EX-99.2 3 v337320_ex99-2.htm EXHIBIT 99.2

 

MANAGEMENT’S RESPONSIBILITY

 

Management’s Report on Financial Statements and
Assessment of Internal Control Over Financial Reporting

 

Catalyst Paper Corporation’s management is responsible for the preparation, integrity and fair presentation of the accompanying consolidated financial statements and other information contained in this Annual Report. The consolidated financial statements and related notes were prepared in accordance with U.S. generally accepted accounting principles and reflect management’s best judgments and estimates. Financial information provided elsewhere in the Annual Report is consistent with that in the consolidated financial statements.

 

Management is responsible for designing and maintaining adequate internal control over financial reporting. The company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for reporting purposes. Internal control over financial reporting includes processes and procedures that:

 

·pertain to the maintenance of records that, in reasonable detail, accurately reflect the transactions of the company;
·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements and footnote disclosures;
·provide reasonable assurance that receipts and expenditures of the company are appropriately authorized by the company’s management and directors; and
·provide reasonable assurance regarding the prevention or timely detection of an unauthorized use, acquisition or disposition of assets that could have a material effect on the consolidated financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in condition, or that the degree of compliance with policies or procedures may deteriorate.

 

Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2012. Management based this assessment on the criteria for internal control over financial reporting described in the “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the company’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the company’s Board of directors.

 

Based on this assessment, management determined that as of December 31, 2012 the company’s internal control over financial reporting was effective.

 

The company’s independent auditor, which audited and reported on the company’s consolidated financial statements, has also issued an auditors’ report on the company’s internal control over financial reporting.

 

The Board of directors is responsible for satisfying itself that management fulfills its responsibilities for financial reporting and internal control. The Audit Committee, which is comprised of four non-management members of the Board of directors, provides oversight to the financial reporting process. The Audit Committee meets periodically with management, the internal auditors and the external auditors to review the consolidated financial statements, the adequacy of financial reporting, accounting systems and controls, and internal and external auditing functions.

 

These consolidated financial statements have been audited by KPMG LLP, the independent auditors, whose report follows.

 

   
Kevin J. Clarke Brian Baarda
President and Vice-President, Finance
Chief Executive Officer and Chief Financial Officer

 

Vancouver, Canada
March 5, 2013

 

CATALYST PAPER 2012 ANNUAL REPORT 1

 

 
 

 

Report of INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders of Catalyst Paper Corporation

 

We have audited the accompanying consolidated balance sheets of Catalyst Paper Corporation as of December 31, 2012 (Successor), September 30, 2012 (Successor) and December 31, 2011 (Predecessor) and the related consolidated statements of earnings (loss), comprehensive income (loss), equity (deficiency) and cash flows for the three-month period ended December 31, 2012 (Successor), the nine-month period ended September 30, 2012 (Predecessor) and for each of the years in the two-year period ended December 31, 2011 (Predecessor). These consolidated financial statements are the responsibility of Catalyst Paper Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 2 to the consolidated financial statements, the Supreme Court of British Columbia and the Bankruptcy Court in US confirmed the Plan of Arrangement on June 28, 2012 and July 27, 2012, respectively, which became effective on September 13, 2012. Accordingly, the accompanying consolidated financial statements have been prepared in conformity with Accounting Standards Codification 852-10, Reorganizations, for the Successor Company as a new entity with assets, liabilities and a capital structure having carrying amounts not comparable with prior periods, as described in Note 1.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Catalyst Paper Corporation as of December 31, 2012 (Successor), September 30, 2012 (Successor) and December 31, 2011 (Predecessor), and its consolidated results of operations and its consolidated cash flows for the three-month period ended December 31, 2012 (Successor), the nine-month period ended September 30, 2012 (Predecessor) and for each of the years in the two-year period ended December 31, 2011 (Predecessor) in conformity with US generally accepted accounting principles.

 

Chartered Accountants

 

 

Vancouver, Canada

March 5, 2013

 

2 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions of Canadian dollars)

 

   Successor   Predecessor 
   As at
December 31
   As at
September 30
   As at
December 31
 
   2012   2012   2011 
Assets               
Current assets               
Cash and cash equivalents  $16.6   $12.2   $25.1 
Restricted cash (note 10)   0.7    3.7     
Accounts receivable (note 11)   114.0    140.8    134.9 
Inventories (note 12)   125.0    131.5    146.9 
Prepaids and other (note 13)   8.9    13.0    20.0 
Assets held for sale (note 9)   34.3    56.2     
    299.5    357.4    326.9 
Property, plant and equipment (note 14)   611.6    614.1    386.3 
Goodwill (note 15)   56.7    56.7     
Other assets (note 16)   11.0    11.9    24.4 
   $978.8   $1,040.1   $737.6 
Liabilities               
Current liabilities               
Accounts payable and accrued liabilities (note 17)  $113.8   $97.5   $174.5 
Current portion of long-term debt (note 18)   6.6    6.7    466.8 
Liabilities associated with assets held for sale (note 9)   15.2    14.8     
    135.6    119.0    641.3 
Long-term debt (note 18)   422.0    458.9    375.5 
Employee future benefits (note 19)   289.7    300.4    305.7 
Other long-term obligations (note 20)   8.9    9.0    19.2 
Deferred income taxes (note 21)           3.6 
Deferred credits (note 22)           9.6 
    856.2    887.3    1,354.9 
Equity (Deficiency)               
Shareholders’ equity (Deficiency)               
Common stock: no par value; unlimited shares authorized; issued and outstanding: 14,527,571 shares (September 30, 2012 – 14,400,000 shares and December 31, 2011 – 381,900,450 shares)   144.9    144.9    1,035.2 
Preferred stock: par value determined at time of issue; authorized 100,000,000 shares; issued and outstanding: nil shares            
Additional paid-in capital           16.6 
Deficit   (35.2)       (1,556.0)
Accumulated other comprehensive income (loss) (note 23)   6.6        (89.4)
    116.3    144.9    (593.6)
Non-controlling interest (deficit) (note 8)   6.3    7.9    (23.7)
    122.6    152.8    (617.3)
   $978.8   $1,040.1   $737.6 

Going concern (note 1)

Commitments, guarantees and indemnities and contingent liabilities (notes 32, 33, and 34)

Subsequent events (notes 8, 9, and 19)

The accompanying notes are an integral part of the consolidated financial statements.

 

On behalf of the Board:  
Kevin J. Clarke Walter Jones
Director Director

 

CATALYST PAPER 2012 ANNUAL REPORT 3

 

 
 

 

CATALYST PAPER CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(In millions of Canadian dollars, except where otherwise stated)

 

   Successor   Predecessor 
   Three months
ended
   Nine months
ended
   Years
ended
 
   December 31   September 30   December 31 
   2012   2012   2011   2010 
Sales  $260.5   $797.7   $1,079.7   $1,051.4 
Operating expenses                    
Cost of sales, excluding depreciation and amortization   245.6    718.0    970.7    930.1 
Depreciation and amortization   12.9    23.4    105.5    109.7 
Selling, general and administrative   7.7    26.2    40.3    43.4 
Restructuring (note 24)       5.3    5.9    25.3 
Impairment and other closure costs (note 7)           661.8    294.5 
    266.2    772.9    1,784.2    1,403.0 
Operating earnings (loss)   (5.7)   24.8    (704.5)   (351.6)
Interest expense, net (note 25)   (11.6)   (60.3)   (73.2)   (71.9)
Foreign exchange gain (loss) on long-term debt   (3.2)   24.0    (9.7)   27.6 
Other income (expense), net (note 26)   0.1    (2.6)   (2.1)   (2.6)
Loss before reorganization items and
income taxes
   (20.4)   (14.1)   (789.5)   (398.5)
Reorganization items, net (note 6)   (3.2)   666.9         
Income (loss) before income taxes   (23.6)   652.8    (789.5)   (398.5)
Income tax expense (recovery) (note 21)   0.2    (1.1)   (8.4)   (19.8)
Earnings (loss) from continuing operations   (23.8)   653.9    (781.1)   (378.7)
Loss from discontinued operations net of tax (note 9)   (12.9)   (3.6)   (195.5)   (19.5)
Net earnings (loss)   (36.7)   650.3    (976.6)   (398.2)
Net (earnings) loss attributable to non-controlling interest (note 8)   1.5    (31.9)   2.6    1.3 
Net earnings (loss) attributable to the company  $(35.2)  $618.4   $(974.0)  $(396.9)
Basic and diluted net earnings (loss) per share from continuing operations attributable to the company’s common shareholders (note 27) (in dollars)  $(1.55)  $1.63   $(2.04)  $(0.99)
Basic and diluted net loss per share from discontinued operations attributable to the company’s common shareholders (in dollars)  $(0.89)  $(0.01)  $(0.51)  $(0.05)
Weighted average number of the company’s common shares outstanding (in millions)   14.4    381.9    381.9    381.8 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions of Canadian dollars)

 

   Successor   Predecessor 
   Three months
ended
December 31
   Nine months
ended
September 30
   Years
ended
December 31
 
   2012   2012   2011   2010 
Net earnings (loss)  $(36.7)  $650.3   $(976.6)  $(398.2)
Other comprehensive income (loss), net of tax (expense) recovery:                    
Employee future benefits liability adjustment                    
Gross amount   6.6    (32.0)   (47.0)   16.9 
Tax (expense) recovery           0.3    (4.1)
Net amount   6.6    (32.0)   (46.7)   12.8 
Reclassification of amortization of employee
future benefits
                    
Gross amount       3.9    5.0    2.9 
Tax (expense) recovery       (0.9)   (1.6)   (1.0)
Net amount       3.0    3.4    1.9 
Unrealized net gain on cash flow revenue hedges                    
Gross amount               5.8 
Tax (expense) recovery               (1.6)
Net amount               4.2 
Reclassification of net (gain) loss on cash flow revenue hedges                    
Gross amount           (1.4)   (15.1)
Tax (expense) recovery           0.4    4.2 
Net amount           (1.0)   (10.9)
Unrealized gain (loss) on interest rate hedges                    
Gross amount               0.3 
Tax (expense) recovery               (0.1)
Net amount               0.2 
Other comprehensive income (loss) from continuing operations, net of taxes   6.6    (29.0)   (44.3)   8.2 
Employee future benefits liability adjustment                    
Gross amount       0.3    0.1    (0.5)
Tax (expense) recovery           (0.1)   0.2 
Net amount       0.3        (0.3)
Reclassification of amortization of employee
future benefits
                    
Gross amount           0.2    0.2 
Tax (expense) recovery           (0.1)   (0.1)
Net amount           0.1    0.1 
Foreign currency translation adjustments, net of related hedging activities                    
Gross amount       4.0    0.4    (0.4)
Tax (expense) recovery           0.5    (0.9)
Net amount       4.0    0.9    (1.3)
Other comprehensive income (loss) from discontinued operations, net of taxes       4.3    1.0    (1.5)
Total comprehensive income (loss)   (30.1)   625.6    (1,019.9)   (391.5)
Comprehensive (income) loss attributable to non-controlling (interest) deficit:                    
Net (earnings) loss   1.5    (31.9)   2.6    1.3 
Other comprehensive (income) loss, net of taxes               (0.1)
Comprehensive (income) loss attributable to non-controlling interest   1.5    (31.9)   2.6    1.2 
Comprehensive income (loss) attributable to the company  $(28.6)  $593.7   $(1,017.3)  $(390.3)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

CATALYST PAPER 2012 ANNUAL REPORT 5

 

 
 

 

CATALYST PAPER CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)

(In millions of Canadian dollars)

 

   Equity (deficiency) attributable to the company         
   Common stock   Additional       Accumulated
other
   Non-
controlling
     
   Number of
shares
   $   paid-in
capital
   Deficit   comprehensive
income (loss)
   interest
(deficit)
   Total 
Balance as at December 31, 2009 (predecessor)   381,753,490   $1,035.0   $16.4   $(185.1)  $(52.7)  $(18.0)  $795.6 
Stock option compensation expense           0.2                0.2 
Net loss               (396.9)       (1.3)   (398.2)
Distributions to non-controlling interest                       (0.9)   (0.9)
Other comprehensive income, net of tax                   6.6    0.1    6.7 
Balance as at December 31, 2010 (predecessor)   381,753,490   $1,035.0   $16.6   $(582.0)  $(46.1)  $(20.1)  $403.4 
Common shares issued   146,960    0.2    (0.2)                
Stock option compensation expense           0.2                0.2 
Net loss               (974.0)       (2.6)   (976.6)
Distributions to non-controlling interest                       (1.0)   (1.0)
Other comprehensive loss, net of tax                   (43.3)       (43.3)
Balance as at December 31, 2011 (predecessor)   381,900,450   $1,035.2   $16.6   $(1,556.0)  $(89.4)  $(23.7)  $(617.3)
Stock option compensation expense           0.1                0.1 
Net earnings               618.4        31.9    650.3 
Distributions to non-controlling interest                       (0.3)   (0.3)
Other comprehensive loss, net of tax                   (24.7)       (24.7)
Common shares issued   14,400,000    144.9                    144.9 
Cancellation of Predecessor equity (deficiency)   (381,900,450)   (1,035.2)   (16.7)   937.6    114.1        (0.2)
Balance as at September 30, 2012 (successor)   14,400,000   $144.9   $   $   $   $7.9   $152.8 
Common shares issued   127,571                         
Net loss               (35.2)       (1.5)   (36.7)
Distributions to non-controlling interest                       (0.1)   (0.1)
Other comprehensive income, net of tax                   6.6        6.6 
Balance as at December 31, 2012 (successor)   14,527,571   $144.9   $   $(35.2)  $6.6   $6.3   $122.6 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions of Canadian dollars)

 

   Successor   Predecessor 
   Three months
ended
December 31
   Nine months
ended
September 30
   Years
ended
December 31
 
   2012   2012   2011   2010 
Cash flows provided (used) by:                    
Operations                    
Net earnings (loss)  $(36.7)  $650.3   $(976.6)  $(398.2)
Items not requiring (providing) cash                    
Depreciation and amortization   12.9    23.4    112.4    119.3 
Impairment and other closure costs (notes 7 and 9)   8.2    3.3    823.6    294.5 
Deferred income taxes (note 21)   0.1    (0.7)   (7.6)   (16.1)
Foreign exchange loss (gain) on long-term debt   3.2    (24.0)   9.7    (27.6)
Non-cash reorganization items   2.4    (707.4)        
Non-cash interest on compromised notes       48.4         
Employee future benefits, expense over (under) cash contributions   (3.4)   (8.4)   (8.0)   (2.4)
Decrease in other long-term obligations   (0.1)       (3.1)   (4.2)
Loss (gain) on disposal of property, plant and equipment   0.4    (6.7)   (0.1)   (7.2)
Other   0.2    2.6    (1.8)   10.3 
Changes in non-cash working capital                    
Accounts receivable   41.1    (22.9)   (14.3)   (19.1)
Inventories   11.6    8.7    (17.1)   19.3 
Prepaids and other   4.5    (0.5)   7.6    (2.4)
Accounts payable and accrued liabilities   7.7    (10.1)   3.8    (10.3)
Cash flows provided (used) by operations   52.1    (44.0)   (71.5)   (44.1)
Investing                    
Additions to property, plant and equipment   (10.4)   (12.2)   (19.7)   (11.2)
Proceeds from sale of property, plant and equipment   0.8    11.5    1.2    7.9 
Decrease (increase) in restricted cash   3.4    (6.4)        
Decrease (increase) in other assets       3.7    0.8    (1.2)
Cash flows used by investing activities   (6.2)   (3.4)   (17.7)   (4.5)
Financing                    
Increase (decrease) in revolving loan   (40.0)   16.0    48.0    (14.5)
Redemption of senior notes (note 18)           (25.8)    
Proceeds on issuance of senior secured notes (note 18)       33.1        98.4 
Note exchange costs (note 18)               (8.3)
Deferred financing costs (note 18)       (9.3)   (2.4)   (4.5)
DIP financing costs       (3.8)          
Settlement on purchase of senior notes (note 18)               (9.2)
Decrease in other long-term debt       (0.9)   (0.9)   (1.0)
Share issuance costs       (0.2)        
Cash flows provided (used) by financing activities   (40.0)   34.9    18.9    60.9 
Cash and cash equivalents, increase (decrease) in the period   5.9    (12.5)   (70.3)   12.3 
Cash and cash equivalents, beginning of period   12.6    25.1    95.4    83.1 
Cash and cash equivalents, end of period 1  $18.5   $12.6   $25.1   $95.4 
Supplemental disclosures:                    
Income taxes paid (recovered)  $   $(0.2)  $0.1   $0.4 
Net interest paid   11.0    11.7    72.6    72.7 
Common stock issued under stock option compensation plan           0.2     
Non-cash exchange of 8.625% senior notes               (327.1)
Non-cash issuance of 11.0% senior notes               287.2 
Non-cash difference in carrying value of senior notes on modification               39.9 
1 Cash and cash equivalents included in assets held for sale   1.9    0.4         

 

The accompanying notes are an integral part of the consolidated financial statements.

