PRT Forest Regeneration Income Fund

PRT Forest Regeneration Income Fund

August 06, 2009 18:19 ET

PRT Announces Results for Second Quarter of 2009

VICTORIA, BRITISH COLUMBIA--(Marketwire - Aug. 6, 2009) - PRT Forest Regeneration Income Fund (the "Fund") (TSX:PRT.UN) today announced results for its second quarter ended June 30, 2009. The Fund's interim financial report is enclosed as part of this release.

For the six month period, the Fund reported net earnings of $87,000 ($0.01 per unit) and Cash Available for Distribution of $1,398,000 ($0.14 per unit). Net earnings decreased by $0.12 per unit reflecting approximately 27% lower contract volumes this year, while Cash Available for Distribution decreased by $0.14 per unit for the comparable six month period. The Fund reported that its business is highly seasonal, with the second quarter typically being the highest revenue period. As such, Cash Available for Distribution realized in the first half of the year is expected to be used in the second half of the year to fund operations. Cash Available for Distribution is a term which does not have standardized meaning under Canadian generally accepted accounting principles, and may not be comparable to measures provided by other reporting entities. Standardized Distributable Cash - a comparable measure of cash flow prepared under guidance issued by the Canadian Institute of Chartered Accountants - totaled $0.16 per unit for the first six months, as compared to $0.36 per unit in 2008.

For the three months ended June 30, 2009, the Fund reported net earnings of $754,000 ($0.08 per unit) and Cash Available for Distribution of $1,372,000 ($0.14 per unit). Aggregate results were in line with management's expectations given consideration for the current economic environment and the seasonal nature of PRT's business.

Revenues in the six month period decreased by $4.9 million or 22%, with lower contract volumes and prices being the primary cause. Of note however, is that despite the lower volumes, management estimates that market share remained relatively stable. While production expenditures were scaled to the lower volumes, margins declined due to lower efficiencies of scale and higher relative materials and utility costs. Selling, general and administration costs were 11% lower than the first six months of 2008 due to cost reduction efforts as a response to the economic downturn.

Commenting on the first six months of 2009, President and CEO, Rob Miller, said, "2009 has turned out to be a very challenging year for PRT due to the deepening economic recession and financial instability in certain segments of the forest industry. These conditions led to a further decline in silviculture spending and a 27% decline in seedling orders this year. However, we are adapting and focusing on the factors that are within our control including contract delivery performance, innovation in products and processes, and cost management across all operations including management salary rollbacks. These factors are essential to managing our business successfully through the current cycle and positioning it for the long term.

We continue to believe that the downturn in seedling demand has been caused by cyclical rather than structural factors in the forest industry. US housing starts are at unprecedented lows and are well below their long term trend line. Higher future starts are supported by current and projected demographics. We are somewhat encouraged by recent indications that the housing market may be stabilizing, and expect that seedling markets will improve as house construction recovers and returns to more typical levels. In addition, there is large and growing reforestation backlog in British Columbia caused by the mountain pine beetle, forest fire damage, and a growing recognition of the importance of our forests to our environment. We believe these factors will provide considerable opportunities for PRT beyond the current economic cycle, and that by focusing on maintaining our core operational capabilities, managing our balance sheet, and developing new markets we will have the opportunity to build considerable value for unitholders."

Management's Discussion and Analysis for the Fund is available at

About the Fund

PRT is the largest producer of container grown forest seedlings in North America, with 14 nursery locations which produced approximately 170 million seedlings in 2008. Units of the Fund are listed for trading on the Toronto Stock Exchange under the trading symbol PRT.UN.

Conference Call and Taped Replay

The Fund will host a conference call to further discuss the matters contained in this press release. The call will take place on Friday, August 7, 2009 at 11:00 AM PDT, 2:00 PM EDT. To participate in this conference, please call 1-877-407-8031 or 201-689-8031.

Persons unable to attend the conference call may listen to a recorded version by dialing 1-877-660-6853, account # 286, and the conference ID# 327385. This option is available through August 12, 2009. A recorded web cast version of the call may also be accessed from the Fund's website at

The Fund's conference call for the third quarter is expected to take place on November 5, 2009.

