DBRS Confirms TimberWest at BBB (high); Removes from Under Review – Developing

DBRS has today confirmed the Senior Unsecured Debentures rating of TimberWest Forest Corp. (TimberWest or the Company) at BBB (high), now with a Stable trend. The confirmation removes TimberWest from Under Review with Developing Implications status where it was placed on November 1, 2006, following the proposed federal tax changes for income trusts effective in 2011. DBRS expects that TimberWest will not be affected by the proposed tax changes over the next five years at a minimum, although the longer-term impact remains uncertain. The rating action also reflects the Company’s favourable financial and business risk profile, which is less volatile than those of its forest products industry peers.

TimberWest is currently not subject to the proposed income tax legislation for income trusts, given its status as a stapled unit corporation. However, there remains the possibility that the tax treatment of its distributions may eventually change. In the event that TimberWest is affected by the proposed tax change, the Company has available tax shelters to limit the impact for several years beyond 2011. As such, a change in the rating is not currently warranted.

TimberWest is expected to generate favourable, albeit modestly weaker, financial performance over the near term. Strong log demand in Japan and higher-margin land sales, which primarily led to earnings growth in 2006, are expected to persist. However, lower domestic log prices (from excess supply), lumber segment weakening (and possible sale of its Elk Falls mill), high production/input costs, and relative strength in the Canadian dollar are expected to constrain earnings.

Despite near-term challenges, TimberWest’s financial profile is expected to remain acceptable for the rating. The value of the Company’s timberland, which is highly liquid, remains well in excess (roughly six times) of its long-term debt ($195 million). DBRS expects TimberWest to easily fund its operating needs, partly from capex remaining at low levels. The Company’s balance sheet is also likely to remain conservative following an improvement in leverage and coverage ratios to strong levels in 2006 partly from debt repayment (17% debt-to-capital, as per DBRS calculations). Over the medium to longer term, the Company is expected to generate substantial proceeds from high-and-better-use (HBU) land sales as its real estate strategy evolves. Furthermore, future supply constraints related to the implementation and gradual increase in Russian export taxes on logs and mountain pine beetle infestation provide TimberWest with substantial earnings upside potential.

Note:
All figures are in Canadian dollars unless otherwise noted.