 

CATALYST PAPER 2012 ANNUAL REPORT 7

 

 
 

 

CATALYST PAPER CORPORATION

CONSOLIDATED BUSINESS SEGMENTS

(In millions of Canadian dollars)

 

   Three months ended December 31, 2012 (successor) 
   Specialty
printing papers
   Newsprint   Pulp   Corporate
adjustments
   Consolidated 
Sales to external customers  $171.8   $44.0   $44.7   $   $260.5 
Inter-segment sales           7.1    (7.1)    
Depreciation and amortization   11.2    1.4    0.3         12.9 
Operating earnings (loss)   1.2    2.4    (9.3)       (5.7)
Total assets   710.5    182.6    85.5    0.2    978.8 
Additions to property, plant and equipment   6.5    1.8    2.1        10.4 

 

   Nine months ended September 30, 2012 (predecessor) 
   Specialty
printing papers
   Newsprint   Pulp   Corporate
adjustments
   Consolidated 
Sales to external customers  $503.8   $134.1   $159.8   $   $797.7 
Inter-segment sales           22.5    (22.5)    
Depreciation and amortization   18.9    2.7    1.8        23.4 
Restructuring (note 24)   2.9    0.8    1.6        5.3 
Operating earnings (loss)   19.3    11.7    (6.2)       24.8 
Total assets   761.1    193.4    85.4    0.2    1,040.1 
Additions to property, plant and equipment   9.2    1.2    1.8        12.2 

 

   Year ended December 31, 2011 (predecessor) 
   Specialty
printing papers
   Newsprint   Pulp   Corporate
adjustments
   Consolidated 
Sales to external customers  $690.4   $141.3   $248.0   $   $1,079.7 
Inter-segment sales           39.3    (39.3)    
Depreciation and amortization   81.3    9.1    15.1        105.5 
Restructuring (note 24)   4.0    0.8    1.1        5.9 
Impairment and other closure costs (note 7)   507.2    71.1    83.5        661.8 
Operating loss   (565.1)   (69.2)   (70.2)       (704.5)
Total assets   432.0    216.5    75.8    13.3    737.6 
Additions to property, plant and equipment   9.2    6.1    4.4        19.7 

 

   Year ended December 31, 2010 (predecessor) 
   Specialty
printing papers
   Newsprint   Pulp   Corporate
adjustments
   Consolidated 
Sales to external customers  $674.0   $152.4   $225.0   $   $1,051.4 
Inter-segment sales           23.4    (23.4)    
Depreciation and amortization   78.8    16.6    14.3        109.7 
Restructuring (note 24)   8.2    16.1    1.0        25.3 
Impairment and other closure costs (note 7)   104.4    190.1            294.5 
Operating earnings (loss)   (149.7)   (224.3)   22.4        (351.6)
Total assets   1,046.0    450.6    185.1    14.5    1,696.2 
Additions to property, plant and equipment   9.1    1.8    0.3        11.2 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

8 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

CONSOLIDATED GEOGRAPHIC BUSINESS SEGMENTS

(In millions of Canadian dollars)

 

  Three months ended December 31, 2012 (successor)  
Sales by shipment destination:  Specialty
printing papers
   Newsprint   Pulp   Total 
Canada  $25.4   $12.9   $   $38.3 
United States   122.6    9.1        131.7 
Asia and Australasia   14.3    11.4    43.7    69.4 
Latin America   9.5    10.6         20.1 
Europe and other           1.0    1.0 
   $171.8   $44.0   $44.7   $260.5 

 

  Nine months ended September 30, 2012 (predecessor)  
Sales by shipment destination:  Specialty
printing papers
   Newsprint   Pulp   Total 
Canada  $78.4   $31.1   $   $109.5 
United States   356.6    27.5        384.1 
Asia and Australasia   38.2    38.1    158.2    234.5 
Latin America   30.2    37.4        67.6 
Europe and other   0.4        1.6    2.0 
   $503.8   $134.1   $159.8   $797.7 

 

  Year ended December 31, 2011 (predecessor)  
Sales by shipment destination:  Specialty
printing papers
   Newsprint   Pulp   Total 
Canada  $120.2   $36.4   $4.6   $161.2 
United States   484.7    26.9        511.6 
Asia and Australasia   38.7    34.8    243.3    316.8 
Latin America   45.1    43.2        88.3 
Europe and other   1.7        0.1    1.8 
   $690.4   $141.3   $248.0   $1,079.7 

 

  Year ended December 31, 2010 (predecessor)  
Sales by shipment destination:  Specialty
printing papers
   Newsprint   Pulp   Total 
Canada  $103.0   $35.1   $0.2   $138.3 
United States   489.4    31.3    0.9    521.6 
Asia and Australasia   30.6    34.9    222.1    287.6 
Latin America   48.2    51.1        99.3 
Europe and other   2.8        1.8    4.6 
   $674.0   $152.4   $225.0   $1,051.4 

 

   Successor   Predecessor 
   As at
December 31
   As at
September 30
   As at
December 31
 
   2012   2012   2011 
Property, plant and equipment by geographic location:               
Canada  $611.6   $614.1   $377.7 
United States           8.6 
   $611.6   $614.1   $386.3 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

CATALYST PAPER 2012 ANNUAL REPORT 9

 

 
 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 Nature of Operations and Going Concern 11
Note 2 Creditor Protection Proceedings 12
Note 3 Summary of Significant Accounting Policies 14
Note 4 Recently Implemented Accounting Standards 20
Note 5 Changes in Future Accounting Standards 21
Note 6 Creditor Protection Proceedings Related Disclosures 21
Note 7 Measurement Uncertainty – Impairment of Long-lived Assets 28
Note 8 Variable Interest Entities 31
Note 9 Assets Held for Sale and Discontinued Operations 32
Note 10 Restricted Cash 34
Note 11 Accounts Receivable 35
Note 12 Inventories 35
Note 13 Prepaids and Other 36
Note 14 Property, Plant and Equipment 36
Note 15 Goodwill 37
Note 16 Other Assets 37
Note 17 Accounts Payable and Accrued Liabilities 38
Note 18 Long-term Debt 39
Note 19 Employee Future Benefits 42
Note 20 Other Long-term Obligations 52
Note 21 Income Taxes 53
Note 22 Deferred Credits 56
Note 23 Accumulated Other Comprehensive Income (Loss) 57
Note 24 Restructuring 57
Note 25 Interest Expense, Net 58
Note 26 Other Income (Expense), Net 58
Note 27 Earnings Per Share 59
Note 28 Stock-based Compensation Plans 59
Note 29 Fair Value Measurement 61
Note 30 Financial Instruments 64
Note 31 Related Party Transactions 66
Note 32 Commitments 67
Note 33 Guarantees and Indemnities 67
Note 34 Contingent Liabilities 67
Note 35 Condensed Consolidating Financial Information 68

 

10 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

1.NATURE OF OPERATIONS AND GOING CONCERN

 

Catalyst Paper Corporation, together with its subsidiaries and partnerships (collectively, the “company”) is a significant specialty mechanical printing papers and newsprint producer in North America. The company operates in three business segments.

 

Specialty printing papers – Manufacture and sale of mechanical specialty printing papers
Newsprint – Manufacture and sale of newsprint
Pulp – Manufacture and sale of long-fibre Northern Bleached Softwood Kraft (“NBSK”) pulp.

 

The business segments of the company are strategic business units that offer different products. They are managed separately because each business requires different technology, capital expenditures, labour expertise and marketing strategies. Each segment is a significant component of the company’s sales and operating earnings.

 

The company owns and operates three manufacturing facilities located in the province of British Columbia (B.C.), Canada. On September 30, 2012 the company permanently shut down its recycle mill operations located in Snowflake, Arizona (note 9). Two other facilities, including a paper recycling facility, were permanently shut down during 2010. Inter-segment sales consist of pulp transfers at market prices. The primary market for the company’s paper products is North America. The primary markets for the company’s pulp products are Asia and Australasia.

 

Creditor protection proceedings

 

On January 31, 2012, Catalyst Paper Corporation and certain of its subsidiaries obtained an Initial Order from the Supreme Court of British Columbia (the Court) under the Companies’ Creditors Arrangement Act (CCAA). The company applied for recognition of the Initial Order under Chapter 15 of Title 11 of the US Bankruptcy Code. The company entered into a Debtor-In-Possession (DIP) Credit Agreement, pursuant to which a DIP Credit Facility of approximately $175 million was confirmed by the Court.

 

Emergence from Creditor Protection Proceedings

 

Catalyst Paper Corporation and all of its subsidiaries and partnership successfully emerged from creditor protection proceedings under CCAA and Chapter 15 of Title 11 of the US Bankruptcy Code on September 13, 2012 (emergence date). The company met all of the conditions to implement the second amended plan of arrangement (Plan) on the emergence date by securing exit financing consisting of a new asset-based loan facility (ABL Facility) and new floating rate senior secured notes (Floating Rate Notes). For additional information on the company’s emergence from creditor protection proceedings, see note 2, Creditor protection proceedings.

  

In accordance with FASB ASC 852, fresh start accounting was required upon the company’s emergence from the creditor protection proceedings because:

  

-The reorganization value of the assets of the Predecessor company (defined below) immediately prior to the approval of the Plan was less than the total of all post-petition liabilities and allowed claims, and

 

-The holders of the Predecessor company’s existing voting shares immediately prior to the approval of the Plan received less than 50% of the voting shares of the common stock of the Successor company (defined below).

 

 

CATALYST PAPER 2012 ANNUAL REPORT 11

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

FASB ASC 852 requires that fresh start accounting be applied on the latter of the date of approval of the plan of arrangement, or the date that all material conditions to implement the plan are met. The company’s application date for fresh start accounting was September 13, 2012, when exit financing was secured. However, the company elected to apply fresh start accounting effective September 30, 2012, to coincide with the timing of the third quarter close. The company evaluated events, transactions, and fluctuations in product prices, exchange rates and inflation rates between September 13, 2012, and September 30, 2012, and concluded that the use of an accounting convenience date of September 30, 2012 (convenience date) did not have a material impact on the company’s financial position, results of operations and cash flows. The application of fresh start accounting was therefore reflected in the company’s consolidated balance sheet as of September 30, 2012, and related fresh start accounting adjustments were included in the company’s consolidated statements of earnings (loss) for the nine months ended September 30, 2012.

 

The implementation of the Plan and the application of fresh start accounting materially changed the carrying amounts and classifications reported in the company’s financial statements, and resulted in the company effectively becoming a new entity for financial reporting purposes. Accordingly, the company’s consolidated financial statements for periods prior to September 30, 2012 are not comparable to consolidated financial statements prepared for periods subsequent to September 30, 2012. References to Successor or Successor company refer to the company on or after September 30, 2012, and references to Predecessor or Predecessor company refer to the company prior to September 30, 2012. Additionally, references to periods on or after September 30, 2012, refer to the Successor, and references to periods prior to September 30, 2012, refer to the Predecessor.

 

Going concern

 

The audited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The creditor protection proceedings raised substantial doubt about the company’s ability to continue as a going concern. During these proceedings, the company’s ability to continue as a going concern was dependent on obtaining creditor and Court approval of a plan of arrangement, successful implementation of the plan of arrangement that would improve profitability, reduce the company’s debt burden and improve liquidity, and securing exit financing to replace the debtor in possession financing available to the company during the creditor protection proceedings. Management believes that the implementation of the Plan and the company’s emergence from creditor protection proceedings have resolved the substantial doubt regarding the appropriateness of the going concern basis of accounting.

 

2.CREDITOR PROTECTION PROCEEDINGS

 

Reorganization process

 

The Canadian Court and U.S. Court issued a variety of orders throughout the restructuring process. These orders include, among other things, authorization to (a) make payments relating to certain employees’ pre-petition wages, salaries and benefit programs in the ordinary course of business; (b) ensure the continuation of existing cash management systems; (c) honour certain ongoing customer obligations; and (d) enter into a DIP Credit Agreement that effectively replaced the former ABL Facility.

 

The terms of the Initial Order named PricewaterhouseCoopers Inc. (PwC) as the court-appointed monitor (the Monitor), who assisted the company in formulating a restructuring plan.

 

Shortly after the commencement of the creditor protection proceedings, the company began notifying all known creditors regarding these filings. Pursuant to the Initial Order, and subject to certain exceptions, the continuation of any judicial or administrative proceedings or other actions against the company or its property to recover, collect or secure a pre-petition claim were automatically stayed. Most creditor actions to obtain possession of the company’s property, or to create or enforce any lien against the company’s property, or to collect pre-petition amounts owed or otherwise exercise rights or remedies with respect to a pre-petition claim were enjoined.

 

12 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

The company reached new labour agreements, effective from May 1, 2012 to April 30, 2017, with all six union locals at its Crofton, Port Alberni and Powell River mills. The new labour agreements were entered into with the Communications, Energy and Paperworkers Union of Canada (CEP) locals 1, 76, 592, 686 and 1132 and the Pulp, Paper and Woodworkers Union of Canada (PPWC) local 2. Specific terms of the new labour agreements include a 10% reduction in hourly wage rates, various adjustments to vacation, health benefits and work rules, maintaining hourly retiree health benefits, and providing for no wage inflation for the first three years and 2% increases in the fourth and fifth year that these agreements are in effect.

 

On March 9, 2012, the company entered into a Restructuring and Support Agreement (RSA) with certain holders of its 11% senior secured notes due 2016 (2016 Notes) and its 7.375% notes due 2014 (2014 Notes) that outlined a plan of arrangement under the CCAA. On May 15, 2012, the company announced that the original terms of the plan of arrangement, as disclosed in the interim consolidated financial statements for the three months ended March 31, 2012, had been amended.

 

On May 23, 2012, the company announced that it did not receive the necessary creditor approval for its amended plan of arrangement. Approval of not less than 66 2/3% of the principal amount of each creditor class voting on the plan was required. While 99.5% of the principal amount of the secured creditor class voted in favour of the plan, only 64% of the principal amount of the unsecured creditor class voted in favour. With the amended plan of arrangement not being approved, the company was required to commence a sales process in accordance with certain agreed sale and investor solicitation procedures (SISP).

 

On June 14, 2012, the company announced a second amended plan of arrangement after receiving consent from a requisite number of holders of 2016 Notes to move forward to a vote. Proposed changes under the Plan included the compromise of certain extended health benefits, modifications to the salaried pension plan and application for additional solvency deficit funding relief. On June 25, 2012 the company announced that it had received the necessary creditor approval for the Plan. Approval of more than 99% of secured and unsecured creditors was received. The company also received confirmation of regulatory approval by provincial order in council of the proposed modifications to the salaried pension plan and the application for additional funding relief. The Court sanctioned the Plan on June 28, 2012 and the US Court in Delaware confirmed the Plan under the Chapter 15 process in a confirmation hearing on July 27, 2012.

 

Emergence from creditor protection proceedings

 

The Plan became effective on September 12, 2012 and the restructuring under the Plan completed on September 13, 2012. Upon implementation of the Plan, the company was reorganized through the consummation of several transactions pursuant to which, among other things:

 

§The company’s operations were continued in substantially the same form.

 

§Holders of the Predecessor company’s 2016 Notes exchanged their US$390.4 million aggregate principal amount plus accrued and unpaid interest for:

 

-US$250.0 million aggregate principal amount of senior secured notes due in 2017 that bear interest, at the option of the company, at a rate of 11% per annum in cash or 13% per annum payable 7.5% cash and 5.5% payment-in-kind (PIK); and

 

-14.4 million new common shares, being approximately 100% of the company’s issued and outstanding common shares, subject to dilution for (i) the issuance of common shares to unsecured creditors who made an equity election pursuant to the terms of the Plan, and (ii) a new management incentive plan.