Forward Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations for future order volumes, pricing, operating costs and other expenditures; the outlook for future energy prices; plans and opportunities for capital spending; and other statements contained in this discussion that are not historical fact. Words such as "anticipate", "expect", "potential", "intends", "opportunity", "believes", "may", "will" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and actual events or results may differ materially. Risks and uncertainties include, but are not limited to, agricultural risks and crop yields, future commodity prices, exchange rate risks, customer credit risks and customer insolvency, liquidity risks, the ability of PRT to comply with its debt covenants, the outlook for the forest industry, the impact of proposed changes to income trust taxation, and other risks identified from time to time in the Fund's annual report, annual information return, prospectus, and other filing documents. These documents are available in electronic form at, or by contacting the Fund directly. Forward-looking statements are based on current expectations and the Company assumes no obligation to update such information to reflect later events or developments, except as required by law. Readers are cautioned not to place undue reliance on forward looking statements.

Review of Interim Financial Statements

Under National Instrument 51-102, Part 4, subsection 4.3(3) (a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.

The Company's independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.


Consolidated Balance Sheets (unaudited)

As at As at
June 30, December 31,
2009 2008


Current assets
Cash $ - $ 192
Accounts receivable 8,343 6,976
Inventories 1,440 2,369
Prepaid expenses and deposits 464 199
Unbilled revenue 1,847 4,065
$ 12,094 $ 13,801

Investment 242 265
Property, plant and equipment
(note 4 and note 11) 34,012 35,152
Property, plant and equipment held for sale
(note 4) 420 420
Intangible assets 498 631
$ 47,266 $ 50,269


Current liabilities
Operating line $ 4,479 $ 6,055
Accounts payable and accrued liabilities 2,684 4,051
Distribution payable to Unitholders - 192
Current portion of long-term debt 1,728 262
$ 8,891 $ 10,560

Long-term debt 3,764 5,482

Future income taxes 497 326
$ 13,152 $ 16,368

Unitholders' Equity

Capital contributions (note 7) $ 90,346 $ 90,249

Cumulative earnings 15,898 15,811
Unit option grants 54 25
Cumulative distributions declared (72,184) (72,184)
$ 34,114 $ 33,901
$ 47,266 $ 50,269

Subsequent event (note 12)


Consolidated Statements of Earnings, Comprehensive Income and
Cumulative Earnings (unaudited)
($000's except per unit amounts and number of units outstanding)

Three months ended June 30 Six months ended June 30
2009 2008 2009 2008

Revenue $ 10,693 $ 12,824 $ 17,035 $ 21,926

Costs of production $ 6,819 $ 8,206 $ 10,950 $ 13,838
Selling, general and
administration 2,242 2,391 4,063 4,565
Loss (Gain) on foreign
exchange (232) 9 (153) (13)

Earnings before the
following $ 1,864 $ 2,218 $ 2,175 $ 3,536

Interest 158 229 320 492
Amortization of property,
plant and equipment 660 923 1,438 1,844
Amortization of intangibles 66 66 133 133
Equity in loss (earnings)
of investee (7) 36 3 63
Gain on disposal of property,
plant and equipment (8) (10) (14) (11)
Exit activity charges
(note 5) 121 - 168 -

Earnings before income
taxes $ 874 $ 974 $ 127 $ 1,015

Recovery of (provision for)
income taxes (120) (8) (40) 202

Net earnings and
comprehensive income $ 754 $ 966 $ 87 $ 1,217

Cumulative earnings-
beginning of period 15,144 39,253 15,811 39,002

Cumulative earnings-
end of period $ 15,898 $ 40,219 $ 15,898 $ 40,219

Basic and diluted earnings
per Trust Unit $ 0.08 $ 0.10 $ 0.01 $ 0.13

Weighted average number
of Trust Units outstanding 9,670,988 9,603,116 9,641,196 9,603,116


Consolidated Statements of Cash Flows (unaudited)

