/FIRST AND FINAL ADD - TO152 - CATALYST PAPER CORPORATION/
CATALYST PAPER CORPORATION
(formerly Norske Skog Canada Limited)
CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 30, 2005 and 2004
(unaudited)
CATALYST PAPER CORPORATION
(formerly Norske Skog Canada Limited)
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Consolidated Statements of Earnings
and Retained Earnings
Three months ended Nine months ended
(Unaudited and in millions September 30, September 30,
of dollars, except where --------------------- ---------------------
otherwise stated) 2005 2004 2005 2004
---------------------------------------- ---------- ---------- ----------
Sales $ 450.3 $ 466.8 $ 1,352.0 $ 1,400.9
---------- ---------- ---------- ----------
Operating expenses
Cost of sales 390.3 399.1 1,203.9 1,257.0
Selling, general
and administrative 12.1 11.4 41.2 36.4
Amortization 45.1 46.3 134.3 137.7
---------- ---------- ---------- ----------
447.5 456.8 1,379.4 1,431.1
---------- ---------- ---------- ----------
Operating earnings (loss) 2.8 10.0 (27.4) (30.2)
Foreign exchange gain on
translation of long-term debt 38.4 41.5 27.4 22.3
Loss on repayment
of long-term debt - - - (5.2)
Other income, net (0.1) (0.1) 3.6 2.1
Interest expense, net (19.0) (18.8) (56.6) (57.7)
---------- ---------- ---------- ----------
Earnings (loss) before
income taxes and
non-controlling interest 22.1 32.6 (53.0) (68.7)
---------- ---------- ---------- ----------
Income tax expense (recovery)
Current 1.4 0.9 4.1 2.4
Future (note 4) (13.8) 3.7 (40.1) (28.8)
---------- ---------- ---------- ----------
(12.4) 4.6 (36.0) (26.4)
---------- ---------- ---------- ----------
Net earnings (loss) before
non-controlling interest 34.5 28.0 (17.0) (42.3)
Non-controlling interest (note 2) (0.3) - (0.6) -
---------- ---------- ---------- ----------
Net earnings (loss) 34.2 28.0 (17.6) (42.3)
Retained earnings,
beginning of period 72.6 82.7 124.4 153.0
---------- ---------- ---------- ----------
Retained earnings,
end of period $ 106.8 $ 110.7 $ 106.8 $ 110.7
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and diluted
earnings (loss)
per share (in dollars) $ 0.16 $ 0.13 $ (0.08) $ (0.20)
Weighted average common shares
outstanding (in millions) 214.6 214.6 214.6 214.6
CATALYST PAPER CORPORATION
(formerly Norske Skog Canada Limited)
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Consolidated Balance Sheets
(In millions of dollars) September December
30, 2005 31, 2004
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(unaudited)
Assets
Current assets
Cash and cash equivalents $ - $ 26.0
Accounts receivable 235.1 236.8
Inventories 240.7 258.1
Prepaids and other 32.8 24.6
---------- ----------
508.6 545.5
Property, plant and equipment 2,161.7 2,172.9
Other assets 40.1 27.5
---------- ----------
$ 2,710.4 $ 2,745.9
---------- ----------
---------- ----------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 264.6 $ 285.5
Long-term debt (note 5) 878.1 823.6
Other long-term obligations 206.4 233.6
Future income taxes (note 4) 307.2 332.9
Deferred credits (note 4) 26.9 27.5
---------- ----------
1,683.2 1,703.1
---------- ----------
Shareholders' equity
Share capital 913.6 913.6
Contributed surplus 6.8 4.8
Retained earnings 106.8 124.4
---------- ----------
1,027.2 1,042.8
---------- ----------
$ 2,710.4 $ 2,745.9
---------- ----------
---------- ----------
Subsequent event (note 9)
On behalf of the Board
Russell J. Horner Thomas S. Chambers
Director Director
CATALYST PAPER CORPORATION
(formerly Norske Skog Canada Limited)
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Consolidated Statements
of Cash Flows Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
(Unaudited and
in millions of dollars) 2005 2004 2005 2004
---------------------------------------- ---------- ---------- ----------