 

§Holders of the Predecessor company’s 2014 Notes exchanged their US$250.0 million aggregate principal plus accrued and unpaid interest for:

 

-their pro rata share (calculated by reference to the aggregate amount of all claims of unsecured creditors allowed under the Plan) of 50% of the net proceeds following the sale of Catalyst Paper’s interest in Powell River Energy Inc. and Powell River Energy Limited Partnership (PREI Proceeds Pool), or

 

-if an equity election was made, their pro rata share of 600,000 new common shares (the Unsecured Creditor Share Pool).

 

CATALYST PAPER 2012 ANNUAL REPORT 13

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

§General creditors exchanged their general unsecured claims for:

 

-their pro rata share of the PREI Proceeds Pool; or

 

-if an equity election was made, their pro rata share of the Unsecured Creditor Share Pool; or

 

-if a general unsecured claim was equal to or less than $10,000, or if a valid cash election was made and such creditor elected to reduce their claim to $10,000, cash in an amount equal to 50% of the creditor’s allowed claim (Cash Convenience Pool).

 

§All common shares and stock options of the Predecessor company outstanding prior to the reorganization were cancelled for no consideration and holders of such common shares did not receive any distribution under the Plan.

 

The company distributed $1.0 million to unsecured creditors in November 2012 as full and final settlement of claims comprising the Cash Convenience Pool. The company issued 127,571 common shares to unsecured creditors in December as full and final settlement of claims comprising the Unsecured Creditor Share Pool. The company agreed to the sale of its interest in PREI for proceeds of $33.0 million, expects to complete the sale in the first quarter of 2013, and will subsequently pay out the PREI Proceeds Pool to applicable unsecured creditors. The company is required under the Plan to offer its portion of the proceeds from the sale of PREI to the holders of Floating Rate Notes (see note 8, Variable interest entities).

 

Exit Financing

 

On September 13, 2012, the company entered into a new ABL Facility and issued new Floating Rate Notes. The $175.0 million ABL Facility, which was a pre-condition for the company to implement the Plan and exit from creditor protection, matures on the earlier of July 31, 2017, and 90 days prior to maturity of any significant debt. The Floating Rate Notes, which mature on September 13, 2016, were issued for US$35 million. The terms and covenants of the ABL Facility and the Floating Rate Notes are disclosed in note 18, Long-term debt.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The consolidated financial statements of the company are prepared in accordance with United States (U.S.) generally accepted accounting principles (U.S. GAAP).

 

(a)Basis of consolidation

 

The consolidated financial statements include the accounts of the company and, from their respective dates of acquisition of control or formation, its wholly-owned subsidiaries and partnerships. In addition, the consolidated financial statements include the accounts of the company’s joint venture, Powell River Energy Inc. (PREI), a variable interest entity. All inter-company transactions and amounts have been eliminated on consolidation.

 

(b)Variable interest entities

 

Variable interest entities (VIE) are entities in which equity investors do not have a controlling financial interest or the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties. The company consolidates the accounts of VIEs where it has been determined that the company is the primary beneficiary, defined as the party that has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and has an obligation to absorb losses and receive benefits of that VIE.

 

14 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

(c)Use of estimates

 

The consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the year. On an ongoing basis, management reviews its estimates, including those related to inventory obsolescence, estimated useful lives of assets, environmental and legal liabilities, impairment of long-lived assets, derivative financial instruments, pension and post-retirement benefits, bad debt and doubtful accounts, income taxes, restructuring costs, and commitment and contingencies, based on currently available information.

 

The enterprise value that was established as of the valuation date of September 30, 2012 incorporated numerous major assumptions including, but not limited to, the following:

 

§management’s best estimate of future operating performance as of the valuation date,

 

§internal forecasts and external forecasts based on published reports of future exchange rates and product prices,

 

§a discount rate of 15% based on the estimated blended rate of return required by debt and equity investors of the company,

 

§the corporate income tax rate of approximately 25% represents an appropriate rate to apply to future earnings of the company, based on current and projected federal and provincial tax rates,

 

§a capital cost allowance (CCA) rate of 20% represents an appropriate depreciation rate to apply to capital assets in future periods,

 

Actual amounts could differ from estimates.

 

(d)Revenue recognition

 

The company recognizes revenues upon shipment when persuasive evidence of an arrangement exists, prices are fixed or determinable, title of ownership has transferred to the customer and collection is reasonably assured. Sales are reported net of discounts, allowances and rebates.

 

(e)Shipping and handling costs

 

The company classifies shipping and handling costs to Cost of sales, excluding depreciation and amortization as incurred.

 

(f)Translation of foreign currencies

 

The majority of the company’s sales are denominated in foreign currencies, principally U.S. dollars (US$). Revenue and expense items denominated in foreign currencies are translated at exchange rates prevailing during the period. Monetary assets and liabilities denominated in foreign currencies are translated at the period-end exchange rates. Non-monetary assets and liabilities are translated at exchange rates in effect when the assets are acquired or the obligations are incurred. Foreign exchange gains and losses are reflected in net earnings (loss) for the period.

 

Up to September 30, 2012, the company had a foreign subsidiary that was considered to be self-contained and integrated within its foreign jurisdiction, and accordingly, used the U.S. dollar as its functional currency. Foreign exchange gains and losses arising from the translation of the foreign subsidiary’s accounts into Canadian dollars (CDN$) were reported as a component of other comprehensive income (loss), as discussed in note 23, Accumulated other comprehensive income (loss). Subsequent to the permanent closure of the Snowflake recycle mill operations on September 30, 2012, the company ceased to have a self-contained foreign operation and therefore no longer reports foreign exchange gains and losses as a component of other comprehensive income (loss).

 

(g)Derivative financial instruments

 

The company uses derivative financial instruments in the management of foreign currency and price risk associated with its revenues, energy costs and long-term debt. It also uses interest rate swaps to manage its net exposure to interest rate changes.  The company’s policy is to use derivatives for managing existing financial exposures and not for trading or speculative purposes. The company accounts for its derivatives at fair value at each balance sheet date.

 

CATALYST PAPER 2012 ANNUAL REPORT 15

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

In a cash flow hedge, the changes in fair value of derivative financial instruments are recorded in Other comprehensive loss. These amounts are reclassified in the consolidated statement of earnings (loss) in the periods in which results are affected by the cash flows of the hedged item. Any hedge ineffectiveness is recorded in the consolidated statement of earnings (loss) when incurred. In a fair value hedge, hedging instruments are carried at fair value, with changes in fair value recognized in the consolidated statement of earnings (loss).  The changes in fair value of the hedged item attributable to the hedged risk is also recorded in the consolidated statement of earnings (loss) by way of a corresponding adjustment of the carrying amount of the hedged items recognized on the balance sheet. In hedges of the foreign currency exposure of net investments in foreign subsidiaries that are self-contained and integrated within a particular country, gains and losses on translation are deferred in a separate component of shareholders’ equity to be recognized in net earnings (loss) upon sale or upon complete or substantially complete liquidation of the net investment in the foreign subsidiary. Cash flows from derivative financial instruments are classified, in general, to “Operations” on the consolidated statement of cash flows consistent with the hedged transaction.  Cash flows resulting from termination of interest rate swaps are classified as “Investing activities.”

 

Effective April 1, 2010, the company no longer designates its U.S. dollar revenue risk management instruments as cash flow hedges for accounting purposes. The effective portion of gains or losses accumulated as at March 31, 2010 on its previously designated U.S. dollar revenue risk management instruments were recorded in the same income statement line items as the hedged item in Sales. Prior to April 1, 2010, the company designated the hedge relationship and formally documented, at its inception, the particular risk management objective and strategy, the specific asset, liability or cash flow being hedged, as well as how effectiveness was assessed.  Risk management strategies and relationships were assessed on an ongoing basis to ensure each derivative instrument was effective in accomplishing the objective of offsetting either changes in the fair value or cash flow attributable to the exposure being hedged both at inception and over the term of the hedging relationship.

 

Effective October 1, 2011, the company no longer designates the foreign currency revaluation of a portion of its long-term debt as a hedge against the foreign currency exposure arising on the net investment in its foreign subsidiary. As described in note 7, Measurement uncertainty – impairment of long-lived assets, certain assets of the foreign subsidiary were impaired on September 30, 2011. Subsequent to the recognition of this impairment, the revaluation of the company’s foreign currency denominated debt was no longer an effective hedge against the foreign exchange gains and losses that arose on the net investment in the company’s foreign subsidiary. Subsequent to the permanent closure of the Snowflake recycle mill operations on September 30, 2012 the company ceased to have a self-contained foreign operation.

 

(h)Cash and cash equivalents

 

Cash and cash equivalents include cash and short-term investments with original maturities of less than three months when acquired and are presented at fair value.

 

(i)Restricted cash

 

Restricted cash is segregated and presented separately in the balance sheet, classified as current or non-current based on the facts pertaining to the restricted cash, and is excluded from cash and cash equivalents in the statement of cash flows.

 

16 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

(j)Inventories

 

Specialty printing papers, newsprint and pulp inventories are valued at the lower of three-month moving average cost or market. Wood chips, pulp logs and other raw materials are valued at the lower of cost or market. For raw materials to be used in the production of finished goods, market is determined on an as-converted-to-finished-goods basis. Work-in-progress and operating and maintenance supplies and spare parts inventories are valued at cost. Cost is defined as all costs that relate to bringing the inventory to its present condition and location under normal operating conditions and includes manufacturing costs, such as raw materials, labour and production overhead, and depreciation and amortization costs. In addition, cost includes freight costs to move inventory offsite.

 

(k)Repairs and maintenance costs

 

Repairs and maintenance, including costs associated with planned major maintenance, are charged to Cost of sales, excluding depreciation and amortization as incurred.

 

(l)Property, plant and equipment

 

Property, plant and equipment are stated at cost, less accumulated depreciation and amortization, including asset impairment charges. Interest costs for capital projects are capitalized. Buildings, machinery and equipment are generally amortized on a straight-line basis at rates that reflect estimates of the economic lives of the assets. The rates for major classes of assets based on the estimated remaining economic lives are:

 

Buildings 2.5% − 5.0%
Paper machinery and equipment 5.0% – 10.0%
Pulp machinery and equipment 5.0% – 10.0%

 

Effective December 31, 2011, the remaining useful lives of the company’s pulp machinery were revised from approximately 7 years to 11 years. The company concluded that, based on the physical condition of these assets, 11 years more fairly reflected the remaining useful lives of these assets and adopted these change in estimate prospectively.

 

No depreciation is charged on capital projects during the period of construction. Start-up costs incurred in achieving normal operating capacity on major capital projects are expensed as incurred.

 

Leasehold improvements are normally amortized over the lesser of their expected average service life and the term of the lease.

 

When property, plant and equipment are sold by the company, the historical cost less accumulated depreciation and amortization is netted against the sale proceeds and the difference is included in Other income (expense), net.

 

(m)Assets Held For Sale and Discontinued Operations

 

Assets and liabilities that meet the held-for-sale criteria are reported separately from continuing operations in the consolidated balance sheet. Assets held for sale and liabilities associated with assets held for sale are reported separately under current assets and current liabilities, and are not offset and reported as a single amount in the consolidated balance sheet. Assets and liabilities are classified prospectively in the consolidated balance sheet as held for sale. 

 

The results of discontinued operations, net of tax, are presented separately from the results of continuing operations in the consolidated statements of earnings (loss). Per share information and changes to other comprehensive income (loss) related to discontinued operations are presented separately from continuing operations. Cash flows from discontinued operations are not presented separately from cash flows from continuing operations in the consolidated statements of cash flows. All comparative periods are restated in the period that a component is classified as a discontinued operation.

 

CATALYST PAPER 2012 ANNUAL REPORT 17

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

(n)Goodwill

 

Goodwill is measured at the amount that the company’s enterprise value exceeded the fair value of its identified assets and liabilities on the convenience date of September 30, 2012, that fresh start accounting was applied.

 

(o)Government grants

 

Government grants are recognized at fair value when there is reasonable assurance that the company will comply with the conditions attached to them and that the grants will be received. Government grants related to additions or betterments to property, plant and equipment are recognized as credits against the carrying values of the related assets, and subsequently recognized in net earnings (loss) over the useful lives of the related assets as reductions to the resulting depreciation expense.

 

Government grants were awarded to the company by the Canadian Forest Service (CFS) to invest in specified capital upgrades to property, plant and equipment. These government grants, called Green Transformation Credits, were awarded in accordance with CFS’s Pulp and Paper Green Transformation Program.

 

(p)Impairment of long-lived assets

 

Long-lived assets are tested for recoverability when events or changes in circumstances indicate their carrying value may not be recoverable. A long-lived asset is potentially not recoverable when its carrying value is greater than the sum of the undiscounted cash flows expected to result from its use and eventual disposition. The impairment loss, if any, is measured as the amount by which the long-lived asset’s carrying amount exceeds its fair value.

 

Goodwill will not be amortized in subsequent periods, but will be tested for impairment using a two-step impairment test at the reporting unit level. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. A company may first assess certain prescribed qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test.

 

(q)Environmental costs

 

Environmental expenditures are expensed or capitalized depending upon their future economic benefit. Expenditures that prevent future environmental contamination are capitalized as part of Property, plant and equipment, and depreciation and amortization is subsequently charged to earnings over the estimated future benefit period of the assets. Expenditures that relate to an existing condition caused by past operations are expensed. Liabilities are recorded on a discounted basis when rehabilitation efforts are likely to occur and the costs can be reasonably estimated.

 

(r)Asset retirement obligations

 

Asset retirement obligations are recognized at fair value in the period in which the company incurs a legal obligation associated with the retirement of an asset. The associated costs are capitalized as part of the carrying value of the related asset and amortized over its remaining useful life. The liability is accreted using a credit-adjusted risk-free interest rate.

 

The company’s obligations for the proper removal and disposal of asbestos products in its mills meet the definition of a conditional asset retirement obligation. That is, the company is subject to regulations that are in place to ensure that asbestos fibres do not become friable, or loose. The regulations require that friable asbestos be repaired or removed in accordance with the regulations.

 

The company’s asbestos can generally be found on steam and condensate piping systems throughout its facilities, as well as in transite cladding on buildings and in building insulation. As a result of the longevity of the company’s mills, due in part to the company’s maintenance procedures, and the fact that the company does not have plans for major changes that would require the removal of asbestos, the timing of the removal of asbestos in the company’s mills is indeterminate. As a result, the company is currently unable to estimate the fair value of its asbestos removal and disposal obligation.

 

18 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

The company’s obligations to cover (cap) the surface areas of the landfills that are in operation at its mill sites meet the definition of an asset retirement obligation. Capping will prevent future environmental contamination when the landfills are no longer in active use. The company presently has active landfills at its Crofton, Powell River and Elk Falls mill sites.

 

(s)Deferred financing costs

 

Deferred costs related to the company’s long-term debt are included in Other assets and amortized over the legal life of the related liability. Financing costs associated with modifications of long-term debt are expensed as incurred. Financing costs associated with modifications to line-of-credit or revolving debt arrangements are deferred and amortized if the borrowing capacity of the new arrangement is greater than or equal to the borrowing capacity of the old arrangement and if the parties to the new arrangement are the same as the parties to the old arrangement. Borrowing capacity is defined as the product of the remaining term of the arrangement and the maximum available credit.

 

(t)Stock-based compensation and other stock-based payments

 

Stock options and restricted share units granted to the company’s key officers, directors and employees are accounted for using the fair value-based method. Under this method, compensation cost is measured at fair value at the date of grant, and is expensed over the award’s vesting period. Any consideration paid by plan participants on the exercise of share options or the purchase of shares is credited to Common stock together with any related stock-based compensation expense. Performance and time based share-based payments are amortized over their vesting periods when it is probable that the performance conditions will be satisfied.

 

Deferred share units are accounted for using the quoted market value at each reporting period until settlement, and are amortized over their vesting periods.

 

(u)Income taxes

 

Income taxes are accounted for using the asset and liability method. Deferred income tax assets and liabilities are based on temporary differences (differences between the accounting basis and the tax basis of the assets and liabilities) and non-capital loss carry-forwards and are measured using the enacted tax rates and laws expected to apply when these differences reverse. Future tax benefits, including non-capital loss carry-forwards, are recognized to the extent that realization of such benefits is considered more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that enactment occurs.

 

(v)Deferred credits

 

Deferred credits represent the excess of amounts assigned to deferred income tax assets for tax losses acquired in other than business combinations over the consideration paid. Deferred credits are amortized to Income tax recovery in the consolidated statement of earnings (loss) during the period that the acquired tax asset is utilized.

