Factors beyond control
Published Saturday June 20th, 2009
Affidavit Fraser Papers CEO describes the perfect storm of 'risk' that has threatened his firm
Fraser Papers Inc. (TSX:FPS) has spent the last three years taking steps to restructure and save its business from decline, according to an affidavit written by company president and chief executive Peter Gordon.
The firm backed away from unprofitable hardwood pulp and lumber markets and focused on the growth of more lucrative specialty paper divisions, Gordon contends in a document filed with the Ontario Superior Court of Justice and obtained by the Telegraph-Journal.
"The Fraser Group's operations and financial results are influence by a number of factors, many of which are beyond the Applicants' control," Gordon says in the statement.
Fraser Papers - which has operations in New Brunswick, Quebec, Maine and New Hampshire - announced Thursday it had sought protection from creditors in Canada and would do the same south of the border.
According to the document, the integrated pulp, paper and lumber company has improved processes and made energy efficiency moves to cut costs.
All the while the firm closed operations as U.S. housing markets began to crumble and prices for hardwood pulp went south along with the tanking economy, selling off land holdings in New Brunswick to prop up its bottom line.
Just two years after the firm's 2004 breakout as a standalone public company (formerly a division of Nexfor Inc.), management decided to permanently close a mill in Berlin, N.H. that had been churning out 250,000 tons of hardwood pulp annually.
The mill was integrated with the Gorham paper mill, the company's oldest asset - built in 1904.
During the same year, the firm increased shipments of specialty papers by nine per cent and shed the entirety of its freehold timberlands in New Brunswick, a move that netted Fraser Papers $106 million.
Liquidating the land also garnered the company more than 3.6 million securities, representing a 22-per-cent stake in Acadian Timber Income Fund, which now manages New Brunswick lands formerly belonging to Fraser Papers.
The sale of Fraser Papers' provincial assets followed a 2005 move to divest Maine timberlands to Heartland Forest Group for about $86 million.
In 2007, the company overhauled a recovery boiler at its Edmundston sulphite pulp mill and closed two of the smallest and priciest paper machines at the Madawaska mill across the St. John River in Maine.
Another paper machine was closed at the Gorham mill, reducing output there by 20 per cent.
In addition, operations at four sawmills were curtailed by 50 per cent in response to weakening lumber markets.
The firm also sold its interest in Acadian Timber in 2007 for about $44 million.
But in spite of the company's efforts to reduce exposure to underperforming markets, Fraser Papers' end-of-year negative cash flow from operations amounted to roughly $74 million.
The following year, the company pushed ahead into higher value-added divisions, increasing output of specialty packing paper by 11 per cent and high-bright groundwood papers by 35 per cent, raking in $39 million in additional revenue thanks to paper prices fetching seven per cent more.
Nonetheless, by the end 2008 the firm was short $63 million in cash flow from operations.
And the red ink continued to flow: Gordon writes that by the end of the first quarter this year, shortfalls in cash flow had already amounted to $11 million.
The executive paints a perfect storm of "risk" that has threatened the company's business, which beyond the collapse of markets includes: the uncertain availability and price of wood fibre; the effect of U.S. "black liquor tax credits" on pulp prices; the high price of energy; and other political, regulatory, labour and financial considerations.
Gordon writes that the company - which is insolvent - did not have sufficient cash without debtor-in-possession financing to fund operations beyond June 30.
"Existing liquidity under the applications revolving working capital facility is not expected to meet the Applicant's operating requirements beyond the next few weeks."
Fraser Papers has since obtained $23 million from CIT Business Credit Canada and Brookfield Asset Management (TSX:BAM.A) - which controls the company through a majority stock ownership - to fund operations during restructuring.
The firm has been in discussions with the province of New Brunswick, which revealed Sunday its offer of a greater permanent Crown wood allocation - pending the company fixes its financials - and measures to reduce energy costs.
The face of Fraser Papers is certain to change throughout the restructuring process - a point Gordon guarantees in his affidavit through a mention that assets may need to be sold.
The company will continue to focus on its specialty papers division, Gordon has said in interviews. And while the executive has committed in principle to keep the firm's profitable paper operations - which would include mills in Madawaska, Maine and Gorham, New Hampshire - he has also said the restructuring will happen in part at the whims of the firm's secured creditors.
CIT Business Credit Canada is owed $62 million, while CIBC is owed $28 million, with the province of New Brunswick owed $29 million on a $40-million loan, according to Gordon. Brookfield Asset Management has backstopped the CIBC facility and $28 million of the CIT Business Credit Canada facility with a guarantee.
In the affidavit, while the executive offers up that the Edmundston groundwood pulp mill should reopen by June 18 (which has since been pushed back until next Monday), he writes that the company must cut costs further before reopening its adjacent sulphite mill.
Labour negotiations with a union representing the majority of the mill's unionized workers will continue Monday.
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