Three months ended June 30 Six months ended June 30
2009 2008 2009 2008

Cash flows from
operating activities
Net earnings $ 754 $ 966 $ 87 $ 1,217
Items not affecting cash
Amortization of
property, plant and
equipment (excluding
seedling containers) 660 923 1,438 1,844
Seedling container
depreciation included
in costs of production 184 326 426 658
Amortization of
intangibles 66 66 133 133
Provision for (recovery
of) future income
taxes 257 4 171 (211)
Gain on sale of
property, plant and
equipment (8) (10) (14) (11)
Equity in loss
(earnings) of investee (7) 36 3 63
Unrealized loss
(gain) on foreign
exchange (369) 7 (257) 12
Unrealized loss
(gain) on interest
rate swaps (29) (24) (34) 36
Stock Option grants 14 - 29 -
$ 1,522 $ 2,294 $ 1,982 $ 3,741

Net change in non-cash
working capital balances 429 (589) 318 630

$ 1,951 $ 1,705 $ 2,300 $ 4,371

Cash flows from
financing activities
Distributions paid to
Unitholders (note 8) $ - $ (576) $ (192) $ (2,132)
Repayment of long-term debt (65) (191) (131) (380)
Decrease in operating line (1,688) (379) (1,576) (1,458)
Issuance of Trust Units 75 - 97 -

$ (1,678) $ (1,146) $ (1,802) $ (3,970)

Cash flows from
investing activities
Repayment of loans
by investee $ 20 $ - $ 20 $ -
Purchase of property, plant
and equipment (304) (570) (735) (879)
Proceeds on sale of
property, plant and
equipment 11 10 25 11
$ (273) $ (560) $ (690) $ (868)

Decrease in cash $ - $ (1) $ (192) $ (467)

Cash - beginning of period - 206 192 672

Cash - end of period $ - $ 205 $ - $ 205

Notes to Consolidated Financial Statements

(in thousands of dollars except per unit amounts)

1. Significant accounting policies

These unaudited interim consolidated financial statements of the PRT Forest Regeneration Income Fund ("The Fund") have been prepared in accordance with Canadian generally accepted accounting principles. The interim financial statements follow the same accounting policies and method of application as the most recent annual consolidated financial statements, except as described in note 2. As such, these statements should be read in conjunction with the Fund's most recent annual report.

The preparation of these unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

The Fund's subsidiary and operating company, Pacific Regeneration Technologies Inc., ("PRT" or the "Company") has forecasted its financial results and cash flows for 2009 using its best estimates of market and operating conditions. The Company is required to maintain compliance with certain externally imposed capital requirements which include four financial covenants as further defined in note 9 to these financial statements. One covenant includes a requirement to maintain a ratio of total debt (excluding the Notes issued under the Trust Deed) to earnings before interest, taxes depreciation and amortization ("EBITDA") less cash taxes and sustaining capital expenditures not to exceed 3.5:1 ("debt to adjusted EBITDA"). Based on forecasted financial results for 2009, it was earlier determined the Company may not generate sufficient adjusted EBITDA over the year to maintain the required debt to adjusted EBITDA ratio. As a result, management met with PRT's lender during the first quarter and negotiated a waiver to this covenant for 2009; however, this waiver has not yet been required. As a condition of the waiver, no new term debt advances will be authorized by the lender, which could require management to seek other credit facilities or capital should that become necessary.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to present fairly the Fund's financial position as at June 30, 2009 and December 31, 2008, as well as its results of operations and cash flow for the three and six months ended June 30, 2009 and 2008 respectively.

2. Accounting Policy Developments

The Fund has adopted the following new standards issued by the CICA:

Section 3064 - Goodwill and Intangible Assets: This section supersedes Sections 3062 and 3450, and primarily reduces the differences with IFRS in the accounting for intangible assets and results in closer alignment with U.S. GAAP. It also provides guidance for the recognition of internally developed intangible assets (including research and development activities), ensuring consistent treatment of all intangible assets, whether separately acquired or internally developed. Its adoption has had no material impact on the results of operation or financial position.