 

(w)Employee future benefits

 

The company maintains pension benefit plans for all salaried employees, which include defined benefit and defined contribution segments. The company also sponsors other post-retirement benefit plans, covering health and dental benefits. The company recognizes assets or liabilities for the respective overfunded or underfunded statuses of its defined benefit pension plans and other post-retirement benefit plans on its consolidated balance sheet. Changes in the funding statuses that have not been recognized in the company’s net periodic benefit costs are reflected in Accumulated other comprehensive income (loss) in the company’s consolidated balance sheet. Net periodic benefit costs are recognized as employees render the services necessary to earn the pension and other post-retirement benefits.

 

CATALYST PAPER 2012 ANNUAL REPORT 19

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

The estimated cost for pensions and other employee future benefits provided to employees by the company is accrued using actuarial techniques and assumptions during the employees’ active years of service. The net periodic benefit cost includes:

 

-the cost of benefits provided in exchange for employees’ services rendered during the year;

 

-the interest cost of benefit obligations;

 

-the expected long-term return on plan assets based on the fair value for all asset classes;

 

-gains or losses on settlements or curtailments;

 

-the straight-line amortization of prior service costs and plan amendments included in accumulated other comprehensive income (AOCI) over the expected average remaining service lifetime (EARSL) of employees who are active as of the date such costs are first recognized, unless all, or almost all, of the employees are no longer active, in which case such costs are amortized over the average remaining life expectancy of the former employees; and

 

-the straight-line amortization of cumulative unrecognized net actuarial gains and losses in excess of 10% of the greater of the accrued benefit obligation and the fair value of plan assets at the beginning of the year over the EARSL of the active employees who are active as of the date such amounts are recognized, unless all, or almost all, of the employees are no longer active, in which case such costs are amortized over the average life expectancy of the former employees.

 

The defined benefit plan obligations are determined in accordance with the projected benefit method, prorated on services.

 

Amounts paid to the company’s defined contribution plans for salaried employees and to multi-employer industry-wide pension plans are expensed as incurred.

 

(x)Earnings (loss) per share

 

Basic earnings (loss) per share is computed by dividing net earnings (loss) attributable to the company for the period by the weighted average number of company common shares outstanding during the reporting period. Diluted earnings (loss) per share is computed using the treasury stock method. When the effect of options and other securities convertible into common shares is anti-dilutive, including when the company has incurred a loss for the period, basic and diluted loss per share are the same.

 

(y)Comparative figures

 

Comparative figures disclosed in the consolidated financial statements have been reclassified to conform to the presentation adopted for the current year.

 

4.RECENTLY IMPLEMENTED ACCOUNTING STANDARDS

 

FASB ASC 852, Reorganizations, was adopted for the duration of the CCAA proceedings. In accordance with this standard, transactions and events directly associated with the reorganization were distinguished and segregated from the ongoing operations of the business. Pre-petition obligations that were impaired under the reorganization process pursuant to the CCAA proceedings were classified as Liabilities subject to compromise in the balance sheet at the amounts expected to be allowed as claims by the Court. Professional fees, DIP-related financing costs, charges related to indefinite idlings and permanent closures and other provisions for losses directly associated with or resulting from the reorganization were recorded in Reorganization items, net in the consolidated statement of operations.

 

In accordance with FASB ASC 852, Reorganizations, fresh start accounting was applied as of the convenience date of September 30, 2012. See note 6, Creditor protection proceedings related disclosures, for a discussion of fresh start accounting.

 

20 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

5.CHANGES IN FUTURE ACCOUNTING STANDARDS

 

There were no new pronouncements issued by the FASB that may materially impact the company’s consolidated financial statements for future periods.

 

6.CredItOr Protection Proceedings RelateD Disclosures

 

Fresh start accounting

 

As discussed in note 3, Summary of significant accounting policies, the company applied fresh start accounting as of September 30, 2012, pursuant to which the reorganization value derived from the enterprise value established for the company was assigned to the company’s assets and liabilities, which required recording assets and liabilities at fair value in conformity with the procedures specified in ASC 805, Business Combinations. Deferred income taxes and pension and other post-employment benefits (OPEB) projected benefit obligations are excluded from this requirement. In accordance with fresh start accounting, the Predecessor company’s common shares, additional paid-in-capital, deficit and accumulated other comprehensive loss were eliminated. Accumulated depreciation on property, plant and equipment was eliminated and estimated remaining useful lives were updated.

 

Enterprise valuation

 

We engaged an independent financial advisor to assist us in the determination of the enterprise value of the Successor company. The enterprise value was estimated using three valuation methods: (i) discounted cash flow analysis (DCF), (ii) comparable company analysis, and (iii) precedent transactions analysis. The enterprise value was determined primarily based on the DCF analysis.

 

The DCF analysis is a forward-looking enterprise valuation methodology that estimates the value of an asset or business by calculating the present value of expected future cash flows to be generated by that asset or business. The company’s discount rate, defined as the blended rate of return required by debt and equity investors of the Successor company, was estimated to be 15%. A one percent change in the discount rate has an impact of approximately $40.0 million on the equity value of the company. Expected future cash flows were based on unlevered after-tax free cash flows, a five-year projection period, and an estimated value beyond the projection period known as a terminal value. Cash flow projections incorporated various assumptions, including future product sales prices and foreign exchange assumptions based on independent, published market forecasts, future cost trends based on the company’s operating history and realization of the cost reductions negotiated while in creditor protection. The enterprise value of the company calculated using the DCF analysis was $392.9 million.

 

The comparable company analysis estimates the value of the company based on a relative comparison with other publicly traded companies with similar operating and financial characteristics. Under this valuation methodology, the enterprise values of these publicly traded companies, calculated as the aggregate market value of their publicly traded equity securities plus the aggregate amount of net debt outstanding, are expressed as multiples of various measures of the respective company’s operating earnings such as earnings before interest, taxes, depreciation and amortization (EBITDA). These multiples are then applied to the company’s actual and projected operating results, after adjusting for differences in, among other things, product offerings, markets, size, risk profile, profitability, leverage and operating margins. The company’s implied multiple as of September 30, 2012 was estimated to be 4.9 X 2013 projected EBITDA.

 

The precedent transactions analysis estimates the value of the company based on a relative comparison with companies that were recent targets of merger and acquisition transactions. Under this valuation methodology, the purchase prices paid for these companies are expressed as multiples of various measures of the respective company’s operating earnings such as EBITDA. These multiples are then applied to the company’s actual and projected operating results, after adjusting for unique value considerations incorporated in purchase prices, as well as differences in, among other things, product offerings, markets, size, risk profile, profitability, leverage and operating margins. No recent precedent transactions were identified that were comparable on a relative basis to the company and, therefore, an implied multiple could not be estimated for the company in accordance with this valuation method.

 

CATALYST PAPER 2012 ANNUAL REPORT 21

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

 

In addition, certain of the company’s non-operating assets were valued separately as follows: (i) tax attributes were valued based on a DCF analysis of the projected tax savings that will arise from the use of the company’s available post-emergence attributes, and (ii) assets marketed to be sold prior to emergence from creditor protection were valued based on the present value of estimated gross sales proceeds minus estimated sales costs. Income taxes in the DCF analysis were estimated based on the projected statutory tax rates in Canada and the United States during the forecasting period of 2012 to 2017.

 

Allocation of reorganization value to assets and liabilities

 

The reorganization value derived from the company’s enterprise value was assigned to assets and liabilities in accordance with the acquisition method of accounting for business combinations, which requires recording assets and liabilities other than deferred income taxes and pension and OPEB projected benefit obligations at fair value. The amount of deferred income taxes for the Successor company was determined in accordance with FASB ASC 740. See note 21, Income taxes, for additional information. The amount of pension and OPEB projected benefit obligations was determined in accordance with FASB ASC 715, which required that the actuarial present value of the company’s defined benefit pension and post-retirement benefit plan assets and benefit obligations be determined based on certain assumptions (see note 19, Employee future benefits).

 

Fair value estimates were based on the following approaches:

 

§Inventories: Fair value of finished goods inventories was based on estimated selling prices less selling costs, shipping costs and profit allowance. The fair values of raw materials and work in process inventories were estimated to approximate their carrying values. The fair value of mill stores and other supplies inventories was based on replacement cost for high-turnover items and on replacement cost less economic obsolescence for low-turnover items.

 

§Fixed assets: Fair value of construction in progress was estimated to approximate carrying value. The fair value of land was based on the most recent property tax assessments. The fair value of other fixed assets was based on the cost valuation method and the income valuation method. The cost valuation method estimates fair value based on the estimated replacement cost of an asset, adjusted for various factors including physical deterioration, technological obsolescence, economic life, and significant maintenance or betterment projects expected in the foreseeable future. The income valuation method estimates fair value based on a DCF analysis, which incorporates various assumptions including future product sales prices and foreign exchange assumptions based on independent, published market forecasts, future cost trends based on the company’s operating history, and realization of the cost reductions negotiated while in creditor protection.

 

§Assets and liabilities held for sale: The fair value of assets held for sale and liabilities associated with assets held for sale were estimated based on the present value of expected sales price less cost to sell.

 

§All other assets and liabilities were recorded at the Predecessor company’s carrying values, which approximate fair value, after adjustments resulting from the implementation of the Plan.

 

§Goodwill: Calculated as the amount by which the enterprise value of the Successor company exceeded the fair value of identified assets and liabilities.

 

Reorganized consolidated balance sheet

 

The effects of the implementation of the Plan and the application of fresh start accounting on the company’s consolidated balance sheet as of September 30, 2012, are presented in the reorganized consolidated balance sheet below.

 

The adjustments set forth in the column labeled Plan of arrangement adjustments reflects the impact of implementing the Plan including, among other things, the discharge and settlement of liabilities subject to compromise based on claims allowed by the Courts, the issuance of Successor company common stock to holders of allowed claims in satisfaction of such claims, and the incurrence of new indebtedness related to secured notes issued to holders of the Predecessor company’s secured pre-petition debt and related to the company’s exit financing.

 

22 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

The adjustments set forth in the column labeled Fresh start accounting adjustments reflect, among other things, adjustments to the carrying values of the company’s assets and liabilities to reflect their fair values, and the elimination of common stock, additional paid-in-capital, deficit and accumulated other comprehensive loss as a result of the application of fresh start accounting.

 

   As at September 30, 2012 
       Plan of   Fresh Start     
       Arrangement   Accounting     
(In millions of Canadian dollars)   Predecessor   Adjustments   Adjustments   Successor 
Assets                    
Current assets                    
Cash and cash equivalents  $22.7   $(10.5)1  $   $12.2 
Restricted cash   9.8    (6.1)1       3.7 
Accounts receivable   144.8    (4.0)4       140.8 
Inventories   131.5            131.5 
Prepaids and other   20.1        (7.1)7   13.0 
Assets held for sale   44.2        12.07   56.2 
    373.1    (20.6)   4.9    357.4 
Property, plant and equipment   356.7        257.47   614.1 
Goodwill           56.77   56.7 
Deferred income tax assets   2.5        (2.5)7    
Other assets   2.6    9.31       11.9 
   $734.9   $(11.3)  $316.5   $1,040.1 
Liabilities                    
Liabilities not subject to compromise                    
Current liabilities                    
Accounts payable and accrued liabilities  $85.3   $12.22  $   $97.5 
Current portion of long-term debt   6.7            6.7 
Liabilities associated with assets held for sale   16.6    0.52   (2.3)7   14.8 
    108.6    12.7    (2.3)   119.0 
Long-term debt   215.4    243.53       458.9 
Employee future benefits   300.4            300.4 
Other long-term obligations   9.0            9.0 
Deferred credits   9.6         (9.6)7    
Total liabilities not subject to compromise   643.0    256.2    (11.9)   887.3 
Liabilities subject to compromise   875.5    (875.5)4        
Total liabilities   1,518.5    (619.3)   (11.9)   887.3 
Deficiency                    
Shareholders’ deficiency                    
Predecessor common stock    1,035.2        (1,035.2)8    
Successor common stock       144.95       144.9 
Additional paid-in capital   16.7        (16.7)8    
Deficit   (1,688.1)   463.16   1,225.08    
Accumulated other comprehensive loss   (114.1)       114.18    
    (750.3)   608.0    287.2    144.9 
Non-controlling interest (deficit)   (33.3)       41.2    7.9 
    (783.6)   608.0    328.47   152.8 
   $734.9   $(11.3)  $316.5   $1,040.1 

 

CATALYST PAPER 2012 ANNUAL REPORT 23

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

Plan of Arrangement Adjustments

 

1Implementation of the Plan resulted in the following cash impact:

 

(In millions of Canadian dollars)    
Proceeds from implementation of the Plan:     
Release of restricted cash  $6.1 
Borrowing under the ABL Facility   64.0 
Issuance of Floating Rate Notes   33.4 
Payments related to implementation of the Plan     
Repayment of DIP Credit Facility, including exit fee of $6.9 million   (104.5)
Payment of issuance costs related to new debt   (9.3)
Other   (0.2)
   $(10.5)

 

2Reflects the estimated Cash Convenience Pool and PREI Proceeds Pool (see note 2, Creditor protection proceedings) that was payable to the company’s general creditors and the holders of the Predecessor company’s 2014 Notes as of September 30, 2012 as full settlement of their allowed claims under the creditor protection proceedings. The company paid out the Cash Convenience Pool of $1.0 million in November 2012. On February 13, 2013, the company agreed to the sale of its interest in PREI, subject to Court approval, for proceeds of $33.0 million compared to estimated proceeds as of September 30, 2012 of $30.0 million (see note 8, Variable interest entities).

 

3Reflects (i) the issuance of US$250.0 million senior secured notes due in 2017 to the holders of the Predecessor company’s 2016 Notes as partial settlement of their allowed claims under the creditor protection proceedings, (ii) the amount withdrawn on the company’s ABL Facility, (iii) the issuance of US$35.0 million Floating Rate Notes, and (iv) repayment of the withdrawn amount on the DIP Credit Facility that was cancelled on exit from the creditor protection proceedings (see note 2, Creditor protection proceedings).

 

4The settlement or extinguishment of all remaining liabilities subject to compromise as of September 30, 2012 under the Plan is summarized below:

 

24 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

(In millions of Canadian dollars)    
Unsecured pre-petition debt  $243.9 
Secured pre-petition debt   380.9 
Accrued interest on unsecured pre-petition debt   18.9 
Accrued interest on secured pre-petition debt   59.5 
Accounts payable and accrued liabilities, excluding accrued interest   33.8 
Pension and other post-retirement projected benefit obligations   24.8 
Labour union claim *   91.8 
Rejected leases and contracts   21.9 
Total liabilities subject to compromise of the Predecessor company   875.5 
Issuance of Successor company common stock **   (144.9)
Issuance of new senior secured notes   (243.8)
Estimated Cash Convenience Pool payable   (0.9)
Estimated PREI Proceeds Pool payable ***   (11.7)
Elimination of sales tax receivable related to compromised accounts payable   (4.0)
Gain on extinguishment of liabilities subject to compromise ****  $470.2 

 

*The labour unions at the company’s Canadian mills submitted unsecured claims with respect to the June 25, 2012 creditor vote on the Plan. These claims were based on the estimated present value of the five-year wage and benefit reductions agreed to in the new labour agreements that went into effect on May 1, 2012. These claims, which were under dispute at the time of the approval of the Plan, were subsequently allowed by the Court.
**On September 30, 2012, the company had 14.4 million common shares outstanding. These common shares were issued to its secured bondholders. On September 30, 2012, the company held a total of 0.6 million common shares in reserve for the benefit of holders of allowed unsecured creditor claims comprising the Unsecured Creditor Share Pool. In December 2012, 127,571 additional common shares were issued as full and final settlement of the Unsecured Creditor Share Pool, increasing the total common shares outstanding as of December 31, 2012 to 14,527,571.
***The company entered into an agreement to sell PREI on February 13, 2013 for $33.0 million and therefore adjusted the estimated PREI Proceeds Pool payable as of December 31, 2012 to $12.9 million.
****Includes gain related to discontinued operations of $4.8 million. See note 9, Assets held for sale and discontinued operations.