Cash flows provided (used) by
Operations
Net earnings (loss) $ 34.2 $ 28.0 $ (17.6) $ (42.3)
Items not requiring
(providing) cash
Amortization 45.1 46.3 134.3 137.7
Future income taxes (13.8) 3.7 (40.1) (28.8)
Increase in other
long-term obligations 6.7 6.3 17.1 17.9
Foreign exchange gain
on translation of
long-term debt (38.4) (41.5) (27.4) (22.3)
Non-controlling interest 0.3 - 0.6 -
Loss on repayment
of long-term debt - - - 5.2
Other (16.6) (8.5) (8.0) (17.6)
---------- ---------- ---------- ----------
17.5 34.3 58.9 49.8
---------- ---------- ---------- ----------
Changes in
non-cash working capital
Accounts receivable (3.0) 0.4 2.5 (21.1)
Inventories (1.2) (20.9) 17.4 (12.9)
Prepaids and other (14.8) (10.0) (11.4) (9.8)
Accounts payable and
accrued liabilities (20.3) (23.7) (26.3) 8.9
---------- ---------- ---------- ----------
(39.3) (54.2) (17.8) (34.9)
---------- ---------- ---------- ----------
Cash flows provided
(used by) operations (21.8) (19.9) 41.1 14.9
---------- ---------- ---------- ----------
Investing
Additions to property,
plant and equipment (23.8) (10.1) (69.7) (48.0)
Proceeds from sale of property,
plant and equipment 0.1 0.1 2.4 0.2
Purchase price adjustment - 26.6 - 26.6
Decrease (increase)
in other assets 0.3 (0.7) (0.8) (0.5)
---------- ---------- ---------- ----------
Cash flows provided (used)
by investing activities (23.4) 15.9 (68.1) (21.7)
---------- ---------- ---------- ----------
Financing
Increase (decrease)
in revolving loan 25.6 - 25.6 (12.5)
Issue of long-term debt - - - 333.1
Repayment of long-term debt - - - (266.1)
Premium and expenses on
repayment of long-term debt - - - (15.0)
Deferred financing costs - - 0.1 (6.2)
Decrease in other
long-term obligations (8.3) (9.9) (24.7) (22.3)
---------- ---------- ---------- ----------
Cash flows provided (used)
by financing activities 17.3 (9.9) 1.0 11.0
---------- ---------- ---------- ----------
Cash and cash equivalents,
increase (decrease)
during period (27.9) (13.9) (26.0) 4.2
Cash and cash equivalents,
beginning period 27.9 18.1 26.0 -
---------- ---------- ---------- ----------
Cash and cash equivalents,
end of period $ - $ 4.2 $ - $ 4.2
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Supplemental information
Income taxes paid $ 0.8 $ (1.0) $ 4.0 $ 3.2
Net interest paid 18.8 19.0 56.4 60.3
CATALYST PAPER CORPORATION
(formerly Norske Skog Canada Limited)
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Consolidated Business Segments
(Unaudited and in
millions of dollars) Specialties Newsprint Pulp Total
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Three months ended
September 30, 2005
Sales(1) $ 246.6 $ 127.1 $ 76.6 $ 450.3
Amortization 24.5 11.3 9.3 45.1
Operating earnings (loss) 10.3 3.4 (10.9) 2.8
Additions to property,
plant and equipment 13.1 5.7 5.0 23.8
Three months ended
September 30, 2004
Sales(1) $ 270.1 $ 125.0 $ 71.7 $ 466.8
Amortization 26.5 11.5 8.3 46.3
Operating earnings (loss) 4.5 0.3 5.2 10.0
Additions to property,
plant and equipment 4.7 2.6 2.8 10.1
Nine months ended
September 30, 2005
Sales(1) $ 733.2 $ 387.2 $ 231.6 $ 1,352.0
Amortization 73.2 33.4 27.7 134.3
Operating earnings (loss) 16.9 3.9 (48.2) (27.4)
Additions to property,
plant and equipment 36.7 16.2 16.8 69.7
Nine months ended
September 30, 2004
Sales(1) $ 779.2 $ 410.6 $ 211.1 $ 1,400.9
Amortization 76.4 37.3 24.0 137.7
Operating earnings (loss) (4.4) (7.0) (18.8) (30.2)
Additions to property,
plant and equipment 20.6 5.3 22.1 48.0
(1) Pulp sales are stated net of inter-segment pulp sales of
$19.4 million for the three months ended September 30, 2005
($32.6 million - three months ended September 30, 2004) and
$61.2 million for the nine months ended September 30, 2005
($104.5 million - nine months ended September 30, 2004).
