2006 20-F - Sappi

impact on liquidity varies according to the terms of the agreement; generally however, future trade
receivables would be recorded on balance sheet until a replacement agreement was entered into.
An impairment of accounts receivable has been recorded for any receivables which may be uncollectable.
The determination of this allowance is restricted to the 15% risk retained by Sappi.
Equity Accounted Investment. In 1998, our interests in timberlands located in Maine and certain
equipment and machinery were sold to a third party timber company, Plum Creek Timberlands LLP, in
exchange for cash of US$3 million and three promissory notes receivable in the aggregate amount of
US$171 million. In 1999, the Company contributed these promissory notes to a special purpose entity
(“SPE”). The promissory notes were pledged as collateral for the SPE to issue bonds to investors in the
amount of US$156 million. In 2001, the Company contributed its interest in the SPE to a limited liability
company in exchange for 90% of the outstanding limited liability membership interest. All voting control
of the limited liability company is controlled by an unrelated investor that has significant capital at risk and
therefore has not been consolidated by the Company in its financial statements. The SPE is not
consolidated in our financial statements because we have taken the position that it is controlled by an
unrelated investor which has sufficient equity capital at risk to support such a position. The Company’s
investment in the SPE is US$19 million as of October 1, 2006.
The SPE may not be liquidated prior to repayment of the bonds it issued, which mature in three
tranches on February 11, 2007, February 11, 2009, and February 11, 2011. The Company may not redeem
its investment in the SPE (via its ownership interest in the limited liability company) prior to complete
repayment of the bonds issued by the SPE and our investment has a subordinate interest to the payment of
the outstanding bonds. We have not guaranteed the obligations of the SPE and the holders of the notes
payable issued by the SPE have no recourse to us.
The SPE is bankruptcy remote and serves to protect the investors in the notes from any credit risk
relating to Sappi Limited by isolating cash flows from the Plum Creek notes receivable. The structure was
set up to raise funding using the promissory notes as collateral in a manner that would not result in either
debt or the Plum Creek Timberlands LLP notes being reflected on balance sheet. This would not be the
case if we monetised the promissory notes through an issuance of secured notes directly or by an entity that
was required to be consolidated in our financial statements under the applicable accounting principles.
Capital Expenditures
Capital expenditures in 2006 and 2005 consisted of the following:
70
September
2006 September
2005
US$ million US$ million
Sappi Fine Paper
Sappi Fine Paper North America............................... 48 90
Sappi Fine Paper Europe...................................... 136 124
Sappi Fine Paper South Africa................................. 19 27
Total........................................................ 203 241
Sappi Forest Products .......................................... 99 101
Corporate ..................................................... 1 3
Consolidated Total ............................................. 303 345
Of the US$303 million of capital expenditure in 2006 (2005: US$345 million), approximately
US$160 million were investments to maintain operations (2005: US$183 million) and US$143 million were
investments to expand operations. The capital expenditure to expand operations during 2006 included
major projects at Sappi Fine Paper Europe US$81 million, Sappi Forest Products US$61 million, and