 

5Reflects the issuance of common stock of the Successor company, which had an equity value of $144.9 million as of September 30, 2012 which was determined as follows:

 

(In millions of Canadian dollars)    
Enterprise value  $392.9 
Plus:     
Net redundant assets   117.3 
Less:     
Interest bearing debt   (351.8)
Other adjustments   (13.5)
Equity value of the Successor company  $144.9 

 

6Reflects the following items, all of which were included in Reorganization items, net in our consolidated statements of earnings (loss) for the nine months ended September 30, 2012:

 

(In millions of Canadian dollars)    
Gain on extinguishment of liabilities subject to compromise  $470.2 
Professional fees *   (6.9)
Other   (0.2)
Gain due to plan of arrangement adjustments **  $463.1 

 

*Represents professional fees that were contractually due to certain professionals as “success” fees upon the company’s emergence from the creditor protection proceedings and were recorded as part of the effects of implementing the plan of arrangement.

**Includes gain related to discontinued operations of $7.1 million. See note 9, Assets held for sale and discontinued operations.

 

CATALYST PAPER 2012 ANNUAL REPORT 25

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

Fresh Start Accounting Adjustments

 

7Reflects the following adjustments to the carrying value of asset and liabilities to reflect their estimated values as of September 30, 2012 based on the respective valuation methods discussed previously:

  

(In millions of Canadian dollars)    
Prepaids and other  $(7.1)
Property, plant and equipment   257.4 
Assets held for sale   12.0 
Goodwill   56.7 
Deferred income tax assets   (2.5)
Liabilities associated with assets held for sale   2.3 
Deferred credits   9.6 
Gain due to fresh start accounting adjustments  $328.4 

 

The following table summarizes the reconciliation of the enterprise equity value to the reorganization value, and the allocation of the reorganization value to the assets and liabilities of the Successor company based on their estimated fair values as of September 30, 2012.

 

(In millions of Canadian dollars)    
Enterprise value of the Successor company, including net redundant assets and other adjustments  $496.7 
Adjusted for:     
Non-controlling deficit   7.9 
Non-interest bearing liabilities   535.5 
Reorganization value to be allocated to assets   1,040.1 
Less amounts allocated to the value of:     
Total current assets   (357.4)
Property, plant and equipment   (614.1)
Other assets   (11.9)
Reorganization value not allocated (goodwill)  $56.7 

 

8The net adjustments to common stock, additional paid-in-capital, deficit, and accumulated other comprehensive loss included the adjustments required to state assets and liabilities of the Successor company at fair value, which resulted in a gain of $328.4 million included in Reorganization items, net ($328.3 million) and Loss from discontinued operations net of tax ($0.1 million) in the company’s consolidated statements of earnings (loss) for the nine months ended September 30, 2012, and the elimination of the Predecessor company’s equity accounts pursuant to fresh start accounting.

 

Reorganization Items, Net

 

Expenses (including professional fees), realized gains and losses, and provisions for losses resulting from reorganization activities are reported separately from ongoing operations of the business in the consolidated statement of earnings (loss) as Reorganization items, net. Interest expense isn’t a reorganization item.

 

26 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

The components of reorganization items, net for the three months ended December 31, 2012 and the nine months ended September 30, 2012, were as follows:

 

Reorganization items, net  Three months
ended
December 31, 2012
   Nine months
ended
September 30, 2012
 
Professional fees ¹  $1.8   $24.7 
Gain due to plan of arrangement adjustments ²   1.4    (456.0)
Gain due to fresh start accounting adjustments ³       (328.3)
DIP financing costs 4       3.8 
Acceleration of ABL financing costs 5       3.3 
Provision for repudiated lease contract 6       7.0 
Write-off of debt discount, modification and
issuance costs 7
       (11.0)
Adjustment to pre-petition accounts payable 8       (4.8)
Adjustment to other post-employment benefits       2.4 
Provision for labour union claims 9       91.8 
Other       0.2 
Reorganization items, net from continuing operations   3.2    (666.9)
Gain due to plan of arrangement adjustments ²   1.0    (7.1)
Gain due to fresh start accounting adjustments ³       (0.1)
Adjustment to pre-petition accounts payable       (1.9)
Provision for repudiated coal contract 6       4.3 
Reorganization items, net from discontinued operations   1.0    (4.8)
Total  $4.2   $(671.7)

 

1Professional fees directly related to the creditor protection proceedings, ongoing monitoring and establishment of a reorganization plan, including legal, consulting and other professional fees.

 

2See discussion under Plan of arrangement adjustments above.

 

3See discussion under Fresh start accounting adjustments above.

 

4DIP financing costs incurred in connection with entering into the DIP Credit Agreement, including commitment fees.

 

5Pursuant to the creditor protection proceedings, the company’s former ABL Facility was replaced by the DIP Credit Facility which resulted in the acceleration of the remaining deferred unamortized financing costs on the ABL Facility to the consolidated statements of earnings (loss).

 

6The company repudiated on a lease contract at its paper recycling operation which was closed in 2010, resulting in a $7.0 million adjustment to the allowed claims amount. The company repudiated on a coal contract at its Snowflake mill, discontinued on September 30, 2012, which resulted in adjustments for allowed claims of $4.3 million.

 

7The company’s secured and unsecured pre-petition debt balances were adjusted to the allowed claims amounts, defined as the outstanding principal plus accrued and unpaid interest, which resulted in the write-off of the unamortized discount, modification and debt issue costs on the 2014 Notes and 2016 Notes.

 

8The company’s pre-petition accounts payable were adjusted to the allowed claims amount.

 

9The labour unions at the company’s Canadian mills submitted unsecured claims with respect to the June 25, 2012 creditor vote on the Plan. These claims were based on the estimated present value of the five-year wage and benefit reductions agreed to in the new labour agreements that went into effect on May 1, 2012. These claims, which were under dispute at the time of the approval of the Plan, were subsequently allowed by the Court, resulting in a provision for $91.8 million.

 

CATALYST PAPER 2012 ANNUAL REPORT 27

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

Liabilities Subject to Compromise

 

As of December 31, 2012 and September 30, 2012, the company had no liabilities subject to compromise due to its emergence from creditor protection proceedings on September 13, 2012.

 

7.MEASUREMENT UNCERTAINTY – IMPAIRMENT OF LONG-LIVED ASSETS

 

The company reviews its long-lived assets, primarily plant and equipment, for impairment when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. The company tests for impairment using a two-step methodology as follows:

 

(i)determine whether the projected undiscounted future cash flows from operations exceed the net carrying amount of the assets as of the assessment date; and

  

(ii)if assets are determined to be impaired in step (i), then such impaired assets are written down to their fair value, determined principally by using discounted future cash flows expected from their use and eventual disposition.

 

Estimates of future cash flows and fair value require judgments, assumptions and estimates and may change over time. Due to the variables associated with judgments and assumptions used in these tests, the precision and accuracy of estimates of impairment charges are subject to significant uncertainties and may change significantly as additional information becomes known. The carrying value of long-lived assets represented approximately 68% of total assets as at December 31, 2012. If future developments were to differ adversely from management’s best estimate of key assumptions and associated cash flows, the company could potentially experience future material impairment charges.

 

2012

 

The company did not identify any impairment indicators related to its continuing operations subsequent to establishing an enterprise value and applying fresh start accounting as of September 30, 2012 and therefore did not conduct an impairment test as of December 31, 2012.

 

For its discontinued operations the company recognized impairment, severance and other closure costs of $11.0 million for the three months ended December 31, 2012 and $8.7 million for the nine months ended September 30, 2012, as disclosed in note 9, Assets held for sale and discontinued operations.

 

2011

 

The company recorded impairment and other closure costs of $823.6 million in 2011, consisting of an impairment charge of $660.2 million on the assets of its Canadian operations, $161.8 million on the assets of its Snowflake mill, net closure costs of $0.5 million related to the company’s discontinued paper recycling operation and $1.1 million related to a revised estimate for future landfill rehabilitation cost in respect of the landfill located at the company’s discontinued Elk Falls mill.

 

The following table provides the components of the impairment and other closure costs:

 

Buildings, plant and equipment  $801.1 
Land   10.8 
Operating and maintenance supplies and spare parts inventory   10.1 
    822.0 
Other closure costs – operating lease at paper recycling operation   0.5 
Other closure costs – Elk Falls landfill rehabilitation estimate   1.1 
Total  $823.6 
Classification in consolidated statement of earnings (loss):     
Impairment and other closure costs  $661.8 
Loss from discontinued operations net of tax   161.8 
   $823.6 

 

28 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

Continuing operations

 

In respect of the company’s Canadian operations, impairment of $660.2 million was recorded on December 31, 2011 on buildings, plant and equipment. During the fourth quarter of 2011, continuing declines in current and forecast prices for newsprint, directory markets and pulp indicated a probable impairment of the Canadian operations. Two asset groups were identified for the purpose of the impairment analysis; pulp assets and paper assets. Paper assets in aggregate were treated as one asset group as the company’s paper machines are capable of running various grades and can be reconfigured to switch from one paper production such as newsprint to directory or specialty.

 

The company conducted step (i) of the impairment test to determine whether the carrying value of the assets of its Canadian operations were recoverable. Estimates of future cash flows used to test the recoverability of long-lived assets included key assumptions related to foreign exchange rates, forecast product prices, market supply and demand, estimated useful life of the long-lived assets, production levels, production costs, inflation, weighted average cost of capital, and capital spending. The assumptions were derived from information generated internally and external published reports and forecasts. The useful life of the company’s assets was estimated at 11 years for its pulp and paper assets. Product sales prices and foreign exchange assumptions for 2012 of CDN$1.00 = US$0.99 were based on management’s best estimates incorporating independent market information as well as analysis of historical data, trends and cycles. Product sales prices and foreign exchange assumptions for years 2013 to 2015 were based on independent, published market forecasts. The foreign exchange assumption was CDN$1.00 = US$0.97 in 2013 strengthening to CDN$1.00 = US$1.02 by 2015. Product sales prices and foreign exchange rate assumptions for 2016 and subsequent years were estimated by management based on long-term trend pricing for product sales prices and a long-term expected foreign exchange rate of CDN$1.00 = US$0.99. Step (i) of the impairment test demonstrated that impairment charges on the company’s pulp and paper assets were required as the carrying values of the pulp asset group and paper asset group exceeded the estimated undiscounted cash flows that will be generated by each respective group.

 

The company estimated the fair value of its pulp and paper assets on December 31, 2011 by discounting estimated future cash flows from the use and eventual disposal of its long-lived assets and net working capital to present value. A discount rate of 11% was used, reflecting current market assessments of the time value of money and the risks particular to the company’s assets. Impairment of $660.2 million was recognized on the assets of the company’s Canadian operations, based on the excess of the aggregate carrying values of the pulp and paper asset groups compared to their estimated fair values. The impairment reduced the carrying value of the company’s pulp assets by $83.5 million and the company’s paper assets by $576.7 million. The impairment charges were allocated to individual assets on a pro rata basis.

 

The company recorded a $0.3 million impairment recovery in the second quarter and a $0.4 million impairment recovery in the third quarter in respect of a lease obligation recognized in 2010 due to the discontinuation of the company’s paper recycling operation located in Coquitlam, British Columbia. These recoveries represented changes in estimated utility charges, insurance and property tax on the water lot lease from what was originally anticipated in 2010. On December 31, 2011, $1.2 million impairment expense was accrued in respect of this lease obligation. This additional accrual was based on unfavourable changes to certain key assumptions that support the measurement of the obligation. The lease obligation of $10.1 million of which $2.3 million is in Accounts payable and accrued liabilities and $7.8 million is in Other long-term obligations.

 

The company recorded a $1.1 million impairment charge related to the future rehabilitation of the landfill located at the discontinued Elk Falls mill. This charge was based on a revised site remediation estimate obtained in the fourth quarter from an independent third party, and represents the incremental environmental liability, on a discounted basis, that was accrued based on this estimate. It is the company’s accounting policy to capitalize the cost associated with environmental liabilities as property, plant and equipment. The company concluded that, based on the closure and impairment of Elk Falls’ assets in 2010, future economic benefits are unlikely, and therefore, this amount was charged as impairment and other closure costs.

 

CATALYST PAPER 2012 ANNUAL REPORT 29

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

Discontinued operations

 

In respect of the company’s Snowflake, Arizona mill, impairment of $151.0 million was recorded on September 30, 2011 on buildings, plant and equipment and operating maintenance supplies and spare parts inventory. Current and historical operating and cash flow losses plus forecasted continuing losses indicated probable impairment of these assets. A recoverability analysis was performed, and on the basis of this analysis, the carrying value of these assets was fully impaired. On December 31, 2011, $10.8 million impairment was recorded on Snowflake’s land on the basis of an appraisal, dated January 3, 2012, obtained from an independent third party real estate appraiser. On September 30, 2012, the Snowflake mill was permanently closed, and on January 30, 2013, the assets of the Snowflake mill and the shares of The Apache Railway Company (Apache Railway) were sold (see note 9, Assets held for sale and discontinued operations).

 

2010

 

As a result of the decision to permanently close the company’s Elk Falls paper mill and paper recycling operation in September 2010, the company recorded a $304.2 million charge for related impairment, severances and other closure costs. The Elk Falls mill had been indefinitely curtailed since February 2009 and the paper recycling facility was indefinitely idled in February 2010.

 

The following table provides the components of the impairment, severances and other closure costs:

 

Property, plant and equipment  $272.5 
Operating and maintenance supplies and spare parts inventory   20.3 
    292.8 
Less: impairment previously recorded on paper assets (prior to announcement
of permanent closure)
   (12.0)
Severances   9.7 
Other closure costs – operating lease at paper recycling operation   13.7 
Total  $304.2 
Classification in consolidated statement of earnings (loss):     
Impairment and other closure costs  $294.5 
Restructuring   9.7 
   $304.2 

 

During the fourth quarter of 2010, the company assessed whether there were any impairment indicators present that would require the company to perform a detailed recovery test with respect to its pulp and paper assets. The company determined that there were no new impairment indicators at the end of 2010 compared to the impairment indicators that existed at the end of 2009. As a result, the company reviewed its detailed recovery test performed at the end of 2009 and determined that the cash flow analysis performed at that time on the company’s assets still in operation at the end of 2010 (excluding Elk Falls and the paper recycling operation shut down in 2010) indicated a significant excess of undiscounted cash flows over the net book value of the assets. In addition, the company reviewed the major assumptions used in the 2009 detailed recovery test and determined that, on an overall basis, the assumptions used were more conservative than the assumptions that would be used in a new impairment test. On that basis, the company determined that a new detailed recovery test was not required for 2010.

 

30 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

8.VARIABLE INTEREST ENTITIES

 

The company has a 50.001% interest in PREI and consolidates 100% of it as PREI is a VIE in which the company is the primary beneficiary. PREI consists of an integrated hydroelectric power generating, transmission and distribution system which includes two hydroelectric stations in B.C. with installed capacity of 83 megawatts. The company generally purchases 100% of the power generated by PREI.

 

The company has limited access to PREI’s financial assets, which generally take 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.

 

As disclosed in note 2, Creditor protection proceedings, the company must sell its interest in PREI, and in accordance with the Plan, distribute up to 50% of the net proceeds to its creditors. On February 13, 2013, the company agreed to the sale of its interest in PREI, subject to Court approval, to Powell River Energy Trust, a Brookfield Renewable affiliate, for proceeds of $33.0 million. Powell River Energy Trust currently holds the other 50% stake in PREI. The company is required under the Plan to offer its portion of the proceeds from the sale of PREI to the holders of Floating Rate Notes as partial settlement at par of this debt. In accordance with a power purchasing agreement which expires in 2016, with possible extension to 2021 at the discretion of the company, the company will continue to purchase all electricity generated by PREI subsequent to the sale, which is expected to be completed in the first quarter of 2013 subject to various closing conditions.