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CATALYST PAPER CORPORATION
(formerly Norske Skog Canada Limited)
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Notes to the Consolidated Financial Statements
(Unaudited and in millions of dollars, except where otherwise stated)
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1. Basis of Presentation
The consolidated financial statements include the accounts of
Catalyst Paper Corporation (formerly Norske Skog Canada Limited)
("the Company") (see note 9) and from their respective dates of
acquisition of control or formation, its wholly owned subsidiaries
and partnership. All inter-company transactions and amounts have been
eliminated on consolidation.
The accompanying unaudited interim consolidated financial statements
of the Company have been prepared in accordance with Canadian
generally accepted accounting principles on a basis consistent with
those followed in the most recent audited annual consolidated
financial statements except as described in note 2 below. These
unaudited interim consolidated financial statements do not include
all information and note disclosures required by Canadian generally
accepted accounting principles ("GAAP") for annual financial
statements, and therefore should be read in conjunction with the
December 31, 2004, audited consolidated financial statements and the
notes thereto.
All dollar amounts referred to in the unaudited interim consolidated
financial statements and the notes thereto reflect Canadian dollars
unless otherwise stated.
2. Significant Accounting Policies
Variable Interest Entities
Effective January 1, 2005, the Company adopted the Canadian Institute
of Chartered Accountants ("CICA") Accounting Guideline 15,
"Consolidation of Variable Interest Entities" ("AcG-15") on a
prospective basis. AcG-15 prescribes the application of consolidation
principles for entities that meet the definition of a variable
interest entity ("VIE"). AcG-15 requires that an enterprise holding
other than a voting interest in a VIE could, subject to certain
conditions, be required to consolidate the VIE if the Company is
considered its primary beneficiary whereby it would absorb the
majority of the VIE's expected losses, receive the majority of its
expected residual returns, or both.
The adoption of AcG-15 resulted in the consolidation of 100% of
Powell River Energy Inc. ("PREI"). PREI commenced operations February
2001, and consists of an integrated hydroelectric power generating,
transmission and distribution system which includes two hydroelectric
generating stations that provide power to the Company. The Company
purchases 100% of the power generated by PREI. The Company's 50.0%
interest in PREI was previously accounted for using the proportionate
consolidation method.
The Company has limited access to PREI's assets, which generally
takes the form of interest on loans, management fees and earnings
distributions based on the Company's interest in PREI. In addition,
creditors of PREI have recourse limited to the assets in PREI. The
change in consolidation method does not change the Company's
obligations with regard to PREI.
Upon adoption of AcG-15, the Company measured the assets,
liabilities, and non-controlling interest of PREI at their carrying
amounts and the consolidation of the additional 50.0% of PREI
resulted in the following adjustments at January 1, 2005:
Current assets $ 2.5
Property, plant and equipment 56.9
Other assets(1) 15.7
Current liabilities (3.3)
Long-term debt (56.9)
Future income taxes (14.9)
(1) "Other assets" includes $16.3 million of non-controlling
interest, representing PREI's deficit.
The adoption of AcG-15 is not expected to have a material impact on
consolidated net earnings (loss) going forward. The following
summarizes the impact the adoption of AcG-15 had on the Company's
consolidated statement of earnings in the three and nine months ended
September 30, 2005:
Three months ended, Nine months ended,
September 30, 2005 September 30, 2005
------------------- -------------------
Cost of sales recovery $ 1.4 $ 5.2
Amortization expense (0.3) (1.0)
Interest expense (1.6) (4.5)
Income tax recovery
- current 0.1 0.1
Income tax recovery
- future 0.7 0.8
Non-controlling interest (0.3) (0.6)
------------------- -------------------
Net earnings (loss) $ - $ -
------------------- -------------------
------------------- -------------------
The Company has identified two other potential VIEs, but has not been
able to obtain the financial information necessary to evaluate
whether the entities are VIEs, or if the entities are VIEs, whether
the Company is the primary beneficiary. The two potential VIEs are
private entities and, as such, are unwilling to share financial
information with the Company. The potential VIEs are related to each
other, and together they provide the Company with warehousing
services for a large portion of the Company's paper products. The
Company first contracted with these entities in 1999. The amounts
paid to these entities are not significant relative to the Company's
total freight costs.