In January 2009, the CICA issued Handbook Sections 1582 - Business Combinations, 1601 -Consolidated Financial Statements, and 1602 - Non-controlling Interests. Section 1582 replaces CICA Handbook Section 1581, Business Combinations, and establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under International Financial Reporting Standards. Section 1582 is applicable prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011, with early adoption permitted. Section 1601 together with Section 1602 replaces CICA Handbook Section 1600, Consolidated Financial Statements. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. Sections 1601 and 1602 are applicable for interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011, with early adoption permitted. An entity must adopt Section 1582, 1601 or 1602 at the same time. The Fund does not expect the adoption will have a material impact on the results of operations or financial position.

The Fund has adopted section 3800 (Government Assistance) of the CICA handbook. This section is relevant to government grants in place a Biomass heating system under development as further described in note 11. The section applies to profit-oriented enterprises and provides two options to account for grants - the capital approach and the income approach. After analysis of the grants, management has determined that the income approach is most applicable to the current project, and will credit government assistance to income by reducing depreciation and amortization charges based on reduced asset costs.

3. Seasonality of operating results

Revenues and cash flow are affected by PRT's seedling crop cycles and by the seasonality of PRT's customers' planting season. PRT recognizes revenue under contracts on a percentage completion basis with costs incurred as a base. Revenue from non-contracted goods and services is recognized when the goods are delivered or the service has been substantially rendered. As such, fluctuations between quarters occur depending upon the activities and expenditures in the quarter. Comparatively high cost activities, such as harvesting, typically occur in the second and fourth quarters, and accordingly these quarters normally reflect a higher proportion of annual revenues.

4. Property, plant and equipment, and property held for sale

In October 2008, the Fund announced that it will close its seedling nursery facility in Maple Ridge, BC. The closure will take place in phases and operations are projected to cease in the latter part of 2009. The closure is not presented as discontinued operations considering the continuing involvement of the Fund in seedling nurseries, the transferability of crops between nurseries, and the Company's intention to relocate certain long-lived assets to other nursery locations in future years. In view of the fact that long-lived assets remain in service at June 30, 2009, no capital assets have been classified as held for sale at this time. However, the Company reviews long-lived assets for impairment when events in changes in circumstances indicate that the carrying value of those assets may not be recoverable, and at June 30, 2009 no such changes in circumstances have been identified.

In 2007, PRT discontinued production at its Nevada nursery site. Exit activities are substantially complete and no further exit activity costs are expected. Certain of Nevada capital assets which could be utilized at other nursery sites were transferred and will not be sold. The remaining assets are being actively marketed for sale. The following assets have been classified as held for sale, by major category:

Net Book Value ($000's)

June 30, December 31,
2009 2008
Land $ 251 $ 251
Buildings 15 15
Growing facilities 71 71
Equipment 83 83
$ 420 $ 420

5. Exit activity charges

In October 2008, the Fund announced that it will close its seedling nursery facility in Maple Ridge, BC and cease operations in the latter part of 2009 in order to improve production costs. Production that would otherwise have been located at the Maple Ridge nursery site will be absorbed by the Company's other nursery sites. It is expected that the exit activities will be completed by the end of 2011.

Anticipated exit expenditures related to the Maple Ridge site are as follows:

Exit Total Amounts Amounts
Expenditures anticipated incurred incurred
(000's) expenditures current year to date
Legal $ 50 $ - $ 48
Employee costs 420 33 216
Deactivation of facilities 1,841 131 144
Dismantling and relocation
of long-lived assets 1,111 - -
$ 3,422 $ 164 $ 408

The above table excludes costs associated with the disposal of capital assets from the Maple Ridge site (see note 4), but does include the cost of relocating plant and equipment to other nursery sites.

Costs specific to exit activities are recognized when the activities take place and the costs are incurred, and are included in Statement of Earnings as exit activity charges.