 

Condensed financial information with respect to PREI is as follows:

 

   Successor   Predecessor 
   Three months
ended
December 31
   Nine months
ended
September 30
   Years
ended
December 31
 
   2012   2012   2011   2010 
Condensed statements of earnings (loss)                    
Sales – affiliate 1  $4.7   $15.6   $23.4   $20.5 
Cost of sales, excluding depreciation and amortization   2.1    5.1    7.0    6.5 
Depreciation and amortization   1.9    3.9    13.4    7.4 
    4.0    9.0    20.4    13.9 
Operating earnings   0.7    6.6    3.0    6.6 
Interest expense   (2.4   (7.3)   (8.9)   (8.8)
Interest expense – affiliate 1   (0.9)   (2.5)   (2.4)   (2.1)
Other income (expense), net   (0.3)   (4.0)       0.1 
Reorganization items, net   (1.3)   55.6         
Income tax recovery (expense)   1.1    (11.9)   3.0    1.6 
Net earnings (loss)   (3.1)   36.5    (5.3)   (2.6)
Other comprehensive income       0.1    0.1    0.2 
Total comprehensive income (loss) 2  $(3.1)  $36.6   $(5.2)  $(2.4)

 

CATALYST PAPER 2012 ANNUAL REPORT 31

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

   Successor   Predecessor 
   As at
December 31
   As at
September 30
   As at December
31
 
   2012   2012   2011 
Condensed balance sheets               
Current assets               
Cash and cash equivalents  $6.6   $6.9   $6.0 
Other   2.7    3.4    3.1 
Property, plant and equipment   147.0    145.9    95.5 
   $156.3   $156.2   $104.6 
Current liabilities               
Accounts payable and accrued liabilities  $13.1   $8.5   $4.7 
Long-term debt (note 18)   113.8    113.8    113.8 
Long-term debt – affiliate 1   20.8    20.8    20.8 
Deferred income taxes   23.6    24.6    12.7 
Deficit 2   (15.0)   (11.5   (47.4)
   $156.3   $156.2   $104.6 

 

1Balances with Catalyst Paper Energy Holdings Inc., a subsidiary of Catalyst Paper Corporation.
250% is included in the company’s non-controlling interest (deficit) balances.

 

The company has identified one other potential VIE, but has not been able to obtain the financial information necessary to evaluate whether the entity is a VIE, or, if the entity is a VIE, whether the company is the primary beneficiary. The company has entered into a building lease agreement with this potential VIE whereby the company 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. The principal amount of the mortgage was $3.0 million on December 31, 2012 and $3.4 million on September 30, 2012 (2011 – $4.8 million). This agreement does not increase the company’s liability beyond the obligation under the building lease.

 

9.ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

 

Closure and Sale of Snowflake Mill

 

On January 30, 2013 the company completed the U.S. Court approved sale of the assets of the Snowflake facility and the shares of Apache Railway to an acquisition vehicle organized by Hackman Capital and its affiliates for US$13.5 million and other non-monetary consideration. The assets of the Snowflake facility that were sold included approximately 19,000 acres of land, equipment and other assets associated with the paper mill. The mill, which is located in northeastern Arizona, was permanently shut on September 30, 2012. The decision to close the mill was driven by continued financial losses resulting from intense supply input and market pressures. The closure resulted in impairment and other closure costs of $19.7 million in 2012 for, among other things, severance, environmental obligations, and inventory write-offs. Closure costs also included an estimated withdrawal liability of US$11.7 million due to the PACE Industry Union-Management Pension Fund, a multi-employer pension plan the company contributed to on behalf of hourly employees at the Snowflake mill. The company had accrued US$3.5 million in the third quarter for this withdrawal liability, which reflected the most recent estimate of this liability based on the plan’s funding deficit as of December 31, 2008. The company received a new liability estimate of US$11.7 million in the fourth quarter from the United Steelworkers (USW). The company is in the process of verifying the actuarial information used to calculate this estimated withdrawal liability. The Snowflake mill was a component of the company that was held for sale on September 30, 2012 and, therefore, it was reported as a discontinued operation.

 

32 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

Other assets held for sale

 

The agreement that had been reached with Pacifica Deep Sea Terminals Inc. to sell the Elk Falls site was terminated in December 2012. A non-refundable prepayment of a portion of the purchase price was received and the transaction timeline was extended multiple times up to the ultimate deadline of December 18, 2012. The company continues to actively market the Elk Falls property.

 

The company has reached an agreement-in-principle to sell its 13.4 hectare wastewater treatment facility located at its Port Alberni mill along with 3.9 hectares of land combined with a road dedication for proceeds of $5.8 million. The company will settle the mortgage receivable from PRSC Limited Partnership and sell its interest in PRSC Land Developments Ltd. for proceeds of approximately $3.0 million. The company continues to actively market its remaining poplar plantation land. All of these assets and associated liabilities were reported as held for sale in the consolidated balance sheets as of December 31, 2012 and September 30, 2012 and the company expects to complete sales transactions in respect of these assets within 12 months of the balance sheet date of December 31, 2012.

 

A summary of major classes of assets and liabilities classified as held for sale is as follows:

 

   Successor 
   December 31,
2012
   September 30,
2012
 
Cash and cash equivalents  $1.9   $0.4 
Restricted cash   2.3    2.7 
Accounts receivable   0.5    17.1 
Inventories   0.6    5.4 
Prepaids and other       0.5 
Property, plant and equipment   24.7    25.8 
Other assets   4.3    4.3 
Assets held for sale   34.3    56.2 
Accounts payable and accrued liabilities   15.2    14.8 
Liabilities associated with assets held for sale  $15.2   $14.8 

 

As disclosed previously, the operations of the Snowflake mill were classified as a discontinued operation. A breakdown of loss from discontinued operations, net of tax is as follows:

 

   Successor   Predecessor 
   Three months
ended
   Nine months
ended
   Years
ended
 
   December 31   September 30   December 31 
   2012   2012   2011   2010 
Sales  $4.5   $142.8   $181.8   $177.2 
Cost of sales, excluding depreciation and amortization   (5.0   (142.4)   (202.9)   (183.5)
Depreciation and amortization           (7.0)   (9.6)
Impairment, severances and other closure costs   (11.0)   (8.7)   (161.8)    
Restructuring costs   (1.1)            
Interest expense, net       (0.1)   (0.2)   (0.1)
Other income (expense), net   0.7        (4.4)    
Reorganization items, net (note 6)   (1.0)   4.8         
Income tax expense           (1.0)   (3.5)
Loss from discontinued operations, net of tax  $(12.9)  $(3.6)  $(195.5)  $(19.5)

 

CATALYST PAPER 2012 ANNUAL REPORT 33

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

 

The following tables provide the components of impairment, severances and other closure costs for the three months ended December 31, 2012 and the nine months ended September 30, 2012:

 

   Three months
ended
December 31 2012
(successor)
 
   Amount 
Severances and other closure costs     
Severances  $1.6 
Withdrawal liability from multi-employer plan   8.2 
Other closure costs   1.2 
   $11.0 

 

   Nine months
ended
September 30 2012
(predecessor)
 
   Amount 
Impairment     
Operating and maintenance supplies and spare parts  $0.5 
Raw materials   0.6 
    1.1 
Severances and other closure costs     
Severances   3.2 
Withdrawal liability from multi-employer plan   3.4 
Other closure costs   1.0 
   $8.7 

 

Subsequent to the closure of the Snowflake mill, the company recognized an impairment charge to reduce the book value of remaining inventory to the estimated salvage value. In addition to severance, the company recognized obligations related to environmental remediation, dismantlement and other closure costs.

 

10.RESTRICTED CASH

 

Restricted cash includes $0.2 million collateral held against letters of credit. Cash collateral is held at a rate of 105% of letters of credit. These letters of credit were recognized under the former ABL Facility in effect prior to the CCAA proceedings, but are not presently recognized in the calculation of the available balance under the new ABL Facility. Restricted cash also includes $0.5 million cash held in trust pending the outcome of an arbitration case.

 

34 CATALYST PAPER 2012 ANNUAL REPORT

  

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

11.ACCOUNTS RECEIVABLE

 

The components of accounts receivable are as follows:

 

   Successor   Predecessor 
   As at
December 31
   As at
September 30
   As at
December 31
 
   2012   2012   2011 
Trade receivables  $94.7   $121.9   $115.1 
Less:  allowance for doubtful accounts   (2.2)       (2.0)
    92.5    121.9    113.1 
Sales taxes receivable   12.6    12.7    7.5 
Pulp and Paper Green Transformation Program receivable           6.9 
Other receivables   8.9    6.2    7.4 
   $114.0   $140.8   $134.9 

 

Accounts receivable are pledged as collateral against the long-term debt of the company. See note 18, Long-term debt, for detailed disclosure of the collateral arrangements of the company.

 

12.INVENTORIES

 

The components of inventories are as follows:

 

   Successor   Predecessor 
   As at
December 31
   As at
September 30
   As at
December 31
 
   2012   2012   2011 
Finished goods               
Specialty printing papers  $22.3   $31.1   $28.6 
Newsprint   7.7    7.8    9.1 
Pulp   3.9    3.0    7.8 
Total finished goods   33.9    41.9    45.5 
Work-in-progress   0.9    0.9    1.1 
Raw materials – wood chips, pulp logs and other   23.1    21.1    26.3 
Operating and maintenance supplies and spare parts   67.1    67.6    74.0 
   $125.0   $131.5   $146.9 

 

The company had applied write-downs to finished goods inventory of $0.1 million on December 31, 2012 and $0.3 million on September 30, 2012 (December 31, 2011 – $2.1 million) and to raw materials inventory of $0.8 million on December 31, 2012 and $2.0 million on September 30, 2012 (December 31, 2011 – $4.5 million).

 

Inventories are pledged as collateral against the long-term debt of the company. See note 18, Long-term debt, for detailed disclosure of the collateral arrangements of the company.

 

CATALYST PAPER 2012 ANNUAL REPORT 35

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

13.PREPAIDS AND OTHER

 

The components of prepaids and other are as follows:

 

   Successor   Predecessor 
   As at
December 31
   As at
September 30
   As at
December 31
 
   2012   2012   2011 
Property taxes, insurance and licences  $3.2   $6.7   $2.0 
Derivative financial instruments           2.5 
Deferred income tax assets (note 21)           13.1 
Other   5.7    6.3    2.4 
   $8.9   $13.0   $20.0 

 

Prepaids and other assets are pledged as collateral against the long-term debt of the company. See note 18, Long-term debt, for detailed disclosure of the collateral arrangements of the company.

 

14.PROPERTY, PLANT AND EQUIPMENT

 

The components of property, plant and equipment are as follows:

 

   As at December 31, 2012 (successor) 
   Cost   Accumulated
depreciation,
amortization and
impairment
   Net book
value
 
Buildings and land               
Specialty printing papers and newsprint  $224.5   $2.7   $221.8 
Pulp   9.8    0.1    9.7 
Machinery and equipment               
Specialty printing papers and newsprint   384.9    9.9    375.0 
Pulp   5.3    0.2    5.1 
   $624.5   $12.9   $611.6 

  

   As at September 30, 2012 (successor) 
   Cost   Accumulated
depreciation,
amortization and
impairment
   Net book
value
 
Buildings and land               
Specialty printing papers and newsprint  $221.7   $   $221.7 
Pulp   9.6        9.6 
Machinery and equipment               
Specialty printing papers and newsprint   379.5        379.5 
Pulp   3.3        3.3 
   $614.1   $   $614.1 

 

36 CATALYST PAPER 2012 ANNUAL REPORT

  

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

   As at December 31, 2011 (predecessor) 
   Cost   Accumulated
depreciation,
amortization and
impairment
   Net book
value
 
Buildings and land               
Specialty printing papers and newsprint  $574.6   $396.0   $178.6 
Pulp   98.8    96.3    2.5 
Machinery and equipment               
Specialty printing papers and newsprint   2,756.2    2,568.7    187.5 
Pulp   785.2    767.5    17.7 
   $4,214.8   $3,828.5   $386.3 

 

Machinery and equipment with a net carrying amount of $7.3 million on December 31, 2012 and $7.5 million on September 30, 2012 (2011 – $9.6 million) were held under capital leases. These assets had a cost of $7.5 million on December 31, 2012 and September 30, 2012 (2011 – $15.1 million) and accumulated depreciation and amortization of $0.2 million on December 31, 2012 and $nil million on September 30, 2012 (2011 – $5.5 million).

 

Interest capitalized in connection with capital projects was $nil for both 2012 and 2011.

 

Property, plant and equipment are pledged as collateral against the long-term debt of the company. See note 18, Long-term debt, for detailed disclosure of the collateral arrangements of the company.

 

15.GOODWILL

 

Goodwill recorded by the company represents the excess of the enterprise value determined under fresh start accounting over the amount assigned to specific assets and liabilities of the company.  The amount represents the present value of the future economic benefits available to the company from tax attributes available in the company. The tax attributes consist primarily of the excess of tax basis over net book value of depreciable assets that have no expiration date.

 

16.OTHER ASSETS

 

The components of other assets are as follows:

 

   Successor   Predecessor 
   As at
December 31
   As at
September 30
   As at
December 31
 
   2012   2012   2011 
Deferred financing costs  $9.0   $9.8   $11.8 
Deferred charges and other   1.8    1.9    9.9 
Derivative financial instruments           2.5 
Accrued benefit asset – pension plan (note 19)   0.2    0.2    0.2 
   $11.0   $11.9   $24.4 

 

Other assets are pledged as collateral against the long-term debt of the company. See note 18, Long-term debt, for detailed disclosure of the collateral arrangements of the company.

 

CATALYST PAPER 2012 ANNUAL REPORT 37

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

17.ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

The components of accounts payable and accrued liabilities are as follows:

 

   Successor   Predecessor 
   As at
December 31
   As at
September 30
   As at
December 31
 
   2012   2012   2011 
Trade payables  $54.4   $50.9   $81.7 
Accrued payroll and related liabilities   23.6    21.8    32.7 
Accrued interest   11.7    5.6    33.2 
Accrued benefit obligation – pension plan
(note 19)
   7.4    7.3    6.9 
Accrued benefit obligation – other employee future benefit plans (note 19)   5.8    5.3    6.8 
Property taxes, including taxes in arrears, interest and related parties           0.7 
Restructuring (note 24)   0.3    0.4    1.2 
Lease obligation – paper recycling – current portion           2.3 
Payables related to capital projects   3.9    0.9    3.7 
Other   6.7    5.3    5.3 
   $113.8   $97.5   $174.5 

 

38 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

18.LONG-TERM DEBT

 

The company’s long-term debt at December 31 is listed below.

 

   Successor   Predecessor 
   As at
December 31
   As at
September 30
   As at
December 31
 
Recourse  2012   2012   2011 
Floating rate senior secured notes, due September 2016 (US$35.0 million)  $33.9   $33.4   $ 
Senior secured notes, 11.0% due October 2017 (US$250.0 million)   248.7    245.9     
Senior notes, 7.375% due March 2014 (US$250.0 million)           256.4 
Senior secured notes, 11.0% due December 2016 (US$280.4 million)           285.2 
Modification – difference in carrying value of 8.625% and 11.0% senior secured notes (US$38.3 million) on exchange           31.2 
Class B senior secured notes, 11.0% due December 2016 (US$110.0 million)           98.5 
    282.6    279.3    671.3 
Revolving asset-based loan facility of up to $175.0 million due July 2017   24.0    64.0     
Revolving asset-based loan facility of up to $175.0 million due May 2016           48.0 
Capital lease obligations   8.2    8.5    9.2 
    314.8    351.8    728.5 
Non-recourse (note 8)               
First mortgage bonds, 6.447% due July 2016   95.0    95.0    95.0 
Subordinated promissory notes   18.8    18.8    18.8 
    113.8    113.8    113.8 
Total debt   428.6    465.6    842.3 
Less:  current portion   (6.6)   (6.7)   (466.8)
Total long-term debt  $422.0   $458.9   $375.5 

 

Significant changes to long-term debt in 2012

 

On September 13, 2012 as part of the implementation of the Plan and emergence from creditor protection, the Successor company issued US$250.0 million of new senior secured notes (2017 Notes). The 2017 Notes, issued to holders of the Predecessor company’s 2016 Notes, have a maturity date of October 30, 2017, and bear interest, payable semi-annually, at a rate of 11% per annum in cash or, at the option of the company, 13% per annum payable 7.5% cash and 5.5% PIK. The PIK portion of the interest will consist of newly issued senior secured notes that will be governed by the indentures of the 2017 Notes and will have identical maturity, covenants, interest, collateral and other characteristics as the 2017 Notes. In 2012, the company elected to pay interest due on the 2017 Notes in cash.

 

CATALYST PAPER 2012 ANNUAL REPORT 39

 

 
 

 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

In addition to the above, the indentures governing the 2017 Notes make provision for:

 

an annual cash flow sweep, subject to a minimum liquidity threshold; any amounts paid to holders of the 2017 Notes from the cash flow sweep will be used to pay down the principal amount of the 2017 Notes at par value;

 

the company issuing up to an additional US$75.0 million in principal amount of identical senior secured notes, subject to the consent of holders of 75.0% in principal amount of 2017 Notes if the company’s secured debt to EBITDA ratio, pro forma for the issuance of the additional senior secured notes, exceeds 3.0 times; and

 

the company repurchasing the 2017 Notes for 103% of their principal amount until December 15, 2013 and 100% thereafter.