The Company has entered into a building lease agreement with one of
the potential VIEs whereby it has agreed to continue making the
prescribed lease payments directly to the financial institution
holding the mortgage on the building in the event the lessor is no
longer able to meet its contractual obligations. As at September 30,
2005, the principal amount of the mortgage was approximately
$13.2 million. This agreement does not increase the Company's
liability beyond the obligation under the building lease.
3. Segmented Information
The Company operates in three business segments:
Specialties - Manufacture and sale of groundwood specialty
printing paper and kraft paper
Newsprint - Manufacture and sale of newsprint
Pulp - Manufacture and sale of long and short fibre pulp
The segments are managed separately, and all manufacturing facilities
are located in the province of British Columbia, Canada. Inter
segment sales consist of pulp transfers at cost.
4. Future Income Taxes
Income tax recovery for the three and nine months ended September 30,
2005, includes a release of future income taxes of $14.2 million
related to a reduction in provincial corporate income taxes. Although
the provincial income tax rate change has not been enacted, it has
met the definition of substantially enacted as defined in the
Emerging Issues Committee Abstract Number 111, "Determination of
Substantially Enacted Tax Rates Under CICA 3465." Accordingly, the
Company has recorded the impact of the rate change in the third
quarter of 2005.
5. Long-term Debt
The Company's long-term debt, all of which matures beyond one year is
as follows:
September 30, December 31,
Recourse 2005 2004
------------- ------------
Senior notes, 8.625% due June 2011
(US$400.0 million) $ 467.7 $ 485.1
Senior notes, 7.375% due March 2014
(US$250.0 million) 290.3 300.9
------------- ------------
758.0 786.0
Revolving operating facility of up to
$350.0 million due July 2008 with
interest based on Canadian Prime/BA
rates or U.S. Base/LIBOR rates 25.6 -
------------- ------------
783.6 786.0
------------- ------------
Non-recourse (PREI) (note 2)
First mortgage bonds, 6.387% due July 2009 75.0 37.6
Subordinated promissory notes 19.5 -
------------- ------------
94.5 37.6
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$ 878.1 $ 823.6
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Substantially all of the assets of the Company are pledged as
security under the $350.0 million revolving operating facility
("Facility"). Its availability is determined by a borrowing base,
calculated based on accounts receivable and inventory balances, and
includes covenants to maintain the funded debt/capitalization ratio
below 60%, secured debt/capitalization ratio below 30% and
shareholders' equity above $779.3 million as at September 30, 2005.
At September 30, 2005, the Facility had $25.6 million drawn against
it, and after outstanding letters of credit of $22.2 million,
$284.7 million was available to the Company. An interest coverage
covenant is applicable in certain circumstances if the Company incurs
secured debt other than under the Facility. As at September 30, 2005,
no such debt has been incurred.
At September 30, 2005, the Company is in compliance with the
covenants under both its Facility and senior notes indentures. The
Company is subject to restrictions on certain payments, including
paying dividends, under its senior notes. The main restriction is
based on changes in shareholders' equity. With the Company's
accumulated losses since 2002, the Company is not currently permitted
under its 8.625% senior note indenture to pay dividends.
6. Employee Future Benefits
The Company maintains pension benefit plans, which include defined
benefit and defined contribution segments that are available to all
salaried employees and to hourly employees not covered by union
pension plans. The Company also provides other benefit plans
consisting of provincial medical plan premiums, extended health care
and dental benefits to eligible retired employees and their
dependents. For the three and nine months ended September 30, 2005,
the Company incurred a total post-retirement benefit cost of
$13.1 million and $38.6 million, respectively (three and nine months
ended September 30, 2004 - $13.5 million and $42.5 million).
7. Financial Instruments
Derivative Financial Instruments
The Company uses derivative financial instruments to reduce its
exposure to foreign currency and price risk associated with its
revenues, energy costs and long-term debt. The Company also uses
interest rate swaps to manage its net exposure to interest rate
changes.