6. Unusual Items - Insurance claim outstanding

In late December 2008 the Company suffered damage to greenhouses at its two British Columbia lower mainland nurseries as a result of unusually heavy snowfall. The loss is insured at replacement cost subject to an insurance deductible of $100 which was previously charged to earnings. Out of pocket expenses incurred in the current year for crop recovery and structure demolition and salvage operations were $330, and these costs are included in accounts receivable as the insurance claim recoverable.

7. Capital contributions

Capital contributions and units outstanding are:

Three months ended Six months ended
Capital Contributions June 30, June 30,
($000's) 2009 2008 2009 2008
Capital Contributions -
Beginning of period $ 90,271 $ 90,249 $ 90,249 $ 90,249
Units issued under
ESOP program 75 - 97 -
Capital Contributions -
End of period $ 90,346 $ 90,249 $ 90,346 $ 90,249

Three months ended Six months ended
June 30, June 30,
2009 2008 2009 2008
Units outstanding -
Beginning of period 9,619,232 9,603,116 9,603,116 9,603,116
Units issued under
ESOP program 61,313 - 77,429 -
Units outstanding -
End of period 9,680,545 9,603,116 9,680,545 9,603,116

The Fund has a Unit option plan whereby the Trustees of the Fund may, from time to time, grant options to purchase Units to eligible officers, employees and consultants of the Fund or any subsidiary, and to directors of any subsidiary. The aggregate number of Units reserved under the plan is 560,572. The maximum term of any option is ten years. The exercise price of an option cannot be less than the average of the Unit price at the close of business on the five trading days preceding the grant date.

During the year ended December 31, 2008 there were 107,000 Unit options granted to directors of PRT at an exercise price of $1.26 per unit and 248,600 Unit options granted to eligible officers and employees at an exercise price of $3.65 per unit. No other units had been previously issued under the Unit option plan, and no grants were made in the three and six months ended June 30, 2009. The Fund has applied the fair value method of accounting for Unit option grants. The fair value of each option granted was estimated using the Black-Scholes option pricing model with the weighted average assumptions below.

Weighted Average Assumptions

December 31,
Risk-free interest rate 2.8%
Expected life (years) 6.0
Expected volatility 42.3%
Dividend yield 8.0%
Number of options granted 355,600
Fair value of each option granted $ 0.43

For both grants the compensation cost is being amortized against earnings over the three-year vesting period of the underlying options. The compensation cost recognized related to the 354,600 Unit options issued in 2008 was $14 and $15 in the six months and three months ended June 30, 2009 ($0 in both the six months and three months ended June 30, 2008) with a corresponding credit to capital contributions.

A summary of the status of the Fund's Unit option plan as of June 30, 2009, and changes during the period is as follows:

Summary of option plan status

June 30, December 31,
2009 2008
Outstanding at beginning of period 355,600 -
Granted - 355,600
Exercised - -
Forfeited 40,000 -
Outstanding at end of period 315,600 355,600

The following table summarizes information about unit options outstanding at June 30, 2009:

Summary of options outstanding
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Number Average Weighted Number Weighted
outstanding Remaining Average exercisable Average
Range of at June 30, Contract Exercise at June 30, Exercise
exercise prices 2009 Life Price 2009 Price
$1 - $2.50 67,000 5.47 $1.26 - $1.26
$2.51 - $5.00 248,600 5.01 $3.65 62,150 $3.65
$1 - $5 315,600 5.24 $3.14 62,150 $3.65

8. Distributions to Unitholders

For 2009 the Fund suspended distributions to Unitholders from current year operations, in order to preserve cash flow during the current industry downturn. Distributions of $192 declared in 2008 were paid in January of 2009.

9. Capital Structure Financial Policies - summary review of the Fund's objectives, policies and processes for managing its capital structure

The Fund's objectives when managing capital are: (i) to maintain a flexible capital structure which optimizes the cost of capital at acceptable risk; and (ii) to manage capital in a manner which considers the interests of equity (Unit) holders and obligations to debt holders.

In the management of capital, the Fund includes Unitholders Equity, Long-term Debt (including any associated hedging assets or liabilities), short term bank indebtedness (Operating Line), cash and temporary investments in the definition of capital.

