One-time credit from reorganization gains helps Catalyst Paper swing to Q3 net earnings of C$655.7M from a year-ago loss of C$205.7M as sales fall 9.1% to C$265.7M; CEO sees quarter as 'turning point' as company exits creditor protection

Wendy Lisney

RICHMOND, British Columbia , November 13, 2012 (press release) – A significant one-time credit arising from reorganization gains and "fresh-start accounting" valuation adjustments resulted in third quarter net earnings of $655.7 million for Catalyst Paper. The company emerged from creditor protection on September 13, 2012 with significant debt and cost-structure improvements.

Net earnings this quarter contrast with a net loss of $11.7 million the quarter before. Sales were essentially unchanged at $265.7 million . The net after-tax restructuring-related credit was $688.1 million . An after-tax foreign exchange gain on translation of U.S. dollar denominated debt of $25.2 million further supported Q3 earnings.

Before these and other specific items, Catalyst posted a net loss for the third quarter of $48.7 million , compared to a net loss of $5.0 million in the prior quarter. Earnings before interest, tax, depreciation and amortization (EBITDA) in the third quarter were $13.8 million and EBITDA before restructuring costs was $14.0 million , compared with EBITDA of $17.0 million and EBITDA before restructuring costs of $16.9 million in the second quarter.

"The third quarter marked a turning point for Catalyst as we exited creditor protection with a stronger balance sheet, lower interest costs and lower annual operating costs going forward," said President and CEO Kevin J. Clarke. "This puts us on stronger operational footing to address ongoing market dynamics. And it means Catalyst can now take a much more active role in the transformation of the industry as a whole."

Creditor Protection and Restructuring Process

After filing for creditor protection on January 31, 2012 , Catalyst secured 99% approval from voting creditors for its second amended plan of arrangement under the CCAA on June 25, 2012 . The plan subsequently received court sanction in British Columbia and was confirmed by the US Court in Delaware. A new asset-based loan (ABL) facility was in place on September 13, 2012 , meeting the final pre-condition for implementation of the plan.

Previous secured note holders received shares and US $250 million of new senior secured notes due 2017 in exchange for their US$390 million of secured notes due 2016. In addition, we issued US$35 million of new exit notes under a secured exit financing facility on September 13, 2012 , to pay restructuring costs and expenses and to manage other contingencies on exit from CCAA protection.

The restructuring has reduced Catalyst's debt by $390 million , eliminated $80 million of accrued interest, and reduced annual interest expense and other cash costs by $70 million .

Catalyst's operations are continuing in substantially the same form, and a new board of directors took office upon exit from CCAA. Previous secured note holders now own all of the 14.4 million new common shares that are presently issued and outstanding. An addition of approximately 135,000 common shares will be issued to unsecured creditors who made an equity election in respect of their claims under the plan. Additional shares may be issued under a new management incentive plan that may be adopted in future. An application has been submitted to the Toronto Stock Exchange for a public listing of the new common shares.

Fresh start accounting has been applied as of September 30, 2012 , in accordance with U.S. Generally Accepted Accounting Principles. This involved use of independent financial advice to determine an enterprise value for the company and the fair value of Catalyst's assets and liabilities.

Snowflake Closure

The previously announced permanent closure of the Snowflake mill in Arizona, which primarily manufactured recycled newsprint, was implemented on September 30, 2012 . This will stem operating losses and reduce annualized selling, general and administrative expenses. A court-approved sales process for the mill and associated assets was announced on September 17, 2012 .

The closure is expected to result in one-time cost of approximately $10 million ( $8.7 million of which had been paid or accrued by quarter-end) and ongoing costs of approximately $0.6 million per month until disposition. These costs are expected to be largely recouped by sales proceeds.

Performance and Market Overview

Operating earnings of $5.9 million were up from the same quarter last year and on a year-to-date basis but lagged Q2 operating earnings of $9.3 million . They were negatively impacted by reduced pulp transaction prices, a stronger Canadian dollar, increased power costs, and a pulp inventory write-down. Offsetting factors included higher overall sales volumes, lower maintenance costs and lower labour costs - the final factor being an outcome of new collective agreements reached during the restructuring.

North American demand was down year-over-year across specialty paper product lines - most notably by 18.0% for uncoated grades and by 15.4% for directory. Benchmark prices were up moderately for coated grades from the second quarter, but unchanged for other specialty products. Sales volumes decreased while average sales revenue remained flat year-over-year.

North American newsprint demand saw a marginal 1.4% year-over-year increase, although the average benchmark price dropped from the second quarter due to marketplace inventory buildup. Sales volumes increased while average sales revenue was down year-over-year.

Markets for Northern Bleached Softwood Kraft pulp remained weak as a result of end-user inventory in China , and the benchmark price for that market dropped by 8.7% from the second quarter. There were year-over-year declines in both sales volumes and average sales revenue.

Liquidity

Quarter-end liquidity of $96.8 million was down from $125.9 million a year prior, but up from $71.8 million at the end of the second quarter due to a larger borrowing base under the new ABL facility. Cash on hand was down mainly due to payment of success fees of $6.9 million on emergence from creditor protection and debt issuance costs of $9.3 million .

Selected Highlights

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