(a) Revenue Risk Management Instruments
Foreign currency options and forward contracts outstanding to sell
U.S. dollars were as follows:
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Options
--------------------------------
Purchased Sold
Options Options Forward Contracts
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Average Average Average
US$ Rate US$ Rate US$ Rate
Term Millions C$/US$ Millions C$/US$ Millions C$/US$
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As at
September 30, 2005
------------------
0 to 12 months $406.1 1.2168 $302.1 1.3023 $36.0 1.2091
13 to 24 months 44.0 1.1876 30.0 1.2823 - -
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$450.1 1.2140 $332.1 1.3005 $36.0 1.2091
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As at
December 31, 2004
-----------------
0 to 12 months $422.0 1.2902 $362.0 1.3588 $49.0 1.2798
13 to 24 months 56.0 1.2882 56.0 1.3693 - -
---------------------------------------------------
$478.0 1.2900 $418.0 1.3602 $49.0 1.2798
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Foreign exchange translation gains and losses on the above
instruments designated as hedges are recognized concurrently with the
hedged revenue in "Sales". At September 30, 2005, all of the above
instruments are designated as hedging instruments, except for
US$144.0 million where the associated revenue has been recognized. At
period-end exchange rates, the net amount the Company would receive
to settle the above contracts and options is $32.1 million, of which
$9.1 million has been recognized and is included in "Sales" and
"Prepaids and other".
At September 30, 2005, no price hedging instruments were outstanding
in respect of products sold.
(b) Cost Risk Management Instruments
Oil and gas contracts outstanding were as follows:
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Oil Contracts Gas Contracts
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Barrels Average Gigajoules Average
("bbls") Rate ("Gj") Rate
Term (000's) US$/bbl (millions) US$/Gj
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As at
September 30, 2005
------------------
0 to 12 months 50 $ 51.30 0.1 $ n/a(1)
13 to 36 months 50 31.55 - -
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100 $ 41.43 0.1 $ n/a
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As at
December 31, 2004
-----------------
0 to 12 months 125 $ 20.85 0.6 $ 5.58
13 to 36 months 80 32.34 - -
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205 $ 25.33 0.6 $ 5.58
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(1) Net of purchased contracts for 0.5 million gigajoules at
US$6.21/Gj and sold contracts for 0.4 million gigajoules at
US$9.82/Gj.
The above instruments are not designated as hedging instruments for
accounting purposes and are reported under "Prepaids and other" on
the balance sheet at their fair value. Settlements and changes in
fair value are recognized in "Cost of sales". At period-end swap
rates, the net amount the Company would receive to settle these swaps
is $4.7 million, all of which has been recognized and is included in
"Cost of sales" and "Prepaids and other".
(c) Long-term Debt Risk Management Instruments
The Company is party to forward foreign exchange contracts to acquire
U.S. dollars totalling US$59.0 million over a two-year period at
rates averaging C$1.5802/US$. These instruments are not designated as
hedging instruments for accounting purposes, and are included in
"Other long-term obligations" on the balance sheet at their fair
value. Settlements and changes in fair value are recognized in
"Foreign exchange gain (loss) on translation of long-term debt". At
period-end exchange rates, the net amount the Company would pay to
settle these contracts is $24.4 million.
(d) Interest Rate Swaps
The Company has entered into fixed-to-floating interest rate swaps on
notional US$30 million, under which it will receive a fixed rate
receipt of 7.375%, and pay a floating rate of U.S. six month LIBOR
plus 2.0%. The swaps mature March 1, 2014 and are cancellable at the
counterparties' option between March 1, 2009 and March 1, 2014, for
premiums which mirror the call premiums on the 7.375% senior notes.
These instruments are designated as fair value hedging instruments,
with settlement amounts recognized in interest expense, offsetting
the interest expense otherwise incurred. At period-end rates, the net
amount the Company would receive to settle these contracts is
$1.4 million.
8. Stock-based Compensation
The fair-value of share options was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
2005 2004
---------- ----------
Risk-free interest rate 3.7% 3.7%
Annual dividends per share nil nil
Expected stock price volatility 30.3% 30.2%
Expected option life (in years) 4.0 4.0
Average fair-value of options granted
(in dollars) $ 1.11 $ 1.06
9. Subsequent Event
On October 3, 2005, the Shareholders authorized Norske Skog Canada
Limited to change its name to Catalyst Paper Corporation. To minimize
any confusion, the Company has referred to itself as Catalyst Paper
Corporation (formerly Norske Skog Canada Limited) in these unaudited
interim consolidated financial statements.
SOURCE Catalyst Paper Corporation
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