The Fund manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Fund may adjust the amount of distributions paid to unitholders, issue new units, issue new debt, retire existing debt, or issue new debt to replace existing debt with different characteristics.

PRT is subject to certain externally imposed capital requirements as related to both the Operating Line and Long-term Debt. These obligations require the Company to report to the lender on certain covenants including margin requirements monthly for the Operating Line, and the following key ratios reported quarterly for Long-term Debt:

1. Ratio of principal, interest, and other monies payable on loans and the notes issued under the Trust Deed to EBITDA less cash taxes and sustaining capital expenditures and adjusted by a notional "Fund for Debt Service" not to exceed 1:1;

2. Ratio of total debt (excluding the Notes issued under the Trust Deed) to EBITDA less cash taxes and sustaining capital expenditures not to exceed 3.5:1 (as discussed in note 1, this covenant has been waived for 2009);

3. Working capital ratio not less than 1:1; and

4. Tangible net worth not less than $17 million.

The Company is in compliance with all externally imposed capital requirements as at June 30, 2009.

10. Segmented information - geographic areas

The Company recorded revenues from customers located in the United States in the amount of $2,531 and $1,490 in the six months and three months ended June 30, 2009 ($2,955and $1,368 in the six months and three months ended June 30, 2008). In addition, as at June 30, 2009 the Fund's total capital assets employed in the USA amounted to $3,237 (June 30, 2008 - $3,333).

11. Government Incentives

PRT initiated a new project in April 2009 to substitute a significant portion of existing natural gas heating at a northern nursery site by constructing a high efficiency, low emission biomass heating system fed with purpose-grown sustainable Short Rotation Intensive Culture woody biomass. On June 6, 2009 the Company entered into a contribution agreement with the Government of Canada under their Industrial Research Assistance Program ("IRAP"). The Company is eligible to receive up to $227 towards eligible costs as defined in the agreement. Eligible costs under this program primarily consist of up to 100% of supported salary costs and 75% of supported contractor fees. The Company is required to remit claims for reimbursement monthly, and other key terms and conditions of the assistance include demonstration of ongoing capability to complete the project, maintenance of adequate environmental protection to meet environmental standards, no significant changes in the project without IRAP approval, and maintenance of adequate financial records and accounts.

For the period ended June 30, 2009, PRT has credited assistance receivable of $70 to the value of assets under construction (June 30, 2008 - $0).

12. Subsequent event

On July 10, 2009 the Company entered into a government assistance agreement with the Province of British Columbia under the Province's Innovative Clean Energy Fund ("ICE") program. The Company is eligible to receive up to $436 in financial contributions toward eligible costs, as defined in the agreement, of the biomass heating project further described in note 11.


Mailing Office PRT Forest Regeneration Income Fund
Pacific Regeneration Technologies Inc. Board of Trustees
#101 - 1006 Fort Street John G. Taylor, CA
Victoria, BC Stuart E. Wolfe
Canada, V8V 3K4 Robert K. Withers
Tel: 250-381-1404 J. Mark Gardhouse
Fax: 250-381-0252 Robert A. Miller, CA

Registrar and Transfer Agent Pacific Regeneration Technologies
Valiant Trust Company Inc.
Board of Directors and Officers
World Wide Web Robert K. Withers, Chairman & Director
Robert A. Miller, President & CEO
& Director
John G. Taylor, CA, Director
Market Information Stuart E. Wolfe, Director
Stock symbol: PRT.UN J. Mark Gardhouse, Director
Stock Exchange: Toronto Antony A. Pollard, V.P. Finance &
Administration, CFO & Secretary
Herb Markgraf, V.P. Marketing
Investor Relations Robert Maxwell, V.P. Production
Tel: 250-381-1404 John Kitchen, V.P. Business
Toll free: 1-866-553-8733 Development

Contact Information

  • PRT Forest Regeneration Income Fund
    Tony Pollard
    VP Finance/CFO
    (866) 553-8733 ext. 229