 

On September 13, 2012 the company secured exit financing consisting of a new ABL Facility and the issuance of Floating Rate Notes. The $175.0 million ABL Facility, which replaced the DIP Credit Facility the company had access to while under creditor protection, matures on the earlier of July 31, 2017, and 90 days prior to maturity of any significant debt. A financial covenant requires the company to maintain a minimum fixed charge coverage ratio of 1.0:1.0 if excess availability under the Facility is below $22 million; at December 31, 2012, the fixed charge coverage ratio was 0.4:1.0 for purposes of this covenant.

 

The US$35.0 Floating Rate Notes have a maturity date of September 13, 2016, and can be prepaid in whole or in part at any time prior to September 13, 2013, at a redemption price of 103%, on or after September 13, 2013, and prior to September 13, 2014, at a redemption price of 102%, and on or after September 13, 2014, at a redemption price of 100% of the aggregate principal amount outstanding. The Floating Rate Notes bear interest, payable quarterly, at 10.0% plus three-month LIBOR per annum, with a floor set for the floating LIBOR component of 3.0%.

 

The company secured a DIP Credit Facility, which replaced its former ABL Facility, as part of the creditor protection proceedings. The DIP Credit Facility had an 18-month maturity and a maximum draw of approximately $175 million. Maximum availability was subject to certain terms and conditions that the DIP lenders agreed to provide to Catalyst during the CCAA proceedings. The security for the DIP Credit Facility consisted of a first charge on the accounts receivable, inventory and cash of the company (collectively, the DIP First Charge Collateral) and a second charge on the 2016 Notes First Charge Collateral.

 

Significant changes to long-term debt in 2011

 

On December 15, 2011 the company withheld an interest payment of US$21.5 million due on that date on its 2016 Notes, electing to take advantage of a 30-day grace period stipulated in the note indentures. The interest deferral represented a covenant violation on December 31, 2011 under the indentures governing the 2016 Notes. However, the covenant violation didn’t result in a default on the 2016 Notes on December 31, 2011, due to the 30-day grace period that was in force. Per the terms of the company’s former ABL Facility, the covenant violation on the 2016 Notes would have resulted in a cross-default on the ABL Facility had it not been for a 30-day waiver obtained from the ABL lenders. The covenant violation, which remained uncured on the date of the commencement of the creditor protection proceedings on January 31, 2012, resulted in a reclassification of the $414.9 million outstanding on the 2016 Notes and the $48.0 million balance drawn on the ABL Facility on December 31, 2011 as current debt.

 

On May 31, 2011 the company amended its former ABL Facility, reducing the size of the Facility to $175 million, from $330 million, in part due to working capital levels which have been lower since the closure of the Elk Falls mill. The maturity date was extended to May 31, 2016, from August 13, 2013. In addition, the fixed assets of the Snowflake mill were no longer part of the borrowing base and became first lien security under the company’s 2016 Notes thereby increasing the first lien basket under those notes by $60 million.

 

On February 11, 2011, the company redeemed the outstanding 8.625% senior unsecured notes of US$26.0 million, due June 2011 (2011 Notes).

 

40 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

  

Significant terms, conditions and covenants

 

The indentures governing the company’s senior notes contain customary restrictive covenants, including restrictions on incurring additional indebtedness, certain restricted payments, including dividends and investments in other persons, the creation of liens, sale and leaseback transactions, certain amalgamations, mergers, consolidations and the use of proceeds arising from certain sales of assets and certain transactions with affiliates. Collateral provided on the 2017 Notes consists of a first charge on substantially all of the assets of the company, other than (i) a senior collateral charge on the Floating Rate Notes, and (ii) the ABL First Charge Collateral, as described below (2017 Notes First Charge Collateral), and a second charge on the senior collateral charge on the Floating Rate Notes and the ABL First Charge Collateral. The Floating Rate Notes are secured by a charge on the assets of the company that ranks senior to the lien securing the 2017 Notes (Floating Rate Notes First Charge Collateral). The indentures governing the Floating Rate Notes and 2017 Notes limit the ability of the company to incur debt, other than permitted debt, while the company cannot meet a fixed charge coverage ratio of 2.0:1.0. The company’s fixed charge coverage ratio under these indentures, calculated on a 12-month trailing average, was 0.9:1.0 at December 31, 2012 and 0.4:1.0 at September 30, 2012.

 

Under the indentures for the Floating Rate Notes and the 2017 Notes, permitted debt includes, among other things, (a) debt arising under the ABL Facility, subject to certain limitations; (b) debt under the Floating Rate Notes, additional senior secured notes issued under the PIK interest option, and the issuance of up to US$75.0 million additional senior secured notes, subject to certain limitations; (c) purchase money debt and capitalized lease obligations in an aggregate principal amount outstanding not to exceed $15.0 million; (d) a general basket of $25.0 million; (e) debt incurred under interest rate agreements, currency agreements, and reimbursement obligations related to undrawn standby letters of credit, subject to certain limitations; (f) debt in respect of completion guarantees, bid, performance, surety or appeal bonds, subject to certain limitations; (g) a $5.0 million basket for accommodation guarantees, trade or standby letters of credit, performance bonds, bankers’ acceptances and surety bonds; (h) debt equal to 200.0% of the net cash proceeds from the issue or sale of capital stock or capital contributions, subject to certain limitations; and (i) debt incurred as full or partial payment of any asset acquisition, or if debt constitutes acquired debt, subject to, among other things, the company’s consolidated fixed charge coverage ratio being equal or higher after the asset acquisition than immediately before. The company cannot make any restricted payments, including paying any dividends, except to the extent the balance in its restricted payments basket is positive. The restricted payments basket under the 2017 Notes was negative $33.6 million as at December 31, 2012 and $nil million as at September 30, 2012.

 

The security for the ABL Facility consists of a first charge on accounts receivable, inventory and cash of the company (ABL First Charge Collateral) and a second charge on the 2017 Notes First Charge Collateral. Availability under the ABL Facility is determined by a borrowing base calculated primarily on eligible accounts receivable and eligible inventory, less certain reserves. The borrowing base at December 31, 2012, included reserves for a landlord waiver reserve in respect of rent of approximately $2.3 million, a pension reserve not exceeding the sum of normal cost pension contributions, special and catch-up payments and any other payments in respect of a Canadian pension plan that are past due of approximately $1.1 million, a reserve for credit insurance deductibles of $2.0 million, a reserve of $1.3 million for employee source deductions, a reserve for workers compensation of $0.3 million, and a purchasing card reserve of $0.2 million. The borrowing base at September 30, 2012, included reserves for a landlord waiver reserve in respect of rent of approximately $2.3 million, a pension reserve not exceeding the sum of normal cost pension contributions, special and catch-up payments and any other payments in respect of a Canadian pension plan that are past due of approximately $2.7 million, a reserve for credit insurance deductibles of $2.0 million, a reserve of $1.3 million for employee source deductions, and a reserve for workers compensation of $0.3 million.

 

CATALYST PAPER 2012 ANNUAL REPORT 41

 

 
 

 

CATALYST PAPER CORPORATION 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated) 

 

On December 31, 2012 the company had $78.9 million available under the ABL Facility after deducting outstanding drawings of $24.0 million and outstanding letters of credit of $22.3 million, before potential application of the springing fixed charge coverage ratio. On September 30, 2012, the company had $82.2 million available under the ABL Facility after deducting outstanding drawings of $64.0 million and outstanding letters of credit of $17.8 million, before potential application of the springing fixed charge coverage ratio. The company also had cash on hand of $18.5 million on December 31, 2012 and $12.6 million on September 30, 2012, and restricted cash of $3.0 million on December 31, 2012 and $6.4 million on September 30, 2012.

 

The company was in compliance with its covenants under the ABL Facility and under each of the indentures governing its outstanding senior notes on December 31, 2012 and September 30, 2012.

 

Non-recourse debt is debt owed by the company’s subsidiary PREI. The company has a 50.001% interest in PREI, and consolidates 100% of it as PREI is a VIE in which the company is the primary beneficiary.

 

Scheduled total debt repayments

 

   Recourse
debt
   Non-recourse
debt (PREI)
 
2013  $6.6   $ 
2014   1.6     
2015        
2016   34.8    95.0 
2017   272.7     
Thereafter       18.8 
   $315.7   $113.8 

 

The company’s long-term debt is recorded at amortized cost. The following table provides information about management’s best estimate of the fair value of the company’s debt:

 

   Successor   Predecessor 
   December 31, 2012   September 30, 2012   December 31, 2011 
   Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value
 
Recourse  $314.8   $262.5   $351.8   $351.8   $728.5   $279.5 
Non-recourse   113.8    113.8    113.8    113.8    113.8    124.7 

 

The fair value of the company’s long-term recourse debt related to its senior notes is determined based on quoted market prices of identical debt instruments. The fair value of the company’s recourse debt related to the ABL Facility and non-recourse debt related to the first mortgage bonds is measured by discounting the respective cash flows at quoted market rates for similar debt having the same maturity. In measuring fair value, the company incorporates credit valuation adjustments to appropriately reflect its own non-performance risk, where appropriate.

 

19.EMPLOYEE FUTURE BENEFITS

 

The company maintains pension benefit plans for all salaried employees, which include defined benefit and defined contribution segments.  Employees hired subsequent to January 1, 1994 enroll in the defined contribution segment. Effective January 1, 2010, employees in the defined benefit plan ceased to accrue future benefits under the defined benefit segment of the plan and began to participate in the defined contribution segment of the plan. The company also maintains pension benefits for former hourly employees that are not covered by union pension plans. Unionized employees of the company are members of multi-employer industry-wide pension plans to which the company contributes a predetermined amount per hour worked by an employee.

 

42 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated) 

 

The company provides other benefit plans consisting of provincial medical plan premiums, life insurance, extended health care and dental benefits to employees.  In February 2010, the company announced changes to its benefit plans for current retirees which included the replacement of the current extended health benefits program with provision of the lower cost program available to employees in active employment. The reduction in the benefit obligation resulting from the plan changes of $21.3 million was recognized as a negative plan amendment in 2010. The company also made the decision to permanently close Elk Falls mill in 2010 (note 7) and the related reduction in the benefit obligation from the plan curtailment amounting to $9.7 million was recognized with a corresponding increase to other comprehensive income.

 

Certain extended health benefits with an actuarial value of $24.8 million as of September 30, 2012 were compromised under the Plan.

 

Defined contribution plans

 

For the defined contribution segment, the company’s contributions are based on a percentage of an employee’s earnings with the company’s funding obligations being satisfied upon crediting contributions to an employee’s account. The pension expense under the defined contribution payment is equal to the company’s contribution.

 

Defined benefit plans

 

The defined benefit segment provides a pension based on years of service and earnings. Benefits accrued under the defined benefit segment of the plan for service prior to January 1, 2010 will remain in the defined benefit plan and will continue to be eligible for future salary growth and early retirement subsidies.

 

The company offered members of its defined benefit pension plan for salaried employees a one-time reduced lump-sum payment option as full settlement of their entitlements under the plan. Members had to make their elections by no later than December 15, 2012, and have until June 30, 2013 to revoke such elections in favour of continuing to receive retirement benefits in the form of a monthly pension. As of March 5, 2013, the company had received elections for 42% of the total membership and 48% of the total solvency liability. As of March 5, 2013, the future impact of the portability election on the projected benefit obligations and fair value of plan assets of the company are impossible to estimate due to the revocation option, and therefore, were not reflected in the actuarial valuation of projected benefit obligations and fair value of plan assets as of December 31, 2012.

 

The company measured the fair value of plan assets and the projected benefit obligations of the Successor company for accounting purposes on December 31, 2012 and September 30, 2012 with the assistance of its independent actuaries. Changes in the funding status of these plans not recognized in net periodic benefit costs were reflected as an adjustment to Accumulated other comprehensive income (loss). Subsequent to the closure of the Snowflake mill, the company no longer has a projected benefit obligation under the Snowflake Salaried Retiree Medical and Life Insurance Plan.

 

CATALYST PAPER 2012 ANNUAL REPORT 43

 

 
 

 

CATALYST PAPER CORPORATION 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated) 

 

Components of net periodic benefit cost recognized

   Successor   Predecessor 
   Three months
ended
December 31
   Nine months
ended
September 30
   Years
ended
December 31
 
Pension benefit plans  2012   2012   2011   2010 
Defined benefit plan                    
Service cost for the period  $0.2   $1.0   $1.4   $2.1 
Interest cost   3.7    12.3    17.7    20.5 
Expected return on assets   (3.6)   (11.2)   (16.5)   (16.2)
Recognition (reversal) of downsizing program       (0.2)   1.7     
Amortization of unrecognized items:                    
Actuarial (gains) losses       6.4    7.9    6.3 
Prior service costs       0.3    0.4    0.4 
    0.3    8.6    12.6    13.1 
Defined contribution plan                    
Service cost for the period   0.7    2.4    3.4    3.5 
Multi-employer industry-wide pension plan service cost for the period   2.0    7.5    10.1    9.8 
Net periodic benefit cost for pension benefit plans  $3.0   $18.5   $26.1   $26.4 

  

   Successor   Predecessor 
   Three months
ended
December 31
   Nine months
ended
September 30
   Years
ended
December 31
 
  2012   2012   2011   2010 
Other benefit plans                    
Service cost for the period  $0.4   $1.0   $1.3   $2.0 
Interest cost   1.5    5.3    7.6    10.0 
Amortization of unrecognized items:                    
Actuarial (gains) losses       0.1    0.4    0.2 
Prior service credits       (2.8)   (3.7)   (3.6)
Net periodic benefit cost for other benefit plans  $1.9   $3.6   $5.6   $8.6 

 

44 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated) 

 

Change in projected defined benefit plan obligation and fair value of plan assets

 

The following table represents the change in the projected benefit obligation and fair value of plan assets as determined by independent actuaries:

 

   Pension benefit plans   Other benefit plans 
   Successor   Predecessor   Successor   Predecessor 
   Three months
ended
December 31
   Nine months
ended
September 30
   Year 
ended
   Three months
ended 
December 31
   Nine months
ended
September 30
   Year 
ended
 
   2012   2012   2011   2012   2012   2011 
Change in benefit obligation                              
Projected benefit obligation at beginning of period  $393.9   $383.8   $379.4   $150.8   $162.3   $154.5 
Service cost for the period   0.2    1.0    1.4    0.4    1.0    1.3 
Interest cost   3.7    12.3    17.7    1.5    5.3    7.6 
Benefit payments   (7.8)   (22.9)   (42.8)   (1.5)   (5.6)   (6.8)
Recognition (reversal) of downsizing program       (0.2)   1.7        (1.4)    
Elimination of extended health benefits for retirees                   (24.8)    
Actuarial losses (gains) and other adjustments   (3.5)   19.9    26.4    (2.0)   14.0    5.7 
Projected benefit obligation at end
of period
  $386.5   $393.9   $383.8   $149.2   $150.8   $162.3 
                               
Change in plan assets                              
Fair value of defined benefit plan assets at beginning of period  $231.9   $226.9   $246.4   $   $   $ 
Actual return on plan assets   4.3    13.4    1.0             
Company contributions   4.6    14.5    22.0    1.5    5.6    6.8 
Other           0.3             
Benefit payments   (7.8)   (22.9)   (42.8)   (1.5)   (5.6)   (6.8)
Fair value of assets at end of period  $233.0   $231.9   $226.9   $   $   $ 

  

CATALYST PAPER 2012 ANNUAL REPORT 45

 

 
 

 

CATALYST PAPER CORPORATION 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated) 

 

Reconciliation of funded status to amounts recognized in the consolidated balance sheets

 

   Pension benefit plans   Other benefit plans 
   Successor   Predecessor   Successor   Predecessor 
   As at
December 31
   As at 
September 30
   As at 
December 31
   As at 
December 31
  

As at

September 30

  

As at

December 31

 
   2012   2012   2011   2012   2012   2011 
Projected benefit obligation at end of period  $386.5   $393.9   $383.8   $149.2   $150.8   $162.3 
Fair value of plan assets at end of period   233.0    231.9    226.9             
Funded status  $(153.5)  $(162.0)  $(156.9)  $(149.2)  $(150.8)  $(162.3)

  

   Pension benefit plans   Other benefit plans 
   Successor   Predecessor   Successor   Predecessor 
   As at
December 31
   As at 
September 30
   As at 
December 31
   As at 
December 31
  

As at

September 30

  

As at

December 31

 
   2012   2012   2011   2012   2012   2011 
Other assets (note 16)  $0.2   $0.2   $0.2   $   $   $ 
Accounts payable and accrued liabilities (note 17)   (7.4)   (7.3)   (6.9)   (5.8)   (5.3)   (6.8)
Employee future benefits   (146.3)   (154.9)   (150.2)   (143.4)   (145.5)   (155.5)
   $(153.5)  $(162.0)  $(156.9)  $(149.2)  $(150.8)  $(162.3)

  

Of the total funding deficit of $153.5 million on December 31, 2012 and $162.0 million on September 30, 2012 (2011 – $156.9 million) in the company’s various defined benefit pension plans, $83.3 million as of December 31, 2012 and $90.3 million as of September 30, 2012 (2011 – $86.9 million) is related to funded defined benefit pension plans and $70.2 million as of December 31, 2012 and $71.7 million as of September 30, 2012 (2011 – $70.0 million) to “pay-as-you-go” unfunded defined benefit pension plans. In addition, all of the other post-retirement benefit plans, consisting of group health care and life insurance, which had a deficit of $149.2 million at December 31, 2012 and $150.8 million at September 30, 2012 (2011 – $162.3 million) is related to “pay-as-you-go” plans.

