on the sale of its paper, pulp and lumber products. A $25/ton change in the value received on the sale of paper products would have impacted pre-tax loss for the year ended December 31, 2008, by $14.1. A $25/tonne change in pulp prices would have affected pre-tax loss for the year ended December 31, 2008, by $1.3. For the year ended December 31, 2008, pre-tax loss would have been impacted by $4.8 with a change in lumber prices of $25/Mfbm. The Company considers the use of pulp and lumber hedges to limit its exposure to variability in pricing.
During the year, Fraser Papers entered into lumber futures contracts representing 30.8 million board feet of lumber (2007 - 13.2), which effectively fixed the selling price for lumber delivered on the expiry date and were designated as a hedge of a portion of future lumber sales. These contracts matured in the fourth quarter of 2008 and first quarter of 2009 and are highly effective at mitigating the impact of changing lumber prices. The consolidated statements of operations for the year ended December 31, 2008 include a realized gain of $0.7 (2007 - $0.6) on matured lumber futures contacts and an unrealized gain of $0.7 (2007 - nil) is recognized in other comprehensive income during the year. Contracts representing 1.7 million board feet of lumber (2007 - nil) were outstanding at December 31, 2008.
Note 9. Capital Management
The Company monitors capital on the basis of the net debt to net debt plus equity ratio. Net debt is bank indebtedness plus long-term debt, less cash and cash equivalents. Equity comprises all components of shareholders' equity.
The Company seeks to maintain a conservative net debt to net debt plus equity ratio while maintaining adequate liquidity to achieve its business plans. Fraser Papers manages the term of its debt with consideration to the expected life of its net assets. As such, shareholders' equity is maintained at amounts in excess of the carrying value of property, plant and equipment. The Company's current net debt to net debt plus equity ratio is 25%. In order to maintain or modify the capital structure the Company has a number of alternatives, subject to certain approvals, including: issue additional shares; repurchase of its own shares on the market; return capital to shareholders; and the issuance of, or repayment of debt.
Note 10. Commitments and Contingencies
Brookfield Asset Management Inc. (together with its affiliates "Brookfield") has provided guarantees to the lenders of the Company in support of its credit facilities. The maximum amount of the guarantees is $50.0. Fraser Papers has provided Brookfield with a guarantee that it will repay Brookfield any amounts paid by Brookfield to Fraser Papers' lenders. The guarantees are secured by a fixed charge on certain of Fraser Papers' assets.
Norbord Inc. ("Norbord") has provided guarantees for certain obligations of Fraser Papers under a financial commitments agreement. These guarantees were previously obligations of the paper division of Norbord. At December 31, 2008, the maximum potential amount of the obligation guaranteed is estimated to be $1.0.
Note 11. Related Party Transactions
Brookfield is a related party by virtue of owning a controlling equity interest in the Company. Acadian Timber Income Fund ("Acadian") is a related party by virtue of Brookfield's equity holdings in Acadian. All related party transactions are recorded at the exchange amount.
During the quarter and the year ended December 31, 2008, Fraser Papers purchased approximately $1.1 and $4.8, respectively (2007 - $1.3 and $5.7) of electricity for its Gorham paper mill, from Brookfield. Included in accounts payable and accrued liabilities is $1.0 (2007 - $0.5) related to these purchases.
Fraser Papers has invested in units of Katahdin Paper Company LLC ("Katahdin"), an indirectly, wholly owned subsidiary of Brookfield. The units earn a preferential cumulative distribution of 5% per annum.
Cumulative distributions accrued on this investment amount to $2.6 (2007 - $2.1). The investment is accounted for using the cost method and is included in other assets.
During the quarter and the year ended December 31, 2008, Fraser Papers earned a management fee of $1.5 and $7.5 (2007 - $2.5 and $8.0) from Katahdin. Included in accounts receivable is $0.6 (2007 - $2.5) due from Katahdin.
During the quarter and the year ended December 31, 2008, Fraser Papers sold $0.3 and $1.7 (2007 - nil and $3.3) of goods and services to Katahdin. Included in accounts receivable is $0.1 (2007 - $0.8) related to these sales.
Fraser Papers has entered into 20 year fibre supply agreements with Acadian. During the quarter and the year ended December 31, 2008, purchases of fibre from Acadian amounted to $10.5 and $25.7, respectively (2007 - $8.9 and $33.6). Included in accounts payable and accrued liabilities is $1.0 (2007 - $1.0) related to these purchases. In addition, the Company's prior equity interest in Acadian generated distributions of $2.3 for the year ended December 31, 2007.
Subsequent to December 31, 2008, Fraser Papers announced the sale of approximately 10,500 tons of finished goods paper inventory to Brookfield for proceeds of approximately $11.7. In addition, the Company has agreed to supply paper to Brookfield through July 31, 2009, at market prices less a merchant's discount of 3.5%. Fraser Papers will provide sales and administrative support to Brookfield.
In connection with the Offering, Fraser Papers entered into a Standby Purchase Agreement with Brookfield, in which Brookfield agreed to exercise all of its rights and would purchase any common shares not otherwise subscribed for by other shareholders of the Company. As a result, Brookfield paid CAD$54.6 to acquire 18,813,241 shares, increasing their ownership interest to 70.5% of the Company.
Brookfield has provided the Company with a facility with a notional amount of $350.0 to enter into forward foreign exchange contracts as part of the Company's hedging activities. At December 31, 2008, the Company had entered into forward foreign exchange contracts of $41.0 (2007 -$30.2) as a hedge against certain Canadian dollar-denominated net monetary liabilities, nil (2007 - $60.0) as a hedge of anticipated future Canadian dollar cash inflows and $100.3 (2007 - $35.2) as a hedge of anticipated future Canadian dollar cash outflows, under this facility.
The Company has agreed to pay guarantee fees to Brookfield in connection with guarantees to Fraser Papers' lenders in support of Fraser Papers' credit facilities. The fees are equal to an annualized rate of approximately 2.0% of the maximum amount of the guarantees of $50.0 (or $1.0 per year).
Fraser Papers is dependant on the continued financial support of Brookfield. Without this support, it is possible that the Company may not be able to secure alternative sources of financing with terms that are satisfactory to the Company (see also note 10).
All related party transactions are recorded at the exchange amount.
Note 12. Closure of Paper Manufacturing Capacity
During the second quarter of 2007, Fraser Papers permanently shut down two uncoated freesheet paper machines at its East Papers operations. As a result, Fraser Papers recorded a restructuring charge of $15.9 including an impairment charge related to property, plant and equipment and spare parts inventory of $9.2 and other charges of $6.7.
Note 13. Sale of Equity Investee
On September 26, 2007, Fraser Papers sold its interest in Acadian for net proceeds of $38.4, which were received in the fourth quarter of 2007. As the units in Acadian had a book value of nil, a gain of $38.4 was recorded on the transaction.
Note 14. Comparative Figures
Certain comparative figures have been reclassified from those previously presented to conform to the current year's presentation.