 

Amounts not yet recognized in net periodic benefit cost and included in accumulated other comprehensive income (loss)

 

   Pension benefit plans   Other benefit plans 
   Successor   Predecessor   Successor   Predecessor 
   As at
December 31
   As at 
September 30
   As at 
December 31
   As at 
December 31
  

As at

September 30

  

As at

December 31

 
   2012   2012   2011   2012   2012   2011 
Prior year service credits (costs)  $   $   $(2.9)  $   $   $25.0 
Accumulated gain (loss)   4.6        (109.8)   2.0        (1.9)
Accumulated other comprehensive income (loss)  $4.6   $   $(112.7)  $2.0   $   $23.1 

 

46 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated) 

 

Amounts before taxes included in other comprehensive income (loss)

 

   Successor   Predecessor 
   Three months
ended
December 31
   Nine months
ended
September 30
   Twelve months
ended
December 31
 
Pension benefit plans  2012   2012   2011 
Amortization of employee future benefits  $   $6.6   $8.5 
Net gain (loss)   4.6    (17.4)   (41.4)
Net amount recognized in other comprehensive income (loss)  $4.6   $(10.8)  $(32.9)

  

   Successor   Predecessor 
   Three months
ended
December 31
   Nine months
ended
September 30
   Twelve months
ended
December 31
 
Other benefit plans  2012   2012   2011 
Amortization of employee future benefits  $   $(2.7)  $(3.3)
Net gain (loss)   2.0    (14.3)   (5.5)
Net amount recognized in other comprehensive income (loss)  $2.0   $(17.0)  $(8.8)

 

In accordance with the requirements of fresh start accounting, the amounts not yet recognized in net periodic benefit cost and included in accumulated other comprehensive income (loss) were reset to nil as at September 30 2012. Accordingly, no prior service (credit) costs or actuarial (gains) losses were amortized in net benefit cost for the three months ended December 31, 2012. The accumulated actuarial (gains) losses as at December 31, 2012 are less than 10% of the greater of the accrued benefit obligation and the fair value of plan assets on December 31, 2012, and therefore, no actuarial (gains) losses will be amortized in the net benefit cost for 2013.

 

Estimated future benefit payments

 

Total cash payments for employee future benefits for the year ended December 31, 2012, consisting of cash contributed by the company to its funded pension plans, cash payments directly to beneficiaries for its unfunded benefit plans, cash contributed to its defined contribution plans and cash contributed to its multi-employer industry-wide plan, was $38.8 million (2011 – $42.3 million). During 2013, the company expects to contribute approximately $22.7 million to all of the above pension plans and approximately $6.0 million to its other benefit plans.

 

In July 2011, the final true up contribution for the closure of the U.S. sales company’s benefit pension plan was made for US$5.1 million.

 

The following table presents estimated future benefit payments from the plans as of December 31, 2012. Benefit payments for other post-retirement benefits are presented net of retiree contributions.

 

   Pension benefit plans   Other benefit plans 
2013  $30.6   $6.0 
2014   30.5    6.3 
2015   30.1    6.7 
2016   29.6    7.0 
2017   29.0    7.4 
2018 - 2022   133.5    42.4 

 

CATALYST PAPER 2012 ANNUAL REPORT 47

 

 
 

 

CATALYST PAPER CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in millions of Canadian dollars, except where otherwise stated)

 

Plan assets allocation

 

The asset allocation for the company’s defined benefit pension plans, by asset category, was as follows:

 

   Successor   Predecessor 
Plan assets  As at
December 31,
2012
   As at
September 30,
2012
   As at
December 31,
2011
 
Equity securities   56.2%   57.3   58.5%
Fixed income securities   38.6%   37.6%   41.5%
Real estate   5.2%   5.1%    
Total   100.0%   100.0%   100.0%

  

Fair value of plan assets

 

The following tables present information about the fair value of pension and other benefit plan assets:

 

       Fair value hierarchy 
As at December 31, 2012 (successor)  Total   Level 1   Level 2   Level 3 
Asset category                    
Cash and cash equivalents  $2.8   $2.8   $   $ 
Equity securities:                    
Global equity pooled funds 1   85.5    85.5         
Canadian equity pooled funds 2   45.2    45.2         
Fixed income securities:                    
Canadian long bond pooled funds 4   43.7        43.7     
Canadian bond pooled funds 4   43.9        43.9     
Forward currency contracts 5   (0.1)       (0.1)    
Real estate 6   12.0        12.0     
Total  $233.0   $133.5   $99.5   $ 

 

       Fair value hierarchy 
As at September 30, 2012 (successor)  Total   Level 1   Level 2   Level 3 
Asset category                    
Cash and cash equivalents  $2.7   $2.7   $   $ 
Equity securities:                    
Global equity pooled funds 1   84.2    84.2         
Canadian equity pooled funds 2   46.3    46.3         
Fixed income securities:                    
Canadian long bond pooled funds 4   43.4        43.4     
Canadian bond pooled funds 4   43.5        43.5     
Forward currency contracts 5                
Real estate 6   11.8        11.8     
Total  $231.9   $133.2   $98.7   $ 

  

48 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated) 

 

       Fair value hierarchy 
As at December 31, 2011 (predecessor)  Total   Level 1   Level 2   Level 3 
Asset category                    
Cash and cash equivalents  $7.6   $7.6   $   $ 
Equity securities:                    
Global equity pooled funds 1   85.8        85.8     
Canadian equity pooled funds 2   41.9        41.9     
Balanced equity pooled funds 3   0.5        0.5     
Fixed income securities:                    
Canadian long bond pooled funds 4   45.8        45.8     
Canadian bond pooled funds 4   44.9        44.9     
Forward currency contracts 5   0.4        0.4     
Total  $226.9   $7.6   $219.3   $ 

 

1This category includes investments in pooled funds that aim to achieve long-term capital growth by investing primarily in equity securities of companies that may be located anywhere in the world, excluding Canada. Fund performance is benchmarked against the MSCI World excluding Canada (Cdn$) Index.

2This category includes investments in pooled funds that invest in well-diversified portfolios of equity securities of Canadian companies. Fund performance is benchmarked against the S&P/TSX Capped Composite Index.
3This category includes investments in pooled funds that invest in a well-diversified, balanced portfolio of Canadian common stocks, bonds, and money market securities. The fund also holds a portion of its assets in foreign common stock. Fund performance is benchmarked against a customized index consisting of: 35% S&P/TSX Capped Composite Total Return Index, 25% Morgan Stanley Capital International World (Developed Markets) Index excluding Canada, 35% DEX Universe Bond Index and 5% DEX 30-Day T-Bill Index.
4This category includes investments in pooled funds that invest in a well-diversified portfolio of fixed income securities issued primarily by Canadian governments and corporations. The duration range of the fund is +/- one year of the benchmark’s duration. Fund performance for Canadian bond pooled funds and Canadian long bond pooled funds is benchmarked against the DEX Universe Bond Index and DEX Long-Term Bond Index, respectively.
5This category includes foreign currency forward contracts to partially hedge investments in equity and fixed income securities denominated in foreign currencies.
6This category includes direct investment in office, industrial, retail and residential real estate.

 

Cash and cash equivalents are primarily used to pay benefits and are recorded at carrying value which approximates fair value.

 

Equity and fixed income securities are comprised of pooled fund trusts, the fair values of which are measured using the net asset values of the funds, as calculated by the respective investment managers, and have daily or monthly liquidity. Net asset values are determined using quoted market prices for the actively traded securities in which the fund has invested. The funds do not invest in securities that are not actively traded.

 

Forward currency contracts are comprised of over-the-counter instruments and their fair value is measured using the discounted difference between contractual rates and market spot rates.

 

CATALYST PAPER 2012 ANNUAL REPORT 49

 

 
 

 

CATALYST PAPER CORPORATION 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated) 

 

Multi-employer benefit plans

 

The following table provides information about the company’s two multi-employer pension plans: 

 

            Contributions by Catalyst Paper 4       
            Successor   Predecessor       
            Three months   Nine months               
      Pension Protection  FIP / RP status  ended   ended   Year ended   Year ended       
   EIN / Pension  Act Zone Status 2  pending /  September   September   December   December   Surcharge  Expiration
Pension Fund  plan number 1  2012  2011  Implemented 3  2012   30, 2012   2011   2010   imposed  date 5
Pulp and Paper Industry Pension Plans 6  BCFIC - P085324
CRA - 0394940
  Green  Green  No  $1.9   $6.8   $9.2   $8.9   No  4/30/2017
PACE Industry Union-Management Pension Fund 7  11-6166763-001  Red  Red  Implemented   0.1    0.7    0.9    0.9   No  1/3/2014

  

1Employer identification number and three digit pension plan number, if applicable.
2Funded status on each balance sheet date presented expressed as a zone status. Green status equals at least 80% funded, yellow status equals less than 80% funded and red status equals less than 65% funded.
3Indicates whether a funding improvement plan (FIP) or a rehabilitation plan (RP) is pending or has been implemented.
4The company’s annual contributions to the Pulp and Paper Industry Pension Plan in each respective year were greater than 5% of total employer contributions. The company’s annual contributions to the PACE Industry Union Management Pension Fund in each respective year were less than 5% of total employer contributions.
5Expiration date of collective bargaining agreement on December 31, 2012.
6Plan participants are members and former members of the Pulp Paper and Woodworkers of Canada (PPWC) and the Communication Energy and Paperworkers Union (CEP).
7Plan participants are members and former members of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (United Steelworkers or USW).

 

Contributions to the Pulp and Paper Industry Pension Plan are based on a percentage of earnings to a cap in hours worked and contributions to the PACE Industry Union-Management Pension Fund are based on a contribution per hour worked to a maximum cap in hours worked. The risks of participating in multi-employer plans differ from single-employer plans in the following ways:

 

1.The company’s contributions to multi-employer plans may be used to provide benefits to employees of other participating employers.

 

2.If a participating employer were to stop contributing to a multi-employer plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

 

3.If the company chose to stop participating in a multiemployer plan, it may be required to pay an amount to that plan based on the underfunded status of the plan, referred to as a withdrawal liability.

 

As disclosed in note 9, Assets held for sale and discontinued operations, the closure of the Snowflake mill on September 30, 2012 resulted in the incurrence of a withdrawal liability of US$11.7 million related to the PACE Industry Union Management Pension Fund. This liability estimate, provided by the USW, is based on the plan’s funding deficit as of December 31, 2010.

 

As disclosed in note 7, Measurement uncertainty – impairment of long-lived assets, the company permanently closed the Elk Falls mill in 2010. This change had a significant impact on the comparability of total employer contributions to multi-employer benefit plans for the periods presented. The closure reduced the company’s employee base and resulted in a reduction in pension contributions to the Pulp and Paper Industry Pension Plan of approximately $4.5 million.

 

50 CATALYST PAPER 2012 ANNUAL REPORT

 

 
 

 

CATALYST PAPER CORPORATION 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated) 

 

Significant assumptions

 

Actuarial assumptions used in accounting for the company-maintained benefit plans were:

 

   Successor   Predecessor 
   Three months
ended
December 31
   Nine months
ended
September 30
   Year
ended
December 31
 
Other benefit plans  2012   2012   2011 
             
Benefit obligations at period end,               
                
Discount rate   4.00   3.90%   4.40%
Rate of compensation increase   2.00%   2.00%   2.00%
                
Net benefit cost for the period ended,               
                
Discount rate   3.90%   4.40%   5.00%
Rate of compensation increase   2.00%   2.00%   2.00%
Expected rate of return on plan assets   6.50%   6.75%   7.00%
                
Assumed health care cost trend rate at period end,               
                
Extended health benefits:               
Initial health care cost trend rate   6.00%   6.00%   6.00%
Annual rate of decline in trend rate   0.50%   0.50%   0.50%
Ultimate health care cost trend rate   4.50%   4.50%   4.50%
                
Dental benefits:               
Dental care cost trend rate   3.00%   3.00%   3.00%
                
Medical services plan benefits:               
Premium trend rate   6.00% in 2012 and 4.50% thereafter    6.00% in 2011 and 2012, and 4.50% thereafter    6.00% in 2010 to 2012, and 4.50% thereafter 

  

The discount rate for the company’s plans was based on the market interest rate on high-quality debt instruments currently available and expected to be available during the period to maturity of the benefit plans. For December 31, 2012, September 30, 2012 and December 31, 2011, the discount rates were based on AA corporate bond yields as of those dates respectively. In determining the rate of compensation increases, management considered the general inflation rate, productivity and promotions. For the health care cost inflation rate, management considered the trend in extended health care and dental costs in Canada and the impact of inflation on medical service plan premiums. The expected rate of return on plan assets reflects management’s best estimate regarding the long-term expected return from all sources of investment return based on the company’s target asset allocation. The 2012 expected rate of return on plan assets was 6.5% per annum, which was based on a target allocation of approximately 20% Canadian Universe bonds, which were expected to earn approximately 3.4% per annum in the long term, 20% Canadian Long bonds, which were expected to earn approximately 3.3% per annum in the long term, 18% Canadian equity securities, which were expected to earn approximately 8.0% per annum in the long term, and 37% global equity securities, which were expected to earn approximately 8.4% per annum in the long term, and 5% real estate, which were expected to earn approximately 7.5% per annum in the long term. The 2012 expected rate of return on plan assets also included a provision of 0.4% per annum in recognition of additional net returns assumed to be achieved due to active management and periodic rebalancing to maintain the plan’s investment policy, net of investment manager fees, less a margin of 0.3% per annum for non-investment expenses expected to be paid from the plans.

 

CATALYST PAPER 2012 ANNUAL REPORT 51

 

 
 

 

CATALYST PAPER CORPORATION 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 

(Amounts expressed in millions of Canadian dollars, except where otherwise stated) 

 

The company’s investment policy recognizes the long-term pension liabilities, the benefits of diversification across asset classes and the effects of inflation. The diversified portfolio is designed to maximize returns consistent with the company’s tolerance for risk. All assets are managed by external investment firms. These firms are constrained by specific mandates and objectives and their performance is measured against appropriate benchmarks. The asset allocation for each plan is reviewed periodically and is rebalanced toward target asset mix when asset classes fall outside of a predetermined range. Portfolio risk is controlled by having fund managers comply with guidelines, by establishing and monitoring the maximum size of any single holding in their portfolios and by using fund managers with different investment styles. The portfolio includes holdings of Canadian and international equities, Canadian high-quality and high-yield fixed income securities, and cash and cash equivalents. A series of permitted and prohibited investments are listed in the company’s investment policy. The use of derivative instruments is restricted and must be in accordance with the company’s policy. Prohibited investments include categories of assets or instruments not specifically provided for in the company’s investment policy.

 

Sensitivity analysis

 

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost rates would have the following effects for the three months ended December 31, 2012 and the nine months ended September 30, 2012:

 

   Other benefit plans 
Three months ended December 31, 2012  Increase   Decrease 
Total of service and interest cost  $0.3   $(0.2)
Accrued benefit obligation at December 31   16.9    (14.6)